Ladies and gentlemen, welcome to the PSP Swiss Property Q1 2023 Conference Call. I am Sandra, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 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 Swiss Property. Please go ahead, sir.
Yes, good morning, everybody, thanks for attending this Q1 conference call on our results. I'm very pleased with the reported results. For us, it's always special to report Q1, which is shortly after publication of the full year results and after publication of the AGM outcomes. I think we are able to report a solid set of results which are in line with our expectations. As always, I give you a quick intro on results, and then I open for Q&A, as we normally do in the Q1 and Q3 reporting period. We reported, as expected, a solid top line result with rental income growth of 2.6%, which is basically reflecting the indexation. On the like-for-like basic, the results were +4%, which I think are a little bit above the expectations.
Please note that we had valuation gains in the Q1 of last year, and that we had some disposal gains in the Q1. On this basis, clearly the operating income came down despite the relatively strong rental income growth. We report, as always, a strong focus on our operating expenses, slight reduction in the operating expenses. I think this goes in line with our ambition to have an EBITDA margin above 80%. What you see also clearly, a slight increase in the financial expenses. This is clearly due to the changed interest rate environment, and we start seeing that increase going through the P&L. I think this is something we will continue to see also going forward.
However, as we mentioned with the full year results, and we can reconfirm that the visibility we have on the top line development, on the cost development, despite the increased financial expense development, we are very positive that we can continue on our dividend path. Also, clearly the financial expenses will increase going forward. We are confronted with a solid rental market. We're able to lease out well also during Q1, especially in Zurich CBD and Geneva CBD. We had some good lettings. On the other hand, as also mentioned in the press release, we are confronted with a more delicate transactional market, less transactional evidence. Clearly on that we don't have yet evidence for substantial yield widening or yield widening. However, we feel that the transaction market is subdued.
In that view, we also indicated that we are not worried about the valuations, clearly, but that this trend of yield compression probably will stop and that we will see eventually slight valuation corrections starting mid-year or end of the year. However, as we focus on the operating results, we confirmed our EBITDA guidance. We confirmed our vacancy guidance below 4% and are very positive in that sense that we can continue on that path. Having said that, I would like to hand over to the participants and start the Q&A.
We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and one on the 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. Participants are requested to only ask one question. Anyone with a question may press star and one at this time. The first question comes from Ken Kagerer from Zürcher Kantonalbank. Please go ahead.
Good morning, everyone. This is Ken Kagerer from Zürcher Kantonalbank. I would have four questions which I would take one after the other. The first one goes a bit to the point that was mentioned on the transaction market evidence. What is currently the best guess of where the valuations could go in ABC properties in terms of the market, probably?
I think this is really a question for the valuation companies. This is not a question of us. I think we can observe that maybe we get a bit less inflows for potential acquisitions. We cannot give any view on where the valuations can go mid-year. I think that's really up to the valuation company.
Yes and no, because, I mean, we talk to many companies, obviously, and funds and investment foundations, and we just hear that the yield expectations have gone up a lot. You obviously also have yield expectations, which have probably changed over the last month. You also know if you have properties for sale, what you have to expect or what you can expect. So that's a bit more the flavor that you have. You tell us already in your press release that you have a feeling that the valuations go down. Could you give us a bit more granularity on say, high street retail and top office properties?
There's something on the market now on Bahnhofstrasse, as opposed to probably less attractive regions. Where do you see the different areas going, at least in your view?
These are 2 sets of questions. First question was related to valuations in ABC. I think here it's really the valuer who has to make a judgment and the view of the valuations are. Clearly, our yield expectations changed. It depends always on the single asset, depends always on the potential behind. I would say overall, we still see that if there is negative valuation, we are in the low single digits. I think that's what I would expect overall. I wouldn't give now numbers on the specific yields because it depends also based on what in place is. It's based on the potentiality of the building. Clearly, we have also changed our metrics because our funding cost has changed.
I would reiterate here clearly, I don't expect any dramatic development, but I would expect based on what we see also from the feeds which are coming in, a potential slight correction.
Okay, thank you. I would take the second one.
Thank you.
