Ladies and gentlemen, Welcome to the PSP Swiss Property First Half 2024 Results Conference Call. I am George, the conference 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 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 Balzarini, CEO of PSP. Please go ahead, sir.
Good morning to everybody, and welcome to our half year result release. We released the half year report and the presentations this morning, so I will not refer perhaps to the market update. I will leave that to the Q&A, and then we'll do, if it's okay, a quick rundown through the key figures of our half year results, and as always, have a bit more room and time for the Q&A. So if you may go to slide eight, you see that we delivered an EBITDA of CHF 152.3 million, slightly up, and with this, with that, we also confirmed our CHF 300 million EBITDA guidance for the year. The net income without revaluation gain came down due to the fact that last year, if you recall, we had a one-off timing item of the deferred tax releases.
This year, in the first half of the year, the amount was only CHF 3.5 million. Last year, it was for the same period, more than CHF 30 million. The net income went up by more than 100%. This is predominantly due to the revaluation gains, which we will elaborate a bit more in detail later, and the rental income went up by 7.9% to CHF 176.2 million, and all translates also to an increase of the NAV by 1.9%. More in detail, if you go to the next slide 9, you see the rental income coming in with CHF 176.2 million, up, as I mentioned, by 7.9%. The valuation gain was CHF 44.7 million. I will come to that on a later slide.
The more important is the property sales gain on the investment property of CHF 11.3 million. This is the result of disposal of six assets, which we can consider core assets in secondary cities, which is part of our approach to further concentrate our portfolio in prime, premium, premium locations, and then slightly reduce our exposure on secondary cities. Also, those assets are typically also very central. The assets were located in one in Aarau, Fribourg, Olten, Lucerne, Bern, and the range of the gain overall was an average 16% above book, and the range was at book to above 45% of book.
The property sales from the condominium was part of the Q1 result, so this comes in at a total operating income of CHF 235 million, which was clearly driven also by the valuation gain. On the expense side, you see a pretty much flat development, which demonstrate also clearly the simplicity of the business model and the cost discipline we have, and translate an EBITDA margin of above 84%. On the next slide eleven, I think the key number is clearly the increase of the net financial expenses to CHF 16.6 million. The average cost of debt is roughly 1%. I think what I would like to say here, considering the interest movement of the last quarters, I would reiterate my statement a year ago, that going forward, we expect financial expenses to go up CHF 10 million per year.
I think today, based on today's prospects and curve, the interest expenses would go up CHF 5 million per year in a broad range. So clearly, this, reduced interest rate environment will also be beneficial for the EPS development from today's perspective. Nobody knows how this, develops, but if you look at the curve from today, this will clearly have a different picture on the EPS development. If you look at the vacancy rate, the vacancy rate came in at 4%. The largest vacancies are still on the, on the B2B, and so there we have a signed lease, which will kick in, by the end of the year. And the remaining part, I think we can go through the Q&A if there are specific questions.
And also the expiry profile, we have renewed the majority of the expiring lease of this year, so we are confident that we can achieve our below 4% target vacancy rate by the year-end. Slide 18, the changes in fair value. As you recall, we had four revaluation gains in the Q1 . Overall, for the half year, we have a valuation gain of CHF 44.8 million, thereof, CHF 7.5 million is a first-time valuation gain of the acquisition of the assets in Geneva. Overall, we had no changes in the discount rates on average. Clearly, there were within a portfolio of 170 assets, there are ups and downs, but in general, on average, no changes in the discount rate and the plus CHF 45 million gain in the fair values.
If you go on the capital structure, just as a quick summary, slide 23, I think we can continue to demonstrate a strong capital base with an equity ratio of 53.4%, loan to value of 35.3%. You see that financial expenses are clearly moving up with an average cost of debt of ninety-five basis points and passing 1.02%. If you don't mind, I would skip the details on the development projects which are progressing clearly, since also we talked in May, and I would go finally to slide 32, where I would kindly confirm our outlook for 2024, where we reiterate our upgraded EBITDA guidance of the Q1 .
