The Zug Estates Group sees further growth and higher earnings

Property income rose by 4.6% from CHF 40.1 million to CHF 41.9 million. The extensive room renovation work carried out at the Parkhotel Zug resulted in a slight reduction in the income generated by the hotel & catering business unit (-1.9% year-on-year). Following a significant increase in the previous year, the business unit's GOP (gross operating profit) was nevertheless maintained at a high level.

The Zug Estates Group reported a 2.7% increase in operating revenue. Operating expenses were up by 3.0% as a result of the higher personnel costs incurred to expand and strengthen the organization. Operating income before depreciation and revaluation rose by 2.4% to CHF 39.4 million.

As a result of revaluations (net) and completion of a further construction phase at the Suurstoffi site, the book value of the investment properties increased by CHF 137.9 million. Income from the revaluation of investment properties (net) thus decreased year-on-year from CHF 28.1 million to CHF 8.7 million, remaining in positive territory. The contributing factors here were the above-average quality of the locations and properties in the portfolio (high proportion of residential property), and the continuous development and positioning of the Suurstoffi site as a preferred location for housing and business.

The financial result improved by CHF 1.6 million to CHF 5.5 million as a consequence of the higher capitalization of building loan interest and borrowing costs. Due to the lower level of income from the revaluation of investment properties (net), tax expenditure fell by CHF 2.6 million year-on-year to CHF 5.7 million.

As a result of the decrease in income from the revaluation of investment properties (net), EBIT and net income were, as expected, lower year-on-year at CHF 45.7 million and CHF 34.4 million, respectively. At CHF 26.1 million, net income excluding revaluation was, however, CHF 2.1 million or 8.7% higher than the previous year's figure.

Payout increases by 10.9%

Net income excluding income from revaluation, which is relevant for the payout to shareholders, amounted to CHF 51.85 per series B registered share (previous year: CHF 48.73). In order to ensure that the payout to shareholders is in balanced proportion to reinvestment, Zug Estates pays out up to 50% of net income excluding income from revaluation to shareholders. The solid result and intact future prospects allow the board of directors to propose to the 2018 general meeting of shareholders that the payout be increased by 10.9% to CHF 25.50 per series B registered share. This is equivalent to a payout of 49.3%. The payout has increased by 70% since the stock exchange listing.

Total return per share at 11.9%
The NAV at market value, a measure including the fair value of properties used for operational purposes, came to CHF 1 732.57 per series B registered share (previous year: CHF 1 683.49). The Zug Estates share closed at CHF 1 827 on December 31, 2017, 10.5% higher than at the beginning of the year. Factoring in the payout of CHF 23.00 per series B registered share made in April 2017, overall earnings per share came to 11.9% in the 2017 financial year (previous year: 15.8%).

Portfolio up by 9.1% to CHF 1.41 billion

The Zug Estates Group pursued its growth strategy in the year under review, investing CHF 110 million in expanding its portfolio further. In addition, expenses in the amount of CHF 22.3 million for the Aglaya promotional property were reported. At the Suurstoffi site in Risch Rotkreuz, construction projects with a total investment volume of CHF 340 million continued. A master plan was initiated for the Zug City Center site.

Properties used for operational purposes are stated at cost less write-downs. The fair value of these properties was CHF 117.3 million (previous year: CHF 116.0 million), with the fair value of the entire portfolio thus amounting to CHF 1 407.9 million (previous year: CHF 1 290.5 million).

Equity ratio still at 56.9% despite strong investment activity

The Zug Estates Group can build on a solid equity base offering long-term stability. As at December 31, 2017, equity capital totaled CHF 804 million, equivalent to a solid equity ratio of 56.9% (previous year: 61.2%).

Borrowed capital stood at CHF 459.9 million as at the end of December, corresponding to 32.5% of total assets and well under the self-imposed limit of 40%. In relation to the value of the portfolio of CHF 1.41 billion, the loan-to-value ratio was 32.7%.

Zug Estates has a long-term hedge in place against interest rate risk. The average residual term of the interest-bearing debt was 6.4 years (previous year: 8.2 years), while the average interest rate was at 2.0% (previous year: 2.5%).

The Group has undrawn credit lines of CHF 100 million and cash and cash equivalents of CHF 24.7 million, giving it enough scope to finance the planned expansion of its real estate portfolio.

Vacancy rate remains at a very low level
Rental agreements were concluded for all 152 newly built apartments on construction site A prior to completion. 81% of the commercial space on the same construction site is let. A long-term rental agreement was also concluded for the last rental unit on the 5th floor of building S41.

Retail space at the City Center site was let to brands including Calzedonia and Brezelkönig. As well as further enhancing the retail mix, the new leases will also generate higher rental revenue. By contrast, it is proving more of a challenge to market office space.

As at December 31, 2017 (reference date), the vacancy rate was 1.5%, representing a decrease of a further 0.3 percentage points year-on-year. Adjusted for voids before initial renting, the vacancy rate fell once again to 0.6% (previous year: 0.9%).

Intensive construction activity in sync with marketing successes
2017 was a year of intensive construction and development activity. The four major projects underway - construction site A (S16-20), the wooden high-rise (S22), the vertical garden high-rise Aglaya, and the campus of Lucerne University of Applied Sciences and Arts - are expected to generate a substantial increase in income as of 2018. These projects account for an investment volume of around CHF 450 million. Long-term agreements have already been secured for some 75% of this future rental space.

