PSP Swiss Property AG

Ladies and gentlemen, welcome to the PSP Swiss Property Q1 Results 2021 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.

Good morning, everybody, and welcome to this conference call. As always, I will not go through the presentation. I will make a one, two-minute introductory remark and then really leave up the floor for questions. I think, as seen in the past, that's the best use of time of everybody. Just to start off, we reported, I think for us, a very solid Q1 result. Reiterating our guidance is also for 2021. The market has not really materially changed since we last talked about two months ago. What we see is in CBD locations, a healthy letting market. In the outskirts, obviously, a more difficult letting market. but in the majority of our locations we see quite a healthy and good demand. We see a continuously strong transactional market with transaction evidence for equal, if not even lowering, yields on the prime assets with visible cash flows. Headline results is the things to be mentioned, at least from our side, top-line growth, an increase of the rental income of 4.6%, deriving predominantly from new projects which came into the portfolio in Geneva and Zurich and the acquisition. We have a moderate COVID impact in Q1, clearly compared to no impact in Q1 2020. So here from the comparison, the top line growth would have been even higher with a Flat-ish like-for-like development of plus 0.2%. If we include, obviously, the COVID implication, we are at minus 2.1%. We report in Q1 also valuation gains. As you know, typically we value the portfolio twice a year fully. If we have in Q1 or Q3 material evidence based on rental contracts or of completion of projects, We are obliged to ask the value for an extra valuation. We did that in two instances. One on the completion of a project in Zürich West Atmos, which triggered a valuation gain of roughly 20 million. And we have renewed a lease agreement on Bahnhofstraße, the highest retail at higher rents, which triggered a valuation gain of a bit more than 10 million. But these were the two incidences where we had the valuation gains. And also to be evident is the condominium sales gains. On the one hand, the development in Lugano with Parco Lago, where we have transferred ownership of all the reserve departments from year end. And so I've now sold effectively 62% and contributed 5.5 million to the income gap. And we have sold a project in Zurich, Kielberg. As you know, a few years ago, we have earmarked assets with a higher beta usage conversion from office into resi. We have developed a project on Kielberg, various scenarios, thought about developing it ourselves and selling the apartments in view of the strong residential market, we came to a conclusion that we sell it as a project and so realized a gain of 7.7 million or a plus of more than 50% of the book value. On the cost side, fairly stable picture leading clearly to an EBIT margin of above 82, 83%. I think on the cost side to be evidenced is the continuous reduction of the financial expenses We are now on a passing cost of debt of 38 basis points, clearly contributing a substantial part to the bottom line. Here the strategy is when we have larger maturities, try to lock in rather low rates on the longer term, but on the short term we try to, through private placements, try to fund us currently negatively and we fund us negatively at roughly 40-45 basis points in a magnitude of 150 million. So this is quite a strong contributor also to the earnings and here also we try to optimize the whole P&L impact. I think with that, that's a bit the headline numbers. I would really like to hand over to questions and I'm happy to enter into all the material details you would like to go through.

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 their touch-tone telephone. You will hear a tone to confirm that you've 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 is from Pascal Furger from Fontobel. Please go ahead.

Good morning. Three questions, if I may. So the first one is on your contract renewals. So 75% of contracts have already been renewed for this year. I know there are larger expiries towards the end of the year, but my question is based on your calculation. So is your vacancy rate guidance of 4.5% sort of a worst-case scenario? And then the second question, also in terms of relating, you reported positive revaluation gains thanks to Bonhoeff-Strauss at Zurich. Are there any other contracts in that region up for renewal in the foreseeable future? And then maybe the last question, COVID-19 claims, your rent collection is still at very high levels, but were there sort of any new claims from tenants asking for rent relief, which sort of did not ask for it last year, or has anything changed in that regard? Thank you.

On the vacancy rate and the renewals, it's always difficult to speak about worst case. So I wouldn't speak about worst case. That's our best estimate based on what we see on expiries, what we see that what we have to do with the empty space to bring it back to a lettable area. But I'm convinced that we can achieve is around 4.5% and we are not so worried about this number because we see that first of all this is a good space which becomes available quality-wise and we have the top line growth. But I wouldn't speak in April in the worst case terminology. I would say this is the vacancy guidance we can give based on our best estimates and best views we have today. On the re-letting, Yes, we have within the portfolio selectively a reversal potential. What we have seen now that in such an environment, often then you have also to give some concessions, which then offset, I would say even perhaps on the top line, the benefits. We had on this very specific property a renewal already in December, and now a renewal this spring. So they are in the portfolio selectively, but I would say they are not so material that they really can substantially change the like for like growth from today's perspective. In this current environment, we have the positives and sometimes you have a negative. On the COVID rent collection of 98%, yes, I think it's a high number, but it's similar to what we had also last year. We have some requests. but nothing really material where we have to say this is now something which popped up newly with the big ones. We have found agreements. I think here now it's important to see how quickly the situation is really then released and the various operating activities can open.