Obviously you have shown quite a nice like-for-like growth development, and I would assume that a large part of that has been due to these inflation links in your contracts. Could you give us a bit of feedback how those tenants have reacted? Did you get any feedback? Was it like really easy to pass it on and it was just a letter that was sent? Or did you get some feedback from your tenants what they thought about those increases and especially also the increases that one can expect going forward?
Yes. I think it was a very smooth operational process, linked to the normal invoicing. Basically no feedback or no critical feedback. I think this is part of the rental contracts, known to the tenants, known to the landlords, and also in a magnitude which I would say is absolutely digestible, especially if this is a contractual aspect which has been put in place and implemented.
Thank you. The third one is on the financing costs. There, I would like to have a bit more granularity, especially also on your duration, outlook. I mean, you have mentioned with the full year results already that you would be more opportunistic and that you could reduce the duration. Where do you stand there, and where do you see the sweet spots now, and where do you think, this is going to develop for you?
I think here we will continue on the path that, we have a maturity profile which basically, you know, is pretty similar from year on year over the next 10 years. This will lead to a duration of four-five years, because you need, besides, you know, trying to lengthen the duration, you need also market to absorbs, and provides capital, and secondly, also not to be exposed in a single year. I think here we are now around four years. We'll continue to look at the market and try to, raise, debt, renew debt. Depending on the opportunity, perhaps once in three year, once in five year. If the market is deep enough, we will clearly go also longer. It is always also a trade-off on overall all-in costs.
I think here you should expect the similar things we have done in the past, that we have a profile which doesn't put our refinancing on risk also with regard to the magnitudes. That if we have a CHF 3 billion debt portfolio, we basically have every year a similar amount to be refinanced over the main next eight to 10 years. That's a bit the strategy we have.
Maybe a follow-on on that. Did you see any change in the financing conditions following the combination or the planned intended combination of UBS and Credit Suisse, or does it worry you or?
It doesn't worry us because we have a very diversified lender base as we disclosed always. I think from that end, we are not worried.
Okay. The last one, maybe more general question: What were the consequences that you have seen with the introduction to green finance approach?
We introduced firstly the Green Bond Framework because we thought, first of all, we wanted to align the financing strategy to the overall corporate strategy on the sustainability aspects. This was really more of an alignment. We implemented the SLS because we wanted to have a fully sustainable debt finance book, and we expected a deeper capital market for us. We were surprised that we got a lot of inquiries from the banks to do SLS. I think here it's very positive for us that we were able also to enlarge our lender base on the debt side with the banks. I think that was the first and foremost effect, that we were able to increase and enlarge our finance, also with the banks being our fully sustainable finance company.
Excellent. Thank you very much.
The next question comes from Holger Frisch from Zürcher Kantonalbank. Please go ahead.
Yes. Good morning. I have two questions from my side, if I may. First one would be, could you share your thoughts on the refinancing of the upcoming CHF 300 million bond maturity in September? What are your preferred options there for the refinancing? Will it be another bond offering or a secured bank financing was an option that you consider? The second one would be about the indexation. In the press release, it was stated that 90% of your rental contracts are indexed. Could you remind us of the average indexation level for that contracts and maybe, share your thoughts if you see some changes in negotiations for renewals, or do tenants ask for adjustment of that indexation level? That would be helpful.
To the first point, just to remind everybody, we have no secured financing, so it's all unsecured. I think tactically, we have really the optionality, depending on where the capital market is, where spread levels are to do, either a new bond magnitude-wise, up to CHF 300. Duration-wise, as I mentioned, we have unused credit lines we can draw. We can do, private placements depending on the appetite from the investor space. I think clearly we look into it and early on, defined a bit the strategy. When we talk about opportunistic approach, it's really then in this very moment, look at what is, I think, the best, market to ensure a certain duration.
To also ensure that we have overall attractive financing conditions and that we get also, for our portfolio respective spread levels, which in our view respect a bit the quality of the company.
Mm-hmm.
With regard to the indexations, overall we transferred roughly 2.4% of the inflation to the impact on the P&L. As I mentioned beforehand, I think on those levels, and on those inflation levels, that's a contractual aspect, and we will transfer indexations based on the November CPI. As I mentioned, this is pretty much an automatic process.
Okay, great. Thank you.
Thank you.
As a reminder, if you wish to register for a question, please press star and one. The next question comes from Andrea Forni from Baader Helvea. Please go ahead.
