PSP Swiss Property AG
SIX:PSPN
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PSP Swiss Property AG
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Ladies and gentlemen, welcome to the PSP Swiss Property Q1 2019 Results Conference Call. I am Moira, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] 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. And welcome to this Q&A call, and thanks for taking your time. As the last quarters, we'll do a very short introduction on a few highlights, and then I open for Q&A. I think it's also from the feedback I got from you, it's the most efficient way to pursuit. With regard to the Q1 results we released this morning, we are very pleased to show letting successes, that we were able to increase our top line. And with that, we're able to improve our vacancy guidance for the full year to 4.5%. Meanwhile, we continue to show a very stable cost base and can further improve our financial expenses. We were able to issue bonds and tap at very interesting conditions. And we are also able to close some additional swaps to partially lengthen the duration. And we advanced also in the portfolio optimization, things we already mentioned, the full year results, subsequent events, the disposals and the acquisitions. So overall, it was a very active Q1, but we are very pleased with the outcome. And if you are okay with that, I will directly go into the Q&A session.
[Operator Instructions] The first question is from Pascal Furger from Vontobel.
Three questions from my side. So maybe starting with the first one, so you decreased basically your vacancy rate guidance to 4.5%. At same time, you left your EBITDA guidance unchanged. So is it fair to assume that this EBITDA guidance is a bit conservative also when basically then, yes, checking your track record over the past few years? That would be my first question.
Yes. Do you want to have the other 2, so I might answer all 3 then?
Yes. So maybe then, so the other 2, the second on revaluation gains. So the CHF 7.5 million from Bern, why this uplift in valuation there? Is this because you have take into account your renovation works which you have planned there? And then second point with regards to revaluation gains, the property in Geneva, so it's now fully let. Does this mean that all the potential is reflected basically in the valuation to this point in time? And also, has discount rate changed at this property in Q1 or has this left unchanged? And last question with regards to Geneva also, maybe in general, did you have to pay basically some fee to a third party or not?
Yes. Thank you. With regard to the EBITDA guidance, we left it unchanged because the vacancy reduction -- the expected vacancy reduction from the 5% to 4.5% comes on the back of letting successes and agreements which start towards the third and the fourth quarter. So the spot vacancy rate is not a surprise to us. The improved vacancy expectations come through a late vacancy reduction, especially in the Gerbergasse, which we didn't factor in into our forecast. And as they come in Q3, Q4, they are not fully material economically for the full year. We'll see the rental income predominantly next year. So I wouldn't say it's a conservative. We clearly are convinced that we get to our EBITDA guidance, but we have no substance to say we increased the EBITDA guidance at today's point. With regard to the revaluation gain, with regard to Bern, that's evaluation from the value. So we still did a full valuation on all the basically 10 properties, 3 around the Bahnhofplatz [indiscernible]. And that's the value we take into account. It's not reflecting any future value-add work beside the normal CapEx which is expected [ top of line ] at this point in time. With regard to the Rue du Marché, it's clearly now, it's a development project which is mark-to-market. We had benefits from better rental conditions we were able to let and also slight reduction in the discount rate. How this is then developing in the future is something I cannot answer. But clearly, it's a development that's an asset which is fully let, and it's mark-to-market, and we are close to the end. So I'd say the development risk is also rather limited to that end. And there were no fees involved in general on this letting. We had last year a quite significant amount of letting fees to third parties. For the overall year, we expect a bit less fees on that end. But generally, we continue to actively work with intermediaries.
The next question is from Robert Woerdeman from Kempen.
This is Robert, Kempen. First question -- and I know you do not publish the EPRA first quarter EPS. First question, why? And second question, would you be able to give a bit of guidance to where we are for the first quarter, also to make a better comparable with, obviously, the run rate that you have shown in 2018? Do you want me to go through all the questions first and then do the answers? Or...
Yes. I think it's best.
