PSP Swiss Property AG

Ladies and gentlemen, welcome to the PSP Swiss Property Q1 Results 2020 conference call. I'm Moira, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. 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 this presentation of our first quarter results of 2020. I will give you a quick rundown on certain slides of the presentation we released this morning. And in this, I will also elaborate on political and economic discussions on the COVID-19 situation. But I will do it rather quickly in order to allow time for questions which obviously arise in this environment. If you may go down to slide four of the presentation and the current environment, what we can say at the outset is that we went very well positioned into this crisis which occurred at the end of the first quarter in the sense of a quite stable and a rather strong letting market in our areas with as you have seen a record low vacancy rate and with all financings done for the year and more importantly With an organization which we see now and how we developed over the last seven, eight weeks, which works, which is operationally effective, I think we see that it's an advantage, at least from our side, to have all people in the company. That's including also the property managers, and they will come to that point later. On the market, and as we are writing, until the outbreak, clearly we were in a rather strong letting market in Zurich CBD and Zurich West, and we saw good and healthy demand in Geneva. With regard to the letting market, we came not to a full stop. We came, however, to a temporary stop. driven predominantly by also the uncertainty from the tenants, but also, I would say, by other priorities of the tenants and also by the sheer fact that it's impossible, at least for a while, it was impossible to show spaces. However, with a vacancy rate of 3.5% or 3.2%, there's also, we have to say, not much to show, and that will come later to this point. But we believe this is a temporary stop. We expect that the demand for good offices at prime locations will reestablish as soon as the lockdown is resolved. And I come later also to this point, what the steps are from the federal government to really bring back the economy to up to a level we had beforehand. On the investment market, What we hear from the participants is that the demand for assets with a good earnings visibility, with a good location, with a good profile is intact. And we see it ourselves as we are in a process where we are disposing to assets that the demand is very healthy. And so at this point, I will later elaborate. So I think also the investment market is expected to come back for the good assets in good locations. If you move into really the P&L of the Q1, they will come then to the COVID implication of slide eight. We see that rental income as expected came up by 2.2% to 74 million with no impact from the COVID crisis. driven predominantly by vacancy reduction and by the letting successes of the development projects, being it also in Lausanne, being it in Basel, but also in Zurich. The comparison on the negative development of the operating income of 30% is driven by two factors which occurred last year. The one is that last year we had a valuation gain On a single property, we asked to be revalued in Rue de Marchais and by revaluation gains from the acquisitions in Bern we have undertaken. I will come on the valuation side on what happened this year and this quarter on the valuations. And the second effect we had last year was the property sales gains. which occurred due to the Bernerstrasse and due to Fribourg of 14.9 million, which was not happening this year. So from a pure operating point of view, we have a top-line increase, and the rest was driven by factors we had last year. On the cost side, page 9, you see that operating expenses came down by 6.7%. On the one hand, driven by lower vacancies means that the property operating expenses came in lower due to less and lower letting expenses, but also due to further reduction of ancillary expenses, which are typically borne by the landlord. And since years, we are repeating that if you are able to reduce clearly our vacancy rate, this has also implications on the property operating expenses. The property maintenance and ratio expenses, these are effective costs. They came down by 11%. This is in franc wise not a big amount, $400,000. But you will hear later that we expect for the full year lower maintenance and renovation expenses as we quite at the beginning of the outbreak of the crisis looked at all of our projects and reviewed which ones are time critical and which one can we postpone and so a bit support the P&L for 2020. Quite a stable development with personal expenses and slightly lower general admin expenses, but this is almost neglectable with lower IT expense, but overall it translates to lower total operating expense as mentioned of 6.7% and you should see that also across the other three quarters of the year. On slide 10, we can see again a further reduction of the net financial expenses of almost 1.2 million or by 23.7%. This is clearly driven by the bond issues of last year, but also on the bond issues of beginning of this year. We were very lucky to be able to really issue debt at low or even negative rates, which had an impact on Q1 and which will have an impact on the fall 2020. The tax line is an ordinary tax line. Average tax rate of 18.5%. Q1 2021 is clean of any effects we had in the previous years from the tax review. So from that point of view, pretty clear tax view. And if you look at then the net income excluding the valuation gains, a slight reduction of 4.8% or 48.1 million for the quarter. If we move to slide 14 first, And then 15, it's clearly that we have delivered a record low vacancy rate with 3.2%. This shows that the efforts and the initiatives we have started to take 2017-18 really materially had an impact on our vacancy rate and then translated also in the top line. If you look at the single vacancy rates on page 15, Clearly now with this transparency, we see basically every vacancy contribution. These are contributions of 10 to 30 basis points to the vacancy rate. On all these spaces, we are working on letting activities. The reason why we slightly increased the guidance on the