Earnings Call: H2 2020

Feb 23, 2021

Ladies and gentlemen, welcome to the PSP Swiss Property Full Year Results 2020 Conference Call. I am Alice, the Chorus Call operator. The conference must now be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Giacomo Baldarini, CEO of PSP Swiss Property. Please go ahead, sir. Yes. Good morning to everybody, and thank you for these introductory remarks. Just to make a Little corrective statement. We will start pretty quickly into the Q and A session. As always, I make a few comments, general comments, But I think there was also always the feedback from investors and analysts that you had time to go to the documents And that there's a preference that we go direct in Q and A to leave up for questions. So thank you for that. I think generally, we can say we had clearly, as I think every company, quite a challenging year Throughout 2020, however, we are very proud of how we managed the year on the one hand as an organization. From the people side, I think we went out. We are coming out of this crisis even stronger than before. And secondly, we were able to meet our improved guidances with a strong EBITA result, a strong vacancy number And I think with a pretty sound outlook for 2021, so from that end, we are positive. We are confronted, obviously, with, I would say, slightly challenging letting market. Also, I say challenging not in the sense of dramatic, But clearly, at renewals or for new lettings, tenants take a bit more time to consider. There is a bit more uncertainty on their business environment, less so in CBD areas, a bit more in secondary locations. But clearly, it's a bit more demanding on the letting side. On the other hand, and we saw that there was also from the results, Continuously strong investment market, especially in prime location with assets with high visibility. So from that end, I think We are well positioned to attack that. The highlights on the results, I think, are clearly a vacancy rate Of 3%, which is a record low, I think, which is also substantially below structural vacancy by the value around 5% to 5.5% for such a portfolio. We guide for slightly higher vacancy rate for 2021 Due to some expiries in Q4, nevertheless, still with a very low and reasonable 4.5%. The second highlight is, in our view, clearly an EPRA EPS of more than CHF 4.30, which allows us To increase the dividend and to have it fully funded and fully earned, as you know, EPRA EPS takes out All known core activities and the dividend increase we will propose to the AGM is, as I said, fully earned And shows that we are working on a recurring CHF1 plus per quarter EPS, which gives us also a good headroom For the future development on that line. And the 3rd highlight is with an even higher EBITDA guidance of around SEK 2 35% compared to the 71% is that despite the continuous lockdown, we also see in Switzerland now in Q1, which we hope now Starting to come back starting March 1, we see a higher EBITDA guidance for the year for PSP at CHF 275 CHF 1,000,000 despite a slight increase in the vacancy rate, so it means also that also in 2021, We are confronted with, for us, a quite stable development. The overall balance sheet situation With a loan to value of roughly 35%, passing cost of 47 basis points, I think it demonstrates Our strength to be able to go through on a very stable basis through the crisis and to be positioned for Opportunities, although we are very diligent in considering them. I think this is a very quick snapshot intro. I would leave it currently up to you to address questions, address areas of interest Well, I can dive in and answer. So we'll give back to the operator for questions. The first question from the phone comes from the line of Eduardo Gile from Green Street. Please go ahead. Hello. Hi. Congratulations on your results. I have two questions The first one would be on the like for like performance in Zurich. I've noticed that it was negative 80 bps For the full year, however, at Q3, it was negative 30 bps. I was wondering if you could add some more color Around the performance in Zurich over Q4? And the second question I have was Around the vacancy guidance for 2021, if you could add a little more color around the increases And where would it be, whether it would be office or retail, in which cities more specifically? Thank you. Yes. To the vacancy guidance and for the full year, We have some expiries in for instance, in Basel, Where we have to reposition slightly the asset. When the asset comes back, we have to build it back to surface. So at the inception date, 31 December 2021, it will be empty. Although we are currently already In negotiations, one case is in Basel Freitas, a lease agreement with Sara Home, where we know they're leaving, But at inception date, it will be empty. A second one is in Zurich West, one space we have to build back, But we think it's well positioned to be re let. On the other hand, we have Swisscom, which will partially move out in BIL. And there, we are currently in letting discussions also with Citi for some governmental activities, but our projection is that It will not be led by the year end. So I think it's a bit a mix of tenants we know They will move out. And on the other hand, clearly, assets which at inception date Will be empty, but we are positive that we can renew them and bring them back into the market. That was the second question. On the first one, we had on the like for like side In Q4, rent concessions, Especially on the Zurich