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

Ladies and gentlemen, welcome to the PSP Q1 to Q3 Release Conference Call. I am Josef, the Chorus Call operator. [Operator Instructions] 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 Giacomo Balzarini, CEO of PSP Swiss Property. Please go ahead.

Good morning, everybody, and welcome to our Q3 results release. As always, for the Q1 and Q3, I really do a very quick rundown on the key figures and then I would immediately open to Q&A. Just to start on the market. If we talk about the letting market and we wrote it in the -- it's in our release, we are confronted with a very solid office market in the CBDs of Zurich, Geneva, also Bern. As we said also in the previous quarters, Basel is still a bit behind the curve. We have some letting interest. But there's still -- there is a little bit of a push of past oversupply. But we are confronted with a solid demand in the CBDs, as mentioned, of our primary markets. On the transactional side, we start seeing a transactional evidence in the CBD of Zurich again for a very low yields. We just recently saw a prime asset going to the market at slightly above CHF 100 million for 2% net yield, and there's currently one in the market which might go even below 2%. Outside of the CBDs, liquidity is there, but the yields are clearly a bit more on the outside. If you go to Slide 10 of the presentation, just to give a little blimp on the key numbers, rental income rose by 5.8% on the first 9 months, pretty in line with what we reported this summer. Like-for-like rental growth comes a bit down to 3.7%, 1.4 is linked to a turnover rent. As you remember, we had a strong impact in the Q1 of this year; 1.6 percentage points is indexation; and 0.7% are different other factors. If you go then on the valuation side, we saw in the Q3 two assets which had to be revalued. Just as a reminder, we have a full portfolio revaluation full year and half year. And in Q1 and in Q3, we have to revalue the portfolio of single assets if you see a certain materiality and this was evidenced in the asset, which we have bought last year in Westpark where we had a better letting success as the value expected and the same happened in Seefeldstrasse in the CBD of Zurich. On the cost side, you see that the overall expenses are very much under control, allowing us to continue to operate an EBITDA margin of 84%, 85% with a strong cost discipline. And on Slide 12, you see the increased financial expenses, but those expenses, thanks to the reduced interest rate environment, we stabilized at that level. I said at midyear, we expect if we replicate the current curve that the financial expenses going forward will grow CHF 2 million to CHF 3 million per year and not the higher amounts we mentioned even a year ago. If you go into the vacancy rate, Slide 16, you see vacancy rate of 3.6%. We adjusted our guidance by year-end on 3.5%, especially also because we decided that we will turn the Wallisellen assets in a development project. We're working with the city authorities on the rezoning. We have a good visibility that we can pursue this path. There will be a public vote next spring. But this clearly contributed also a little bit to vacancy reduction for the Q4. But overall, vacancy guidance has been adjusted. And if you go then on the projects, I would say pretty much in line with our expectations. We have the opening of The12 this week. Hochstrasse is currently already in motion, and we start the new project, a little one in Bern, the Bollwerk. The EBITDA guidance for the year-end has been confirmed at CHF 300 million. This is what you see on Slide 34. And as I mentioned, we updated our vacancy rate guidance due to the reclassification of Wallisellen to 3.5%. In a nutshell, this is a quick rundown of the results, and I would kindly ask you to start with the questions.

[Operator Instructions] The first question is from Kai Klose from Berenberg.

Just a quick question from my side regarding the personnel expenses in the -- for the 9 months, they were a little bit lower compared to last year. Are there anything specific or a normal level of fluctuation?

We will expect lower bonuses for top management for the full year, and this is a reflection of that.

The next question is from Steven Boumans from ODDO BHF.

So you provided a constructive view on the transaction market. Does that mean that yields for your portfolio are most likely to be flat or maybe slightly down at full year reporting?

I would say I would expect rather flat because I think the valuer will take this transaction evidence as a confirmation and as a whole. But clearly, I cannot speak for them, but I would say that's rather a strong confirmation of the current yields.

Okay, that is clear. And expected ERV growth?

We have -- we see in the Q1 and Q3 revaluation gains, they are driven predominantly by the fact that the in-place rents are higher than the expected market rents. However, I think with an expiry profile of 14%, 15%, 16%, it does only come in very slowly. But if you look on the annual report in the annex, you see roughly a gap of 4% between the in-place rent and the expected market rents by the valuer. So I think that's something which should materialize over the course of the time if we continue to be able to renew at current conditions or even better.

The next question is from Ken Kagerer from ZKB.

I have three short questions. The first one regards the expiries in 2026. There is 19%. Could you just let us know what the highlights there are and where the risks are with regards to those expiries?

