Several different special effects – including the first proceeds from sales in the Aglaya condominium project, a gain on the sale of an investment property that was not in line with our strategy, further value increases on our portfolio of properties as well as a non-recurring positive tax effect from a reduction in the deferred tax rate – nearly doubled our net income as well.

Qualitative growth continues

Property income rose by 7.3% to CHF 54.5 million due to full-year rental income from the Suurstoffi properties S22 and construction site A, tenants moving into the first phase of construction site 1 as well as rentable space in the Aglaya building.

Sales generated in the hotel & catering business came in at CHF 16.6 million, which represents a slight 0.8% decline over the previous year. This is due to the lower number of overnight stays, which is mainly attributable to the departure of a major customer. There was also a reduction in the number of large-scale events. Gross operating profit (GOP) still remains high, however, at 39.8%.

Compared to the previous year, property expenses rose by 7.7% to CHF 7.8 million due to overall growth in the real estate portfolio. These expenses included investments made for renovation work at the Suurstoffi site as well as an increase in maintenance work at the Zug City Center site.

Operating income before depreciation and revaluation rose from CHF 42.2 million to CHF 53.4 million (+26.6%). This striking increase is attributable to sales proceeds from promotional activities (first phase of the Aglaya condominium project). The sale of the first 36 of a total of 85 condominium apartments generated a total pre-tax profit of CHF 7.9 million. The remaining 49 units have been sold in the meantime and the proceeds from those sales will be posted to the 2020 financial year.

At CHF 19.6 million, which is 76.4% or CHF 8.5 million higher than the previous year, income from revaluation has increased significantly due to the above-average locational and property features of our mixed-use portfolio, ongoing development and positioning of the sites as preferred residential and business locations, successful re-rental efforts and factors on the overall market with respect to real estate. We were also able to sell an investment property that was not in line with our strategy at market value in the year under review; this sale generated a pre-tax profit of CHF 1.0 million (no investment properties were sold in the previous year). EBIT rose from CHF 49.8 million to CHF 70.5 million (+41.7%) as a result. The release of deferred taxes in the reporting period due to a revision of the tax laws in the Canton of Zug also gave rise to a non-recurring positive tax effect of CHF 20.3 million. Driven by both solid operational growth as well as the special effects mentioned above, net income rose by 95.9%, from CHF 38.8 million to CHF 76.0 million. Excluding revaluation and special effects, the Group's net income showed operational growth of 9.6%, from CHF 28.6 million to CHF 31.4 million.

Considerably higher distribution

In an effort to gradually increase the distribution to two thirds of net income excluding revaluation and special effects, the board of directors will propose to the general meeting of shareholders that the dividend be increased by 10.7%, from CHF 28.00 to CHF 31.00 per series B registered share. Since shareholders should also participate in the proceeds from the sale of the Aglaya promotional project, an additional proposal is being made to distribute this year's promotional profit after tax in full in the form of a special dividend of CHF 13.00 per series B registered share. This would increase the distribution from CHF 28.00 to CHF 44.00, or by 57.1% per series B registered share. A decision regarding the distribution of a special dividend, if any, from 2020 promotional profit will be taken in the spring of 2021.

Value of portfolio climbs to CHF 1.63 billion

Brisk development activity at Zug Estates resulted in portfolio investments of CHF 85.9 million in the year under review. Properties worth another CHF 40.9 million were sold as part of the Aglaya promotional project. The market value of the overall portfolio rose by 6.2%, from CHF 1.54 billion to CHF 1.63 billion.

Slight increase in vacancy rate

The completion of buildings A and B on construction site 1 as well as the addition of new rentable space in the Aglaya building meant that around 22 600 m² of new commercial space was added to the vacancy calculation for 2019. The vacancy rate only rose by 0.4 percentage points during the year, from 2.9% to 3.3%, even despite this sharp increase in space.

Green bond placement

September 2019 saw Zug Estates become the first Swiss real estate company to successfully place a six-year, CHF 100 million green bond with a coupon rate of 0.1%. The proceeds of the bond will be used exclusively to refinance outstanding short-term loans connected to the construction of three buildings on construction site 1 of the Suurstoffi site. The buildings, one of which is Switzerland’s tallest wooden high-rise, meet the most stringent of sustainability requirements and offer measurable environmental benefits. Zug Estates is using the green bond to diversify its financing structure and reduce the average interest rate of its debt from 1.8% per year in 2018 to 1.4% for the 2019 financial period at an average residual term of 5.2 years (previous year: 5.4 years). Thanks to cash inflows from the sale of promotional properties, which are used to repay debt, and despite brisk construction activity, interest-bearing debt as a percentage of total assets saw a marginal increase from 35.7% to 36.1%.