portfolio from the COVID, and this was hitting the like for like. We had overall rent relief for 4,600,000 Which translates in overall, as I said in the presentation, negative like for like of minus 0.2. If we exclude that we have a positive 1.5, the large part of this rent concession came in Zurich. Understood. That's very helpful. And in Zurich, that would be on the office portfolio or is more skewed towards the retail portfolio within Zurich? Neither nor. It's restaurants and hotels and Understood. It's very clear. Thank you. Thank you, Eduardo. Mr. Bazzarini, since there are no more questions at this time. Well, we had our best ever operating year and we had our 2nd lowest questions ever with 1, that 1,000,000. Sorry to interrupt. We have a last minute registration from Ms. Andreas Sonarz with Baader Helvea. No, it's not accepted. Please go ahead, sir. Not accepted. Time is over. No Andreas? Yes. Good morning. No, just a quick one. If you would look out into First half and with regards to revaluations, what would be your feeling? I mean, probably low interest rates, but now like for like, it Seems to be COVID against you. And also the environment is getting challenging. I mean, do you still think flattish? Or are we now seeing more like negative If I look at transaction evidence, I would see a flattish or even selectively a stronger market. Then clearly, the value we look at what could be potential COVID implication, rent implications. But if I look purely on the transactions, which went through January so far, we see them at or even at Slightly lower yields. What then the value does with it, that's very difficult to say because it clearly looks then also at rent situations. And so But I would say the short term, I'm not so concerned. I'm not concerned in the long term, but you're asking in the short term. So I'm not so concerned. But I cannot say if it's red or green. It's difficult to say. And just a quick follow-up. The situation in Wallisellen with Microsoft moving out, is that Reflected in the valuation? Or is that something that could be addressed in the few quarters? Now the Volizel and Microsoft asset has been marked down with adjusted market rents and increased discount rates over The period already, I think the value rightly so, when you have an expiry of a lease agreement and a non renewal, He has to reflect that in his estimates. And we saw also in the full year Q4 last year That this was marked down on the rent side. It was already being marked down a bit beforehand. So it's, I would say reflected in the valuations, it's reflected also in our EBITDA guidance for the year. We are currently preparing for the build spec, but we're also already in discussions With potential tenants on the surface, so I think we are working on the case. But on specific on your question, It has been reflected on the valuation. And just a A quick last one. A lot of peers or some of your peers are now basically looking at their portfolio and using the good environment to get rid of Some, let's say, yes, lower quality assets. I mean, specifically, I mean, wouldn't that be a good opportunity to review Your Rheinfelden asset, which is kind of a bit of an outlier in your general portfolio, How do you see Rheinfelden going forward? I don't see it as a lower quality asset. So I think there's no urgency to say that What do you mean? No, no. I understand it. It's not really on the I would say, on the scheme of super prime, I agree. On the other hand, this is an asset which is stable, has a good rental income demand. We can still work a bit on the vacancy. Honestly, it could be an asset which could be swapped for something more central, but there's no urgency to sell it for us. But if there are opportunities where we say, well, we could trade it for an asset more in our areas, Then this is something we would consider, but there's no reason to do a straight sale on that. Thank you very much. Thank you, Diaz. Your next question comes from the line of Alvaro Soriano de Miguel with Bank of America. Please go ahead. Hello, gentlemen. Thank you very much. I'm going to take the opportunity to ask Some questions, if possible. The first one on financing. Yes, your thoughts On where are we heading in terms of cost of debt for PSP, I mean, the all in 0.22 percent 10 year bond issued in February, I think it's a milestone. But Should we expect continued trend to 0%? Then the second question is About banks and financial institutions, how does it look, the labor market and the Office use from financial institutions and banks in Zurich and Geneva. We are reading a lot of headlines In London and Paris, some banks are reducing their headquarters. And then, yes, the third one, What sort of a like for like assumption are you taking on your EBITDA guidance? And finally, and maybe Much more wishful thinking or long term trend. I think we are entering in a new CapEx You are for offices, if they need to adapt to the new world. So have you think about the CapEx need your office portfolio will need over the next 10 years. That would be all taking opportunity of your time, of course. Thank you. Thank you very much for the questions. Interesting question. On the financing side, we are clearly, I would say, heading towards Floor. We have a €3,100,000,000 debt book and €13,000,000 of financial expenses. Clearly, the bond issued for 10 years at 'twenty two will trade it further down. We did a private placement for the year at minus 40 bps. We'll continue to try to