Ladies and gentlemen, welcome to the PSP Swiss Property Full Year Results 2020 Conference Call. I am Alice, the conference call operator. 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 to everybody, and thank you for these introductory remarks. Just to make a little corrective statement, we will start pretty quickly into the Q&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 through the documents and that there's a preference that we go direct in Q&A to leave up for questions. 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 are coming out of this crisis even stronger than before.
Secondly, we were able to meet our improved guidances with a strong EBITDA result, a strong vacancy number, and I think with a pretty sound outlook for 2021. From that end, we are positive. We are confronted obviously with, I would say, slightly challenging letting market. 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's a bit more uncertainty on their business environments, less so in CBD areas, a bit more in secondary locations. Clearly it's a bit more demanding on the letting side. On the other hand, we saw that there was also from the results, continuously strong investment market, especially in prime location with assets with high visibility. 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 a structural vacancy assumed by the valuer around 5%-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 non-core activities.
The dividend increase we will propose to the AGM is, as I said, fully earned and shows that we are working on a recurring CHF 1+ per quarter EPS, which gives us also a good headroom for the future development on that line. The third highlight is with an even higher EBITDA guidance of around CHF 275 compared to the CHF 71, is that despite the continuous lockdown we also see in Switzerland now in Q1, which we hope now is starting to come back, starting March 1st. We see a higher EBITDA guidance for the year for PSP at CHF 275 million, despite a slight increase in the vacancy rate. It means also that also in 2021, we are confronted with, for us, a quite a stable development.
The overall balance sheet situation with a loan-to-value of roughly 35%, passing cost of 47 basis points, I think 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 kindly up to you to address questions, address areas of interest where I can dive in and answer. I will give back to the operator for questions.
The first question from the phone comes from the line of Edoardo Gili from Green Street. Please go ahead.
Hello. Hi. Congratulations on your results. I have two questions from me. The first one would be on the like-for-like performance in Zürich. I've noticed that it was - 80 basis points for the full year. However, at Q3 it was - 30 basis points. I was wondering if you could add some more color around the performance in Zürich over Q4. The second question I had 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, and in which cities more specifically. Thank you.
Yes. To the vacancy guidance and for the full year, we have some expiries, 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. At the inception date, December 31st, 2021. It will be empty, or so we are currently already in negotiations. One case is in Basel, Freie Strasse, a lease agreement with Zara Home, where we know they're leaving, but at inception date, it will be empty. A second one is in Zürich West. One space we have to build back, we think it's very possible to be re-let. On the other hand, we have Swisscom, which will partially move out in Biel. There we are currently in letting discussions also with the city for some governmental activities. Our projection is that it will not be let by the year-end.
I think it's a bit a mix of tenants. We know they will move out. 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. This was hitting the like -for -like. We had overall rent relief for CHF 4.6 million, which translates in an overall, as I said in the presentation, negative like -for -like, of -0.2%. If we exclude that, we have a + 1.5%. The large part of this rent concession came in Zürich.
Understood. That's very helpful. In Zürich, that would be on the office portfolio, or it's more skewed towards the retail portfolio within Zürich?
Neither nor. It's restaurants and hotels and bars.
Understood. That's very clear. Thank you.
Thank you, Edoardo.
Mr. Balzarini, seems there are no more questions at this time.
Well, we had our best ever operating year, and we had our second lowest questions ever with one. We had one, now one.
Sorry to interrupt. We have a last minute registration from Andreas von Arx with Baader Helvea.
No, it's not accepted.
Please go ahead, sir.
Not accepted. Time is over. Hi, Andreas.
Yeah, good morning. Just a quick one. If you would look out into the first half and with regards to revaluations, what would be your feeling? Probably low interest rates, but now like-for-like, it seems to be going a bit against you, and also the environment is getting challenging. Do you still think flattish or are we now seeing more negative developments in 2021?
If I look at transaction evidence, I would see a flattish or even selectively a stronger market. Clearly, the valuer will look at what could be potential COVID implication, rent implications. If I look purely on the transactions which went through January so far, we see them at or even at slightly lower yields. What the valuer does with it, that's very difficult to say because he clearly looks then also at rent situations and so. I would say the short-term, I'm not so concerned. I'm not concerned on the long-term, but you're asking on the short-term. I'm not so concerned. I cannot say if it's red or green. It's difficult to say.
