PSP Swiss Property AG

Ladies and gentlemen, welcome to the PSP Swiss Property Q3 Results 2021 conference call. I'm Andre, the chorus 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 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 Valzarini, CEO of PSP Swiss Property. Please go ahead, sir.

Good morning to everybody and welcome to this conference call on our Q3 results. As always, I really do a very short introduction on a high level and then I would like to give back to you for a Q&A. As mentioned last time, we are all back in the office since June. We are at the moment confronted with a quite stable rental market in the CBD of Zurich and Geneva. Geneva even better than originally expected, but I would say solid rent fundamentals both in CBD Zurich and Geneva. A bit weaker CBD market in Basel, which was already highlighted in the half year. and I would say stable markets in Bern and in Lausanne. On the other side, we are confronted with a very strong transactional market, particularly in CBD areas, but also on periphery assets, well-lit assets. We have sold on our end at very strong premiums, so the transactional evidence for potential further slight decompression is on the table. We have, based on our results and on our view on Q4, slightly improved our guidance on the EBITDA and slightly reduced our vacancy guidance for the year-end. All in all, I would say after a difficult period of 18 months of COVID, a solid result of PSP and the good visibility for good full year results of the company. With that, I would like to immediately hand back to you that we can start the Q&A.

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 have entered the 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 or a comment may press star and one at this time. The first question comes from the line of Pascal Furger from Fontobo. Please go ahead.

Good morning. A couple of questions on the vacancy rate side. So, can you give us, please, some details of which rental contracts you extended in order to revise your guidance down work? And are there any other potential surprises possible on the vacancy rate side in the fourth quarter? and maybe looking also towards next year, can you already comment how much of the contracts that are set to expire that you are already in discussions and where you feel positive that you can re-let the space? Then the question number two is related to Parco Lago. Can you remind us when you expect that all the apartments will be sold? Just wondering what we expect in terms of earnings contributions for next year. And the last question, if you just briefly could comment on your revaluation gains in the third quarter. That's it from my side. Thank you.

Thank you, Pascal. On the vacancy guidance, this improvement, our guidance, although I would say slight improvement, is driven by a letting success in Lausanne, Place Saint-Francois, which we were working on since a while, is based on a letting success in Rheinfelden, a letting success in Zurich, Zurich-West, Hartungstraße, and then especially one in Geneva. I think these were, as you know, when we do our, and I mentioned that last time, our forecasts, we wait based on probabilities, potential letting successes, and if then we close one, which we had perhaps a little lower probability, this clearly at the end improves our overall view. But across the board, I have to say, slightly better letting successes in Lausanne, Geneva, and selectively also in Zurich West, which leads us to improve our guidance. With regard to the contracts which mature next year, I think here we typically give an indication on our pre-letting successes with the full year results. What I can say is that we are having one large contract with a tenant on multiple buildings and we are very well ahead in renewing that lease agreement and it makes more than 25% of our expiry of next year. For the rest, I would kindly ask you to wait for the February lease when we then provide with our pre-lettings for the full year. On Parco Lago, in general, we are, I would say, pretty happy on the progress of the development, which will be finished by the end of this year. The whole green area, park area, will be finished beginning next year. There we have a bit of delays also due to COVID, so the whole surrounding. But if you take the sold apartments and the reserved one, we are a little bit above 80%. And I would say it's reasonable to assume that we will finish to sell all the apartments by end of next year, latest early 2023. Please keep in mind that we are not providing discounts on our disposals. So we have our pricing view and we are not really in a hurry to then really dispose in a certain time frame. But my guess would be that we will get to the finish line by the end of next year. With regard to the revolution gains on Q3, as a reminder, we value our properties based on stock exchange rules twice a year by the external valuer. As we do quarter reporting, we have to review the valuations of our assets if there is a larger contract to be signed or expires, which leads to a plus-minus valuation impact of 5 million on that asset. This happened during Q3 on the part of Plot 9, where we prolonged a lease agreement and at conditions where we thought this will be triggering this hurdle. And effectively, we had a valuation gain of 5.6 million on that asset. And additionally, we sold our bath in Locarno on the 1st of October, but with a notary settlement on 30th of September. which triggered the adjustment of the market value of that asset in Q3 by 1.3 million. This leads to this 6.9 million revaluation gain for Q3. Is that fine for you?

Thank you.

Just a small follow-up question. Is there any sort of cluster risk such as a very large apartment or an expensive penthouse which might take more time? Thank you.

We have still two apartments on the top floor. Apparently one strong interest came in yesterday. I wouldn't speak about the cluster risk on this side. because our profit margins are very high. As mentioned, the product is good. We're not in a hurry. But yes, clearly, there are some more expensive apartments to be sold, but not too extreme ones.

Great. Thank you.

Thank you. The next question comes from the line of Eduardo Ghiri from Green Street. Please go ahead.

