PSP Swiss Property AG

Ladies and gentlemen, welcome to the PSP Swiss Property Q3 Results 2020 conference call. I am Alessandro, the course call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. 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 from PSP. As always, I will conduct a very short introduction and then go directly into the Q&A. So the introduction will go for a couple of minutes. in order to have really best use of time on your question. Perhaps to start with, with regard to COVID-19 and our situation within the company, to say we, I think, internally weathered the storm pretty well so far, touch wood. We had, as I mentioned, a mid-year during the first lockdown. We have also had some employees at home. As for today, the majority of the employees are in the office. We can ensure and guarantee all the safety measures. We see, first of all, a high willingness of the employees to come to the office. They have the possibility to come by car, so avoiding all the traffic elements. We have all the sanitary measures, the social distancing. and we service food in order to avoid traffic over lunch going outside. But we feel in this context by being able to provide a reasonable good office product that the efficiency is quite high and that also the mute within the company and within the employees is high. And this is something which leads us always through the reflection how will this working from home implicate the future need for office and we have had a variety of discussions with larger corps. I think throughout, as soon as you have innovation element, if you have activities where people need to meet together, the employees want to go back to the office and also the companies want to have the people back into the office. So I think we have fostered a bit our view that this forced home office has proven to be digital viable, but that there is room and space for good products in the city centers with good accessibilities, good floor plates, and that not necessarily there is a need for less demand, but perhaps a bit of a different demand. If you go in a nutshell into what we see in the letting market that we have written also in our presentation and comment later this morning, Clearly, after a good start at the beginning of the year, we had a slowdown during the spring, a recap during the summer, and clearly the second wave, which is on the number side also in Switzerland, increasing. However, if you look at the traffic of the flow of people outside, it's not so perceivable. It had a bit of an impact also on the demand. And I would say more or less on the demand, but more on the interaction with potential tenants. You know, we have a semi-lockdown in Geneva and semi-lockdown in Cotonou. So the whole system in that region has a bit slowed down. But we are, on the other hand, also in letting activities, in discussions. But clearly, the decision-taking process has slowed down. Nevertheless, as you have seen, we confirmed our vacancy guidance around 3% for the year end, so we are convinced that we can achieve this number. Two words on the transactional market. Here we continue to see quite a strong appetite for CBD assets with good visible income streams. So I would say here from a yield perspective, we don't see widenings of yields. We see rather a stable or in certain cases also narrowing, and now we are getting towards the end of the year so that the amount of transaction has been reduced, but still there's still enough transactions out there to have certain data points. Last but not least, the capital market. If you look at today, I think it's in a healthy position. Spreads came in a bit, so accessibility to capital is there. In our view, it's always important to be very prudent, anticipate your capital needs, because if all of a sudden you need a bit too much of funding, there's a risk really that you depend then from the market. That's the reason why we have staggered all our fundings over the next years in a reasonable manner. to be very well positioned also for that. So in a nutshell, we confirmed our EBITDA guidance for the year. We have confirmed our vacancy guidance of the year. We feel strong about our balance sheet, about our visibility on the earnings, also the development aside, and we clearly come into it when we have the Q&A. We have no major changes on development sites and on the income perspectives. So from that end, I think it was a, a very good Q3 and we are positive on the Q floor and to finalize this full year result according to our expectations. With that, and I apologize if this was only a very quick intro, I'd like to really go into Q&A and take advantage of addressing basically all your questions.

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and 1 on the touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handsets while asking a question. Anyone who has a question or a comment may press star and 1 at this time. The first question comes from Ken from . Please go ahead.

Yes, good morning, everyone, and thank you for taking my questions. I would have three. The first one is, could you please indicate what to expect in terms of P&L impact in Q4 and maybe also in 2021 in terms of earnings contribution from the sale of further apartments in Paco Lago?

