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 Q3 Results 2019 Conference Call. I am Alice, 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.
Thank you, and good morning to everybody to this Q&A call on our Q3 results. As we outlined in our press release, we're obviously very pleased on the Q3 numbers and therefore, also improved our full year guidance on the EBITDA and on the vacancy rate, although moderately, but it's a sign of confidence, clearly pleasing with continuous top line growth, and all of that on the back of an even stronger balance sheet. I think in the merit of time and also as we did in the last quarters, I'd like to offer the time to questions. So I would really directly hand over to you, to those with questions, and we take the best time of it.
[Operator Instructions] First question comes from the line of Ken Kagerer, ZKB.
I would have 3 short questions. Firstly, one with regards to the vacancy outlook into 2020. The second one is related to potential revaluation gains in the second half after the strong transaction evidence that we have seen, what can we expect here? Some companies have given a guidance there. And the third one is a bit of a special one on the portfolio. What do you expect asset development with the Globus sale? For the Globus on Bellevue, what can we expect there? I think in the past, certain developments have been mentioned. Is there something concrete you can tell us?
Thank you, Ken. With regard to the vacancy rate outlook for 2020, as you know, we typically give the guidance with you -- with our full year results. I think what I can say based on the expiry profile, which is also evidenced on Slide 16, knowing that we have 10% of leases expiring, considering currently our discussions on these pre-lettings and retention plans, I think we are pretty confident that we can continue on this low vacancy rate. The exact number and the exact guidance will come out in February. But we feel pretty strongly that we can continue to be around this 4% number. But please allow us that the full year numbers guidance to come out in February. The second, with regard to the revaluation gain guidance, we refrain from giving a revaluation gain guidance. I think this is not appropriate. It's clearly the task of the valuer. What we observe is, as you mentioned, some transactional evidence. We clearly are letting well, and we bring our vacancy rate further down towards the year-end. So I would expect, based on these factors, clearly rather a positive connotation on the valuation. But overall, the valuation is a task of the valuer, not ours. With regard to the Globus on Bellevue, I would say that's nothing to do with the overall sale of the Globus. It's a project we have launched. We have briefly informed a few months ago. We have aligned the lease expiries, and we are working on a set of projects and set of discussion with potential tenants to either do a refurb, stronger or weaker, and bring this building, which is placed as one of the best spot, on a newer shape and obviously with a certain adequate rental uplift. But there's still a few years to go. We are working now with a variety of architects on this project, but it's independent of the mentioned Globus sale.
[Operator Instructions] The next question comes from the line of Robert Woerdeman with Kempen.
This is Robert. Apparently, there is a great difference in pricing between, let's say, prime assets, where we see yields of 2% or slightly above that, versus value-add properties, where apparently there's hardly any market for and arguably there is a number of those assets potentially in the market. Would this be a segment given the fact that your platform is obviously stronger than average property companies? And would this be a segment that you could potentially act in and look at, let's say, mispriced assets?
Well, to your first point, I think it's pretty clear in this negative interest rate environment that prime assets with a good visibility on rental income patterns are going at the mentioned yields. I would say there is not much value-add around because I think investors who have the value-add opportunity work on this value-add opportunity. I think it's not -- it has to be seen. If there are mispriced opportunities, we'd clearly look at value-add opportunities but still in our perimeter, so close to city or transportation hubs. We are currently concretely working on a bid for a land plot with a project close to the city -- or one of the -- of our cities. Not huge, so it's not very sensitive, but obviously look at it. I think what one has to be a bit careful that you're paid still for the risks you're entering within these development projects because although it might be a value-add story, but we are not talking about 5% yields. You are still talking about quite aggressive yields. So it's then also finding really the right risk-return profile for these value-add projects. But yes, we are looking at those, but they have to be still in our acting perimeter where we see also future potential rental growth and job creation.
Yes. Okay. So can I summarize that as you might be adding, let's say, obviously, the offices on good locations if the opportunity comes by?
I would say very good locations. We're not looking at secondary cities where we are not in.
Yes. Okay. Also on the transaction market, I think that's strong. I think that that's pretty clear. Would you be considering also potentially stepping up the pace of, let's say, the tail end of your portfolio and/or, let's say, the assets where there is literally no growth anymore? Or is this something that would affect earnings too much and that you actually want to safeguard your future earnings?
Well, I think we want to look continuously to improve our earnings quality. So if they are bad earnings, we are not willing to safeguard them for the future because they will deteriorate. We started a few years back a bit more active on the portfolio rotation, on the firsthand looking at, really, can we extract the extra returns for the CapEx we have to do in a few years; or secondly, also what we did now with Uster, are there better uses to our properties? Can we develop a project inside the project? So this portfolio rotation will continue. But over the last years, we have really very much streamlined and optimized our portfolio. So yes, we will continue, but we will not step up now and start selling prime assets.
Yes. No, that's perfectly clear. And then last question, a little bit nitty-gritty and -- but for the third quarter, your like-for-like rental growth was minus 0.7%. And for the first 9 months, it was decent 1%. What happened? And how should we read this?
Yes. For the full year, you will see obviously, again, close to 1% of like-for-like growth. What we had in the Q3, and this is nitty-gritty, we had a tenant arrear, so we didn't book this rental income coming from this tenant, which then was settled and we will rebook in the fourth quarter. And this was a larger tenant payment which had nothing to do with the credit of the tenant but was a delay on his side, but we still booked it as an arrear and did -- and so it didn't reflect the like-for-like.