Zug City Center site

• Demand remains high for retail and office space at the Metalli complex and rental contracts for space totaling more more than 4 600 m² were either renewed or extended during the year under review. Contract negotiations for the remaining commercial space are already at an advanced stage.
• The second phase of an extensive CHF 1.5 million renovation project on the property at Liegenschaft Baarerstrasse 14a was completed on schedule at the end of 2019.
• Preparatory work to connect it to the Circulago lake water district is nearly finished. Assuming that the final steps proceed according to plan, the entire Metalli complex will be operating nearly CO₂ free from April 2020 onwards and have its heating and cooling requirements covered by water from Lake Zug.
• Contracts to connect the remaining 16 properties to the Circulago lake water district were signed in December 2019. Commissioning is to take place in stages in 2021, 2023 and 2025. From then onward, Zug Estates will be able to operate its entire portfolio nearly CO₂ free.
• December 2019 saw work begin on the installation of CO₂-neutral air conditioning system in the rooms of Parkhotel Zug. This project, which has an investment volume of around CHF 1 million, is scheduled for completion in April 2020 and will offer guests a significantly more comfortable experience.
• The adjustments to the Metalli and Bergli development plans needed to develop the city center are being made together with the city of Zug. For this, a planning agreement was concluded with the city of Zug, which clarifies the general conditions for the joint project. To clarify urban design-related issues, three planning teams took part in something referred to as a quality assurance competition (QAC), which began in August and was successfully completed in December 2019. A reference project should be available from Q2 2020 onward, which will serve as a baseline for adjustments made to the two development plans. The legally binding, modified development plans are expected to take effect in 2022/23.

Suurstoffi Rotkreuz

• In September 2019, approximately 19 000 m² of teaching and office space on construction site 1 was handed over to the Lucerne University of Applied Sciences and Arts on schedule. This space is subject to a long-term rental contract. Prominent, long-term tenants were found for the 2 000 m² of space on the top three floors of the ARBO wooden high-rise: Burger Söhne AG (Dannemann), Sanofi Aventis and Konplan AG. In fact, demand for these spaces is so high that we can expect the ARBO building to reach full occupancy sometime during 2020. The completion of the third building with a total area of 4 900 m² is scheduled for Q2 2020. Around 74% of the total area available for rent of 25 000 m² on construction site 1 has already been rented on a long-term basis.
• As announced, the Aglaya garden high-rise was completed in early November 2019. The last of the 85 condominium apartments were also sold at the same time. Tenants gradually began to move in on November 4 and the final phase of this process is expected to be completed end of March 2020. 2 100 m² of commercial space has been leased to Spaces, a provider of coworking space, and Sapori's, an à la carte restaurant. This project had an investment volume of around CHF 100 million, 92% of which was for promotional purposes.
• The final two floors of the S22 wooden high-rise, with a total area of 2 950 m², were rented to the global medical device company Align Technology in June 2019.
• A floor with a total area of 1 000 m² was rented to Arisco Versicherungen AG in the S41 building. This space had previously been used by the Lucerne University of Applied Sciences and Arts on a temporary basis.
• Longer-term rental contracts were concluded in 2019 for a total of nearly 5 900 m² of commercial space at the Suurstoffi site, which will generate annual income of more than CHF 1.4 million.
• Zug Estates received the building permit needed for the final two commercial buildings, S43 and S45, at the end of 2019. These two buildings comprise total rentable space of 18 000 m² and construction on them will take place in stages and in line with demand. The last of three geothermal sites will be built during the final phase of the Suurstoffi project, thus marking the completion of the sustainable power system.

Outlook for 2020

In the real estate business unit, we anticipate an increase in rental revenue due to full-year rental revenue, newly rented space from the first phase of construction site 1 and rentable space in the Aglaya building. At the same time, renovation work at the Metalli complex and further maintenance work at the Suurstofff site point to higher property expenses. Lower investment activity will significantly reduce the share of capitalizable financing costs and increase financial expenses considerably as a result.

We expect sales and gross operating profit in the hotel & catering segment to fall short of prior-year levels due to impact of the coronavirus.

For the 2020 financial year we are looking to see another year-on-year increase in operating income before depreciation and revaluation, largely driven by the second wave of projected sales proceeds from the Aglaya condominium apartments.

We are not able to make any definitive assessment of the impact on net income excluding revaluation and special effects at this time.