Ladies and gentlemen, welcome to the PSP Swiss Property H1 Results 2023 Conference Call. I am Sandra, the Chorus C all 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.
Morning, everybody. Thank you for dialing in to this update call on our half year results. As always, I will do a quick introduction. I will highlight some key figures and some key, key events we had during the half year. Then I would rather rapidly open to the Q&A for matter of interest. In general, as we explained in the documentation, the press release, and the report, we are confronted with a healthy letting market. We are very happy with our underlying operating performance. We had some significant letting successes in the second quarter, which bring us to a positive tone for the overall year, especially one in Basel and a couple of one in Zurich.
We see in the CBD areas, especially of Zurich and Geneva, quite low incentive requests, quite strong demand for high quality products. That trend continues. I don't want to sound euphoric, but overall, for the products we are offering in those regions, we are very positive. On the transactional market, as an update, and we will come later when we talk about valuations, I think the market doesn't give evidence of strong moves on the yields. You have seen that we have a slight yield down movement on the valuation, but the underlying transaction market reflects that. We don't see leveraged buyers which need to sell. We don't see for sellers.
Clearly, we are confronted with a rather illiquid market on the CBD areas, but overall, we did a sizable transaction in Q2, which I will go into it, but we are confronted with a rather healthy transaction market, but clearly, slightly, I would say, illiquid. That's unchanged towards what we have observed in the Q1. If you go into some key figures, slide eight, the rental income, an important number for us. We, we saw rental income growth of 3.5% on a back of a 2.4% contribution coming from the indexation and the like-for-like of 5%, which is perhaps a bit inflated due to some events in the first half, will come down over the full year.
Overall, I think, in our view, a reasonably strong number, which underlines the operating performance of the company. I will quickly evidence later on the valuation losses of CHF 90 million. The second line, the property sales, we have already mentioned, one is the Wädenswil disposal we have seen beginning of the year, and then Lugano/ Paradiso, which by the end of the year, will be basically closed as an overall project. On the cost side, slide nine, here, our focus was to continue on our cost discipline. On the single lines, I think it's more rounding errors than, than, than everything else, but our aim is to keep with our target to have an EBITDA margin of above 80%. I think the organization is very lean, very professional.
We have seen that throughout the also Q2, that this operational excellence holds on. Finally, on those numbers on slide 10, two numbers. One is you start seeing the outwards movement of the financial expenses, so an increase H1 2023 towards H1 2022. You have seen also average cost of debt moving out, and you have seen also clearly that our marginal cost of funding moved up, but that's something we have always signaled. We, we are not surprised with it, and over the term, we can digest it without implication our view on the dividend. Clearly, now you start seeing this outwards movement of the financial expenses.
The second line item is the release of the deferred taxes, and the release of the deferred capital gain taxes, due to the treatment of the effective value 20 years ago, which now starts to materialize and will, will come through in a lesser effect going on for the next years, but clearly has a quite significant impact this year on our P&L. If you go quickly on slide 17, on the valuations, as a nutshell, the valuation loss of CHF 94 million overall, the existing portfolio comes through, valuation loss of the investment portfolio of CHF 100 million and a valuation gain of CHF 10 million on the development portfolio. If you look overall, was not more than CHF 2.5 million, so rather moderate impact on the variety of assets.
The yield widening overall was seven basis points. If you look on the next slide, you see that the valuer adjusted his inflation adjust, his inflation expectation from 1% to 1.25%. The overall yield widening effect of the portfolio was seven basis points. Slide 22, quick overview on the balance sheet capital structure. You see here, now we have a solid LTV of 36%, which went up due to the acquisition, the Westpark, which I quickly will mention. As I mentioned, the increase of the average cost of debt, with a continuation of the average interest period. I think here we feel very comfortable with these metrics. To close my introductory mark, you see on slide 33, the announced transaction during Q2, the Westpark in Zurich West, which we were able to acquire.