Well, for the final of the year, it's clearly embedded in our EBITDA guidance. I would say we had a contribution now of roughly 5.5 million in this first three months. There is an additional I would say 3 million we would say we expect in the fourth quarter. It is clearly a bit depending on the pace we can hand over the apartments. And all the 60 sold apartments have been terminated in the sense of timing dates where we hand over. We have a cross-border lockdown to Italy. So there might be slight delays in deliveries of furnitures or kitchens or bath elements. However, we don't see the impact to be so imminent. So what we see currently still that we are handing over is apartments. So from that end, I would say we are pretty positive on the 2020 and this additional 3, 4 million. If you don't mind, with regard to 2021, We will comment when we present the full year results 2020.

Okay, thank you. The other one is basically on the discount rate. You provided the nominal discount rate for the half year of 3.29%. Would it be also possible to give us the nominal discount rate that Wirsch Partner applied on the assets in Geneva that you have acquired from UPS?

We don't disclose the single asset discount rate. Plus we have, if you have seen, one asset has been put on the investment portfolio and one asset has put into development portfolio. So it's clearly part of the overall yield now in Q3. But as we don't value the whole portfolio in Q3, it's not meaningful. But we are, I would say, in that range. you will see it then with the full year numbers. But we are not disclosing discount rates of the single assets.

Okay, maybe the last one. In terms of the maturities in 2021, you have 14% then. Could you just tell us where you are currently standing and how much has been worked off already? Thank you very much.

Yes, Ken. I think for 2021, what I can say is from the 10 largest expiry and and we talk here about up and to roughly 600 000 of rent view from the top 10 we have already settled the nine clearly we're working through the others for some we know that they are going to move out or reduce. For others, we know that they will stay in. Also here, we don't see a dramatic move. What the implications will be overall on the vacancy rate for the full year, we'll also disclose in February. I would anticipate, based from where we're coming, from a 3%, the current circumstances, that the vacancy moves up a bit, but I don't see dramatic moves. Thank you very much.

Thank you for taking my questions.

Thank you. The next question comes from Alvaro Soriano de Miguel from Bank of America. Please go ahead.

Yes, thank you. Just a quick one, a follow-up on the last one from my colleague. I would like to know what sort of conversations are you holding with with your tenants, not only in regards to 2021 renewal but also 2022. How your customers are confronting those conversations? Are they, I mean, they are rationalizing their footprint. Are they willing to stay or to commit for longer leases? a bit of color on the day-to-day of those conversations. Thank you.

Well, thank you. I think generally, if you look at our 10 days, it's quite a strong tech base, strong innovation elements. And for those companies that are just coming out of a video conference of the larger tenants, which clearly have currently a home office in place that's predominantly for health measures, but they're eager to come back to the office. They are reviewing, obviously, the set-ups and what kind of implications they have, but the bottom line is that they probably don't need less space, but different space. So overall, we will for sure have tenants which are currently optimizing and streamlining and come to the conclusion that they might need a bit less space. But we have also a lot of conversations where tenants are doing well. They are working well. They want to have their people back in. And we have, I would say, also all these renewals, which I mentioned for next year, there was not less space, was not the argument. Duration of the lease contracts, by matter of fact, the largest expiry next year was prolonged by 10 years, which triggered also revaluation judgment in the Q3 and therefore revaluation gain. We don't see now requests for early breaks. We see that contracts are prolonged on a five plus five year basis. Interesting enough, we had two renewals on the highest retail. Might be specific cases, but we renewed them at higher rents in 21. So I would say clearly also if you look beyond 21, 22, if I look at the largest tenant there, I think a large part, for a large part, Office is important. Getting people together is important. Being at point of interest is important. And it's our duty to really have these interactions and to try to help those tenants on how to best fulfill their needs. But we don't see now really an exodus on office space.

Okay, and thank you very much for that. A last question on your portfolio, on the valuation of the assets. What could we expect in full year? And could you explain a little bit the valuation suffer on Geneva acquisition, those three buildings? It is something normal or is something related with this specific transaction? Thank you.