Development and marketing status update:

• Construction of the third development phase/buildings S16, S18 and S20 (see chart on page 15) was completed on schedule. The staggered handover to tenants began in the fourth quarter of 2017, with completion scheduled for mid-February 2018. The investment volume for the approximately 11 000 m2 of commercial space, 152 apartments and 52 student accommodation units amounts to some CHF 110 million. Car-sharing service provider Mobility and market research institute GfK are the principal tenants. The occupancy level for the apartments is 100%, and for the commercial space 81%.
• Construction work on what is currently set to be Switzerland's tallest wooden building is likewise going to schedule. The investment volume for office building S22 is approximately CHF 55 million. Long-term rental agreements have been concluded with biotechnology company Amgen for around one-third of the commercial space. Arval and Mobilezone have also joined the ranks of notable future tenants certain to further enhance the Suurstoffi site's appeal as a business location. A staggered move-in is planned over the period from summer 2018 to the end of the year. Long-term rental agreements have already been concluded for 60% of the 11 885 m2 of office and commercial space. Negotiations (some at an advanced stage) with further prospective tenants are underway.
• The vertical garden high-rise Aglaya is also in the design and build phase. Completion and hand-over is scheduled for the first half of 2019. The investment volume runs to approximately CHF 100 million, 92% of which is for promotional purposes. The marketing successes are also encouraging, with 70% of apartments already sold or reserved by end-2017.
• Following the issue of the building permit for the campus of Lucerne University of Applied Sciences and Arts in July 2017, work on the CHF 185 million project could begin immediately. Three buildings with a total of 26 000 m2 of rentable office and commercial space are to be constructed. Long-term rental contracts have been signed with Lucerne University of Applied Sciences and Arts for around 70% of this space, and move-in is scheduled to be completed by fall 2019. The second construction phase is scheduled for completion by summer 2020.
• Consistently strong demand for commercial space prompted the decision by Zug Estates to begin planning work on the last two buildings at the Suurstoffi site (S43 and S45). Zurich-based Bauart Architects and Planners Ltd were awarded the mandate to conduct a study. The needs-led project is to be carried out in stages.
• A master plan was initiated to develop the Zug City Center site. Initial results from the four interdisciplinary teams are expected in Q2 2018.
• Furthermore, renovation of the 73 rooms at the Parkhotel Zug was completed on time.

Business hotel segment
In a challenging market environment, Hotelbusiness Zug AG succeeded in maintaining occupancy rates at its establishments despite a slight increase in room prices. At CHF 10.6 million, income from hotel activities was slightly lower than in the previous year (CHF 10.9 million). This is due mainly to the related temporary non-use of the 73 rooms at the Parkhotel Zug while they were under renovation. Catering income remained stable at CHF 5.5 million. Overall income for the business unit decreased 1.6% year-on-year to CHF 16.8 million. Following a significant increase in the previous year, the business unit's GOP (gross operating profit) was maintained at a high level.

Outlook for 2018
Overall, we are looking to see a slight improvement in operating income before depreciation and revaluation. We anticipate a year-on-year increase in net income excluding income from revaluation.

In the real estate business unit, we expect to see a rise in rental revenue as construction site A (S16-20) is completed and as tenants start moving into building S22 from summer 2018 on. At the same time, further renovation work at the Metalli complex points to higher property expenses.

In the hotel & catering segment, thanks in part to the newly renovated rooms, we expect to maintain sales and gross operating profit at prior-year levels in what remains a difficult market environment.

Proposals to the general meeting 2018
Net income excluding income from revaluation, which is relevant for the payout to shareholders, amounted to CHF 51.85 per series B registered share (previous year: CHF 48.73). The solid result and intact future prospects allow the board of directors to propose that the payout be increased by 10.9% to CHF 25.50 per series B registered share. This corresponds to a payout ratio of 49.3%.

Departure from the board of directors

We announced in March 2017 that Heinz M. Buhofer will be stepping down from the board of directors at the 2018 general meeting of shareholders. With his great farsightedness and entrepreneurial spirit, Heinz M. Buhofer has played a key role in shaping the company since 1984. For over ten years, he was chairman of the board of directors of predecessor firm MZ Immobilien AG, and was chairman at the time of the successful stock exchange listing of Zug Estates in 2012. The board of directors wishes to thank Heinz M. Buhofer for his successful contribution over many years and for his judicious and committed approach.

Changes to the shareholder structure
In connection with his resignation, Heinz M. Buhofer had proposed that a voluntary offer be considered for the conversion of series A registered shares (voting shares) into listed series B registered shares, provided that this continues to satisfy Lex Koller restrictions and that it enables a successor solution from within the company. Both conditions have been satisfied, and the board of directors has thus decided to submit to shareholders with voting rights a voluntary conversion offer, subject to the requisite resolution of the general meeting of shareholders. This reinforces the public nature of the company and increases the liquidity of B shares. To ensure compliance with Lex Koller over the long term, the board of directors is proposing an amendment to the articles of association that will place even greater emphasis on this element in future.

The purpose of the conversion offer published today (see https://www.zugestates.ch/de/investor-relations/generalversammlung.html) is to make the increase in the freely tradable portion of B shares possible and facilitate the transition between generations among key shareholders. Consequently, the significant shareholder groups and shareholders have already issued their approval for the conversion of a total of 1 434 130 A shares into B shares. The offer applies to all 1 948 640 A shares. In the period from March 22, 2018, to April 6, 2018, 2 p.m., shareholders holding A shares may avail themselves of the offer to convert A shares into B shares, at a ratio of 10 A shares to 1 B share. Holders of A shares will be notified by their custodians of the further procedure involved prior to the start of the conversion period.

To ensure long-term conformity with Lex Koller, the board of directors is also proposing to the next general meeting of shareholders that the articles of incorporation be amended accordingly.

The board of directors is also proposing that entrepreneur Johannes Stöckli be elected to the board. Having him and Annelies Häcki Buhofer on the board continues to ensure that anchor shareholders with a long-term outlook are well represented, and that the continuity which is so vital to a real estate company remains intact.