The next question is from Pascal Paul from Stiefel. Please go ahead.

Yes, good morning. I want to follow up on this rent relief. You booked 1.6 million in Q1. What is your expectation for Q2 and also for H2 in that regard? That's my first question. Secondly, we saw a positive progress in Parco Lago. Do you see to this to continue and by when do you expect to have things sold, the rest of the units?

On the rent reliefs, I cannot give you a number on what we expect for Q2 and Q3. I think what we said with the full year is that our best estimate that it could be like last year. So we have foreseen in our projection further rent relief, but depends really on how long this COVID lasts. But we have in our guidance, there is some cushion in it. And we have certain, I would say, certain scenarios already embedded. On the Parco Lago expectations, the progress is that the disposals are going well. I would say reasonably we would say that by the year end 22, so now from now another 18 months, we should have sold the majority of the apartments. Clearly they are working full speed. The apartments are now being completed, but still this needs a bit of time and there is really no hurry. You have to keep in mind that we are hardly giving price concessions. So there was no price concessions And we have a profit margin of roughly 35%. So we are not under pressure.

Thank you. The next question is from Ken Kagerer from ZKB. Please go ahead.

Yes, good morning, everyone. I've got two quick questions. The first one, we've heard that Google intends to move to General Giesemke in Zurich. What are your discussions with Google on the Hürlimann area? Do you see any risk that they might move out or do they even want more space? Could you give us a bit of an insight there? And the second one is the one that I always bring. It's basically on the expiries in 2022 and 2023, where we have each year 18%. So 36% are going to be renegotiated or have to be renegotiated in the next years. Could you give us an update there where you stand with the negotiations or discussions with these tenants? Thank you very much.

With Google, you know, we have a long-dated relationship with them. I think what we have discussions on the relating of the space. Our observation is that they generally are expanding, that they generally have the desire to grow and to take up more space. And as far as I can say so far, the Turliman is an important part on that game for them. I think that's what I can say specifically on this. On the expiry of 22 and 23, I think here it's correct, it's an 18%. But, you know, with rent contracts lasting five years plus five-year option, we theoretically have every year. an expiry of 20%. I think for the 2022, we have one large expiry we talked about. They make up a large part of it. And we are here on good ground, I would say. And on the 2023, I think there's nothing really, I would say, imminent. We have some projects which we on purpose are vacating and repositioning. Is it the Globus on Belvi, for instance, or we have in Basel the Hochstrasse, where we are already on the way to reposition that asset and bring in the new concept. So they are not really big, big expiries. There are many smaller ones, which we are, you know, on the one hand, we are confident that we can renew. On the other hand, the majority is in very good locations and we will address them in the right manner. Generally, I can say that we see a solid top-line development independently from those expiries, which should ensure the dividend growth pattern we have seen in the past. For this period, I have limited doubts that we cannot continue on that path.

Thanks. Maybe one follow-up question, which is not connected to the first two, but could you just give us a bit of an update on the performance of the hotels in terms of bookings there and what your expectation is for this year and maybe also going forward? Do you have revenue rents introduced for those hotels or what's exactly going on? Sorry.

No, no, nothing to apologize. It's a fair question. We have, in one case, we have on top of fixed rent, we have a revenue-based rent, which is obviously not paying in now. I think on average what we observe is that during the week they have occupancy ratios of 30, 20, 30, 40 percent, peaking up to 100 percent on the weekends. The Geneva one is what we see performing better than the Piers. clearly not being at levels they would like to, but working fine. And, you know, our hotel exposure is rather limited. So I think from that end, you know, Geneva opened well. They are adhering to their contract. So I think here limited worries, but it is clear that as long as you have partial lockdown or partial home office obligations, is that during the week the hotels are not full and you have limited tourism, but they are very solid operators and very centrally located hotels. So I think here we will go through with them.

Thank you.

Thank you, Ken.

The next question is from Andreas Brunn from Credit Suisse. Please go ahead.

Good morning. I've got only one question left. the adjusted EBITDA guidance remains at 275, despite kind of the 10 million higher EBITDA number you would normally reach on a quarterly basis. Can you put this into perspective, please?

Well, we have in our EBITDA guidance, I apologize, we have foreseen the, how can I say, the disposal gain of Kiesberg Clearly, we have, as I mentioned, a little bit of COVID reserves, but it's too early to talk about any change in the guidance. But I think the guidance is solid at this 2.75.