We confirm the CHF 300 million, and we confirm the vacancy rate guidance of below 4% for the full year 2024. With this, I would conclude the quick introductory remarks and leave the floor for 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 touchtone 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. Anyone who has a question may press star and one at this time. Our first question comes from John Vuong in Van Lanschot Kempen. Please go ahead.
Hi. Good morning, Giacomo. Thanks for taking my questions. Could you perhaps talk a bit more about the disposals that you made in Q2? I think the press release said that they were investment properties, but then considering a 16% premium to book value, that sounds rather steep. Were the book values perhaps too conservative, or do the buyers have found a different purpose for these assets?
Thank you very much. I think what clearly helped is, first of all, these are core assets in the secondary location we mentioned. From a size-wise, we talk about buildings in the range of CHF 5 million-CHF 25 million, so clearly with a broader appetite. Thirdly, the interest rate movement clearly helped also, the potential investors, you know, to find this appetite. We have, however, to say that the market was not so deep. So I think we found for every of those assets, two, three potential bidders, clearly with a very local focus and a specific approach. It's difficult to say, I think that the value is off, because we were not under pressure to sell them. We were able to prepare the cases very well.
I think it's a great success that we were able to sell those assets at the premium to book. But I would refrain to say and to interpret a read across on the portfolio. I think without pressure, I'm very happy and comfortable with all the assets we have to dispose those at a premium, but I wouldn't interpret too much in a 45% premium to it. I think here, the specific buyer has a specific purpose. Is it his own use? Is it a potential reconversion? Is it the need to invest capital? What I can say, the buyers ranged from privates to institutionals, so it was quite a broad range in it.
Okay. Thank you. That's very helpful. And then just on valuations in general, I do want to ask about that, if you don't mind. Just looking at your valuation gains in H1, I think most of it was already recognized in Q1 due to property specific factors, which probably means that Q2 appraisal pointed towards flat valuations. Would you consider that valuations are bottoming in that case?
I would confirm your first statement. I think that's very much driven by property specific items and leasing up items. I think we have also say, you know, the data points, probably the value has seen confirmed the valuations we have in the book. So clearly, he very much looks at the transaction market, and the confirmation of the valuation is a confirmation that the market holds up. I wouldn't speak of bottoming or ceiling. I think it's a valuation as per the thirtieth of June, based on what the valuer sees in the market, and clearly, as I mentioned, there were no, on average, changes on the discount rates, perhaps a plus five, minus five, property specific, but with that, I would say it's a regular valuation cycle of the valuer. I wouldn't now specifically talk about bottoming. I cannot foresee the future, unfortunately.
Okay, that's fair. Thank you. That's it from my side.
Thank you.
Our next question comes from Marc Forster and Finanz und Wirtschaft . Please go ahead.
Good morning. Hello. I have a question on the Geneva acquisition of the Edmond de Rothschild headquarters you announced recently. You said you wanted to turn it into a hotel business. Can you say a little bit more about the project, so what kind of hotel do you intend to establish there? What kind of partners or tenants are you looking for? Are there already any specific plans, and are hotels a business you want to grow in? I think they are rather rare in your portfolio, but yeah, seems to be an interesting investment too.
Thank you very much, Mark. I think what we generally try to do in our portfolio, which is a very inner city concentrated portfolio, to find the best commercial use, and if a hotel, and typically when we talk about hotels, it's boutique hotels, specific, volume-driven hotels, then it's the best commercial use for that area. What we did is in the due diligence phase, we looked at what could be the potential best use in this area. As we mentioned at that time, the press release, we had discussions. We have an LOE with a potential hotel operator, and now we have time to work on it.
