PSP Swiss Property AG

SIX:PSPN

Earnings Call Analysis

Strong Q1 Performance with Increased Guidance

PSP Swiss Property delivered robust results for Q1 2024, showing a nearly 10% growth in rental income due to new acquisitions and full indexation. The company successfully concluded a 20-year construction project, adding CHF 550,000 in sales gain. Costs increased by 5% but remained within projections. Financing costs rose, yet funding remains attractive. Guidance for full-year EBITDA was slightly raised to CHF 300 million, and vacancy rate is expected to stay below 4%. Key drivers included strong rental demand and specific valuation gains of CHF 1.2 million recognized. Market conditions remain favorable, with prime rents showing solid performance.

Strong Rental Income Growth

PSP Swiss Property reported a substantial rental income growth of nearly 10% in Q1 2024. This was bolstered primarily by the recent acquisition of Westpark in Zurich West, which had a notable impact. The income growth was further driven by full indexation and turnover rent recognition for 2023. Additionally, a tenant fit-out payout contributed to the robust figures .

Valuation Gains

Typically, valuation gains are unusual for Q1, yet PSP saw positive adjustments due to material evidence in rental contracts leading to revaluation. Four specific assets, including those on Bahnhofstrasse and Waaggasse, saw gains driven by rental contract updates and tenant performance. However, these are isolated gains, not indicative of overall portfolio trends .

Property Sales and Project Completion

The company realized a gain of approximately CHF 550,000 from the sale of condominiums, marking the completion of the Parco Lago project after nearly 20 years of development. This long-term project concluded successfully, reflecting PSP's capacity for handling extensive real estate projects .

Cost Management

Operational costs increased by 5%, but remain aligned with projections. Higher costs were attributed to letting activities, general and administrative expenses, sustainability efforts, and IT projects. Despite these increases, the cost growth is considered manageable and partly seasonal .

Financial and Tax Expenses

Financial expenses rose, but funding remains attractive due to favorable bond issuance terms and rate cuts by the Swiss National Bank. The higher tax impact is attributed to valuation gains, and overall, the tax scenario remains typical for the quarter .

Vacancy Rate and Leasing Activity

The vacancy rate stands at 4.1%, with the year-end target set to be below 4%. Significant vacancies are being addressed, particularly with efforts to secure large commercial leases in light industrial areas. Continued leasing success is anticipated, supporting the overall positive outlook .

EBITDA Guidance and Future Rental Income

The EBITDA guidance has been slightly updated to CHF 300 million from CHF 295 million. Expected rental income until the end of 2025-2026 is projected at CHF 23 million, with CHF 1.2 million already recognized. This shows a healthy leasing pipeline and long-term revenue robustness .

Development Projects

Key projects, including those in Basel and Lausanne, are progressing well. The full leasing of Hochstrasse in Basel and positive tenant activity in other developments underscore the strength of PSP's project management and market position .

Acquisition and Divestment Strategy

While the acquisition market presents limited attractive targets, PSP is focused on CBD assets with value-add potential. Divestments of non-core assets are progressing, with strong interest and negotiations expected to conclude in Q2. These activities are integrated into the updated EBITDA outlook .

Market Dynamics and Outlook

The company observes robust demand in prime locations like Zurich and Geneva, with strong footfall and stable rent levels. Though the market is dynamic, significant rent growth is not anticipated across all segments. PSP maintains a cautious but positive outlook for the remainder of 2024 .

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the PSP Swiss Property Q1 2024 Results Conference Call. I am Maria, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. The presentation will be followed by a Q&A session. [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.

[Giacomo Balzarini, executive]

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 review, 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 observed the bifurcation between CBDs and non-prime.

If you go directly into the key slides, I would ask you 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 of “Westpark, Zurich West, we undertook last year; secondly, we have recognized the full indexation in the first quarter of roughly 1.1 percentage points; thirdly, we had to recognize a 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 CHF 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 is a plus/minus change of CHF 5 million per asset, we are obliged to ask the valuer to review the valuation of this asset. This had a materialization of 4 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 CHF 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, also we see a plus 5%. I think on Swiss franc amount, it's almost neglectable. And compared to the last year and also with regard to projections, we are pretty in line with our cost view. We had a bit higher letting costs we had on the G&A. 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 costs. I would -- here, I wouldn't have anything major to highlight, also 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 issued the bonds in the first quarter at very attractive spreads needed or nevertheless, clearly, financial expenses grew and will continue to grow, perhaps a bit less strongly than we had expected due 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 recalibration of the 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 B2Binz.

Here, we have signed a lease agreement with the light industrial area, and we are in the final steps of signing a large commercial lease. We're hopeful to come to an end by the next couple of weeks and would 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 and, 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 4 assets with regard to the Bahnhofstrasse and Waaggasse. 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 breakup which was not exercised. Therefore also here, an adjustment on the DCF model by the valuer.

The Waisenhausstrasse, Bahnhofquai 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 a valuation gain. And the Hochstrasse in Basel was driven by the letting success on the leasing side and having now a fully let building since Q1, and this triggered the fourth valuation gain.

So I think these 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 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 valuer.