It had already a slight impact on the rental income. We adjusted our guidance already with the Q1 numbers due to this acquisition. We continue to adjust our guidance for the full year, EBITDA, it now mid-year to CHF 295 million. Clearly, this is one of the, of the contributing factor of this EBITDA adjustment. With that, I would stop for a moment on my introductory remarks, and I would like to hand over for 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 use only handsets while asking a question. Anyone with a question may press star and one at this time. Our first question comes from Ken Kagerer from Z KB. Please go ahead.
Yes, good morning, everyone. I have a few questions. Firstly, could you detail the like-for-like growth of 5% a bit more, please?
Yes. Yes, you have, you have clearly a regional divergence, with strongest contributions coming from Zurich, Lausanne, Geneva, Bern. Basel, in that respect, was flat. If you take the indexation into account, which I said is roughly 2.4%, we had some letting success in Zurich West, which were quite significant also on the Hürlimann site, due to new letting contracts. We had letting successes in Lausanne, Saint-François. We had letting successes in Rue de la in Geneva and Corraterie. Then, in Bern, especially on the Adlerstrasse and the Heimstrasse. I think these were a bit the single highlights. We had also start to see some turnover rents, which came back in, but I think that was a bit, in a nutshell, the like-for-like detail.
Thank you. The next one is on, on the debt side. The average debt maturity is standard four years now. I know that you're a bit more opportunistic, but could you elaborate a bit to us where you would want to end in one or two, that figure?
The figure will not materially change in one, two years. We have roughly CHF 300 million maturing per year, which is a 10%. Clearly, the curve is pretty flat, so at next upcoming refinance, we might look more into six, seven years, but it depends also very much on, you know, on the appetite of the market, on the implication of the spreads. I wouldn't call it opportunistically, but clearly we will look at if it's a five year, six year, if it's perhaps a private placement to bridge a certain part. We have CHF 1 billion of unused credit lines. I think we have now, with our Green Finance Framework, full access to the capital market. I think we will try also to take advantage of spread levels, of windows, which, I think we continue this line.
Thank you very much. The last one, the third one, is on some specific task. Firstly, a quick update where the situation is and which discussions are currently having on site. Secondly, I had Rothschild is moving out of, they're renting in Geneva, and it would be interesting to hear what your plans are with regards to that. Thank you.
Thank you. Just as a replay to your maturity, it's clear that we tend to look at six, seven years for new bonds. Our focus was always that level. That might have some opportunistic twist, just to replay on that one. If you come to Google, we have renewed our letting agreement with Google in December. I think there's from our side, no update. In general, what we observe in the market is that in certain surfaces, which they have apparently let, which apparently started refurb and to prepare, that it seems that they're not moving in into those surfaces. I think they are generally reviewing their location.
I think there's no more to say that what we hear is that they're very committed to the city and, and to the existing properties. From our end, we are, we are not worried on that side. On the Rothschild , it's correct. The to maturity on the Geneva bank assets, on the majority of it, which are rather small, they will vacate probably towards the end of next year. We are here in planning models, which was already, I would say, partially foreseen when we underwrote it, that this is coming up. The beauty of it, in our view, is that these are predominantly single assets, reasonable surfaces. We look at multiple usages. I think that's asset management activity, which we are undergoing.
But timeline is more or less in, in a bit more than a year, when we talk about the, the, the move of, of the tenant.
Thank you very much.
The next question comes from John Vuong from Kempen. Please go ahead.
Hi, good morning. Thank you for taking my questions. With regards to the letting success, are you capturing positive reversion here?
I think what we continue to see is that when we are able to offer a refurbed product, then we have substantial positive reversion. We have relettings. I would say in Zurich West, we had some uplifts, yes. Generally, you, you index it, and that's the reversionary. I think selectively you have it, but then on the peak size, it doesn't really materialize. We had, I would say, a very nice letting success on, on prime retail beginning of the year, which standalone was outstanding, but if you put it in the context of CHF 360 million, it gets somehow lost. I would say main line is the trend, a refurb product, a new product.
You can, I would say, translate in majority of the cases, if it's a, a good product which comes to maturity, the tenant is in since five, 10 years, typically it's prolonged at the same levels, plus indexation. What we don't see, and we have seen that for a period, that selectively you had some incentive requests at those breaking points. That's something we don't necessarily.
