PSP Swiss Property AG

Ladies and gentlemen, welcome to the PSP Swiss Property Q1 2024 results conference call. I am Maria, the cross-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, Maria, and good morning to everybody to our first quarter results report of 2024. As always, I will do a quick rundown on the major highlights in order to have plenty of time for the questions. As you have seen, in our view, we have achieved very solid operating results. in the first quarter. I will not enter into the market discussion as we have talked about it almost end of February and since then the market really didn't change so much. We are confronted with a very solid CBD market and clearly observe the bifurcation between CBD and non-prime. If we go directly into the key slides, I would ask to go to slide 9. I think one of the highlights is the rental income growth of almost 10%, driven on the one hand by the acquisition West Park to West we undertook last year. Secondly, we have recognized the full indexation of the first quarter of roughly 1.1 percentage points. Thirdly, we had to recognize turnover rent for the full 23 in Q1. And plus, we had a payout of a fit-out of a tenant, which is considered kind of a one-off for the Q1. This amounted of this increase of roughly 8 million for the first quarter. On the valuation gains, which are unusual for Q1 and Q3, you know our matrix that we have a full valuation of the portfolio in the half year and the full year. And if we have material evidence that based on rental contract changes, there's a plus minus change of 5 million per asset, we are obliged to ask the valuer to review the valuation of this asset. This had a materialization of four assets. I will go into the details on a later slide. And thirdly, you have seen a property sales gain on the condominiums. of roughly 550,000. This is basically the last gain and the closing of the project Parco Lago in the southern part of Switzerland after almost 20 years of construction. So this project now has finally come to an end. It was a very successful project. On the cost side, although we see a plus 5%, I think, on Swiss franc amount, it's almost neglectable and compared to the last year those with regard to projections we are pretty in line with our cost view we had a bit higher letting costs we had on the gna we had a bit higher rating costs with regard to our sustainability efforts and some it projects but overall it was a pretty normal quarter with regard to the cost. So here I wouldn't have anything major to highlight, although some percentage points are a bit higher, but this is also seasonality driven. On the next slide, 11, you see on the one hand the increase clearly of the financial expenses. We are still able to fund at very attractive terms. We showed the bonds in the first quarter at very attractive spreads. Nevertheless, clearly financial expenses grew and will continue to grow, perhaps a bit less strongly than we had expected also due to the interest rate cut by the Swiss National Bank. But I think this is something which is inevitable and also in one or the other case also a bit healthy that we have a re-correlation of a sound market. On the tax side, The higher tax impact here is driven by the valuation gains. Nothing else. It was a pretty ordinary quarter with regard to the taxes. If you look on the vacancy rate, which came in at 4.1%, here we confirm our guidance for the year-end to be below 4%. If you look, the biggest vacancy contribution comes from the B2Bs. Here we have signed the lease agreement with the light industrial area, and we are in final steps of signing a larger commercial lease. We're hopeful to come to an end by the next couple of weeks, and we'll then do a respective announcement. Here we're clearly working full speed on this letting, and we see that the product is quite attractive in the market, so we are pretty positive on it. On the remaining part, no major changes to what we have reported in the Q1. As I mentioned, an unchanged guidance. On the expiry profile, the majority has been already released. We are left with 14% to be released. And this leads me to the slide 18 with the changes in fair value. Here we disclose the four assets with regard to the Bahnhofstrasse and Waagkasse. This is an option which has been exercised by a tenant in advance at higher rents, and this triggered clearly a valuation gain on the Bahnhofstrasse 66. This was a break option which was not exercised, therefore also here an adjustment on the DCF model by the valuer. The Weissenhausstrasse Bahnhof G is driven by the strong performance of the tenant and by a partial recognition of the turnover rent which was so far not recognized and triggered evaluation gain and the hochstraße in basel was driven by the letting success on the leasing side and having now a fully led building since q1 and this triggered the fourth evaluation gain so i think this are really asset-specific contributions. I would be careful in applying a read across the whole portfolio. I think we are confronted, as I mentioned at the beginning, with a healthy letting market. Nevertheless, we still would expect a flattish development over the full year. I think in the Q&A we might also talk about the transaction market But the evidence we have today is that on the valuation side, we should see overall a flattish development for the year. And therefore, you see also slide 19, those valuations had no impact on the yields. It's a pure DCF rental income, cash flow driven perspective applied then by the value. On slide 21 and 22, the financing situation, I would say unchanged. We are confronted with a solid funding market being on the credit side, being on the bond side. And I think also with regard to the maturities, we have a very good visibility. We have plenty of committed credit lines and also the credit matrix. with the equity ratio, with the loan-to-value, is basically unchanged towards the full year results, and they wouldn't expect also major changes towards the year end. What is not recognized here is obviously the dividend, which was paid then shortly after the Q1, and clearly this would change a little bit the matrix, but not substantially. On the development projects, We are all working, I would say, full speed on the ones we have listed. On a summary, on slide 30, you see that Fusli Strasse, we have had this letting success on the office side. We have already talked. We are working on the retail side with a couple of tenants. On the tech on Basel, as mentioned a bit, also in the full year results, so far unchanged. This will take a bit longer to be leased up. On the Globus on Bellevue, all signs on green. Tenants are starting with the fit-out, and it's planned to be opened for Christmas. Hochstrasse, it's fully let. And Hotel du Post in Lausanne, we have started on the marketing side. We have a partial letting, and here we are working now really on the construction side and started up the letting. From this 23 roughly million of potential rental income, which will come in until the end, 25, 26 annualized, 1.2 million have already been recognized. So to answer the presentation before going into the Q&A on slide 34, you see in a nutshell, slightly updated EBITDA guidance of 300 million compared to 295 million. and a confirmed vacancy rate guidance of below 4%. With that, I would end my short presentation and leave the floor for the Q&A.