And I think if you don't mind, it's very early stage to provide details, but it's a building which is location-wise and building-wise predestinated also for a hotel utilization. As we are very much concentrated with office in that area, we would clearly also value up the office space we have surrounding that building, providing an additional service, providing additional product. So these are the considerations we are going through now, but I think we should be able to ideally provide a bit more info with the full year results of 2024 or thereafter. I think here we still work on both options. We have interest also from office tenants. We have interest from several hotel operators.
So I think that's the phase now where we continue to work with our identified partner and see if we get to an agreement on it. But I think this is a bit irrational. We have some hotel leases, but these, those are treated very much like a commercial activity in the inner city, which helps clearly all our other businesses, being it high street retail, being it office. I think that's a very fruitful combination for us.
Thank you very much.
Thank you.
Our next question comes from Ken Kagerer and ZKB. Please go ahead.
Yes, good morning, everyone. I would have three questions. The first question relates to Basel, and there, the situation looks a bit more difficult, also for more quarters now. So, I would like to know if you would think about divesting one or the other asset in Basel. That's the first one. The second one is on the expiries next year, if there are any issues, and if you have already a bit of visibility there. And the third one is on the two tenants, Google and Globus. Could you give us an update on the situation there, please? Thank you very much.
Yes, thank you very much, Ken. I think a short question on Basel, we don't have short-term disposal plans. I think it's clearly a statement we make that we are in the markets we are in with Zurich, Geneva, Bern, Lausanne, and Basel. It's a bit more weakening part. Also, now we have a good interest from a tenant on one of our larger vacancies, which we are negotiating. And as you recall, in the past, we always complained, and then we signed for the full Clime, and then we complained, and then we signed for the whole Hochstrasse. So it's a bit an interactive, erratic market for us.
From a pure, you know, bottom of the stomach, it's not the most solid of the markets we are in, but there's absolutely no reason to think of disposal at this moment. Also, I wouldn't exclude, as we do it in other markets, that in one point of time, we might sell a single assets. On the expiry for last year for next year, we're working on the majority of the expires already now. I think there's nothing, you know, substantial to mention, which would say that's a key concentration. So I think here, the progress is as expected, as normal. I think the overall expiry profile next year with 10% is also relatively moderate.
On updates on Google and Globus, on Google, I think there are no updates. They are tenants of us. They lease up our spaces. So I think here we are not in a discussion mode. Globus, they are building out the surface they have rented from us in the Globus on Bellevue. We have their capital markets day today at 10:30 A.M. for bondholders, bond investors, and we have the CEO of Globus quickly speaking and introducing their context. So I think from our end, this is a lease agreement as all the others, which is progressing. So we have absolutely no other sign on this one.
Thank you very much.
Thank you.
Our next question comes from Tommaso Operto in UBS. Please go ahead.
Yeah, good morning. I have a short follow-up on the acquisition you made in Quartier des Banques in Geneva. You said the yield was 4%. I mean, I think that it seems to screen quite attractive. I don't know, what was the motivation of the seller? I mean, was it like a motivated seller, or is there anything that you could share in terms of how you negotiated that yield?
I think, well, they're very always difficult to speak for the seller. I think what we can say is that they are concentrating their activities in the Quartier de l'Étang. They did a sale-and-leaseback of five other assets with us a year back. This is the last cornerstone. As we mentioned, we bought it at the 4% yield. After repositioning, being it in a hotel, the yield would come down probably to a 3.7%. If it would relet it as an office, we would keep it probably at the yield of 3.9%-4%. Having said that, it's very difficult for us to talk about the motivation of the seller. You know, clearly this is the valuer, which then looks at the portfolio at the asset and does a half year valuation and comes up with his view on the value, which is, in this case, independent from our transaction.
Understood. Thanks.
Thank you.
If I may just a follow-up on the capital recycling, I mean, were parts of the sales of the property sales that you have done now also kind of motivated by this acquisition? Or was this totally unrelated?