The second point, if you look back into the records, whenever we do an asset deal, the valuer values the asset. In this case, in Hotel du Bon, he matched the purchase price. On top, we have transaction costs of roughly 3%, which are activated and therefore is a hit in the P&L. We have seen that when we bought an asset in Bern and when we bought an asset also in Zurich West years back. So this is not a surprise to us. When we did put in the bid, we knew that we'll have a little first-time revaluation loss due to transaction costs. With regard to the full-year evaluation, and this is really my sentiment and my read without having talked to the valuer, is that the activities on the transactional market might lead to a stable or little further yield compression for prime assets. I think that the value will review assets with an operational angle and might consider there to be a bit more prudent on earnings feasibility. In our cases, This is rather limited as we don't own shopping centers and only a limited amount of hotels, but these are typical assets which he would review with regard to earnings visibility and risk. And then in general, the overall recession element, economic development might lead him to review selectively market trends. So net-net I would expect a flat development. If it's a slightly positive or negative, you know, it's more of a judgment call. I think you will have two elements which are going opposite, depending now on the, I think, also the general sentiment on this development of the vaccines. This might have also been an element of the judgment on visibility going forward. But I would say generally the value should be stable. from what I see and observe in the market from today's point of view, knowing that we have another two months in front of us.

Okay. Makes sense. And the last one, perhaps on more strategic angle, if you are right and PSP is right on on the polarization of the office market, and we have started to see different performance between core or A offices and B and C. What sort of a strategy is the company or will implement the company? Should we expect a new streamline of the portfolio disposing those offices where upside is very limited or risks may increase? Or actually you are quite happy with your portfolio in this new office world? Thank you.

No, generally, I think generally, if you look over the last years, we had quite a strong disposal program. Also, every year, a little bit, we have sold for more than $600 million. So I think this streamlining of the portfolio has already taken place. And if you go on slide 60 of the presentation, if you look at the portfolio grid, I think generally, our assets are there where we want them. I think we have identified, first of all, assets where we believe there is a higher and better use, and we are evaluating if we should extrapolate that. These are examples like we did in Uster, we did in Geneva, where we developed a project and sold it. We have earmarked another few assets of this kind and are working on concepts. And secondly, clearly we have looked at perhaps assets on more A- or B- locations, which we might give in a certain time where there is no need. I think net-net, also considering the loan-to-value of 36%, we feel quite comfortable with the portfolio size. We might add here and there an asset. but we are also not shy of then trading it with another one, either through an asset swap or a straight sale. Our focus is in improving earnings quality and continuous improving earnings quality. And there are no really specific assets which we now feel uncomfortable and where we think we have to sell it. Okay, thank you very much.

Thank you. The next question comes from Andreas Brun from .

Please go ahead. Hey, good morning. I have two topics. First one, can you actually please comment on your city hotels and what do you expect in terms of rent reliefs going forward also in 21? And with regards to the hotel at in Geneva, how much of rent do you expect? by 2021.

Perfect. On the city hotels in general, as you know, we have three of them. We have one in Basel, which up to now, you know, fulfilled their obligations. And clearly now, if the situation is prolonged, we might consider a support into 21, but this is in a moderate manner. It's a franchise from the Accor Group. It's owned by a French family which owns a large part or a few hotels in Switzerland. They have closed a few ones in this phase, but they keep our ED style open. They're committed to keep it open. So here we are in a dialogue. but it's in a reasonable manner. We are discussing a certain liquidity relief and not rent relief. So here it's more of a liquidity judgment. The second one is the Hotel B2 in Zurich, which is doing well on the weekends and obviously suffering a bit during the week, also due to the fact that Kugel is in a complete home office modus. Also here we are in continuous discussions. There is no need and no urgency. from our point of view, but clearly we are in discussions with the operator. With regard to the Citizen M, it's open. We had recently discussions with them. Clearly, the occupation ratio is much lower than they expected, but they have very strong shareholders behind the company. They pay their rent. We are not disclosing You know, what is the single rent they're paying, but they fulfill their obligations, and it's according to what we have fixed in the rental contract. You had a second question. If I might add this, Andreas, you wrote me a mail asking what were the rental incomes from the projects Bärenplatz, Baufeldsee, and Grubenstrasse in 2020 from all the three projects the rental income we captured was zero. So it's all coming in, the projected income is all coming in at completion, starting then end 21 and going through 23.