If you look on the expires on 2026, I think the one we have is in Geneva, the [indiscernible]. Also this clearly depends also on their development. We have to see how this is aligned. We are also already in discussions with two potential tenants. Then we have two expiries into Zurich West which we think are a nonissue for that because they just move in and they demonstrate quite a solid business model. Then the same holds true for an expiry of law firm in the CBD which we think that is not really an issue. And then we have, one is clearly the acquisition we just undertook, the Rue de Hesse Rothschild which we said we have a sale and lease back. We will vacate that building, recognize the position in that building and then bring it back to the market as a hotel. We are currently finalizing the lease agreement. So this will be clearly de-classified than as a development project.

The second question regards your LTV. And my question would be, if you found a great opportunity on the acquisition market, how far would you go with the LTV?

I think we have demonstrated in the last years that we are ready for opportunities but very disciplined on the loan to value. Having said that, I think there is room, but there's reasonable room. All the rest is opportunity driven. It has to make sense for the shareholder and this for both aspects from an income point of view but also from a debt point of view.

No quantification as a limit or so there?

No. We always said clearly that our ambition is to keep a single A rating. But there are elements which we cannot influence. This is the [indiscernible], and other than that, we also don't want to take too many risks. So we will continue to be opportunistic. We think in the last years always bought assets, but we are not changing our risk profile.

And that brings me to my third and last question. Could you give us a bit of an outlook on the turnover-based element in your rents? What do you expect from that for the next 1, 2 years?

Well, the turnover rent part is linked to a few hotels and to a few restaurants, was originally roughly 1 percentage point of the overall rent roll and is today with the new hotels and the strong turnover roughly 2 percentage points of the overall rent roll and I think we have consummated already 1, 1.5 percentage points. So this, I think, will continue in that path.

The next question comes from Ventsi Iliev from Kempen.

Just one question from my side. On the pipeline already you added one more project and, of course, the asset in Geneva is going to be repositioned, but could we see more from you in the coming period?

Yes, I hardly hear you. I think if I got it right, it's regarding the pipeline.

Sir, I could repeat.

Yes, please.

Yes. So indeed, it's regarding the pipeline. We already see you added one project in Bern, and you talked about the repositioning of the asset in Geneva. Could we expect more from you in the coming period?

Yes, we have a few projects in the pipeline. It's a repositioning one is, another one in Bern, where we are already signing a lease agreement post-repositioning and we are working on a very CBD asset in Basel at the marketplace. We are discussing since the year with Lausanne on the development on the lot parking on the land lot we have in Sévelin which we should be able to materialize also in the next 1, 2 years. So there is further room within the portfolio to develop. But clearly, it will be more on the magnitude of the portfolios and of the projects we have seen lately and no huge, big schemes.

Next question is from Eleanor Frew from Barclays.

I have two questions on rental rates for me. Firstly, how does rental rates differ in the strong locations you talk about versus the weaker locations?

Well, first of all, we have completely different levels. If you talk about prime rents in Zurich, Geneva, you are at 800, 800 plus. And if you are able to really like in Zürcherhof for the Füsslistrasse, if we were able to vacate the building and then bring it on the market as a new product, rents can be selectively almost doubled. Whereas in the non-prime area, if you go especially towards Zurich North, there is a substantial rent reduction that you have to foresee. If you are in Bern or in Lausanne with a new product, we can push rents to 400, 450, I think, which is roughly, I would say almost say 20% above the highest rent, but it has to be seen. It comes with an investment. It has to be a new product, but then you see rent growth in that area.

Very clear. And then secondly, you started thinking of your overall rental growth expectations for next year. Would you expect something similar to this year?

Yes. If you don't mind, we typically guide for the following year with our full year results. I think what we can say is clearly that indexation makes roughly 1% a bit less than 1%. That's what we see now coming out from the inflation in the October numbers, which will be put into the systems and then charged to tenants. Besides that, if you don't mind, we come out with our full year guidance on the EBITDA guidance and from that on, then also on the top line.

The next question is from Matteo Lindauer from Vontobel.

I have a question regarding the B2Binz property. Could you give us some colors on that property and the vacancy rate?

Yes, the B2Binz, we have received the building permission for the fit-out of our anchor tenant. We are just finalizing the last 2 elements really to start with the fit out, it took a bit longer, but they take the ground floor and the first floor. As you remember, we had basically signed three floors with an international auditor, and this summer lost it, unfortunate, last minute, but are now in exchange of final lease agreements with a pharmaceutical company on one full floor and the second floor with another tenant. I think here, it took a bit longer, but what we see is that the product is very attractive. We have quite a lot of interest, but we'd expect that within the next year, we should be able to almost fully lease up the B2Binz. But the priority now is really to fit out ground floor, first floor, bringing the House of Interiors, which is a strong anchor tenant, and then continue to lease out.

[Operator Instructions] Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Mr. Balzarini for any closing remarks. Please go ahead.

Thank you very much to everybody, and I look forward to have further exchanges over the next couple of days. Thank you. Bye-bye.

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