PSP Swiss Property AG (PSPN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Full Year 2023 Results Conference Call. I am Vicky, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Giacomo Balzarini, CEO of PSP Swiss Property. Please go ahead, sir.

Thank you, and good morning to everybody to our results release of 2023. As always, we'll do a quick rundown of the major points of our results and then leave room for the Q&A. Just to start, we just released, I would say, outstanding operating results, which were backed by a healthy letting market in our areas. We were able to undertake an excellent transaction in the first quarter of last year. And as we will see, we had quite a strong execution of the projects we have in the pipeline and everything in line with a very lean and stable organizational structure. And on the funding side, as you will see, and we have also announced previously, we were able to finally conclude the full finance concept linked to a sustainable KPIs. If you go to Slide 3, just as a highlight, you will see here as always, our major activities are concentrated primarily in the Zurich CBD, Geneva CBD and then also following the other three major cities, Bern, Basel, Lausanne, this will continue like this. We will concentrate our activities in where we think is the strongest labor markets in Switzerland and where we have the strongest resilient returns in these. Looking at Slide 4, we were confirmed as I mentioned at the beginning, with a strong letting market, we see limited new demand in the CBDs of Zurich and the space of Geneva. We see here companies who want to be active in those city centers and thanks to the investments undertaken by the landlords over the last, I would say, almost a decade, we have quite high-quality asset portfolios, which also allows those tenants to be active. You will continue to see quite a strong bifurcation from prime to non-prime. Luckily, we are not active or very limited active on the non-prime areas, but there, we would expect a stronger bifurcation also in '24 with regard to rent levels and also with regard to valuations. On the transaction side, as also publicly known by values and reported, there's very few for sellers. We have a bit pickup of transactional evidence, but the transactional market is continues to be healthy and underlies the current in-place yields as we can observe. If you go into the key figures of the rental income and the consolidated income on Slide 9. The rental income for 2023 came in at CHF 331.9 million. This is an increase of 5% or CHF 15 million. The like-for-like growth was 5.1%, where of 2.8 percentage points came in from the inflation. For 2024, the indexation is 1.4%, still quite a strong top line growth clearly less of a strong like-for-like growth, but anywhere a very strong, again, expected top line growth for '24 impact also on this inflation adjustment. We'll come back to the valuation changes, which came in negative by CHF 161 million on the later slide. And you see here also the property sales revenues, CHF 14 million were already reported in Q3. One asset was in Wädenswil and then the disposals of the Parco Lago apartments and a plot, land plot in Bern. Here you see a certain volatility in the earnings on this side, but we continue to develop assets and dispose them as we go through the near future. On the expense line, Slide 10. As you know, we aim to have an EBITDA margin of above 80%, high cost discipline overall operating expenses, again, around CHF 56 million, very stable operating expenses, which is also due to the fact that we have our in-house property management and are able to very closely monitor any type of accesses or deviation. Maintenance and renovation expenses depend on the project pipeline, but this year came a bit down by 15%. Personnel expenses and the general mix expenses pretty flat. I think here, we are on a very stable and foreseeable ground also for the next couple of years. Slide 11, you see the increase of the financial expenses as already previously announced, still historically on a very low level with CHF 23 million, but clearly an increase compared to 2020, '21 or even '22. And as already mentioned also in the half year and in the third quarter, deferred capital tax release overall by almost CHF 100 million, which linked to a positive tax effect for '23, here for '24, we should expect a deferred capital gain benefit of roughly CHF 10 million. Slide 12, you see a continuous strong dividend growth path of PSP. And as we mentioned already various times, based on our top line expectations, our cost discipline, we see this trends to be continued for the next couple of years based on our today's visibility, and we proposed to the AGM an increase of the dividend to CHF 3.85. If you go on Slide 15 and 16, a quick rundown on vacancy. Vacancy came in at 3.6%. The largest one, the largest contribution is the project in bins, which we finished and last year, which moved into the investment portfolio for the -- all the floors, we are in negotiations in discussions with potential tenants. We have an LOI signed for the full light industrial area, and we are confident to be able to conclude those lease agreements in the next couple of months. The product is excellent. I think we need just a bit of time to really conclude all those negotiations, but we are positive that we are able to sign leases and to report leasing successes in the next couple of quarters. The remaining largest vacancies are rather small overall. We have the [indiscernible] in Basel, which is very closely at the main station basically on the main station. We are rebuilding back one floor plates, where we see a lack of demand. But nevertheless, we have seen in Basel that regularly, we are surprised by the market and they're able to let it out. We have full efforts in letting it. However, we have also seen these are rather minor contribution to the overall top line. Worthwhile to mention is the restricted asset in Wallisellen. We are with the local authorities on the rezoning plan. And I think we can report back a bit more details over the next quarters. As this is more of also a political process, but we are positive that we will be able to bring forward a new project, which is really helpful also for the local commonality and the tenant and also for us. Lease expiries '24 from the 9% lease expiries, we are left with 24 percentage points and also for '25, we are already working on the largest leases and we have a very good visibility also on '25 maturities. So I think here, it's nothing to be really worried about. Slide 18 on the changes in fair value. You remember that we had a first revaluation loss in the half year of roughly CHF 90 million, CHF 100 million coming from the investment portfolio on the negative side compensate partially by the development portfolio. We have the positive revaluation gains report in Q3 linked through lease achievements. And then overall, in Q4, we had another negative contribution on the investment portfolio, mainly driven by yield widening of roughly 12 basis points, which was compensated predominantly by the inflating market letting successes, like-for-like rent growth. I think overall, the minus 1.7% of the overall investment portfolio. A couple of words on the finance, Slide 21. As I mentioned at the beginning, we have implemented the full grain finance policy. We have seen also in our view a certain materiality on the negotiations with the banks and of the issuers of the bonds, being on the demand side, being also on the spread side. And if you look on Slide 23, overall metrics, loan to value, the adjusted one at 34.7%, still high credit metrics, reasonable duration, I think we will continue to operate on the back of a very strong balance sheet. A few words on the current projects, Slide 25. Fusslistrasse we were able to fully let the office part. We are left with the ground floor and first floor retail. I think here, we need another couple of months. We have interested parties on the letting side. We are not rushing into it because we believe it's an excellent product at an excellent location. But we see as soon your Bahnhofstrasse and we have a first floor retail, it becomes not immediately obvious. But we have interest. We are in discussions and we are pretty positive that we are able to report letting successes also in the course of this year. Hochstrasse, as you remember, was originally let 50% to a service apartments operator in the first quarter of this year, we were able to lease out the remaining 50% to a school. So the building is fully let before completion in end of this year and it will be an excellent project, an excellent product. We can offer them at the main station of Basel. Bellevue, Globus and Bellevue, nothing new. We will start handing over the surfaces during Q2 and Q3 of this year and the project runs according to plan. Slide 28. I mentioned that already last time, it's the final project and the final asset we are developing on this gross Grosspeter area, where we said that's the most defensive part. We have Swisscom, which retains the infrastructure almost half of the building and we are finishing up and renovating the office part and will be in the market. But clearly, this will take a bit more time, but we see this last piece as an overall finish up of the Grosspeter area, which was really a success story of PSP. And the latest project which we're working on is in Lausanne, the Hotel des Postes, very prominent location at Place Saint-Francois. We have here already signed the leases with Post and Swisscom, which are coming back and working on a repositioning of the building and are starting leasing discussions and this will be then completed by the end of next year. This leads me to the guidance for the year. We are guiding for a vacancy rate again of below 4% as this year. And we are again guiding for an EBITDA of [ above ] CHF 295 million, backed on, as I mentioned, a strong top line growth less condominium sales, which falls into this EBITDA and very stable cost base. And therefore, again, in our view, a very strong operating results to be expected by PSP in 2024. With that, I would like to open for discussions and the Q&A.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Ken Kagerer, ZKB.