Okay. Then a positive surprise and I think this is one of the reasons why the market is doing so well as well is on your EPRA like-for-like change. Any funny things in this change? That's one. Or should we really read this into had the brokers becoming more positive on Zürich in general, and is that also what you're seeing in the market? Then on the valuation, the CHF 7.5 million that you do on your acquisition, and how is that possible given the fact that you're active in a pretty competitive market? So I reckon that you buy at market and that there is no lucky buys. That was it for now.
Yes. Thank you, Robert. On the EPRA EPS, I think it's just also an element of complexity. Now we do the Q1, we do a full Q1, but then also doing the EPRA Q1 is something which we think is, and until now, not really needed from the market. If you do the math, you basically -- if you go -- if you would go to Page 8 or Slide 8, basically, we have a bit more condominium sales, Q1 compared to last year, 1 million. But I would say overall, this is the big difference. It's -- then it's rather neglectable in comparison to Q1 last year on the EPRA EPS. So it should come through basically systematically to the EPRA EPS because the big driving part is the rental income. And the cost base, they were stable. We have big benefits on the tax side, so we have a little above, clearly EPRA EPS in Q1. We think about if there is a desire, we'll check if we have to add also the EPRA Q1 and Q3 EPS and entities, something we will take up. On the like-for-like, I wouldn't call it funny. I think it's a reflection of vacancy reduction. Clearly, we observe also what the brokers are starting to say, that they say, a more active demand in especially Zurich CBD and Zurich West. It doesn't translate yet into rental growth and -- rent growth, but the predominantly like-for-like reduction was -- increase was coming from vacancy reduction which comes through. And on the acquisitions, as I said beforehand, if you look at it on the 10 assets, it's -- and on the overall portfolio, it's rather neglectable. It comes from the pure valuation. And I think there's not much more to say to it.
Yes, it's -- in the bigger scheme of things, I fully agree. But if you look at -- if you isolate for the price paid than, a CHF 7.5 million uplift on that is pretty decent. Put it differently, can I also basically have as a read-through that perhaps the market was not as competitive or that you typically had a pretty decent one-off -- or sorry, that you were pretty much in exclusive discussions wherewith you were able to get it pretty much lower than market?
I wouldn't frame it that way. It was a CHF 230 million transaction, so it's quite a sizable transaction. And these were 2 -- it was a share deal. So I think overall, this was what came out. But as you know us, I think on the valuations, we take what comes from the valuer in general. So yes, I wouldn't take it as a read across. So we had a negative impact on Rothschild last year and a few years back consumer base. So I wouldn't see that as a read across.
Okay, okay. And then what you said is you had one big benefit on taxes that affected the earnings. Would you be able to share how much that was?
Yes. It was the tax reform in the Canton of Basel where they changed the tax rate from roughly 22% to 13%, which had an impact on CHF 5 million on our deferred capital gain taxes, whereby CHF 1.3 million goes into the operating income as they were billed through amortizations. The same procedure we adopted 2 years ago with the Canton of Vaud.
The next question is from Andreas von Arx from Baader-Helvea.
Just quickly on Page 15, your largest vacancies. The Avenue de Sévelin in Lausanne is new on the list. Could you give here some insights what's going on there? Also when I looked at the annual report, it's not really clear to me what kind of usage there is. There's a large part of other, so if you could just give some additional information on that object. Then I mean also on the same page, when I calculate the vacancy square meters that are vacant apart from the top 10, so the difference between the top 10 you show and the total investment portfolio, there's quite a significant reduction from around 30,000 to 23,000 in the first quarter. Is that mainly the object you sold in Zurich and Fribourg? Or has there been additional, let's say, letting successes that will be worth mentioning? And then the third question, on your developments on the Steinentorberg in Basel, which I think is first time on the list, could you indicate when you will start with that development? And could you indicate how much rental income you might lose once the development starts? So meaning it's quite a big object theoretically, with I think 14,000 square meters. So will there be a significant impact on your rental income, let's say, starting from midyear? So if you could share here some information. Also if the CHF 10 million project costs, whether that's just for the retail space or for the overall project, just some additional color would be nice.