Okay, thank you. I have a last one. Could you elaborate on the expected rental income from the UBS building for this year and next year? And then on your CAPEX slide on page 31 in the presentation, The Geneva building from UBS is not included there. What is the reason? Or is it that it will be renovated? To elaborate a little bit more on that building, please.

The Hotel de Banque will contribute 2.5 million this year. In the fourth quarter, 10 million next year in rental income. It has not been included because we just acquired. We'll put it on the full year presentation. We're working on the final concepts. We have launched now all marketing efforts and pitches for the brokers. However, investment-wise, it's a very small investment. It's really more an opening of the side parts from Coratree and Cite, in analogy to the Confederation entry,

and it's more about accessibility and facelift but we are talking about the single digit capex from our site okay thank you maybe a last one if i may um what do you expect actually the rent release um to come from going forward in in 2021 as well um do you still expect that the spas uh will be weak or Could you maybe give us some qualitative assessment?

It very much depends on the development now also from the lockdowns. If you look at Geneva, clearly this lockdown will have an impact on the bath, which was expected to pay the rent. So I think for us, the parts which will be on the focus are the restaurants, Some are doing very well. Some have a bit more difficulties. It will be, I would say, the two hotels and it will be the three spots. I think from that end, it's quite a reasonable overview we have and we're working through. Giving now a magnitude for 21. Honestly, it's too early. We are still working through the last two months. Whatever, you know, worst case scenarios has been embraced in our EBITDA guidance. So I think from that end, we should be safe. And I hope you understand that in this circumstance, we are not negative. We are not super critical for 21. But we have really to digest now the latest news, the latest lockdowns, observe the numbers and the policies. And I'm sure in February we'll be in a much better position to give also a good view on 21. Also, from today's point of view, 21 will be a very good year for PSP. Where we will be and how it will be, we'll disclose more in February.

Perfect. Thank you very much.

Thank you.

The next question comes from Andreas von Arx from Bad Rivea. Please go ahead.

Yeah, good morning. I'll start on the revaluations. If I calculated correctly, you have 6.8 million positive revaluations on your existing portfolio. Did I understand that correctly, that this is coming from the renewed rental contract at the location in Urdorf? Is that so?

Yes.

What are here then the kind of the rules that trigger in third quarter revaluation. I mean, surely you're not doing that at every single rental renewal that you're doing. So why was that so significant in that case?

It's an excellent question. We have from the stock exchange the obligation to report or to do a full portfolio valuation twice a year. As we have also quarterly results and we're the only one, basically the quarterly results should also contain a full revaluation of the portfolio because it should be according to the half-year results. We got more than 10 years back a wafer that we say in the first quarter, in May and the second quarter, November, we are reviewing on an asset-by-asset side if there have been material changes to the rental contract. So we're not looking at the market factors, but at rental contracts. And if we have the impression that the change of the rental contract has an impact of more than plus minus 5 million on that asset, that we have to ask the value to review that valuation of that building. So happened in Udorf, because the tenant renewed the contract by 10 years. We knew that the potential capex in the model was likely too high, so we asked the value to review that value. They came to the conclusion that it's more than 5 million, so we disclosed it. We had instances where a case was less than 5 million, so we are not disclosing it, and it goes into the full results. This was the majority, the main trigger for this evaluation gain was that the value was has not expected a prolongation of 10 years and had a bit higher cap axis than what we have effectively had or will have over the next 10 years. And this triggered this deliberation.