I have two quick ones. The first question refers to the EBITDA guidance. Last year, we had, as you mentioned, the likes of sales from Parco Lago. What do you incorporate as a compensation for that -- for the current year?

So far, Parco Lago we have basically closed the project end of last year. I think there will be no significant contribution in '24. The EBITDA guidance foresees CHF 4 million of gains from -- 2 other projects which we are working on, but the Parco Lago project per se is completed.

No, I'm aware of that. I'm just wondering where the other net results from property sales like Parco Lago comes from? But you said 2 other projects that should contribute CHF 4 million, is that correct?

We are working on completely 2 and in our EBITDA guidance 4 are considered for it. And we'll report back on -- depending on the progress during the next quarters.

Excellent. And the second question is really with regards to the renewals for 2024. I mean, you have done a good job, there is only a limited open. But could you just tell us where and why this is the case? And if you have any of those implied into your vacancy guidance?

The full expiries is embedded in our guidance. I think the biggest one is clearly the bins, which is actually the biggest contributor on the vacancy. Here we have foreseen letting successes. It's one of our top priorities. We have also Fusslistrasse, which will be finished this year will come into the portfolio and where we have vacancy at the moment. We have the Bahnhofplatz spots, which is currently up for letting. On the other hand, we have the Hochstrasse, which is fully let, which comes into the portfolio or the Bellevue. So I think we are working on those upcoming reclassifications. But as I mentioned, we are pretty confident that we will have enough letting successes to achieve our guidance.