We will now begin the Q&A session. Anyone who wishes to ask a question or make a comment may press star and 1 on the 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 2. 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 John Wong, Financial Campaign. Please go ahead.

Hi, good morning, Giacomo. Thank you for taking my questions. On the like-for-like rental growth, and more specifically the turnover at LynxRent, If I remember correctly, this was also mentioned as a factor in last year's later quarters. So is this solely an effect seen in Q1, so more of a base effect, given that this was already recognized in the later quarters, or is this a different effect from those?

It's a bit of a special effect because we have been reported this turnover range for 23 years. early 2024, so it's a full year recognition of the 2023 turnover. For the like-for-like, we took out three quarters of it. So on a like-for-like basis, it's correctly recognized on the adjusted side that you see for one quarter. On the overall rental income, we have recognized the full year. What you will see over the next couple of quarters clearly is the the accrual of the expected turnover rent contribution on the remaining turnover contracts we have for Q2, Q3, Q4. Overall, as you recall, roughly 1.5 percentage points of our rent roll is turnover linked. And we currently see that the majority of the rental contracts produce a turnover rent. And this triggered also the light adjustment of the EBITDA guidance.

Okay, that's clear. And maybe as a follow-up on this, on the underlying like-for-like rent growth, which is still super strong at plus 3.3%, I think you mentioned that 1.1 percentage points is coming from indexation. So is the remainder reversion captured on this? And how do you see this 3.3% develop over the rest of the year?

The second question, I think that's, something i would expect towards the end of the year as well and the indexation overall should contribute roughly 1.4 percentage points overall we would expect as per now but overall for the for the full year i would expect the like for like of slightly above three percent from today's point of view okay thank you that's it for my side

The next question comes from Ken Kager, ZKB. Please go ahead.

Good morning, everyone. This is Ken Kager on ZKB. I would have three questions. The first one regards the divestments of non-core assets. Where do you stand with those?

We have currently a handful of assets which we are in, I would say, in advanced negotiation. We have a very strong interest on it. Also, as you know, every disposal, every transaction has its own roots. I think we should come to an end in Q2 with it. We are hopeful for it. And then in Q2, we will report clearly the details of it. The demand on it is relatively strong. The amount is not so meaningful anymore. that we dared it so critical to report now on details and as we are singularity in negotiations about it. But we are confronted on those assets where we are in discussions with a solid demand.

What could be the top line impact of those investments if they all materialize?

Reflected in the EBITDA guidance and clearly once we have done the disposals, we would communicate it. But it's not substantial.

Thank you. The second question is with regards to the acquisition market. Do you see any attractive targets, especially also from real estate funds with redemptions?

From that channel, we don't see attractive targets for our portfolio, as we are very much focused on CBD assets or value-add CBD assets, and we have not seen those type of targets. We are looking at a couple of incidences, but these are not the typical, you know, evident cases. Feeding processes at the moment in our target segment, we don't have really transactions going on. There are no substantial sellers on this field. But we are working on two incidences, yes, but smaller transactions.

Thank you. And then my last question, just to get some clarification on those revaluation effects. You mentioned already that these were predominantly cash flow driven adjustments, but could you just tell us if the value also confirms the discount rate or looked at it, or if there were mild adjustments in one way or the other, or this was not considered at all?

Not considered. The yield is reviewed mid-year and year-end. This is a pure... Reflection of the adjustment of the rental contract. As I mentioned, either by taking out an absorption time if an exit option is not taken or adjusting the effective rent to the old market rent or by reducing the expected vacancy.

Excellent. Thank you very much. This was it from my side.

Thank you.

The next question comes from Andreas von Arx. Badr Elvea, please go ahead.

Yeah, just a quick one from my side on the deferred taxes. On what you reported in the first quarter, is there any amount that is related to that 20-year deferred tax item that you had significantly last year, or is that only coming once a year?

This can only come when you perform a full revaluation through the valuer, half year and full year. And there they are recognizing again the value 20 years ago. So there's no impact in the Q1 of it. But every six months, there will be a review and a respective adjustment.