Okay, that's clear. And does that also mean that on your pipeline, that you push higher than on the rate?
I think, I think on the overall, when we expect to high rent ambitions, we should be able to them. Increase them on the way, I think it's somehow it's also difficult. We were already very ambitious. If you look at the value of, I think, to achieve those, I wouldn't say written a year or two years ago, there's a material electively. Honestly, there are also elements or, or sites where you have to review lettings and then potentially adjust it downwards for a few percentage points. That's, I think, in the nature of the business.
Okay, that's fair. On, on your deferred taxes, your report mentioned that there's another CHF 60 million to be released in H2. Is that everything, or should there be more to come in, in, in the following years?
No, there will be, there will be clearly more to come, because the, the mechano is that as we did always, every 6 months, clearly, we review, which have the new values, no impacts, but for the same assets, we will always have them a new value, which was 20. This continuous release of how and how the values developed from 20 years ago to today. We expect, and we know it by calculating, release, we make 20 years over the whole portfolio on the assets, they were ownership. On that premise, yes, we will continue to release. This is my first to the press exterior value emerging. These 19 years are an exceptional in the mind, but we see probably another five, six frankly, next years distributed year by year.
Okay.
Assumption that we are closing asset, prime assets in Zurich. I think that's the baseline assumption.
Okay, thank you.
Next question comes from Marc Mozzi from Bank of America. Please go ahead.
Thank you for the presentation. Following up on the releases, if I understand, they are included in EPS. Just to understand why, because in my understanding, deferred taxes and capital gains shouldn't be in the EPS. This would be my, my first question.
It's a, it's a release on the deferred tax on the review. As it's a, it's a recurring element of the buildup. Not I think that's well stated. It will not be in our estimates dividend distribution. I think it's, it's predominantly an NAV change from previous. We have reviewed it. It was part of it. Yes.
Okay. Thank you. On the like-for-like, just to try to understand how the second, I don't know if you have in your finding cause.
Yeah, I think the light comes slightly down, in which magnitude I think that's, as I mentioned, drives of lower costs, but we have perhaps foreseen in our projections, contributes as well. So I think these are the drivers of this EBITDA guides increase, on, on the rent growth. I think that's, that will continue to be positive. Giving you a like-for-like guidance, I, I would expect that it is perhaps rather around 4-ish, without, you know, getting, getting me hooked up on the number.
Okay. No, thank you. Very, very helpful. My, my last one would be just to, if you could remind your combined UBS and Credit Suisse exposure, and then exposure.
There's no combined exposure because we have only an exposure to UBS in Geneva, in the Hôtel de Banque , and exposure. We have no exposure to Credit Suisse.
Okay, the UBS, how much does it represent as your rental income?
It's overall, I would think, I think we are below 2%.
Okay. Thank you very much.
Thank you. Cheers.
The next question comes from Holger Frey from Zürcher Kantonalbank. Please go ahead.
Yes, good morning. Thank you for taking my questions. I have two. First one would be on the renewal of expiring leases. At this point, 68% of the 2023 maturities are renewed. This is lower compared to the last four years. Could you give some insights for this lower renewal level and let's say, the challenges in the renewal process, or don't you expect any additional renewals for this year? Then, on the note, the private placement that was due in July, I assume you refinanced that note. Did you use a new note or did you use your ex- unused? I would be interested in the conditions that you had for that.
Second one, we refinanced it with the with the with the Westpark or so private placement. I think generally on the on the on the cost side, if you go the capital market, spread levels are give or take 40 basis points. If you go on the credit side, spread levels are give or take 50 basis points, and then you add curve to it, basis points selectively, we are to people, we have. On the query profile, I think are well on track, some like also the Saint François, which we are vacating the year, so we will not, and we will then reclassify the buildings into development as we do large refurbs. [audio distortion]
Something not at the which comes you with, the one which has already been made by Ken, which comes in towards the end of the year, and not long had all the house area, and this was prolonged. For now, pretty so on the maturity of.
Okay, great. Thanks.
The next question comes from Andreas von Arx, please.