The next question is from Tommaso Operto, UBS.

Hopefully, you can hear me okay. So the first question, just from a very high level point of view. With the UBS merger, I was wondering, do you currently see any additional supply coming to the office market in Zurich, for instance?

I think if you look on their current footprint, Credit Suisse being, I would say, predominantly, and I say Zurich at the [indiscernible] and UBS concentrated around the [indiscernible] locally and [indiscernible] my best guess today is that going forward, they will concentrate more on the CBD and less in the secondary location like [indiscernible] here perhaps over the next 5, 10 years, which would mean that this would rather strengthen our position in the CBD. And for that, I'm not really worried about this merger with regard to the Zurich CBD office supply.

Okay. And then second question on the like-for-like growth. I think you alluded to it, so apologies if I've missed it, but how much of the like-for-like growth really comes from indexation, how much is from rent reversions for instance?

If you look at 2023, we have this 5.1 percentage points like-for-like, of which 2.8 percentage points came in from indexations. If we look at the like-for-like of '24, which best guess today is around 2%, 2.5%, 1.4 percentage points come from the indexation.

Okay. And last one on interest costs. Where would we expect interest costs to be in '24 given some debt maturities?

Two years ago, when this interest rate increase start, we said you could add CHF 10 million every year. As the best case, I think it's still about this case.

Next question from Steven Boumans, ABN AMRO ODDO BHF.

I have one follow-up on the rent renewals. Could you please provide me some color where those renewals will come in '24, especially since and [ you have larger ] cash positive rental income is like 8% below estimated rental values. So a large amount of contracts maturing, I don't know that the rents are below ERPs or the ERPs conservative? Some color would help there.

Probably a little comment is the correct one with the ERVs being rather on the conservative side, which one -- the ones are closed or disclosed. We are currently on the larger ones signing leases 4%, 5% above market. So I think it's -- clearly, it's very, very fragmented, very, very differentiated. Overall, it will translate into top line growth, as I mentioned, of roughly 3.5% like-for-like, around 2%, 2.5%. There are instances which the renewal is flat. As soon as we invest something in the building, we can selectively substantially increase the rents. But it's very difficult to make a harmonized expression on it.

Okay. Clear. Then I have the second and last question, it's on retail. Can you help with your experience when couple of department store closes next to high street [indiscernible] retail shops on items like footfall, retailer revenue, rents for your shops?

I have to admit on the locations, we are positioned -- there are no retail stores which are closing. And since what we still experience is that when there are renewals, we just had a recent one, where the tenant exercised the option for renewal, we are still able to increase those rents. Zurich CBD retail with a reasonable position on the first row, rents are still moving up. That's what we observed.

Okay. And it's more theoretical question. So if a large department store closes nearby in the CBD, do you think that will benefit your high street shops that are in the area?

As I mentioned, I think what we -- it depends clearly always on the brands which are in these department stores. And clearly, they're only selective of brands, which want to be at the Bahnhofstrasse and those are ready to really pay these top rents. As from the recent announcement of disclosure of department stores, we see interested brands looking at -- at their face, but there's not much availability. So there is no much retail availability on this main shopping street. So as you perhaps also mentioned correctly, it's a bit a theoretical question.

Our next question from Markus Kulessa, Bank of America.

And most of my questions have been answered already on the guidance. So if I understood well, you're guiding on a like-for-like to between 2% and 2.5% rent growth next year? Just if you can confirm this and maybe a bit of detail on the deferred tax release for this year [ over ] CHF 10 million, how it's going to be split between H1 and H2? And the last question on transaction market, if you see any opportunities for acquisitions or if you're more under seller mode for 2024?

Thank you, Markus. Just to be clear, we guide on vacancy and we guide on EBITDA. We gave a bit of an outlook of like-for-like based on the indexation assumption and what we see on the renewal. And there, as I said, if you calculate back our EBITDA guidance, on the assumption of disposal gains from the condominium sales, you can get to top-line growth of roughly 3.5%. If you take there, the indexation out, which is known by roughly 1.4%, we get to this like-for-like of 2% to 2.5%. I think that's a bit back of the envelope calculation. On the deferred taxes, this release of expected CHF 10 million will come through the year, either half year partially and end of the year. It's a very technical calculation asset by asset. And as we mentioned, this will occur over the next 20 years, every year, one year a bit more, one year a bit less. And on the transaction side. Unfortunately, we don't see at the moment, big opportunities in the CBD. That means also nobody is ready to sell. As in CBD, we're looking at 1 asset, but this is something we are currently evaluating. At the moment, for us, we need really, as we mentioned also in last year and as we underlined with the acquisition at Westpark, we need to really be able to generate additional value by those acquisitions. So we look always at a bit special angles when we evaluate transactions.