And would it make sense to review that 5 million threshold? I mean, you know, it seems to me a bit that this is, you know, given that you have properties with such significant high value, you know, this is triggered quite often and maybe, you know, also if there's not that significant movement just because of the overall value of the property. Would it then not make sense? you know, to increase the threshold so that, you know, this, in quote, in half-year revaluations are not triggered that often, just as a comment.

I think it's honestly, it's a valid comment. We have started with 5 million herd because we thought it has a certain relevance. But honestly, I will take it up. And think about it with the auditor and look if it makes sense to increase this threshold to the next level.

From my side, thank you.

Thank you.

The next question comes from Stephen Beaumont, ABN AMRO. Please go ahead.

Hi, good morning and thank you for taking my questions. I have two questions. First, could you please comment on where prime office rents are going for the full year, given your latest conversation with tenants or maybe external valuators? That's the first one.

Well, the prime office rents towards the year end, I think we are in a quite dynamic market. but not in a hyperactive market. I think we are confronted currently on the prime office rents in Zurich and Geneva. I would say almost at 900 in selective cases, a bit north, the super top rents. I wouldn't see now a substantial change of it. It might depend on a very particular case where you can reach higher rents. But generally, prime rains are 800, 850. On the retail side, this is very depending on the respective space. But there's not, I would say, such a high evidence that you can say now due to the upcoming lettings, you see a strong trend upwards. I think it's a solid base. The prime rains are very solid and you can get above this top prime rent, depending on the product.

Okay, so can I say it's low to mid-single-digit prime rental growth for 2024, as far as you can see?

I think it would give perhaps the wrong message, because on the one case, now this option, rents went up almost 20%. In other cases, you have indexation when you have already prolongations. So I think generally saying mid-high single digit in general is something which I think it's difficult then to see. It's really asset-specific, contract-specific. The more the market is solid, I would say in certain cases it's even strong, but it's not so dynamic that you can speak about the seeing high single-digit rent growth. I think this might give the wrong perception.

Yeah, that is very clear. Then the second and last question is on retail for high street. I see from external data that food hall in Zurich, Bahnhofstraße is up materially and slightly down in Geneva. Is that also what you see for your portfolio and is that reflective of of what you expect for rental growth and retail sales locally?

I think what we observe is generally strong footfalls in both CBD markets. It might be that you have seasonality effects, periodic effects, where then the footfall is a bit stronger in Zurich than Geneva. You know, the majority of our rental contracts are not terminal-based on the retail side, so we have fixed rent contributions. So it's something we then store-specific are not necessarily observing. What we observe, as I mentioned, that on these prime spots, the demand is quite high.

That is very clear. Thank you. Thank you.

The next question comes from Kai Klose, Berenberg Bank. Please go ahead.

Yes, good morning. Just two quick questions from my side. The first one, the amount of committed credit lines went down by 100 million this spring in the first quarter. Was there any specific reason behind it, and what do you currently pay for committed credit lines? And the second question is on the vacancy target for 2024. To reach that, how much is dependent on the largest vacancy reductions, which you show on page 16?

On the first one, I think this is driven by ordinary refinancing of bonds. We handle this quite opportunistically and try to be quite diversified between bond market and credit market. The average commitment fees, I would say on average, are around 15 basis points we pay on the credit side. On your vacancy rate question, with regard to 16, I think clearly the guidance includes letting success on the B2B. I think that's something we are working towards. It includes also letting success on the Bahnhofplatz, Bahnhofkasseite, and clearly also some other letting successes, but we are quite confident to achieve those successes. If you look overall, I think... It's still, and I think that's very important, that every quarter clearly is always a per quarter observation of the vacancy rate. I think the overall vacancy rate of whatever is around 4% is already an excellent vacancy rate. And often, especially like also Fürslichstrasse, we might tend to try to get a slightly higher rent rate and so sacrificing a little bit the vacancy rate for us for a quarter instead of just locking in a rental contract and therefore being able to show low vacancy rate. I think when you are on those levels of vacancy rate, it's important also to gear towards rental and rental growth instead of only focusing on the vacancy rate.

Understood. Very clear. Many thanks.

Thank you.

As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question comes from Alexander Totomanov, Green Street. Please go ahead.

Good morning, and thank you for taking my question. You mentioned tenants at the 12 in Zurich have already started to get out of their areas. Is that the case for Globus as well? And has there been any discussion with the tenant given the difficulties of SIDMA, one of the department store's owners?

We have a valid rental contract with the respective tenant and they're fulfilling their obligations as it is expected. And there have been no other discussions for the others. I think for the moment, as I mentioned, they're all signs on green.

Thank you very much.

Thank you.

Mr. Bolzerini, there are no more questions.

I would like to thank you on behalf of the full PSP team, as always, and we will be in touch on the next couple of days on further questions, if they may arise. Thank you. Bye-bye.

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