Good morning. Some questions from my side. With the risks of sounding like a broken record, could you give an update on B2Binz letting. Maybe, I mean, also an update on how it is with Google. I think you have delayed some modernization projects there. Maybe you have some new news on that one. That will be the first one.
Thank you. There's no broken record. We're still on the dance floor. Perhaps the music is a bit tuned in the B2Binz. I think we are progressing well with the development. We had, as I think all development sites, a little bit delays on the developments. We are in negotiations with roughly 80% of the surface. Clearly, the light industrial part is a bit more challenging because there's a very attractive part to it, and there's a bit less attractive as we try to combine it. We are not under pressure, as once you are afflicted, obviously then you have to set up. If you have to divide the spaces, you know, you're then left with leftovers, and that's something you can prevent doing at the beginning.
If you would say, are we behind schedule on the letting side based on what we saw? Yes. Are we worried? No. I think it's a very attractive property. Clearly quality-wise, a bit upper mark in that region. That has also a little bit at the edge, a bit high-rent expectations. I think here we need to move there. Yes, if you ask concrete letting signs, zero. We are in advanced discussions, in some cases also negotiations. I think here, we work according to plan. With regard to Google, as a reminder, we have renewed the leases end of last year. Clearly the increase of the one building DL3 at the moment is on hold.
We are in discussions with the counterparty. I think here, also, there's no worry. I think there's more of a tactical stop and to see on how to develop it. Overall we have renewed these agreements. From that end, we're also confident that we will continue that plan, most probably not by 2025, 2026. Still not late.
In the press release and also on the call today, you stressed that the rent increase will offset the higher financial expenses. I mean, I assume this is only on the actual financial expenses.
Of course, a large part of your financial debt is in bonds. You know, high interest rates do not have an immediate effect. You know, theoretically, on the total debt, I mean, the impact on the financial costs will be significantly higher than what you can offset by the rent increases, right?
I think if you have if you look at the financial expense projections, it's pretty easy to calculate, and you would assume that we end at roughly CHF 20 million-CHF 21 million by year-end. You add another CHF 10 million, and you add this 2.5%-3% top line growth indexation to the CHF 310 million-CHF 320 million. Basically, it's in line. I think from that end, you have a compensating factor. Going forward, clearly, you have then a bigger impact on the financial expenses, but we have also pipeline which comes into maturity. From the top line, we have a compensating factor, but it's not a full compensation. If you continue that inflation path, that's something we have never said.
Mm.
If you look at the numbers for this year, it should have an offsetting element.
I mean, you mentioned pressure in BNC locations. I mean, if you do a renewal of contracts like you did in Wallisellen, or you get new tenants, I mean, is this still, let's say, similar, lower rents you have to accept than, let's say, three or six months ago? Has here the situation worsened so that it would be, you know, I don't know, clear double-digit lower rents, if you go for a new tenant here?
Well, feeling-wise, it worsened. Evidence showed that we signed two leases. I think what we see is that when there's a maturity coming up, the tenant tends to reduce the space. We have signed also a lease contract in Q1, a larger one at reasonably good rents, which above what we have on our books. I think the sentiment is still very subdued in Wallisellen. There is quite a lot of availability. We are partially holding a bit back because we want also to view if there is an alternative project and not another utilization in that area. Clearly demand is very difficult. If you look on the rents we have in place, I think we are at market. It's more really a question of almost demand than just purely the rents.
Okay. I mean, for you as a real estate expert, I mean, if you compare, let's say, if you own a central location office building versus, you know, a large scale building a bit outside, and now you assume there is a trend for more flexible working, let's say more home office, you need to adjust space and so on. Which property owner is better off? The one who sits in the center with smaller spaces which are more difficult to change, or the one with the large space outside with cheaper rent, where it's probably easier, you know, to change the floor layout and so on? Who will be the beneficiary if there's a flexible work environment in the midterm?
I would change, if I may, a bit the question. If I look it from a tenant point of view, a tenant who leases today 8, 900 square meter in the centers, which is our average tenant, working from home flexibility is not such a big issue. His approach is not really there and material to, "I have to reduce the space." No, he wants to be in that location. What you observe if you take now Wallisellen as an example, but I think it's pretty much true for many of the larger corps which utilize larger space, that they are reviewing a bit their floor plans. They are reviewing their utilization.