Hi, Giacomo. Thank you for taking the question. The first question I have is on the expiry of leases for next year and actually 2023 as well. So on page 16, I can see that there's 18% and 18% again. You just mentioned that for next year, it's related to one big contract that has to be renewed. But can you give us a little bit more color on, you know, is it office or is it retail? And also in terms of the location, is it more CBD or is it more in the periphery as well?

Thank you, Eduardo. Well, the one next year, the big one, I would call it CBD Zurich. If you look at the CBRE, CBD class definition, it's really short outside. It was an original big development site and it's a tech company. The other ones are really then rental income-wise below half a percent. And a large part of them, of the big ones, we have a good view that they will be prolonged because they're central. So really not too worried about 22. If I go through the list and if I can say so, I still expect rental growth, overall top line growth for next year. So I'm pretty positive on our expiries for 22.

Understood. And in terms of leasing spreads, are we seeing that positively? If you have any estimates in mind or any indication of what it could be.

We have seen some slight positive like for like excluding COVID for this year. We will see now what we can put in as indication, as indexation levels. I would say considering the overall market with some positives of the CBD during Geneva, perhaps a bit more challenging in Basel and stable on the other two markets, I would say it's a flat positive releasing spread across the portfolio.

Thank you. Thank you. I have another question on page nine of the presentation while we talk about consolidated expenses. Can you give us a little bit more color on why the increase has been so high on multiple line items, for example, on maintenance and renovation, but also on general and administrative. What is the cost of that increase? Is it wage inflation only or is it something else?

No, it's definitely something else. On the property operating expenses, the increase is due to the property tax we have to pay as we acquired a new building in Geneva, the Hotel de Banque. And you pay in Geneva a rent tax on the property based on the rental income. And this goes through the operating expense line. Excluding that fact that this line would even decrease as we have reduced over the years the vacancy rate and the ancillary expenses, we were able to transfer them to the tenants. So net of the Hotel de Bonk acquisition, we would have had even an improvement of the operating expense line. And if you look at the general admin expense, and I think we spoke already in half a year, we had last year, we had a positive effect from a settlement of a law case with Steiner, which provided us with a theoretical income of 500,000 or a cost reduction. which was a non-repeat this year. So if we move forward for the full year, I don't see on a like-for-like basis a different number than last year. So no cost inflation, wage inflation. Personal expenses will be slightly higher, but as it seems, we have record results, and this triggers slightly higher personal expenses.

Understood. Thank you. My third question is on rent release, which are affecting your like-for-like prints. I was wondering, so what do you envision for the short-term future? And I'll put things about accounting. Are those rent release fully included in receivables, or some of them are going to be in bad debt, or are you writing some of them off as well?

Well, the rent relief we have shown of 3.6 million went through the P&L. So there are losses taken. Then we have some receivables, which if we take out the impact and the reliefs are basically postponement of payments, which we are pretty convinced that we can collect from today's point of view. So from today's point of view, on the COVID side, we should be true. So we wouldn't expect any, I would say, any significant, not even major, impact from COVID coming through Q4. We should be true COVID hit as per Q3.

I understand that's very helpful. I have another question on the The office fundamentals for West Zurich specifically and where the Atmos building, for example, is, I'm just wondering, you mentioned that on the periphery, the fundamentals are softer than in a CBD. How would you characterize West Zurich as a whole?

Well, we have seen through the development of the Atmos building and the letting of the Atmos building, that if you provide a grade A building in Zurich West, you can really increase the local rents, which are, of course, lower than what you see in CBD, but I would say healthy, good rents. This has a kind of a spillover effect to the immediate neighboring buildings. So I would say solid rents, increased rents to what we have seen four, five, six years ago. Clearly, with a modernized building and modernized floor plates, but in a different ball mark than what you see in the CBD Zurich. So if in CBD Zurich we see top rent being at 800 plus, I would say top rent in Zurich West are at around 400 plus. But we are confronted in Zurich West, at least where we have our properties, with a solid market and a good community.

Supply risk, I would assume it's higher than in the CBD. Would you say that's true?

Sorry, I didn't get the first part of the sentence.

Supply risk or development activity in the West Zurich area. would you say it's been pretty active in the recent months or recent years?

It was active in recent years, but there's limited new products coming. There is some projects, but I wouldn't say that there's big availability coming on in the future.

That's very helpful. I have one last question on the state of retail, especially in Zurich CBD. How would you characterize the situation now versus pre-pandemic in terms of retailers, sales productivity, and also profitability, and perhaps also football, if you have any indication or data on that?