On Slides 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 metrics 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 Füsslistrasse, 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 TEC on Basel, as I 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 the Christmas. Hochstrasse is fully let. And Hôtel des Postes in Lausanne, we have started on the marketing side. We also have the partial letting. And we are working now really on the construction side and started up the letting.

From this CHF 23-roughy million of potential rental income, which will come in until the end of '25, '26, an annualized CHF 1.2 million have already been recognized. So to end the presentation before going into Q&A, on Slide 34, you see in a nutshell slightly updated EBITDA guidance of CHF 300 million compared to CHF 295 million and a confirmed vacancy rate guidance of below 4%.

With that, I would end my short presentation and leave the floor over for the Q&A.

[Operator]

[Operator Instructions] The first question comes from John Vuong, Van Lanschot Kempen.

[John Vuong, analyst]

On the like-for-like rental growth and, more specifically, the turnover-linked rent, 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 much -- so more of a base effect given that this was already recognized in the later quarters? Or is this a different effect on those?

[Giacomo Balzarini, executive]

It's a bit of a special effect because we have been reported this turnover rent for '23, early '24. So it's a full year recognition of the '23 turnover. For the like-for-like, we took out 3 quarters of it. So it's on a like-for-like basis, it's correctly recognized on the adjusted side that you see for 1 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 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.

[John Vuong, analyst]

Okay. That's clear. And maybe as a follow-up on this, on the underlying like-for-like rental 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?

[Giacomo Balzarini, executive]

The second question, I think that's something I would expect towards the end of the year as well. The indexation overall should contribute roughly 1.4 percentage points overall, we would expect as per now. But overall, for the full year, I would expect the like-for-like of slightly above 3% from today's point of view.

[Operator]

The next question comes from Ken Kagerer, ZKB.

[Ken Kagerer, analyst]

This is Ken Kagerer on ZKB. I would have 3 questions. The first one regards the divestments of noncore assets. Where do you stand with those?

[Giacomo Balzarini, executive]

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 routes. 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 that we [ deemed ] 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.

[Ken Kagerer, analyst]

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

[Giacomo Balzarini, executive]

They're reflected in the EBITDA guidance. And clearly, once we have done the disposals, we would communicate it, but it's not substantial.

[Ken Kagerer, analyst]

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

[Giacomo Balzarini, executive]

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 a typical evident bidding 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 2 incidences, yes, small -- but smaller transactions.

[Ken Kagerer, analyst]

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 valuer 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?

[Giacomo Balzarini, executive]

Not considered. The yield is reviewed midyear 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 ops is not taken or adjusting the effective rent to the old market rent or by reducing the vacancy, expected vacancy.

[Operator]

The next question comes from Andreas von Arx, Baader-Helvea.

[Andreas von Arx, analyst]

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?

[Giacomo Balzarini, executive]

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 6 months, there will be a review on the respective adjustment.

[Andreas von Arx, analyst]

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

[Giacomo Balzarini, executive]

I think it's, honestly, it's a valid comment. We have started with CHF 5 million hurdle 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.

[Operator]

The next question comes from Steven Boumans, ABN AMRO.

[Steven Boumans, analyst]

I have 2 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.

[Giacomo Balzarini, executive]

Well, the prime office rents towards the year-end, I think we are in a quite dynamic market, but not in a high proactive 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 rents 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 rents are very solid, and you can get above the top prime rents depending on the product.

[Steven Boumans, analyst]

Okay. So can I say it's low to mid-single digits prime rental growth for '24 as far as you can see?

[Giacomo Balzarini, executive]

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 January saying mid-high single digit in general, it's 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 a high single-digit rent growth. I think this is -- might give the wrong perception.

[Steven Boumans, analyst]

Yes. That is very clear. Then the second and last question is on retail for high street. I see from external data that footfall in Zurich Bahnhofstrasse is up materially and it's slightly down in Geneva. Is that also what you see for your portfolio? And is that reflective of what you expect for rental growth and regional sales locally?

[Giacomo Balzarini, executive]

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. The majority of our rental contracts are not turnover-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 observed, as I mentioned, that on these prime spots, the demand is quite high.

[Operator]

The next question comes from Kai Klose, Berenberg Bank.

[Kai Klose, analyst]

Just 2 quick questions from my side. The first one, the amount of committed credit lines went down by CHF 100 million just in the first quarter. Was there any specific reason behind? And what do you currently pay for committed credit lines? And second question is on the vacancy target for '24. How much of this -- to reach that, how much is dependent on the largest vacancy reductions, which you show on Page 16?

[Giacomo Balzarini, executive]

On the first one, I think this is driven by owner refinancing of bonds. We handled 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 it -- clearly, the guidance includes a letting success on the B2Binz. I think that's something we are working towards. It includes also letting success on the Bahnhofplatz, Bahnhofquai 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, it's 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 Flüelastrasse, we might tend to try to get a slightly higher rent.

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.

[Operator]

[Operator Instructions] The next question comes from Alexander Totomanov, Green Street.

[Alexander Totomanov, analyst]

You mentioned tenants at The12 in Zurich have already started [ to keep 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 cinema ], one of the department store's owners?

[Giacomo Balzarini, executive]

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. So I think for the moment, as I mentioned, they're all signs of green.

[Operator]

Mr. Balzarini, there are no more questions.

[Giacomo Balzarini, executive]

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.

[Operator]

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.