Thank you very much. On the Avenue de Sévelin, this is one asset on the overall -- on overall site we own there, which we acquired through a portfolio acquisition from Swisscom which is close to the floor and which, by the way, we have also a project which is called [indiscernible] [ third ] development. The vacancy which arise through that is a move-out of a tenant. And the large surface, it was originally a former industrial area as it was -- as was Zurich West for 15 years back. But for that surface, we are already in discussions. We have let one part in the neighboring building, and we are in discussions with a unit from the Canton for some additional office space. On the vacancy delta, you mentioned it rightly. It is predominantly the disposal of the Bernerstrasse and from Fribourg and additional smaller lettings. And on the Steinentorberg Strasse, we are typically not disclosing the single rent of the buildings. What we can say here is that we are confident. The work has started. It will take time of roughly 1 year. And it's already basically fully let. We have signed in the phase of the planning a lease agreement with the bank, and we are in negotiation now of the remaining floor of that building. So it's basically fully let, I would assume, once it's completed next year. With regard to the loss of rental income, that's already factored in into our EBITDA guidance of the year.
But is that -- is that the full building, so the full square meters you're showing, so the full 14,700 square meters? Or is it just one floor? And it's all office, and there's some retail on the space -- on the bottom or on the ground floor? I mean, if -- yes, and that will be great.
Yes. No, it's -- the full building they're vacating is predominantly office. What we -- even though we were able to move one tenant in order to have really a full renovation, to move one tenant into another building where we had some vacancy, because the biggest tenant which is moving out is Roche, that we can say, it's not coming back. But one tenant we are moving up and is coming back, so it's predominantly an office building. And it's a full renovation. And it's fully -- basically, fully let when it's finished.
[Operator Instructions] The next question is from Ken Kagerer from ZKB.
I have also a couple of questions here. The first one refers to the fact that your cost base has been relatively stable in the first quarter, what can we expect here going forward? And especially how are the renovations going to do in the future? Do you think that the maintenance and renovation expenses are at a stable level here as an absolute amount or as a percentage of the total rents? Or do you think that this has to go up going forward? The second one, I've seen that you've basically reclassified Rue des Bains in Geneva and Uster for sale. Now the question is do you intend to sell some properties going forward? Is there any strategy behind or is there some opportunistic view on that? At the same time also, do you plan to buy some larger properties like you have done in the recent future? The next question, and I think you want to have all the questions first, is what is the development on Bahnhofplatz currently doing, especially also with the area that has been suffering from the fire? And the last question would be I've seen that the EPS where you're basically per share, where you mentioned that this is a relevant figure for dividend payouts has increased by 70% in Q1, what -- I mean it's early days now, but what can we expect in terms of dividend increases if the situation continues like that? And the last one is not a question but a request. I've seen that you only show the split of the tax into deferred and current tax in the presentation, but there's no comment in the financial commentary of the reports and account in Q1. And it would be quite useful and helpful to show it there as well.
Thank you, Ken. On the costs for -- with regard to the full year, I think here we can expect a continuation of what we have seen in Q1. We don't expect an increase on the operating expense and neither on the maintenance and renovation expenses. We don't see neither a substantial trend of really increase of a cost base. What we clearly see is that, selectively, the tenant demand, if it goes towards fit-outs, and it's a -- and you have limited demand on that building, that these are costs you bear. On the other hand, we observe now that on the majority of the areas where we are active, we have quite an active demand. So also negotiation power on that end is a bit stronger for us. So if we -- as I look at our medium, longer-term cost development, I don't see worthwhile movements which go in a deterioration direction.
Sorry, just to interrupt you, but these fit-out costs, do you typically book them in the P&L or do you capitalize them? Because now it sounded a bit like this would be costs that you would book into the P&L.
