Swiss Prime Site closed the first half of 2023 with strong operating results. Like-for-like (LfL) rental income was up by 3.4% compared with the same period last year. This was due to a strong rental market with notable lettings success and indexation in existing rental contracts. The Asset Management Business increased the Assets under Management by 6.5% to CHF 8.2 billion. With strict cost discipline, operating cash flow (Funds from Operations, FFO I) was almost constant at CHF 2.01 per share despite a significant increase in interest expense. With the current market visibility, Swiss Prime Site confirms the guidance set for the financial year 2023 with a stable FFO I and an LTV below 40%.
René Zahnd, CEO of Swiss Prime Site: «It’s been an extraordinary half-year for us. We’ve significantly streamlined our business model by repositioning the Jelmoli building and selling Wincasa, and done so in a challenging environment where the industry has been adjusting to higher capital costs and reduced valuations. It’s all the more important that we create value in areas where we are market leaders: property management and development – both for our own portfolio and for third parties. We expect our streamlining measures to make us even more agile and efficient. Overall, we’re satisfied with the first half and confident about the remainder of the year.»
Following the sale of Wincasa, Swiss Prime Site has modified its financial reporting based on IFRS 5 for the half-year. Wincasa is separately reported as discontinued operations, and previous years adjusted accordingly. Alongside, the segment reporting will be adjusted to reflect the new focussed strategy and the two segments «Real Estate» and «Asset Management» will be reported (until the end of 2024 also the segment «Retail»).
Rental income up, vacancies at a record low
Swiss Prime Site achieved rental income of CHF 218.9 million in the first half of 2023 (+1.9% or +3.4% growth on a comparable basis). This was based on record low vacancies of 4.1% [4.3% end 2022], thanks to further success in lettings. The high indexation rate of around 90% for the rental spaces also had a positive effect on rental income. The weighted average unexpired lease term (WAULT) remained almost stable at 5.2 years.
Revaluations due to higher discount rates
The notably higher interest rates had an impact on the assumed discount rates in the models of the external appraiser Wüest Partner. The averaged nominal discount rate increased to 3.93% as of 30 June [3.72% end 2022]. Thanks to an increase in new lettings, rent indexation and strict cost discipline, Swiss Prime Site managed to significantly cushion the negative valuation effects caused by the discount rate. Overall, the revaluation effect of the property portfolio amounted to CHF -98.8 million [CHF +166.6 million H1 2022]. This represents a relative reduction of -0.74% in fair value compared to the end of 2022. As at the balance sheet date, the total value of the property portfolio stood at CHF 13.1 billion and was therefore stable compared to the end of the year thanks to further investments in the pipeline and existing properties.
Robust transaction market
Despite the lower estimated fair value of the existing portfolio, Swiss Prime Site produced substantial profits with the sales of non-core properties of around 10% above fair value as at the end of 2022. Since the beginning of the year, ten properties were sold with a total transaction volume of CHF 148 million; two of these sales occurred after the balance sheet date. Under the capital recycling strategy, proceeds from these transactions are being reinvested in current development projects.
Less growth in asset management but greater market share
In the first half of the year, the market environment for the business area Swiss Prime Site Solutions proved to be very challenging due to subdued investor appetite. Despite attractive opportunities for acquisitions, the business was not able to carry out all planned capital increases to the targeted level. It still grew Assets under Management by 6.5% to CHF 8.2 billion [CHF 7.7 billion end 2022]. Due to the low funding volume, income from asset management fell to CHF 22.2 million [CHF 27.2 million H1 2022] and EBIT reached CHF 11.3 million [CHF 17.1 million]. Accordingly, the EBIT margin fell to 51.1% [63.1%] – this with a significantly higher ratio of recurring fees (78% vs. 53% 2022). For the year 2023, the company is anticipating – in a challenging environment – a good operating result.
Strict cost control continues
There was a slight fall in real estate costs, and further decreases are anticipated in the second half of the year. The first effects of streamlining the corporate structure are becoming apparent in other operating expenses, which declined by 15%. There was a marginal increase in personnel costs through the internalisation of competencies in the development team. By streamlining the corporate structure, Swiss Prime Site is expecting total savings to amount to around 10% of operating costs (excluding Jelmoli), which equates to around CHF 7.5 million per year. The effects should become fully apparent from 2024 onwards.
Very good financing market but higher costs
In the first half of the year, Swiss Prime Site tapped its existing sources of financing and issued a convertible bond within the Green Finance Framework worth CHF 275 million at an attractive rate of 1.625% in June. Due to the interest rate hikes by the Swiss National Bank (SNB) resulting in higher base rates on refinancing, net financial expenses increased to CHF 28.1 million in the first half of 2023 [CHF 21.4 million H1 2022]. Average interest costs currently stand at 1.2% (+30 bps vs. end 2022).
Higher profits with Wincasa sale
Profit excluding revaluations increased to CHF 298.9 million [CHF 158.0 million H1 2022], boosted by the CHF 145.9 million gain from the sale of Wincasa. Excluding this one-off effect and adjusted for other Wincasa profits, profit excluding revaluations amounted to CHF 149.2 million [CHF 152.6 million; -2.2%]. The slight reduction was due to higher financing costs and lower income from asset management, offset by higher rental income and lower costs in the real estate segment.
Stable FFO I and another fall in LTV
FFO I was largely unchanged at CHF 2.01 per share [CHF 2.09 H1 2022]. The main reason for the slight reduction was the cessation of Wincasa’s contribution as of the beginning of May. Compared with the first half of 2022, the loan-to-value ratio (LTV) for the property portfolio went down further by around 0.5 percentage points to 39.7% [40.2% June 2022], corresponding to a slight seasonal increase from year end 2022 due to the dividend paid in the first half of the year [38.8% end 2022]. The average residual term to maturity of interest-bearing financial liabilities came in relatively stable at 4.8 years per balance sheet date [5.0 years end 2022]. At CHF 101.40, the net asset value (EPRA NTA) per share was slightly higher than in the previous year (+ 0.6% vs. H1 2022).
Targets for the 2023 financial year confirmed
Swiss Prime Site’s management is optimistic about the second half of the year given current market conditions. With a further increase in rental income the company is anticipating a stable FFO I, despite increasing financial expense.