Honestly, I hate the word capital recycling, because it's basically something, you know, we do since years. We could try to focus our portfolio in the most resilient markets, where we see that there's the highest potential rental growth, where we have the strongest cash flows, and where we have the most alternatives in tenants when we have, you know, lease expirations. And those are typically not in Aarau or in Fribourg, but those are typically in the CBD of Zurich and Geneva and then Bern, Lausanne and Basel. So I think this is something which we continue to do. Honestly, we said when we did the Westpark acquisition last year, that we are clearly also looking at the next phase of further concentration of the portfolio, so that with Rothschild was an opportunity we saw, which was independent now from this disposal.
Disposal was more linked to the 4% acquisition of the Westpark, with the aim to sell less prime at a lower yield. If we now look clearly at the yields, considering the CapEx you would have had to put in, and our view on what the potential rental income was, we sold at the 3.3, 3.4, and we bought Westpark at 4. This is a bit irrational. The hotel, the Rue de Rothschild, I checked it, but was independent of the disposals. This was an opportunity, we can afford to do it, and we will continue to screen our portfolio and in a very operational, smooth way, try to further strengthen the resilience of the cash flows of PSP.
Understood. Thanks. And last question, if I may, the one on the like-for-like rental growth. Q1 was still kind of impacted by a couple of positive one-off effects. If you calculate, if you exclude those one-off effects from Q1, how high would the like-for-like growth have been for H1?
If you exclude those, which are predominantly linked to the Bahnhofplatz, as I mentioned case, and to the Löwenbräu case, we would have been rather in a 3% range.
Okay, perfect. Thanks.
Thank you.
Our next question comes from Steven Boumans, ABN AMRO. Please go ahead.
Hi, good morning, and thank you for taking my questions. I have a broader question on the UCN capital expenditures. Could you please remind us of your energy intensity ambition, the timeframe of this ambition, and especially the expected CapEx, for example, per square meter, needed to reach this? Also some maybe broader questions, some color, on how to look at sustainability CapEx would be welcome. Thank you.
Thank you very much. I think with regard to the CapEx needed on our sustainability efforts, and I think here we clearly communicated that we will become Net Zero within the time frame of 2050, that we would halve our emissions by 2035 compared to 2019. The CapEx we would need is not more than what we have already foreseen in our investment plans, so there will be no additional CapEx in it. We have the normal renovation cycles, and that's already part of the valuation of the buildings, and more details in CapEx per square meter. I think this is something we are not necessarily disclosing or even, you know, lining up overall. We looked at the case by case.
We have our emission reduction path, which we follow, and I think in order that we're very comfortable that we get to our targets with the CapEx we have foreseen. I think that's something we stated very early, that based on the investment cases and CapEx plan of the single properties, that we follow that, and we had this confirmation also in the past renovations we have seen. We didn't have excess CapEx due to sustainability efforts. Sustainability efforts is go all well, well planned.
Okay, clear. Very clear. If I may, one second question and last question. I also see that the average lease term is rising in the past years, say below four at the start of 2021 and close to five today. That seems contrary to peers and market trends. Is that... So the question is: What do you see that too? Could you please comment on why the average lease term is rising, what you expect in the coming years, and the potential financial implications of this?
I think this is, I wouldn't say, more a coincidence. We had two large leases which were very long, which expired and were renewed again by more than 10-12 years, and I think those clearly then, you know, have an impact on the duration of the overall. I think generally, also perhaps the few hotel leases we had, which are typically 20-25 years, help, but if you recall, we renewed the Google case, which expired last year, again by 5 years, so this has an immediate impact. We had a large Swisscom and Post lease, which expired, and we released by more than 10 years. I think these are the biggest drives, perhaps, but I would have to verify. There were some periods where we had requests of early breaks, and we see a bit less requests of early breaks, and clearly our duration includes the early breaks, so at the edge, this could also be a little element of a prolongation of the duration, but I would say the majority is the fact, as I mentioned beforehand.
Okay. Very clear. Thank you.
Thank you.