The next question is from Andreas von Arx, Baader-Helvea.

Just a first question, if I'm understanding. Slide 16, largest vacancies. Just that I do get that correct. So in the PNs, so the 30% you mentioned, so that means with the 10% that is rented already and the 30%, there will be a 60% vacancy let's say, at the half year, if nothing changes. Do I read that slide correctly?

Correct part is the 30% plus the 10% would be 40%, where this is the LOE with 1 tenant on the light industrial. But we are in discussions also with tenants on the fifth, fourth and the sixth floor. So what the number will be midyear, it's difficult to say. We will aim for a higher absorption, obviously. But this 30% is just linked with the light industry, does not incorporate the advanced discussions we have with the other potential tenants.

The second question is on deferred tax. I'm struggling here a bit with -- you have around CHF 116 million deferred tax or clearly above CHF 100 million, whatever, plus or minus. But in your adjusted figures you only take 28.9 as a reversal tax effect. Why that significant difference?

You help me when you see this 28 or -- if you don't mind, I look at it and come back to you because I don't have this 28 in my - on top of mind...

In your adjusted net fee calculation, you have an adjustment tax effect of valuation gains get to [ 7.4 ] adjusted EPS that you report?

Well, you have the positive impact of release of deferred taxes from the negative valuation and then you have also deferred taxes UBS based on the amortizations, which you need to factor in. But I will look into it. And if you don't mind, I come back to you after the call.

Okay. No, I mean, we can discuss later. I mean, I'll see... And if we look at -- you mentioned that you think the CBD areas are relatively healthy and maybe a bit more challenging secondary market. Now if you would have concrete offers for properties, I mean, where would you look at that? And I'm coming with some specific regions. I mean, let's say, closed one Oerlikon, all state ambiance, closed 2 [indiscernible] any CBD close to train station in Lausanne, Saint Gallen and [indiscernible]. Is there any of these 3 clusters you would right now look at the large office building? Yes, to buy.

I think we will continue to focus the CBD areas of Zurich, Geneva, Bern, Lausanne and partially Basel. I think we were -- take Saint Gallen when we were in Saint Gallen, we had our exposure in Saint Gallen. The issue is just company sizes, the magnitude of economic strength of those areas, if you want to have a largest exposure is limited. And so it might be an interesting transactions to go into. But as soon as you have upcoming expiries, it has been proven in the past, it's very difficult to find alternative replacement to have negotiating power on the rents. And this is true for most of the secondary locations soon as [indiscernible] office rental size. So taking all the clusters, we'll probably focus on the areas we are currently active and selectively move out depending on the opportunities of the few secondary class that we are in.

Okay. So that means like Oerlikon in Zurich or Liebefeld in Bern that's already non-CBD according to your criteria?

Absolutely. And we are not in Oerlikon and Liebefeld we are active, also we are very happy with the portfolio we have acquired in Liebefeld, which is stabilized [indiscernible] and we are not envisaging to going to Oerlikon.

Now assuming that there will be pressure on vacancy rates in secondary locations. I mean, would you foresee that rents there would come significantly down, increasing the gap between CBD office rents and secondary rents? I mean is that the development that might come in the next couple of years?

I think that's the development you have seen in the past years, yes. Rents came down on the secondary locations significantly and incentives increased significantly. So this gap has increased. Clearly, we were already confronted 10 years ago with the question now, does the gap becomes so big the tenants from the CBD move out to the secondary locations. You might have selected those, but predominantly, those which want to be in the CBD, want to be in the CBD. So we still observe the trend that tenants, which they are -- once they are an available spaces in the CBD like to move into CBD. But these rent declines is something we observe now since a few years.

[Operator Instructions] Next question is from Alexander [indiscernible] Green Street.

Does Globus lease sell the entirety of your Bellevue project in Zurich?

I didn't really fully understand. I tried to repeat. It was a question on Globus...

Does Globus [indiscernible] sell the entirety of your Bellevue project in Zurich?

No. Globus leases, the ground floor and the basement, so the minor part of the building, we have another tenant on the ground floor as well. We have third tenant in the first floor and we have a very large bank taking over all the office parts. It's less than the original space, they are leasing back after renovation.

And apart from Bellevue, do you have any other exposures to Globus in your portfolio?

No.

[Operator Instructions] Mr. Balzarini, there are no more questions at this time.

Thank you, the operator and all the participants for attending the call and look forward to follow-up on questions and discussions. Thank you very much, and have a good day. Bye-bye.

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