We're booking it into the P&L. We activate investment costs in the building typically depending on the activation rate, but the others are booked to the P&L. With regard to the reclassification of Rue des Bains and Uster, here this is not opportunistic. It goes in line with what we did in Rheinfelden. We look, since now been more than a year, more active in highest and best use of the buildings. Both assets we work since longer time on a project of repositioning. And with both assets, we identified that we're positioning that asset into residential is of higher value. And so we are -- we have developed for both a project of repositioning in residential and are pursuing a disposal of those assets. Or if we see that the market is perhaps not so strong as we believe, then an old development and then a disposal of those flats. But we see, based on the current demand, that this should go through in Q2, Q3 of the both. And with that, clearly, we screen our portfolio a bit more actively on which asset is worthwhile keeping and developing and which asset is worthwhile to sell or to redevelop. With regard to the acquisitions...
Sorry, just I guess -- sorry for the interruption. I mean, it's probably difficult, but in combination, what type of gains would you expect if you sold those assets in Q2, Q3?
Yes. If -- I would say it's also that it's factored in into the EBITDA guidance that we go through. And I would say it's not in the interest now of us in the disposal mode to disclose an exact -- but it's also not -- I would say not so relevant. I think you can capture it that we have factored it in our EBITDA guidance and that we are working on this disposals. But they are also not really relevant. On the acquisitions, what we see is that for prime, prime assets, yields are continuing to be low. We look at opportunities, but we continue on the path that we want to find things where we believe that we can generate some additional value going forward. So there is nothing imminent now which is on our radar on the acquisition side. On the Bahnhofplatz, on the building we had the fire, we submitted the building permission. So we had a very good interaction with the city authorities. And we have no new news on the tenant side, so we continue as planned. We are in full mode planning and redeveloping, and we stick to the opening scheme we have disclosed.
And the square meters you're achieving under the new format have increased by how much or not at all? Or...
No, not at all.
Not at all. No.
I didn't understand your EPS question with regard to the 70%. You mentioned 17.
17%, 17%, just...
Okay, okay. Yes.
And the number went basically up from 0 point or is it...
9.4 to 1.1.
9.4 to 1.1, right.
Yes, one element was clearly then also the tax effect from Basel, this CHF 1.3 million which is for the first quarter, clearly, if you go through, we should see probably slightly higher EPS for the full year. With regard to the dividend, it's correct. This is the number we base our dividend. And as we said, we are following a dividend policy where we would like to pay out more than 70% of this number, but we want to have also quite a continuity on the dividend development. So if you look on the past, I would say I would not be surprised that we can keep the dividend of last year or slightly increase it. But I think that's something then we will discuss end of the year with the Board and then something for the AGM. With regard to taxes, we take up this point and -- yes.
The next question is from Alban Lhonneur from BMO.
I basically had 4 questions. The first one is on the like-for-like, whether you could break down the 3 components, CPI, uplift on basically releasing spreads and the vacancy impact?
Well, if you look basically outside the 44, you see the development of the rental income. And you basically see that the rental uplift overall is neglectable, and the majority part comes through the vacancy reduction. We have a negative effect of CHF 1 million on the disposals and the positive effect of CHF 2.5 million on the acquisitions and the CHF 1.2 million effect of the vacancy changes plus then the effect on the developments and the new construction. So it's basically a CHF 1.8 million like-for-like contribution. It's a new slide we added in the presentation.
No, that's very useful. The second one was on the cost of debt. I was -- sorry, the interest rate expenses. The cost of debt was marginally down. But the interest rate expenses went down 15%. So quite a significant savings despite the fact that the debt was an average -- the average debt was 7% higher. So is there any other impact there in terms of capitalized interest or others?
No, I think the biggest impact is that we refinanced the bond at cheaper conditions. And what we are able to do, it's a bit a technicality, but we have one loan agreement with the bank where we can draw negative -- on a negative basis, and we swapped in that leg immediately. And from one bank, we get back their refinancing cost. We refund basically on that volume at 50% of the margins. And that clearly had quite an impact on the quarter and will have also an impact on the full year.