The next question comes from Markus Kulessa in Bank of America. Please go ahead.
Good morning, and thank you very much for your presentation. My first question is on the guidance, because you say you're reiterating it. Maybe I missed something, but I think it was CHF 295 million, EBITDA before, to CHF 300 million . So I'm, is it correct if I read into it as a rise in the guidance? And my next question would be some indication on the rent indexation in H2.
Yes, thank you. We increased our guidance in Q1, so we reiterate the upgraded guidance of Q1. Probably as we are one of the few, which to, at least in Switzerland, we're the only one doing full, you know, Q1, Q3 release. Perhaps this was not so clear, but we did an upgrade, an upgrade of the guidance in Q1, and we now confirm this upgraded guidance. On the indexation, it's the same as of the beginning of the year. We have not, you know... The majority of the leases start January, so they take the November indexation, so the next data point would be the November CPI or October CPI, which will then be fixed in November for 2025 . At the moment, we look at an inflation of 1.2% for 2024, which would then be relevant for 2025. There is no major rate bumps to expect in H2.
Thank you very much.
Thank you.
Our next question comes from Andreas von Arx and Baader Helvea. Please go ahead.
Hey, good morning. I have three quick questions of understanding and then two, one on the valuations. The question of understanding, I mean, with the disposal that you made, were there any significant tax effect that would explain the price that you have achieved? But first one, I've seen that you have a delay at the project Climb in Basel. Any, is that an operational reason or just a minor delay, I don't know, due to low pre-let? And could you give an update on where we stand on the Westpark? Is there any, you know, modernization planned here, or are there changes in the tenants coming in the next quarters? That's the three quick understanding ones.
Thank you, Andreas. I think on the dispose, there are no specific tax elements. I think this is pure supply, demand, and specific interest of specific investors. Absolutely, no tax elements. I think the delay on the tech is not major. It's mainly driven by the fact how far we go with the product we provide. Is it really a raw product, a bit fitted out product? And I think this halted a bit the situation to look, okay, what kind of demand are we confronted with? Also, I have to admit, and as we said at the beginning, the demand is very subdued in this area, but we were in discussion with a potential logistic tenant, which, you know, halted a bit the process to review what kind of product are we providing. And on the Westpark, there are no modernization plans. We are leasing up the building, everything runs as planned. I think this is a relatively new, very modern, sustainable building, so there are no plans on that side for the moment.
Okay. Then you still have a record high inflation component in your discount rate at 1.25%. I mean, that's what the external value does, which is above the 1% we have seen in 2015. Now, inflation expectations have clearly come down in 2024. Why is that not reflected in the nominal discount rate? And should any reduction in the interest rate that we now see, not first be reflected in that inflation component? That's my first question on valuation, and the second one is then on the discount rates themselves. I mean, I have, you know, you speak yourself that the environment in Basel is challenging, and I think most of your peers, too. Even in the residential space, there has been, you know, adverse political decisions in Basel. Why is this not reflected in the discount rate used for the Basel region? That would be my second question.
Thank you, Andreas. I think on the first one, I think clearly it's a question for the valuer. So if I make a statement, I would say I would rely more on what the valuer would say on it. And clearly, I think I would expect that the valuer looks at it. I would also expect that a valuer, perhaps on those decisions, looks more on a full year basis, and has to see on is this a sustainable change, right? So is it now something they have to adjust in the mid-year or rather with the end of the year? We are still plus, minus in the inflation range.
I think what you would have to see then also a reduction of the inflation component, the discount rate, would then also go hand in hand with the reduction of the expected market rent adjustment in his DCF model on the inflation adjustment. So at the end, if he adjusts the inflation expectations on the discount rates, this will have as a consequence on an adjustment of the market rent growth. And I think net, what we have seen in the past, also the increase of the inflation component, is basically netting off in the valuation. But this, I'm sure the valuer at the moment looks at this component, looks at the market, but I don't see neither a sense of urgency now that they have to immediately act, because it's not so, in my view, disruptive.