vacancy rate from below 3.5 to around 3.5 is predominantly due to our Urania Strasse 9, where we were close of signing a lease agreement pre-corona. The discussions have been stopped, and there is a certain uncertainty if we are able to sign this lease by year end or not. Clearly, we will aim to lease it, but in case not, this is, I would say, one of the swing factors of our guidance. However, Urania Strasse is a very central location, and we are positive that we are able to really be able to let this space in due course. As also in Saint-Francois, we have a lease agreement outstanding and expect feedback on these discussions, so also the gross paper tax. On all these elements, clearly in today's environment, a bit more difficult to discuss. It takes more time. Potential tenants take time to review their expansion plans But we have to admit we are working on a very low base now with 3.2, 3.5 vacancies. On slide 16, you see the expiry profile. And if you look at it and compare with our full year presentation in February, already there we said that 85% of the maturities are solved and reelected. this figure has not changed over the last quarter. It's predominantly because this 15% of expires, we knew that they're moving out, and it's difficult now, as was difficult really, to have these relating discussions, but we have quite a good visibility on this 15%, plus then also on the 2021, which we have to say that the largest ones we have already re-elect, and that the other ones, we don't have really a big single expiry where we would see this as a dominant effect. Please keep in mind that with a leasing profile or rental contracts of five-year plus two five-year options, we always have 15% to 20% of maturities a year. So this is pretty standard picture for us. If we move to slide 17 on the changes in fair value, I would like to start first to outline again on how we proceed with valuing our portfolio. By the regulation of the Swiss Stock Exchange, we have to value our portfolio twice a year fully by an external value, in our case, Ruiz Partner. It's done in the full year, and it's done in the half year. In the first and in the third quarter, we run an analysis ourselves based on the single assets with regard to new lettings, with regard to vacancy development, with regard to market rent assumptions, and also with regard to investments in the property beside what is clearly and evident beside single transactions. If in this internal analysis, we come to the conclusion that on a single property point of view, we have a deviation or a potential deviation of a value of 5 million on the assets plus or minus, we have to go back to the buyer and ask him for a revaluation. So happened last year, Q1 2019, where we signed the lease agreement on the retail side. which we thought this could have an impact on the valuation, and it triggered a revaluation game of the machine. Going through this process, we have identified no case where we think on a single asset basis we have to revalue this asset. Anyhow, in considering the market, we asked the valuer explicitly to do a roll-forward valuation of our portfolio in order to have also the valuer's view, which should then somehow foster or be contrary of our assumptions. The valuer looked at the portfolio of PSP based on starting point 31st of December, looked at all the agreements which have been closed so far, looked at the 11 regions, split by office, retail, looked at the vacancy rates, looked at the single largest assets, and took some assumptions on structural vacancy, on potential market rate adjustments, on structural vacancies, and also yields based on the market evidence they have now, and they came to the conclusion that there is no material evidence for a substantial increase or decrease of the valuation. So, based on what they know today, based on what we close in our portfolio, and based on what they see in the market, they come to the conclusion that as per June 30th, 2020, the valuation should be plus minus zero. Clearly, they added A disclaimer that this statement is based on an increased uncertainty giving the overall COVID crisis. So with this in mind of running our process as we do it every first and third quarter and the assessment of the value, we came to the conclusion that we have not to value the portfolio in the quarter, and we will revalue the portfolio in the ordinary course of business mid-year of this year. The slight revaluation loss of a bit more than 200,000 francs is due to the fact that we acquired a building with a piece of land in Zurich, The value evaluated at market at what we paid for it, but we have to activate our costs. So this is basically activated on services. We charge the building. But the value was even valued by the valuation company, 100,000 francs higher than what we bought it for. This leads me now to the capital structure on slide 20. As mentioned, we were able to do two bond issuance beginning of 2020 in the amount of 250 million, and we were even more, I would say, lucky to renew a loan facility which was maturing in October of this year in advance. So we did a forward loan maturity renewal for 10 years starting in in February at an all-in cost of 23 basis points. What we did also at the same time, we reduced a bit our committed lines. We had committed lines of more than $1 billion and reduced the committed lines by this $350 million and in this sense saved on average about 15 to 20 pips of commitment fees. So our net expense for this new loan is roughly three to five basis points. And with that, we have no loan and bond maturity in 2020. We have a little bond maturity early 21 and one end of 21. And today, we are having 770 million unused credit lines and therefore 620 committed lines which gives us plenty of headroom to do our developments and to clearly renew also our 21 and then potentially also our 22 maturities. Which leads me to slide 21. I would say a basically unchanged picture of our capital structure with a loan-to value of 32.8% of an increased duration to 5.9 years. which is rather high for PSP. This is clearly driven by the significant amount of bond issues we have done last year and beginning of this year. And a passing cost of debt, which is below 60 bit. There, keep in mind that we did a negative bond in the first quarter, so