Martin Durchschlag, CEO, and Laurent Spindler, CFO, were interviewed by Beat Seger.
What were the most significant events of the business year 2018?
Martin Durchschlag: Through strategic acquisitions worth about 11% of annualised rental income, we were more than able to compensate for announced tenant departures, particularly those of ABB Turbo Systems AG in Klingnau, and thus strengthen cash flow growth and the dividend base.
Laurent Spindler: We also increased the average lease term of the portfolio again in the 2018 business year. The weighted average lease term is now roughly 10 years. We also further expanded the redevelopment portfolio. Approximately 50 projects are planned for the next 10 years with an investment volume of about CHF 1.8 bn and 620’000 m2 of usable area.
Are you satisfied with the overall results?
MD: This was HIAG’s most successful year yet in the real estate sector. We were able to make progress in many redevelopment projects, which will support long-term income growth. The high value increases are due to this performance, and not to market effects. Even with investments in HIAG Data, we were able to increase earnings compared with the previous year. We also reached an important milestone with the announced partnership with SIX.
LS: HIAG’s inclusion in the EPRA index was also a gratifying development, considerably boosting the visibility of the HIAG share.
What impact does the inclusion in the EPRA index have on the HIAG share?
LS: Since the inclusion in the EPRA index, liquidity has practically doubled, as this inclusion is an investment prerequisite for many investment vehicles that have now bought our shares.
MD: Inclusion in the index supports the long-term tradeability of the share, which ultimately benefits all shareholders.
HIAG manages to regularly make strategic acquisitions in a highly competitive investment market. What is your recipe for success?
MD: It can be very different from one transaction to the next. This year, for example, we negotiated sale-and-lease-back transactions with partners who have long-term strategic interests in these sites. Our experience and skill in industrial uses play a central role in this. The fact that we can support these companies in the implementation of their strategy is given at least as much weight as economic factors, and can make all the difference when closing the deal.
You made several sale-andleaseback transactions during the business year 2018. What are the strategic considerations underlying these investments?
MD: The three sale-and-leaseback transactions in Brunegg, Goldach and Pratteln are consistent with our strategy, but have different starting points. The Brunegg transaction concerns the consolidation of an existing property that allows us to expand and thus better position our existing logistics site. In Goldach, the production site includes an approximately 63’000 m2 campus, where a new hall is being built. Should manufacturing activities be discontinued here one day, the site could also serve other purposes based on its location. The building structure in Pratteln, on the other hand, is definitely in its final cycle of use. Over the coming years, rezoning can be prepared here.
LS: With sale-and-leaseback transactions, we always use various scenarios in order to be prepared in the event of a change in the tenant structure. The buildings’ potential for third-party use also plays a key role in this.
So you always have a strategy in mind for the site when you make an acquisition?
MD: That is correct. We consider acquisitions only when their size, context and site strategy fit our portfolio.
LS: That also applies to Brunegg, Goldach and Pratteln. On one hand, we always aim to increase portfolio cash flow in the medium term via long-term leases, thus supporting the dividend payout to HIAG shareholders. On the other hand, we have already laid out long-term development strategies for two of the three sites.
What do you do to make a site successful?
MD: Our main concern is an entrepreneurial vision. How can a site be developed? Where and in what ways can a centre be created that allows for a vibrant use with jobs, residents and cultural exchanges? These considerations are incorporated in our master plan and become more focused the closer we get to the time of actual implementation. Throughout this process, we develop ideas and concepts that help us to identify potential users, which we contact directly in order to optimise the mix that we envision at a site in the long term.
LS: Each site is unique. That’s why it is important that we rethink our vision every time while making use of synergies from proven concepts across the portfolio. Success is reflected in value adjustments over the long term. This revaluation is driven by actual redevelopment steps such as permits, cost security and leases. The result can then be seen in both the income statement and the cash flow development, and shows what we have accomplished at the sites.
When do you start attracting tenants for your sites?
MD: Efforts begin immediately. Naturally, the question does not arise for a sale-and-leaseback contract. For a site that is undergoing a long-term transformation process, it takes a certain amount of time for us to establish the legal basis for the interim use of the site. The earlier a site becomes available, the more actively we can enter into discussions with tenants or contact those that we would like to have at the site.
LS: These types of initiatives can emanate from portfolio management as well as site redevelopment.
What sets HIAG apart in terms of site redevelopment?