Yeah, I'm referring to page 18 of presentation on the discount rates. I mean, you think that the name and second go out today. Why is that not shared by your external valuer, who seems to increase the discount rate, but all of the same, if the risk would be higher for the secondary location, shouldn't that then reflect the first question?
I think, well, as always, it's clear, it's clearly a question to the value. What I would-- what I have observed, and I think it's on time, potentially down, and this is my which has clearly much higher sensitivity than on the non-prime. I think in our case, the majority of the assets are prime, so there you had a pure customer, our portfolio. It's always difficult to compare companies and companies, on the single snapshot, if it's not the same valuer or if in-- within the valuer, it's not the same valuer. In our portfolio, we had, as I mentioned, generally a five basis adjustment on the date. I wouldn't say across the border, but pretty much. That was a bit adjust, and I think it had signal, well, prime is not so strong as not because the majority of our assets were prime.
Non-prime, before the decision was taken, there was not much to work on the yields, because I think much was already in. That's probably what we see.
Okay, on page four, to a working rate, could you elaborate? I'm here interested with regards to, let's say, space of the tenants. Is it just like, you know, this affects more the larger tenants? Does it affect all tenants, larger and smaller, just everybody goes to be the smaller spaces, and why you see that, you know, difference in effect between prime and the secondary? You clearly see that in secondary locations, your tenants say, due to home office, we reduce large spaces. Is that kind of the situation or? Yeah. Thank you.
I, I think honestly, that's what we have seen in Biel, in two tenants, and in Wallisellen. In Biel, we were able to completely replace that upcoming vacancy. In Wallisellen, we're holding back because we have a larger rezoning project ambition, so we're holding a bit back with, with, with the relating. We are not observing that in the city centers. In our portfolio, that when I say that's, that's something which is affected, if you take Zurich, of larger or larger corporates, took space in Zurich North, in all these large... I think they're reviewing a bit their setup, and that this, the new model has potential implication. We are not affected. We absolutely don't see the city center.
In the city center leases 900 square meter, we don't observe, working from home there, and more so that, there's, this strong push to bring people back. Anyway, it was never big issue, but yeah, but locations, large floor plates, more cost-sensitive. We have right also that, because our thing has a very, very long contract. Clearly, reviewing, I think that's. I also that is the ongoing business.
Maybe for, I mean, more for you as, the real, with a more I can see that it's for two UBS, that people lose, and these working spaces will not need it. Do we expect here, especially on the market, given the change in, in the next month? Thank you very much. Or do you think this can easily be absorbed?
It's an important question. We clearly internally at the beginning, as transparent as possible and location. As to not talk the initial part, so about the prime exposure. I think, first of all, it will take years. It's true, there is you their strategy, it's public, UBS more on the chain in Altstetten Paradeplatz, and Credit Suisse is more on the chain, Uetlihof Paradeplatz. The question is on how the new co will prioritize. We are around Paradeplatz. We believe there's not too much potential vacancy which could come up. I think it will be rather positive because some of those buildings need some refurb, and this will increase attractiveness.
What the implications in optical, which obviously will the end of life in seven, eight, nine years, or Uetlihof, which has apparently a long data contract still on the line, I think this is something which will not happen so quickly. I think attractiveness, decreased attractiveness of the last years of the CBD of Zurich is strong. I don't believe that this combination has significant impact on vacancy in the city center. Rather, gives opportunities. The same holds partially true for Geneva. I think there, the presence is also not so enormous in the city center. So we are pretty positive on it, I would say. Clearly, it has then more of an impact on secondary locations, secondary cities, depending on how something which is not known yet, it looks like.
I'm not aware of this, obviously not aware of what happens to the Swiss bank. These will have implications, but perhaps more in markets where we are not present.
Okay, let's finish off with maybe a bit tough question. You know, your recent, a minor initial revaluation gain on, let's say, you bought it on market levels. Now, your own stock trades and discuss for portfolio value. Would not have been more shareholder capital, in fact, did not interest sale properties? Thank you.