Okay. And is that sustainable? Can you carry on doing this for a few quarters or a few years?
Well, on the negative drawing, that's part of the loan agreement. And we closed -- 2 weeks back, we closed 2 forward-starting swaps. We start next year basically at 0 for 7 and 8 years. So clearly here, we capture on a quite large loan agreement. The other agreement is -- on this margin reduction is on a yearly basis. And there clearly, we will keep up negotiating. For the capitalized loan services, we had even a slight reduction compared to the previous year's quarters.
Okay. The third one was on the tax. I'm just trying to make sure I understand correctly on Slide 10. So you now break down current and deferred. The current is really the cash payable tax that goes through the equivalent of the FFO, and that's incumbents including revaluation. Is that correct?
It's without -- it's the IFRS tax, and it's not the cash tax. It's the IFRS tax without the revaluation and without the amortization.
Okay. But that's the figure you take into account in your net income?
Exactly, exactly.
And is it fair to say that we should not really look at this on a quarterly basis because it swings around quite a lot?
It's correct. The only one quarter I might want to look at is the Q2. As you might know, on the 19th of May, there's a big vote on the corporate tax reform in Switzerland and, simultaneously, also 19th of May in Geneva. And if the tax reform is approved -- has been approved -- will be approved on the federal level and also on the Canton level, I would look at it for the second quarter. But then I wouldn't read across it for the full year.
Okay. And so in Q1, the actual current tax rate increased to CHF 11 million from CHF 3 million last year. Is that the way I should read it, i.e., there was a [ CHF 7.5 million ]?
Yes because we had the higher net income plus revaluation gains compared to slight revaluation losses last year. That's right.
Okay. But the current tax rate, so it's calculated -- it's used to calculate the net income excluding revaluation, but the tax itself takes into account the tax on revaluation? Is that...
Well, the tax from -- on Slide 10, from CHF million to CHF 14 million is on the profit which includes the -- also revaluation gains and disposals. So that tax line is obviously higher.
But my point was last time in Q1, the current tax was CHF 3 million. This year, it's close to CHF 11 million on the current. That's CHF 3 million and that's CHF 11 million. Are these impacted by revaluation?
Yes, yes, yes.
Okay. And the last one was just on the -- just to get an update, I guess it's fully let now, but there was a large tenant departure with the Japan Tobacco International, JTI, 2 years ago, and whether the building was now fully relet.
I think it's difficult for me after a year of disposal to know where they are. My last question -- my last -- what I heard last is that they had partial letting. But they are in repositioning modes, and they are more on the market with a quite lower rate. But that's really street noise I heard. So it's not a qualified statement.
Okay. And on the whole, do you see any opportunities to buy assets which are partly or largely vacant and reposition them?
Unfortunately, not where we want to buy assets, but clearly, we look. But at the moment we don't have a full buy plan on that position..
[Operator Instructions] The next question is a follow-up question from Ken Kagerer from ZKB.
I've got just one quick follow-up question on Parco Lago. I've seen that 10% of the units are sold. Obviously, it's early days. But as we all know, the market is quite tough there, and you're investing CHF 80 million. What is your plan? And how do you see the market evolve? And how do you see the project evolve there?
Well, I think on that -- I have to say on the general construction side, we are very positive. We are progressing very well, and we'll finish within a month. The first mockup apartment that we really can also show how it is. We have a quite high amount of reservations. We have 8 reservations plus 16 strong interests. Additionally, it's clear that the sales process was slower than what we expected. On the other hand, we put a lot of efforts in with regard to understanding the market. And we are still positive that we can successfully conclude this project. It might take perhaps a bit longer than we thought, but we're not talking about years. So we are -- we're generally quite positive on the efforts. We are positive on the product. So there is, at the moment, no signs of worries from our end and also from the end of our local partners. But we are quite intensively involved also with our local -- with our people from here.
There are no more questions at this time, sir.
Well then thank you very much to everybody also from our side, and then we talk to each other in August. Thank you. Bye-bye.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.