Well, as you know, our rental contracts on the retail are pretty much rental contracts as we have for office tents with fixed rents. What we have as data point is that during COVID, we have renewed three large retail contracts on the CBD area and in all three, we were able to increase the rents. I think what we observe, and this is a particularity, especially if you take Zurich, we are confronted with one high street which has, I would say, its respective footfall and attracts the brains. And if you have a reasonable floor plate with a reasonable accessibility to the street and the window's first line, we observe a certain resistance and even quite strong interest. Going forward, one has to keep in mind that we have a new Globus concept, which we think will be an enrichment for the whole Bahnhofstrasse in proximity. But generally, we see a positive environment. Is it pre-pandemic? I have to say, I see from a pure rent, limited differences. I would expect that from a pure footfall, we still don't have yet international traffic, which we were used to. But so far, no harm to the rents.

Understood. So they are helpful. Thank you, Eduardo.

Thank you, Eduardo.

The next question comes from the line of Andreas von Arx from Barrio Vea. Please go ahead.

Yeah, good morning, everyone. First question will be on the positive, like-for-like rental growth you had in the third quarter. Is that just kind of a one-off or, you know, a post-COVID effect? or would you read, let's say, a trend in that? That's the first question. Second question, if you could get an update on realistic perspective with regards to lettings on Baufeld C and B2B. I mean, these projects are not too far out, and there's still significant vacancies. I mean, you mentioned especially challenging environment in Basel. I mean, if you could provide an update here. Then third question on the disposals. I noticed, I mean, you have sold one in Locarno and another one in Olten is on the disposal list. Is that just, you know, individual opportunities or can we expect here further disposals in, let's say, non-top five Swiss cities? Like, I don't know, Aarau, Biel, Fribourg or Interlaken. I mean, are you now using the opportunity or was that just one-time events with those disposals? And then last one, I'll just try it. I mean, would you dare to comment on what's happening in Germany with Austria office? I mean, it's quite similar peer than you are. If I look at the offering price and your discount that you're trading, I mean, have you been approached by any party, you know, like Austria did? Thank you very much.

Thank you, Andreas. On the like-for-like side, if we look at the regions, the positive contributions come from Geneva, Estonia, Basel, and Lausanne. Lausanne is the one rental contract, the Saint-Francois, Basel is the reposition of the Steinentorbergstrasse, which was the positive contribution, netted then by a little bit negative impact from the Grosspeter Tower. And Geneva was the mentioned renewals we had mentioned beforehand. Is this the trend? I think we have, as I mentioned, also on the next year's expiry, positive negatives. From a distance, I would say I would expect slightly more positives than negatives, but we are around the number we have disclosed now. It's my expectations. On the letting update, Baufeld C and B2B. On Baufeld C, we have still only the Swisscom letting and the restaurant. We have in Basel, we have to admit limited interest at the moment. On the other hand, we will come with a reasonable sized, very modern, very sustainable building close to the main station. And I think as we get closer to the finish line of this product, we will attract interest. And I think we will let this surface in reasonable times. So I think it's size-wise, location-wise, product-wise, something which needs a bit of absorption time, but I think we will soon, once we have completed, be able to light this building. On the B2 bins, we have, I would say, very strong interest in that building, and we are currently in talks with a variety of different companies, being it from the tech sector, being it from the light industrial area, being it from also, I would say, consumer-guided retail part, which are interested in this floor plate. We just got permission to build it a few weeks ago, so we are now in this start discussions with them concept-wise. But it is a good product, a new product in the proximity to Hürlimann site and so very central. And with an adjoining really train station, one stop to the main station. On the disposal, we have even mentioned today in the press release a subsequent event disposal For the Schaffhauserstraße, Schaffhauserstraße is a building in, for us, a B-plus location. We were able to let it fully for the first time, I think, last year, and this triggered for us, I think, the reasonable assumption, okay, now it's time where we can, in this market, dispose this asset. It's part of, I would say, of further... refining of our focus priority strategy where the longer the more we want to go even more cbd we are not under hurry to sell assets i think the biggest cleanup has happened in the last last few years but we have some assets in mind and we will review based on letting progress, based on our view on how this local market develops, if we will continue to sell those going forward. Just as a reminder, all these disposal gains, as significant as they are, they are not part of our dividend strategy and we don't need those to fund our dividend. We pay our dividend out of the operating earnings per share. This is, I think, important for us to keep in mind whenever we sell such, I would say, non-prime assets. On your last point, I would love to give you any answer, but I cannot. I think the only thing I can say is that historically, we have not seen big private equity companies being very active on an unfriendly basis in Switzerland. Is it due to local tax regime? Is it due to liquidity? Is it due to language hurdles? But I think we have not seen in the last 15 years those movements. What happens in future, I cannot answer.

Thank you very much.

Thank you.

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There are no further questions.

On this end, thank you very much for your interest. Whenever you have a follow-up question, don't hesitate to contact us, and then we look forward to answering. in discussions and wish you a great year and this time already a good holiday season.

Thank you. Bye-bye.