this will clearly help this year to have the financial expense even lower If you then have to renew this negative bond, we will have a compensating element, but we see average passing cost of debt to be around 60 bits by the end of the year. This would lead me to really a snapshot on the development pipelines, and here I will only go into what has changed basically since we spoke end of February. Page 24, Parco Lago. We have a delay of roughly three months. We had lockdowns and partial lockdowns in the region. A big challenge by our operating people in-house and on the ground. And a big thank you to all involved parties. I think everybody does his best. This is a very nice project. it will just suffer a bit of delay in the delivery of the apartments. Clearly also difficult to sell new apartments in a phase where you have lockdowns, but we are convinced about the project and we are positive that as soon as we can really start again with the development and showing the flats that we will pick up with the sales. I will come later to this. We compensate the delay of this project and delayed earnings from this project with another disposal, but then come later to this point. The second project which was hit by the lockdown is the Redevelopment in Geneva on slide 25. Here we expect the opening in August. Contrary to what we thought originally to be a June opening, we have very constructive discussions with the operating company and with our developer, so we're all working in strength on this new deadline without any penalties occurring. So here clearly everybody works together on this new timeline and is positive and looks forward to this opening. Here clearly we'll have a delay of opening and this will also clearly have an impact on the top line as I mentioned in the beginning. The project in Zurich, so for UTMOS, are working according to plan with clearly the securities and sanity and health measures, which led to selective delays, but as we were very well in our timeline, this has no impact on our original timeline and also the discussions with the tenants which signed, you know, this is 100% now pre-let or positive, and we expect the completion to occur as we mentioned beginning of 21. So also for the development in the bound of blood, flight 27 and 28, everything is running according to plan, and we have here no major impact which would have an impact on the 2020 results. Slide 29 is the acquisition in Bernplatz next to the parliament. You see in the back the Swiss parliament building and in front the buildings we acquired. You will see that we have pre-let now 30% of the building to a gastronomy operator, and we are in advance discussions to pre-let the office and also service departments. We have slightly higher costs in this repositioning. As we clearly, when we did the underwriting, we were aware this is a historically protected building. Once you touch it and you start seeing really what is behind the walls, behind the floors, we might have slightly higher costs. On the other hand, we realize also today, I think, what a beautiful location this is and how attractive this is for potential tenants. So this overall context and situation is We are not worried for the slight increase on the costs, but we disclose it pretty transparently. Slide 30, we have submitted the construction permit Due to COVID-19, there's a slight delay in the approval process. We expect that we can start mid-2020. We have pre-let 50% to Swisscom. I think here this will be a nice addition to our area around the main station of Basel. There's nothing additional to add. That would lead me to our latest acquisition, slide 31. It is... a piece of land with a former building from Biopharmaceutical, which we are tearing down, doing new development. It's a 50% office and 50% light industrial area, where we additionally will invest roughly 35 million. We are already in discussions with potential tenants from a variety of sectors, and we expect a gross yield of roughly 4.1, 4.2% based on what we see today. This leads me to the end of this development overview on slide 32, where you see, as in the past, all the projects the committed capex from those projects and the committed capex from the investment portfolio, and also pre-let status, which demonstrate a very high visibility on the future rental income with, I would say, a rather limited additional committed capex to come. With this, I would end the Q1, and I would ask you kindly to go quickly to slide 37. where I, before we go then into the Q&A, would give you our view on COVID-19 implications. First of all, we have seen partial lockdown starting beginning of March by the Federal Council, which affected the non-food retailers, restaurants, leisure facilities, and schools. We have, as per today and since the 27th of April, certain retailers open, and the remaining retail stores, the restaurants, the schools, the travel office and port facilities will open next Monday. So there will be a strong release of those activities starting next Monday, and then the last wave, expected to be open on June 8th are the zoos, the theaters, the cinemas. But the ones which are relevant for us opened on the 27th of April and will open next Monday. Clearly this is all subject of a judgment by the Federal Council. We have to say the measures They have taken to support the economy and the speed of those measures in our view were extraordinary. They supported the small mid-sized companies clearly with liquidity injections, being it by helping them on the payments of their various bills, but also by providing them credits on a five to eight years maturity at zero cost, which was what we hear very well and strongly absorbed in the market. So from that end, I would say strong interventions by the government. There is a current discussion on the way, and there is a political, we say various political initiatives, not to say activism, to try to get in between the discussions tenants have with landlords. As you know, as a property company, it's our daily business to have the interactions with our landlords. And there's the obvious question, is the rent due to be paid if a tenant cannot access the surface? We have done various reviews. We have legal opinion from a very strong law firm. and we are convinced that the rent is due. However, we