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 a few quotes?
No, the Wallisellen Microsoft asset has been marked down with adjusted market rents and increased discount rates over the period already. I think the valuer, rightly so, when you have an expiry of a lease agreement and a non-renewal, he has to reflect that in his estimates. 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. 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 back, but we're also already in discussions with potential tenants on the surface. I think we're working on the case. Specific on your question, it has been reflected on the valuation.
Just a quick last one. Some of your peers are now basically looking at their portfolio and using the good environment to get rid of some, let's say, lower quality assets. Specifically, wouldn't that be a good opportunity to review your Rheinfelden asset, which is 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. I think there's no urgency to sell the asset.
But you mean.
No, I understand. It's not really, 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 development. We can still work a bit on the vacancy. Honestly, it could be an asset which could be swapped for something more central. There's no urgency to sell it for us. 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. There's no reason to do a straight sale on that.
Thank you very much.
Thank you. Yes.
The next question comes from the line of Álvaro 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. Just your thoughts on, where are we heading in terms of cost of debt for PSP? The only 0.22% 10-year bond issued in February, I think it's a milestone, but should we expect continue trend to 0%? 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 Zürich and Geneva? We are reading a lot of headlines in London and Paris. Some banks are reducing their headquarters. Here, the third one. What sort of a like-for-like assumption are you taking on your EBITDA guidance?
Finally, and maybe much more wishful thinking or long-term trend, I think we are entering in a new CapEx era for offices if they need to adapt to the new world. 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 a floor. We have a CHF 3.1 billion debt book and CHF 13 million of financial expenses. Clearly, the bond issued for 10 years at 0.22%, we'll trade it further down. We did a private placement for the year at - 40 basis points. 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 at below 47 basis points . I think we get to a certain natural floor. Is this at 12? Is it at 11? I don't know, but somehow gut feeling tells me we are getting there. What we try to do is when we have refinancing needs, that we try to lock in longer-dated money at interest rates.
If, for whatever reason, spread levels are not on a level we think are appropriate, then we fund it short-term, because we have not much on the short-term side. We try to optimize and try to time it a bit. Now with the duration of five year and the rates I mentioned, I think we are well positioned, but we are getting, as 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 third-party leased office into their own offices, and they start to sell lease back and reduce. They operated already on a 0.6%, 0.7%, 0.8% ratio. I would expect that they continue to optimize.
On the other hand, I think also there's a kind of natural level where you are not able to further optimize. We, for ourself, 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. By then they move out of the 55%. 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. We are talking about market rent levels, which we underwrote. This leads me a bit to your fourth question on the CapEx. The average space per tenant in our portfolio is a bit less than 1,000 sq m.
Clearly, when you have relocations and moves out, you might talk about 10 fit-outs. The property portfolio, the quality of the assets. It's Grade A. Many of those assets are either new or 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. 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. I don't see now that our CapEx line, which was CHF 60 million-CHF 70 million, would shoot up to CHF 25 million or CHF 30 million. 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 per 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 five, 10 years. We are repurposing that space into residential. What is your view? Can it be done in Zürich and Geneva? Does the math works on those cities, moving from office to resi?
It's something we observe, something we are also doing ourself. I think I would question the scalability. It's a bit mentioned as the new flavor of the moment, you cannot turn down 50, 100 office buildings in resi. I think you will do it individually. We have one project we sold in Zürich last, at Zurlindenstrasse, where this will happen. We have one here in Zürich in Kilchberg, 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 the strength of the resi area and this micro location, we are considering it.
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. At the end, you will see those cases. How material they are for the individual company, it's a bit questionable because also the company has to digest it. We cannot go there and say, now we turn down five assets in one year.
You have an organization to work with it. Yes, it's predominantly, at least in Switzerland, we saw it. It's possible because the resi market on a yield space is even lower. You can, even by investing more, sell it with a gain because you have the right direction. You turn an office asset on a 3% yield into a resi asset of a 2% yield. The direction is the right one. I would say I would question scalability.
Perfect. Understood. Thank you. Thank you very much for your answers.
Thank you.
There are no more questions at this time.
From my end, many thanks for your interest, for your questions, and if there's 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.