I would say at maturity, depending on the importance of the rent levels to their overall P&L, they might say, "Okay, there is some savings around." Those assets might suffer a bit more. I think that's what we experience. We have very limited view that our tenants in the city centers are really affected by a large trend home office. They will probably apply flexibility, but this is not leading to reduced spaces. Whereas the ones, the few we had or have outside, there we saw that this had an impact on the surface requirements.
Okay. I don't know whether you saw, but yesterday, in Germany, Vonovia sold high quality or highest quality residential units in Berlin and, you know, tier 1 cities for a price 10% below book. Not adjusted NAV, but 10% below book value. Do you think that could be possible for commercial space in Switzerland as well in 1 year or 2?
I thought it was 11%.
Yeah.
Perhaps it, so there was a difference.
Yeah. I'm just rounding.
No, no. You asked if I saw it. Really, we also observe, you know, it's such a, with all respect, it's such a vague question because it depends really very much on the asset or the tenant structure. I think it's, you know, it's really a question which is almost impossible to answer with just a number. We have seen historically always prices going up and down for a variety of reasons, also varieties of the owner which wants to sell. At the moment, you know, we don't experience that because we are not on the sale. We sold a little asset in Interlaken at a premium of 50%, it's not representative, it's a minor element.
There, you know, there might be cases where you have four sellers, and in a specific asset you might have those prices. I think from the outside now, you know, without real case, it's very difficult to answer on it.
Okay. Last one from my side. I mean, I can see that, I mean, it's the external valuer's job to come up with the valuations and not yours. Do you think, you know, given the approach of the external valuation company, do you think that in their half year 2023 assessment, they will already fully reflect the raise in the interest rates we have seen over the last year? Do you think their models actually are not really capable of fully reflecting that? What's your opinion on that one?
Now I would say no. I think we not. I think that's not what they see in the market. In my view, I said it's up to them, but clearly they are based, as far as I understand, are based on transactional evidence, and there's no evidence for such impact on yields and what you have seen on the interest rate, because the underlying market is very solid. We are letting well. There's still a demand for those assets. I would not expect that. Absolutely not. That they are reflecting a certain element of interest increases, yield widening, that's what they said, what they would expect. The underlying, and I think that's also important to see if we compare markets.
You know, if you compare the Swiss office market with the U.S. New York office market, these are two different galaxies or different worlds. That's very difficult to do a read across. We have here, we are confronted with a company which in the city center in Swiss has almost no vacancy, which still has rental growth and can fully index, and which is not affected from working from home. The underlying cash flow earnings stream are very positive. Clearly, if you go to New York, you see buildings which are 50% empty. I think here it's a bit difficult, and I think the valuer, as far as I can judge, has a sound, reasonable approach to it.
There is clearly a change in yield expectations, and if they materialize, they will have an impact on respective values. We have prepared ourselves always for this. We are in a cyclical business. First of all, most we want to generate earnings which ensure the shareholder a constant growing dividend, especially in a rising inflation environment. I think we guided and we indicate that we have a visibility that for next five years, we see this dividend growth despite on what the values do. If they come down so very strongly, this provides also opportunities for us. That's the reason why we have always kept a strong war chest also on the balance sheet. Don't forget that we are in a cyclical business. Interest rate moves and values will change eventually.
Yeah. I would also just add that, you know, I see your point on the cash flows, that they will not change for your prime properties in Zurich. You know, that's only half of the equation. The other part of the equation is that what discount rate do you then calculate that fair value? I wonder a bit whether what the external values do in Switzerland really fully reflects the new interest rate environment, you know, if they just base it on a couple of transactions. Is that a fair judgment, given that we have a completely different discount rate environment?
I think if we look at transactional evidence and then apply and take conclusions out of it, as far as I can see, I don't see this approach as a full adjustment because there's not enough transactional evidence to do it. We have still seen also in Q1 transactions going through the market at reasonable market rents and market yields, which were in place since. I think from that end, I wouldn't expect absolutely that he applies this change in interest rates to the yields. At the end, as I mentioned, it's the responsibility of the valuer. We are in a position where we have a balance sheet, a P&L, which is strong enough to be confronted with the majority of the scenarios.