are in strong interactions with the tenants and we are of the opinion and convinced that the landlord should deal it bilaterally with the tenants itself as we have a history with those tenants and we expect those to have a future with those tenants. Nevertheless, there is a proposal in the parliament that tenants which pay less than 5,000 Swiss francs a month, so that means 5,000 Swiss francs per month should get a complete reduction of this rent for two months. This discussion has been taken yesterday in an extraordinary session in the Council of when it has been approved by 24 to 19 votes. It will be discussed today in the National Council. If the National Council is in disagreement, it will go back to the Council of State. If the National Council supports this, then it will go to the Federal Council, whereby the Federal Council said now twice that they don't want that the politics interfere with a certain or interfere in the discussion between the landlords and the tenants what does it mean for psp clearly in reviewing our guidances for the year we took a variety of scenarios into account so we look at and observe what the politicians do and we hope that that they come to a reasonable assessment to let the economic players act with their daily activities clearly we are in discussions with our tenants and you see it on slide 38 we have in our view a rather limited exposure to these lockdown affected areas we have received roughly 300 requests requests for rent holidays reductions we have in april provided rent holidays in the amount of 3.5 million to 170 tenants. And we are, from those, we have intensive discussions or basically verbal agreements in the amount of 10%. And we started those discussions mid-end of last week. Now, why did we start only mid-end of last week? It's pretty simple, because as long as you don't know when the store, the shop, the activities reopens, you don't have a visibility on what you're talking about. So we have instructed our property managers, asset managers, and this was excellently done by our chief investment officer, Reto Grunder, which took also advantage of this six-week period to do really a profound assessment of it to start the discussions. They are discussing with all the tenants on the lease agreement, and we are convinced that we find in the majority of the cases an agreement. But clearly, this is our daily business. We have cases where we have a history. And that's the reason also why we need and we have to look also at having the appropriate legal support. With regard to the rent collection, on the April rent, the overall rent collection was likely above 70%. For the affected tenants, the rent collection was around 25%. But clearly, the measures put in place by the federal council to allow the tenant or to put in the fact that the landlord cannot terminate the contract now within 30 days but needs 90 days basically allowed also tenant not to pay the rents because we clearly cannot enforce a rent collation. We are clearly monitoring. We are asking on a written basis for this rent payment. We are giving notice, but the legal notice cannot be given in advance the 90 days. So that means also there is quite a strong incentive by the affected tenants to not pay the rent. So we're not so surprised by the rather low rent collection of the affected tenants. In a summary, clearly our aim is to collect the rent. but also to have constructive and prospective discussions with our tenants, because clearly we are aware that we have also a future with them. Which leads me to my final slide, 39. Again, what are the implications for the P&L 2020 from the construction side? As mentioned, it's Parco Lago in Paradiso with the percentage of completion recognized gains, plus the loss of rental income due to the delay in Rue du Marché. That's the P&L. The remaining projects work according to plan. The second is whatever is then the bottom line impact from the discussion negotiations with our tenants. We have also luckily a rather moderate turnover component in the world portfolio of roughly 1%. Here in our projections, we assumed a significant reduction of it. We tried to compensate these negative effects by reviewing all the projects and renovations within the portfolio also to reduce traffic in the building but also which are really not timely critical and and so we're able in our view and are able to optimize the cost space and what we did is to compensate for the delay of resenza parco largo we anticipate a project sale in tour lindenstrasse in zurich that's similar to the project we saw last year you know that our portfolio is based on high best use. We identified buildings we think can be converted in residential. We also in Zurlinden since about 18 months are working on a project on how this could be converted and then always take the decision is this something we should do or we can sell as a project considering the current positive market environment for residential. We decide to dispose it. We are currently in the discussions, and we here see that there is quite a strong appetite for it. So this will be a compensating element for the Parco Lago, which will then come, as expected, in 2021 and 2022. On the capital structure summary, I think we are well capitalized, enough committed credit lines, nothing to be refinanced this year. So we can really focus on two points. on the tenant discussions, on our development projects, and even more important so on the health of our employees and the relationship with our partners, which at the end is for us the most important. Outlook 41, in summary, we reduced a bit our EBITDA guidance from above 260 to around 260. This takes account of the various effects I already mentioned and the slight expectation of a higher vacancy rate instead of below 3.9% to around 3.5%, but we're still convinced that these are a solid outlook from what we know today. So clearly these are guidances based on our today's knowledge, our best efforts, If anything material would change in our view, we clearly would announce it. That would end my presentation on Q1 and my outlines on the COVID-19, and I'm happy to take questions.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you've entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Pascal Fugger from Fontobo. Please go ahead.