optimize financial costs. If rates stay at the levels they are, I think we can further optimize as long as we refinance below 47 bps, but I think we get to a certain natural Floor. Is this at 12? Is it at 11? I don't know, but somehow, God fearing tells me We are getting there. So what we try to do is when we have refinancing needs that we try to lock in longer dated money At the interest rates, if for whatever reason, spread levels are not at On a level we think are appropriate, then we found it short term because we have not much on the short term side. So we try to optimize and try to time it a bit. But now with the duration of 5 year and the rates I mentioned, I think we are well But we are getting, I said, a bit to a natural floor. On the banks and their office needs, I think here compared perhaps to London or Paris, they went through some Restructuring exercise already many years ago. I think the financial crisis in Switzerland did specifically hit The larger banks, they went out of 3rd party leased office into their own offices and they started to sell leaseback and reduce. So they operated already on a 0.7%, 0.6%, 0.7%, 0.8% ratio. I would expect that they continue to optimize. On the other hand, I think also there, there's a kind of a natural level where you are not Able to further optimize. We for ourselves, we bought the headquarter of UBS in the city of Geneva, Where they did the sale leaseback, and they will lease back 45% of the whole building. Within the next 18 months, we have a rent guarantee, and by then, they move out of the 55%. But for us, it's an opportunity because it enables us To really create a prime product in a prime spot, we are currently in discussion negotiation with a variety of tenants. And we are talking about market rent levels, which we are on the road. And this leads me a bit to your 4th question on the CapEx. Our average space the average space per tenant in our portfolio is a bit less than 1,000 square meter. So clearly, when you have relocations and moves out, you might talk about 10 feet outs. But the property portfolio, the quality of the assets is Grade A. Many of these assets are either new All are historically protected, but we have renewed them. Those projects where we see some repositioning potential, Clearly, we will have higher CapEx that was already projected, but we expect also higher rents. So we don't see So much of new additional CapEx. Clearly, you have at the moment to provide a bit more fit out contributions Depending on the asset, depending on the location, but I don't see now that our CapEx line, which was €60,000,000 €70,000,000 would shoot up to €20 €5,000,000 or €30,000,000 I don't see that. Based on also our ESG targets to reduce CO2 emission by half in the next 10 or so years, that's already all projected in the investment plan we have for asset. This, I think, is a normal trend we have basically anticipated. On the third question, If I go one back on the EBITDA guidance, I think here we have assumed basically a flat like for like development. Considering also a COVID impact, which was similar to the one we had in 2020. Well, this is great. Last question, I'm going to go for it. We are listening in other cities and other companies Across the continent about repurposing some office space if demand weakens over the next 5, 10 years. Yes, repurposing that space into residential. What is your view? Can it be done In Zurich, Geneva, does the math works on those cities moving from office to resi? It's something we observe, something we are also doing ourselves. I think I would question the scalability. It's a bit mentioned as the new flavor of the moment, but you cannot turn down 5,000,000 office buildings in Resi. I think you will do it individually. We have one project we sold in Zurich last year to Lindenstraas, so while this will happen, We have one here in Zurich in Kirchberg, which is planned. We are working on one in Geneva, Where there is some additional floor plates you can generate due to the realization rate, and with that, you can convert it because it's a resi area. We have in Basel an office building, which was leased for many years to an office tenant, but was more on a resi area. And due to Strength of the resi area and this micro location, we are considering it. But it needs really, On the one hand, a resi micro area. And secondly, it needs also the kind of Either asset which allows this repositioning or if you have to tear it down, you need some Extra utilization to make the math work. So at the end, you will see those cases, How material they are for the individual's company, it's a bit questionable because you are also the company has to digest it. We cannot go there and say now we turned down 5 assets in 1 year. You have an organization to work with it. But yes, It's predominantly, at least in Switzerland, we saw it. It's possible because the resi market On a yield basis, even lower. So you can, even by investing more, Say it again because you have the right direction. You turn an office asset on a 3% yield into a resi asset 2% yield. So the direction is the right one. But I would say I would question scalability. Understood. Thank you. Thank you very much for your answers. Thank you. There are no more questions at this time. So from my end, many thanks for your interest, for your questions. And if there is any follow-up, don't hesitate to send us a mail, And we clearly talk over the next couple of days to each other. Thank you very much, and bye bye.