Much appreciated. Thank you very much.
Thank you, Andreas.
The next question comes from Markus Kulessa from Bank of America, please go ahead.
Yeah, good morning. Thank you for taking my question. Just wanted to follow up on your dividend. You're clearly confirming when you're talking about a dividend path, it's a growing dividend, even with declining or stable EBITDA going forward. This would be my first question.
You have talked about the declining EBITDA. We indicated that we have a top-line development, a project development pipeline, which ensures us a certain growth. We have in place a cost discipline, and that's not a cost-saving program, but a discipline demonstrated over the years that we can work on EBITDA margin of 80%+. Clearly, this will allow us, in our view, for the next 5 years, to continue on that path of, let's say, the CHF 0.05 increase. Of course, it's every year, which we will do the judgment, in which environment are we, is the baseline still confirmed?
This is based on our top line expectations, inflation expectations, pipeline on the development side, that we have the visibility now with the payout ratio of 70%, and the NETP EPS of CHF 1.10 per quarter to continue on that path.
Okay. Even this year, because this year the EBITDA guidance is slightly down versus the year before, you should continue increasing the dividend.
Yes, because the one element which is. That, it's always a bit difficult because one tends, and that's not a critique, it's obviously with so much news flow, tends to look at the bold part of a press release. It's a disposal gain, which is a non-repeat. We had last year of CHF 50 million, which is a non-repeat, and therefore the EBITDA guide is a bit lower. You see that we have a top line growth of 2.6% in the first quarter. I think that's the relevant basis for us. If you look at the EPRA EPS, that's our underlying. This is without the disposal gain, which is still part of the EBITDA. Yes. Yeah.
Okay. Following up on the rent growth, we had the 4% like-for-like. Only you said earlier 2.6% was indexation or 2.4%. My question is, do we... What should we expect for full year? Is it more 4% as rent go for like-for-like rent go for a full year? Is this gonna be closer to the 2.4%, on the indexation?
Let's do a compromise and take the midpoint. That's my best guess.
Okay. Thank you. You, you guided, I heard right, CHF 20 million-CHF 21 million financial expenses in 2023, yeah?
Yes. You know, I think there are two official guidance, which is the EBITDA guidance and the vacancy guidance. I think the other two are indications on what we see. I would say if I look at the financial expenses, it's more on a CHF 21 million per year. It can be a bit lower, a bit higher. I think it depends also on how we refinance, but I think that's a bit the indication where we should go.
Yeah. My question was because I go there, but I had this for next year only. My question was, is it this year already, are we gonna be close to the CHF 20 million also this year?
Yes. No, no, no, I think we will be there. Yes.
Good. Last question, just not bothering too much on the valuations, but do you have or do you see a difference in how your assets are valued versus, let's say, the CBRE or some market values? Do you have a buffer which would or could help explain what a low single-digit decline as you expect for your assets versus what we see with the broker, where the assets are already down more double digit since June 2022?
You know, I think on the asset valuation, we don't rely on brokers' view. We have an appraisal company which values our portfolio twice a year, and that's our reliable base. We don't talk about buffers. That's a mark-to-market view. In the first quarter and the third quarter, we are obliged to review our valuations, and in case we see valuation changes based on rental contract changes, we have to signal that to the valuer and ask for a valuation, as we did last year in Q1. We had no such evidence in Q1 of this year.
Okay. H1 will be the first one where transactions should impact.
H1 will be a full valuation of this part of our portfolio, yes.
Okay. Thank you.
Thank you.
The next question comes from Alexander Totomanov from Green Street. Please go ahead.
Good morning. I think my question, in the first quarter report, you mentioned that of the lease contracts maturing in 2023, 66% were renewed by the end of March. Could you give us an idea of the rent levels entered into most negotiations? Were they renewed at a similar rent, or was there a positive or a negative trend reversion?
It was positive, which translated in the like-for-like growth, this range to the rental income growth. Yes.
Thank you.
Mr. Balzarini, so far there are no more questions.
Thank you very much to everybody. Clearly, as always, we are available for bilateral discussions. I wish you all a great summer, which seems to have started now, and all the best. Thank you. Bye-bye.
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