These are. If I would say two questions. We both had discounts translate on buys the assumption for the dive. For sake, it has you, but I think on an asset level, both at, I think we compared to a share buyback. Which is more important for regional presence in Zurich West, which for us was also very important. Thirdly, clearly a shareholder, a share, share buyback is something which we never exclude, but in our view, it is not so easy as it seems to say, well, we buy for CHF 200 million shares overnight at those discounts. We did it once, 2008, 2009, where we had a stronger discount, where the market was under distress, and you were able to buy back shares. I can tell you it was very difficult to buy back those shares.
A short answer would be not possible. Not even possible to buy back the shares, CHF 200 million worth of shares in such a period on such a discount, because the market would then also react. I think on the share buyback, our philosophy is we would need a real shock, which then would trigger also a liquidity in the stock with an underlying view on the performance of the market, and that clearly would trigger for us a review of the share buyback. This would have been an opportunistic one, which I think is not even feasible, in my view. That's a bit my technical view. That's good enough as an answer?
Yeah, why then not sell property?
No, I think of the dispose, this is, this is separate, something we continue to look at. You know, we feel very comfortable with our capital structure. We don't need to sell in order to buy, but we have clearly always a view also on further concentrating the portfolio. If we look at our underlying capital structure on where our covenants are, we have plenty of headroom to say, "Okay, we buy now this Westpark, it's an opportunity." There's a sense of urgency on the timing from the seller, which allowed us to buy, that there is need to end or no need to do it. We does not exclude that we are considering disposals.
At the end, we want to be long-term engagement, be visible, transparent, and with this, but also without this acquisition, we have a very happy continue our growth for the next, the next, for from today's point of view. Probably also longer, but I would say, if I say five years, it's already.
Okay. Thank you.
Thank you.
As always, for a question, please press star followed by one. The next question comes from Alain Bitzberger from CS. Please go ahead.
Good morning, thank you for answering the questions. I have 2two questions specific regarding tenants. The first one regarding the newly acquired Westpark. If I'm not mistaken, only one week after your communication, it has been said that Schroders will probably move their back office, and I think it has been confirmed by now. What is the current status there, and how much space is Schroders renting in the Westpark? The second one is regarding the Bahnhofplatz. Also there, I think the final tenant is supposed to be Google. What is your update there? As you said before, will they move in, or is this one of these locations that they are rethinking to move in?
What would be the consequences, if they do not, as you are not directly, renting to Google? Thank you very much.
Thank you very much. On, on the Westpark, the Schroders surface was not a surprise to us. This was part of, a bit, our underwriting. Meanwhile, we are in letting negotiations for a variety of the services in the Westpark, with also here, more than one tenant. We are very positive on that upcoming vacancy as we are already in negotiations with different tenants. The exact amount, I think, is roughly around 2,500 square meters on the Westpark, but here we are not varied on the letting based on the interest we have already in the surface. On, on the Bahnhofplatz, you're right, the tenant is a tenant of one of our tenants. We have heard that they're not moving in.
I think, as you said, we have a lease agreement with the IWG Group. They are continued to let on their, on their, on their original strategy. I think it's enough to them with Google to figure out on how to resolve their agreements. For us, there is no impact because our underlying, our original underwriting was with IWG, based on the business model of IWG, based on the conviction that on that location, this is a, an outstanding tenant. I think even they have been high checked a bit by a tenant who wants to take all. I think for us, to your question, nothing changes.
Can you name the details? How long is the contract with IWG, and maybe what they pay on average?
I think it would be not professional, that I would share something which I'm not part of it and not even aware exactly.
No, I mean, what you have with IWG, not what I have with Google.
I know. With IWG, I think the, the, the rents at the time were even, even written out. I think they are around CHF 780 per square meter, CHF 800 per square meter, and it's a typical contract, of five-year plus two five -year options, if I'm not mistaken. I think that is the big, the typical, contract we have. It was a.
Thank you very much.
It was also written out, yes. Thank you.
No, thank you. Bye.
Mr. Balzarini, so far there are no more questions.
We'd like to thank everybody for participating in this Q&A. As always, feel free to send us an email, and we definitely will talk to each other over the next couple of days. I wish you a nice Friday and happy weekend. Thank you.
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