ANNUAL REPORT 2018 Contents Strategy and Management Report Corporate Governance Report Compensation Report Financial Report Reporting structure Swiss Prime Site AG is the leading listed real estate company in Switzerland. The core of the Company’s business is its property portfolio, which is man- aged sustainably and innovatively. Reporting consists of the Strategy and Management Report, which is available online (annualreport2018.sps.swiss), and the separate sub-reports (PDF download). For reasons of innovation and sustainability, only the short report is available as a printed version. STRATEGY AND MANAGEMENT REPORT 2018 Contents Strategy and Management Report 3 Our strengths at a glance 6 Foreword by Hans Peter Wehrli, Chairman 7 Our success story 8 Our markets 10 Risk management 12 Interview with René Zahnd, CEO 17 Financial commentary by Markus Meier, CFO 22 Business model 24 Sustainability 25 Value creation 33 Board of Directors 34 Strategy 35 Executive Board 36 Real Estate portfolio 38 Project pipeline 40 Interview with Peter Lehmann, CEO Swiss Prime Site Immobilien 44 Information policy Strategy and Management Report At a glance Our strengths at a glance CHF Sustainable business model Stable financing Swiss Prime Site invests in high-quality land, properties The Company is solidly financed with debt and share- and locations. These, together with conversions and holders’ equity. The equity ratio is 43.9%. Debt is balanced developments of entire sites, make up the Company’s in its composition, using a range of instruments such as core business. Vertically integrated real estate-related bonds, mortgages and loans. The loan-to-value ratio is group companies complement the core business and 45.3%. provide attractive added value. First-class locations High profitability and growth The current portfolio of 190 high-quality properties com- The existing property portfolio realises an attractive net prises Swiss properties with good value retention situated yield of 3.6%. Swiss Prime Site achieves a return on in first-class locations, which have a fair value of CHF 11.2 equity of 6.4%. The project pipeline for the coming years billion. The Company has a strong focus on office and comprises more than 20 projects with an investment retail space. The vacancy rate is 4.8%. volume of around CHF 2 billion. CHF High share liquidity Well-balanced dividend policy Swiss Prime Site is the largest stock exchange-listed real The Board of Directors pursues a consistent and investor- estate company in Switzerland, with market capitalisation friendly dividend policy. Around 80% of the profits gen- of CHF 6.0 billion. The 76 million registered shares have erated, excluding revaluations and deferred taxes, are a free float of 100% and high liquidity on the SIX Swiss currently returned to the shareholders. The dividend yield Exchange. is currently 4.8%. 3 Strategy and Management Report At a glance Results People Potential 1 214 6 295 2.0 million CHF operating income employees billion CHF project pipeline +5.1% year-on-year +6.5% year-on-year −4.8% year-on-year 310.9 4 513 1.6 million CHF profit women million m2 rental space +1.8% year-on-year +1.7% year-on-year −0.5% year-on-year 3.80 449 4.8 CHF dividend¹ apprentices percent vacancy rate unchanged year-on-year +11.4% year-on-year −7.7% year-on-year ¹ Proposal to the Annual General Meeting on 26 March 2019 4 Strategy and Management Report Foreword Chairman of the Board of Directors Dear Shareholders Swiss Prime Site made good progress in 2018 in its core business and the vertically integrated real estate-related business fields. Robust economic performance and stable business conditions on the Swiss capital market allowed us to continue to implement our strategy according to plan. 2018 was a successful financial year for the entire group. Our In short, we are happy with the past financial year, and we are results at all levels reflected the goals we had set ourselves. optimistic about the coming year. I would like to thank you, our Operating income increased by 5.1% to CHF 1 214.1 million. It is valued customers and partners, for your trust and support. My gratifying to note that growth was underpinned by both the Real thanks also go to all employees across the entire Swiss Prime Site Estate and Services segments. Profits rose by 1.8% to CHF Group, the Executive Board and my colleagues on the Board of 310.9 million. This includes profits of CHF 67.6 million from reval- Directors. uation of investment properties. In addition, important transactions allowed us to increase the value of the portfolio to CHF 11.2 billion. We also made important progress within our development pipe- line. In Geneva, both of our important urban development projects, «Espace Tourbillon» and «Alto Pont-Rouge», are making very good Hans Peter Wehrli headway. The