Okay. Then on the asset swap, here you booked the 7.6 million gains. Is that for the disposal only or is that for the combination of the disposal and taking in the other assets?

I understand. If you look on slide 17, the change in fair value, the seven minutes you mentioned which we booked were the pure gain on the disposal of Zurlin and Strasse. The footnote 6 contains This $10.2 million contains a first-time revaluation loss from the Hotel de Banque, which was roughly $12 million, or 3% of the purchase price, and the $1.9 million revaluation gain from the Siler Strasse, which was the swapped asset we bought, which basically is a revaluation gauge which should reflect the... the efficiency gained and the premium you get by having the combined entity. So the 7.9 is Thurlinden, Seiler-Strauss is 1.9, Hotel de Bonk 12 gives net 10.2.

Very clear. On the COVID-related lockdown rent receivables, I mean, these came down from 5.2 to 4.7. I mean, how much do you expect here to kind of work off, let's say, until the full year? And if you would have to make a guess, given we are now entering a second lockdown or there are certain lockdowns now, I mean, will that number will rise again until the full year? What is your view here?

Clearly, we will work down this number. The lockdown in Geneva and , which we have in place now, will increase these numbers slightly. What I can say is that our expected rent relief we have to give from these receivables has been factored in in our projection. It's difficult to say or to tell now from this 4.7 how much are we working down number-wise and how much do we have to give as a concession. I think what we can say is based on our judgment on the single cases, we feel comfortable that we can hold on with our increased guidance of mid-year.

Is this pure a negotiation thing or is that also related to legal decisions?

The legal decision from the government costs us, worst case, 500,000 francs. Mid-year, it was 700,000. We worked on the case. It's 500,000. These legal decisions. This is pure negotiation, discussions with those single tenants, and yes.

Okay, last one from my side. I have seen a clear increase in the capitalization of own services in the third quarter, also going through the cash flow statement. Is here a special item, or is this driven by a change in your methods? What's the reason here?

This is purely the fact that according to IFRS, we can activate our own transaction costs linked to Hotel de Banque. Whenever we do an acquisition, we can activate our costs according to IFRS. That's always the situation we had also in the past. And this goes into this capitalization, this increase of the capitalization rate of these capitalized owned services. Thank you very much.

Thank you. As a reminder, if you wish to register for a question, please press star and 1. The next question comes from Pascal Boll from Mainfirst. Please go ahead.

Good morning from my side. I have one question regarding Parco Lago. When I look at your presentation, then I see that 40% of the apartments were sold, 15% have, I see, a reservation. How much of this 40% so the department is already recognized in the P&L or has been recognized?

You can say from a percentage of completion point of view, all.

From a handover point of view, we have handed over in Q3, Q5, in q4 now we are at um at 10 and we expect another 29 to go through so you can say basically um yeah another another third another two-thirds will go through in the q4 two-thirds of what of yeah if you're from the number of departments but you know We do percentage of completion, so every quarter we recognize a little bit of profit of every part we have already sold in the past, based on how much we have completed of the project. So if you look that we had, let's say, 5 million P&L positive impact in the mid-year, as I mentioned beforehand, we'll have another 3-4 million which will come in in the fourth quarter, plus then potential additional reservation will do. We are currently having another three, four reservations, which then will be recognized in percentage of completion. The moment we hand over the apartment, then it's fully recognized on the profit side. Thank you.

Ladies and gentlemen, this was the last question.

Well, thank you from my side. If there are any follow-up questions, unfortunately, road shows are virtual, so please send me an email. Give us a call. Happy to discuss and answer, and especially wish you all the best and a lot of health, and then talk to you soon.

Thank you. Bye-bye. Ladies and gentlemen, the conference is now over.

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