The next question comes from the line of Pierre Paren, BMO GAM.
Just on the back of the last question from Robert on the like-for-like rental growth, which was lower in Q3. If I understand correctly, you're guiding somehow for 1% like-for-like rental growth for the full year. I don't really reconcile it with occupancy gains that you saw year-on-year, which is going to be more than 100 basis points year-on-year because you should get to back and see level below 4%. One could expect that your like-for-like rental growth is much better than 1%, so if you could help me reconcile those 2 aspects. And also on the reletting that you've done so far this year, could you give a bit more indication in term of the reversion you achieved, whether negative or positive, as well as lease duration? Any detail on the reletting would be helpful.
Yes. Thanks. I would say on the first question, where is it, is it at 1% or 0.9% or 1.1%? I think today, it's difficult to see. We will see that at the year-end. Yes, you have to factor in clearly also the disposals on this like-for-like calculation. But overall, what we see on the pure like-for-like growth, it's coming predominantly through the vacancy rate reduction. It's not coming through, and that's linked to your second question, to rent growth. So we have not seen across the portfolio rent growth in the first half, and we don't see across the portfolio rent growth in the third quarter. We see that for lettings of repositioned assets, refurb assets, we can get quite a strong uplift compared to market rents, the risen part of the rents. But overall, if we factor in really the reletting of the existing tenants and we factor in additional potential rent-free periods or a big fit-out contribution, the rent is flat. So that has not continued towards the half year. Now that we are getting to even a lower vacancy rate, clearly, the task will be to be a bit stronger on the renegotiation side. But as you know, on a CHF 7.8 billion portfolio with relettings of 10%, until you see the materiality of it, this will take some time. So I think that's it. And based on the like-for-like, you have also seen that we have basically no inflation adjustment in it. So it's 0 -- basically 0 coming from the CPI.
Just as an indication on the rental uplift you managed to lock in post a repositioning of an asset, are we talking high single digit there, double digit, just to get an idea?
If I take the 6 largest which we did in Q3, the range is from 0% to 18%. There are some single digits, and there is one strong one, yes. But as I said, I think it's important. We have also a slide in it in the annex, that the rent -- the rental income growth is coming, thanks to, obviously, the acquisitions, net of the disposals. It's coming through the effect from the development pipeline which comes into the portfolio maturing. And about CHF 3 million are coming through the vacancy rate. So we are very happy with this. However, the underlying net effect from the rental market is flat. We see improving signs in the CBD of Zurich and in Zurich West, but this is clearly with a lower maturity profile not really coming in into the top line as quickly as one would perhaps expect from reading the news that the market is strong.
Okay. That's clear. And then last one's on the reletting for next year on the expiries you've got for 2020. Do you have the rough geographic split of those renewals? Are we more looking at some Zurich assets, or is it kind of widespread?
If I look at it, it's basically spread through the portfolio. Clearly, Zurich is, due to the size of the portfolio, the dominant part. But if I look at the top 10, we have 4 of Zurich, we have 3 Bern, we have 1 Geneva, 1 Lausanne, so it's quietly spread. But as I mentioned in -- I think it was Ken's point, we are looking at the largest upcoming expiries quite ahead with our renewal discussions, so we have a very good visibility on 2020.
The next question comes from the line of Pascal Furger with Vontobel.
Three questions also from my side. The first one, just related to ATMOS, so here you successfully increased your pre-letting by 16%. Is the name of the Swiss company public? And also, you mentioned further letting soon, hasn't revaluated or basically reassessed this project. I assume you must know this number sometimes in Q4. Is it fair to assume that we will see quite substantial revaluation gain related to ATMOS? That was my first question.
Thank you. Yes, the name of the tenant is public, but we cannot disclose it as they will inform, I think, internally in the first quarter. So as soon as they will inform, clearly, we will also disclose it. Secondly, we are in very far advanced negotiations for another 20% of ATMOS, which will lead up to more than 80%. With regard to the valuer, you have seen it in Q1 that we had the revaluation gain, really must schedule to a letting to [indiscernible]. But there, the closing of the lease agreement happened in Q1. Here, the closing of the lease agreement happened after Q3, and therefore, the value will, of course, take all this information into the consideration for valuing the property by the year-end. So we have no indication now on it. We'll disclose it then with the full year results.
Then the other question on your inventory sales of CHF 6.6 million in the third quarter. Can you give us a rough indication how does this split by the Paradiso project and the Uster one? And maybe in terms of Paradiso, so here, could you please share with us what kind of basically selling of the apartments do you expect by the end of 2019? And what can we expect by the end of 2020?
Yes. Well, the split is I think quite transparent. We have disclosed on Page 5 that the Uster contribution was CHF 5.8 million. If you take out the Löwenbräu of CHF 2.2 million we have disclosed I think first quarter or half year, we have the Lugano contribution of roughly CHF 1.6 million. For the full year, we think from this condominium sales, we will get close to CHF 13 million, plus or minus. We are, I would say, improving our sales pattern in Lugano. And if it's fine for you, I would leave further guidance for 2020 at our February communication of the full year results.
[Operator Instructions] Mr. Balzarini, there are no more questions at this time.
Thank you very much. And thanks to everybody for attending this Q&A call, and I wish you all a pleasant day and a great year-end rally. 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.