modification of the «Schönburg» building has Chairman of the Board of Directors progressed, enabling staged hand-over to tenants this year. In Basel, the former Stücki shopping centre is currently experiencing a repositioning as an attractive mixed-used site with high demand for floorspace for laboratories, offices, research and health. In Zurich, we have begun work on the modification of a large site in Schlieren, which is designed as an important hub for knowledge transfer, entrepreneurship and innovation. The acquisition of the «West-Log» project in Zurich as an urban logistics property with great future potential represented a significant enhancement to our pipeline. In the real estate-related business fields, we are investing in digitalisation and expansion, thereby strengthening our individual business models. 6 Strategy and Management Report Success story Our success story Swiss Prime Site was founded in 1999. By 2018, the Company had grown to become the largest stock exchange-listed real estate firm in Switzerland, with a property portfolio currently valued at CHF 11.2 billion. By means of acquisitions, property developments and conversions as well as sharp focus on prime locations, Swiss Prime Site has continuously built up its portfolio. The acquisition of Maag Holding with the Maag site in Zurich-West in 2004 count among the most significant takeovers. Prime Tower and the surrounding annex buildings were subsequently developed at the site. The acquisition of the Jelmoli portfolio of properties in 2009 doubled the value of the Company’s real estate holdings. Since that time, Swiss Prime Site has carried out key strategic acquisitions with Wincasa (2012) and Tertianum (2013). In addition, Swiss Prime Site has generated additional growth and created Fair value premium properties by means of significant in-house developments – such property portfolio in CHF billion as SkyKey Zurich (2014) and Espace Post Berne (2015) – or conversions of former office floor space (for example, Motel One Basel and Zurich). 11.2 10.1 10.6 9.8 9.7 9.3 8.6 8.1 8.0 8.2 3.7 3.8 3.3 3.3 3.5 2.0 2.2 1.7 0.8 0.5 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 2018 Swisscom Arthur Frey Maag Jelmoli Wincasa Tertianum SENIOcare BOAS Senior Care Cityport Messeturm OPUS Sihlcity¹ PostFinance Prime Tower SkyKey EspacePost Gotthard Motel One Beethoven- Zurich Basel Zug Zurich Arena Zurich Zurich Berne Building Zurich strasse Berne Lucerne Zurich ¹ sold as at 1 October 2018 7 Strategy and Management Report Our markets Our markets Swiss Prime Site Group operates in the Swiss real estate market with its core business. The most significant influencing factors for the Company include the rental, transactions and capital markets. Other important impulses emanate from the national retail trade as well as the demand for senior services. Rental market Capital market From June 2017 to June 2018, around 63 000 positions were Both direct and indirect real estate investments continue to profit created in the services sector, generating increasing demand for from high investor demand. Swiss Prime Site took advantage of office space. Demand developed at a dynamic pace, in particular the favourable market climate in the late summer of 2018 for a in the major centres important for Swiss Prime Site such as Zurich capital increase totalling around CHF 331 million. The pleasing and Basel, and significant rental contracts were finalised. The subscription result of over 98 % confirmed the attractiveness of market for retail floor space remained challenging. Bricks and Swiss Prime Site shares. In addition, a convertible and a fixed mortar stores, and in particular shopping centres, are facing strong interest bond were placed in 2018, with proceeds of the issue competition from e-commerce. Swiss Prime Site benefits from totalling CHF 490 million. For its part, Swiss Prime Investment holding properties in high-traffic central locations that enjoy strong Foundation, the assets of which are managed through Swiss Prime demand. This made it possible to sign follow-up leases, in some Site Solutions, undertook a successful share issue in the amount cases at higher rent prices, for floor space that had become avail- of CHF 221 million. This demonstrates the sustained demand able. Given that the demand for the urban micro-distribution of from pension funds for services in the field of real estate asset goods is likely to increase, this will open up additional opportunities management. While the Swiss Prime Site share outperformed in for Swiss Prime Site. The Company sees great opportunities in the first half of 2018 as a result, in the second half of the year urban logistics and is already investing in two very promising rising bond returns in the US and additional capital increases in projects in Geneva and Zurich.