The next question is from Andreas von Arx from Bader Elvea. Please go ahead.

Good morning, Captain, from my side as well. Could you give some color on the increase in the trade payables to close to 200 million? That would be the first question. Second question, on your vacancies, could you give some insights on Rue du Prince and Haselstraße in Bern? And then last question, you have been rather outspoken in your outlook statement on weakness of the retail segment market. Could you give some evidential examples here on why you come to that conclusion that retail is so much under pressure? Thank you.

Thank you, Andreas. I think on the first one, if you look on our COVID implications and the lockdown-related rent receivables, which went slightly up, these are because we staggered some payments. but it's nothing unusual, and we are working down on this element. On the vacancy rates, on the Rue des Princes, we are currently in relating talks of two floors. The Rue des Princes is really Rue du Molar, Place du Molar, Rue du Marché, very central. I would say excellent spaces, and we are here in discussions for relating talks. On the Haslerstrasse, Effingerstrasse, we had a larger tenant leaving, SBB, and here we are in discussions for relating it. It is not prime. We have, on the other hand, quite attractive rent levels. I think here we just need a bit of time. The one question is more technicality. We are discussing... you know, access to the various floors for the tenant we had before. One elevator was good enough in the discussions with potential new tenants. We'd like to have a second one. So we are thinking of is an additional investment needed really to get those tenants. But it's, I would say, quality, price, location, it's an okay asset. It's clearly not an asset which would now fit really into our priorities, but we are full speed working on the relating on this asset. On the weaknesses of retail, it's more an observation not on the high street, but more on the I would say commercial, retail, non-food, what we see with regard to the various trends also of the e-commerce. where we clearly see that those stores are under pressure. As soon as you are away from high-frequency areas and you're going into a commodity product, those tenants have difficulties, and we observe that more when we discuss about expiries, perhaps in secondary locations. Fortunately, we are not too much exposed to it, but we have also, when we talk about Freistrasse in Basel, we have an expiry, And the market has changed. So that's, I think, something one has to face.

Okay. And just quickly on my first question, I mean, I'm just looking at the balance sheet. Trade payables went to 200 million and have been around 20 million in all four quarters of the previous year. So that's 160 million roughly difference.

Let me check. Sorry, then I misunderstood the question.

your question I will come back to that okay thank you as a reminder if you wish to register for a question please press star and one on your telephone Once again, to ask a question, please press star and 1 on your telephone. The next question is from Holger Frisch from Zurich Continental Bank. Please go ahead.

Yes, good morning. Thank you for taking my question. Another question on your guidance for the vacancy rate of 4.5% roughly. Considering that you have new leases starting Q2, which contribute around 0.5% to the current vacancy rate of 3.1%, this would imply an increase in the vacancy rate of roughly 2 percentage points expected until the end of the year. Could you please give some more clarity? What is driving expected increase in terms of properties and the type of use? Is it office? Is it retail? Et cetera. Thank you.

Thank you. Perhaps just I read, I looked at the balance sheet again, Andreas. We had a dividend obligation clearly in Q1. We had the AGM on 30th March. The dividend was then paid in Q2. And so this account payable is the 170 million dollars for the dividend on the 31st of March. And you see also this has an impact on the equity side. The equity statement, you had an impact from the dividend. The cash payment then happened in April. So that's the reason for this account payable. Increase from 26 to 196. If you deduct The 170, you're back on the 26. Sorry, I had to quickly just cross-check and think through. On the increase of the leases, on the vacancies, these are specifically an asset that we have in deal. It's specifically office. It's... not here on the retail side, and it's typically, I would say, good quality office. On the one hand, also sometimes office we have to bring back into the lettable fashion, and considering that you have to expire in Q4, this takes often two, three, four months. But I would say if you go through the list now, It's predominantly office. The only one which is retail is the one I mentioned with Freistrasse in Basel. But here we are already in discussions with a potential tenant. Probably the lease would start then early 2022. Another big one is the one I mentioned in an office in Biel, which is a bit of a larger surface. Rue des Princes, we have expired, but here we are also ready. In letting discussions, those will start then if in early 2022. So nothing really, I would say, which spikes up, which is against our core business activity. Thank you.

There are no more questions at this time.

Well, then I would like to thank all participants. If there are any follow-up questions, don't hesitate to contact us. And then I wish you a great day and all the best. Thank you. Bye-bye.

Ladies and gentlemen, the conference is now over. Thank you for choosing Coruscall and thank you for participating in the conference. You may now disconnect your lines. Goodbye.