MD: We consider site redevelopment as an intensive communication task, in which we balance the interests of established structures, existing users and the public. From this point, we develop our entrepreneurial vision and actively contribute our experience as a family business with industrial roots. It is also important for us that our very large sites develop their own strong identity. We want to attract vibrant communities that identify with a site and participate actively.
LS: Through an active and sometimes extensive management of the interim use, we grant ourselves the necessary time to position a new quarter.
HIAG is solidly self-financed. Would greater leverage make for faster project development?
LS: Successful site redevelopment does not depend on financial possibilities only. Every project can be financed with a well-developed use and a long-term lease. But forcing this condition on the timeline would mean having to make compromises.
MD: We can afford the time, because we maintain an active interim use at the sites and generate rental income. The better we position a site, the greater the ultimate leverage for long-term value creation.
And what is going on at the sites in Dietikon, St. Margrethen or Biberist, for example?
MD: The future positioning of the Dietikon retail site still depends on the impact of the development of the Limmattal suburban train. Instead of rebuilding the entire site all at once, we decided to upgrade the existing structure step-by-step and prolong contracts with anchor tenants such as Media Markt on a long-term basis. We are kicking off the structural renovation with the new building for XXXLutz, offering clear visibility from the motorway. This building will set the tone for the further redevelopment of the site.
LS: In St. Margrethen, we are taking a completely different approach. We are transferring construction rights for approximately 70’000 m2 of a total of 100’000 m2 of the historic HIAG site to Stadler Rail until 2080. In doing so, we harmonised the duration of use of our two adjoining sub-sites in St. Margrethen and allowed the region to take an important development step. In 2018, we sold the last paper machines in Biberist, which are now being dismantled. As of mid-year, we will be free to tackle the revitalisation of the entire site.
MD: A large part of the available surface area in Biberist is being used again today. Between 100 and 150 jobs have already been created at the site. We aim to establish a distinctively entrepreneurial and innovative site, where different companies can create new concepts. Our new tenants include an innovative 3D printing company, for example, and in 2019, eSports events for Swiss leagues will take place regularly in Biberist.
At HIAG, you are not just talking about digitisation, you are actively promoting it with HIAG Data. Could we say that as a provider of specific cloud infrastructure solutions, HIAG is also an enabler of the digital transformation?
MD: We use synergies from both fields of activity to take the strategic discussion to another level. What is currently happening with technology is disruptive in more and more areas. Sooner or later, these changes will affect every business model. So we are not talking about two different worlds, but rather about two merging worlds.
What is happening with the strategic partnership with SIX announced in December?
MD: HIAG Data’s Board of Directors decided to focus on large partners in this highly regulated environment that are developing their own services on HIAG Data’s platforms. This refocusing is accompanied by an extension of the investment phase. HIAG Data’s vertical integration is also developing beyond that of a pure infrastructure provider. Together with SIX, we announced our plan to offer SIX’s customers our first services on this platform in the third quarter.
What are HIAG’s objectives in terms of sustainability?
MD: HIAG’s business model is sustainable by its very nature: to develop sites in such a way as to create vibrant, well-mixed quarters where high added value can be created. The United Nations set forth 17 sustainable development goals in its 2030 agenda, which can be recognised in many of our developments. In particular, the goals of “Industry, Innovation and Infrastructure”, “Sustainable Cities and Communities” and “Responsible Consumption and Production” are at the heart of our understanding of site redevelopment. We are presenting our projects in the context of these sustainable development goals for the first time in our Sustainability Report.
In conclusion, could you tell us a little more about your objectives for the 2019 business year?
MD: Each site has its rhythm and specific focus. Due to the longterm orientation of the projects, we generally do not set annual objectives. We are pleased to be able to take the first steps towards formulating our vision in Geneva in the PAV redevelopment area, as well as in Niederhasli. The development of communities remains a challenge in the portfolio as a whole, and synergies with HIAG Data also play an important role.
What basic conditions do you need to achieve your goals?
LS: In the future, we hope for as stable as possible a political and economic environment inside and outside Europe. Switzerland’s locational advantages are acknowledged throughout the world, and the preservation of these advantages is important in order to attract companies.
MD: The momentum comes from young companies that operate from Switzerland with global business models. To attract these kinds of companies, giving them access to top professionals from around the world, is essential. Strict thirdcountry quotas lead to a situation where many innovative startups do not have Switzerland on their radar.