But clearly, the interest rate movement will have an impact on their considerations and what they will observe. On the discount rates, I think it's building-wise, I think it's clearly reflected the higher discount rates in a building like for us, in a Peter Merian, where we have perhaps difficulties to let. On the other hand, if we let Hochstrasse very well, and we have a full lease with twenty-year contracts, I think they apply the discount rates they see, and I think they're fair. So I don't see that they need now on a fully let asset with quite a long lease term, adjust the discount rates. I think here they will look at the transaction market. We have not seen evidence in the transaction market collapsing in Basel, which would lead to a full read across on the office side. On the resi side, I think this has perhaps a more or stronger impact based on external regulation, but that's something we are not observing on the office side.
I think when we speak about difficulties in the Basel market, it's because we're also tied to try to lease a tech, knowing that we will have one day to reposition it, but we see it's difficult to let. We don't have to forget that we are able to develop the Grosspeter Tower and the Clime and all the assets, thanks to having this tech building, which is 50% let still to Swisscom. So I think there we make our statements or when in the Peter Merian, we have sometimes a letting success, and then we lose a tenant on a good location. I think I wouldn't read through the whole portfolio, this negativity, but still we would like to say that Basel is what we see, not really overrunning us with a strong demand.
If I may add, given that we're in 2024, could you provide with an update on how you see the development of home office work? Are people really coming back, or is the long-term trend rather that demand has changed and the home office remains here and maybe, you know. So, what have you seen in the first half on that segment? And that will be it. Thank you very much.
Thank you. I would say in the CBD areas, we have seen a clear commitment towards the office. I think what you have is an element for flexibility, which is provided by employee, employers. But in our tenants, what we observe, that they are back in the office. I think what you observe, perhaps in the surrounding areas, it's clearly an optimization process, but this is I would say this part is done. You have also seen that we are confronted with a very limited, also additional supply. So I think when there is optimization, you really don't see it. But on our tenants, when we go through and when we hear also what they say, it's really a strong commitment towards the office as a place to meet. And that's also in a recent partial survey we did with our tenants, which emerged. But it's clearly a partial view because we only cover the CBD, so I can only speak really for this premium segment.
Thank you, Andreas.
As a reminder, if you wish to register for a question, you may press star and one. Our next question comes from Thomas Rothäusler in Deutsche Bank. Please go ahead.
Hi. Morning, everybody. Just one broader question. I mean, given a more favorable environment, with regards to rates and property values, just wondering how you look at the current point of the cycle. Any change regarding your appetite for acquisitions or developments, especially given your strong balance sheet, that would be helpful to get any view?
Let me phrase it this way. We are and we were and still are a very long-term investor, which has the aim to be able to go through the cycles. So with the portfolio we have, we are not playing any cycle. I think what we have is a very opportunistic acquisition approach, where we try to take accretive opportunities, and these are often cycle and event driven. So clearly we observe a certain cyclicity, but we don't apply a strategy to it and say, "Let's now we see rates coming down, where now we should push for acquisition, and then we should push for disposals." 90%, 95% of our assets, we will keep, I say provocatively, independent of the cycles. Because we believe that this is a cyclical sector.
We need a balance sheet to be able to go through the cycles, but we also believe that we are in a very strong country, and in that country, in very strong cities, which long term will create value. And that's where we try to focus, and try to work on the underlying cash flows, on the sustainability of the buildings, which then will mature also in rental growth. And this cyclicality we played rather opportunistically with specific events like the Westpark, or now the Rothschild or whatever. But we don't look at clocks.
Okay, thank you.
Thank you.
Ladies and gentlemen, this was our last question. Back over to Mr. Balzarini for any closing remarks.
Thank you very much for this interaction, and I look forward for further discussions individually. I wish you all a great day and a good start in the second half. Thank you. Bye-bye.