Earnings Call: Q3 2020

Nov 10, 2020

Ladies and gentlemen, welcome to the PSP Swiss Property Q3 Results 2020 Conference Call. I am Alessandro, 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 and A session. 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. Thank you, and good morning to everybody from PSP. As always, I will conduct a very short introduction and then go directly into the Q and A. So the introduction will go for a couple of minutes in order to have really best use of time on your question. So perhaps to start with, with regard to COVID-nineteen and our situation within the company, To say, we have, I think, internally weathered the storm pretty well so far, touch wood. We had, as I mentioned, the midyear During the 1st lockdown, we have also had some employees at home. As of today, the majority of the employees are in the office. We can ensure and guarantee all the safety measures. We see, 1st of all, a high willingness of the employees to come to the office. They have to possibly to come by car, so avoiding all the traffic elements. We have all the sanitary measures, the social distancing, and we service food in order to avoid traffic over lunch going outside. But we feel in this context, by being able to provide a reasonable good office product that the efficiency is quite high and that also mute within the company and within the employees is high. And this is something which leads us always through the reflection how will this working from home implicate the future need for office, and we have had a variety of discussions with larger corps. I think throughout, as soon as you have innovation element, if you have activities where people need to meet together, the employees want to go back to the office and also the companies want to have the people back into the office. So I think we have fostered a bit our view that this forced home office has proven to be digital viable, but that there is room and space for good products in the city centers with good accessibilities, good floor plates and that not necessarily there is a need for less demand, but perhaps a bit of a different demand. If you go in a nutshell, what we see in the letting market that we have written also in our presentation and comment later this morning, is clearly after a good start. Beginning of the year, we had a slowdown during the spring recap during the summer. And clearly, the 2nd wave, which is on the number side also in Switzerland increasing. However, if you look at the traffic of the flow of people outside, it's not so perceivable, had a bit of an impact also on demand. And I would say more or less on the demand, but more on the interaction with potential tenants. We have a semi lockdown in Geneva and semi lockdown in Canto Vaux. So the whole system in that region has a bit slowed down. But we are, on the other hand, also in letting activities, in discussions. But clearly, the decision taking process has slowed down. Nevertheless, as you have seen, we confirmed our vacancy guidance around 3% for year end. So we are convinced that we can achieve this number. Two words on the transactional market. Here, we continue to see quite a strong appetite for CBD assets with good visible income streams. So I would say here from a yield perspective, we don't see widenings of yields. We see rather a stable or in certain cases also narrowing. And now we are getting towards the end of the year, so that the amount of transaction has been reduced. But still, there's still enough transactions out there to have certain data points. Last but not least, the capital market. If you look at today, I think it's in a healthy position. Spreads came in a bit. So accessibility to capital is there. In our view, it's always important to be very prudent, anticipate your capital needs because if all of a sudden you need a bit too much of funding, there's a risk really that you depend then from the market. That's the reason why we have staggered all our fundings over the next years in a reasonable manner to be very, very positioned also for that. So in a nutshell, we confirmed our EBITDA guidance for the year. We have confirmed our vacancy guidance of the year. We feel strong about our balance sheet, about our visibility on the earnings, also the development side and we clearly come into it when we have the Q and A. We have no major changes on development sites and on the income perspectives. So from that end, I think it was a very good Q3, and we are positive on the Q4 and to finalize this full year result according to our expectations. With that, and I apologize if this was only a very quick intro, I'd like to really go into Q and A and take advantage of addressing basically all your questions. We will now begin the question and answer session. The first question comes from Ken Cager from ZKB. Please go ahead. Yes, good morning everyone and thank you for taking my questions. I would have 3. The first one is, could you please indicate what to expect in terms of P and L impact in Q4 and maybe also in 2021 in terms of earnings contribution from the sale of further apartments in Paco Lago? Well, for the final of the year, it's clearly embedded in our EBITDA guidance. I would say, we had a contribution now of roughly 5 €500,000 in this 1st 3 months. There is an additional, I would say, dollars 3,000,000 we would say we expect in the Q4. It is clearly a bit depending on the pace we can hand over the apartments. And all the 60 sold apartments have been terminated in the sense of timing, dates where we hand over. We have a cross border lockdown to Italy. So there might be slight delays in deliveries of furnitures or kitchens or bath elements. However, we don't see the impact to be so imminent. So what we see currently still that we are handing all these apartments. So from that end, I would say we are pretty positive on the 2020 and this additional €3,000,000 €4,000,000 If you don't mind, with regard to 2021, we will comment when we present the full year results 2020. Okay. The other one is basically on the discount rate. You provided the nominal discount rate for the half year of 3.29%. Would it be also possible to give us the We don't disclose the single asset discount rates. Plus, we have if you have seen, one asset has been put on the investment portfolio and one asset has put into development portfolio. So it's clearly part of the overall yield now in Q3. But as we don't value the whole portfolio in Q3, it's not meaningful. But we are, I would say, in that range, and you will see then with the full year numbers. But we are not disclosing discount rates of the single assets. Okay. Maybe a last one. In terms of the maturities in 2021, you have 14% then. Could you just tell us where you're currently standing and how much has been worked off already? Thank you very much. Yes, Ken. For the I think for 2020, 2021, what I can say is from the 10 largest expiries, and we talk here about up to roughly $600,000 of rent due. From the top 10, we have already set to the 9. Clearly, we're working through the others. For some, we know that they are going to move out or use. For others, we know that they will stay in. Also here, we don't see a dramatic move. What the implications will be overall on the vacancy rate for the full year, I will also disclose in February. I would anticipate based from where we're coming from a 3%, the current circumstances that the vacancy moves up a bit, but I don't see dramatic moves. Thank you very much. Thank you. Thanks for taking the questions. Thank you. The next question comes from Alvaro Soriano de Miguel from Bank of America. Please go ahead. Yes. Thank you. Just a quick one, a follow-up on the last one from my colleague. I would like to know what sort of conversations are you holding with your tenants, not only in regards to 2021 renewals, but also 2022. How your customers are confronting those conversations? Are they I mean, they are rationalizing their footprint? Are they willing to stay or to commit for longer leases? Yes, a bit of color on the day to day of those conversations. Thank you. Well, thank you. I think generally, if you look at our spend base, it's quite a strong tech base, strong innovation elements. And for those companies and just coming out of a video conference of 1 the larger tenants, which clearly have currently home office in place that's predominantly for health measures, but they're eager to come back to the office. They are reviewing, obviously, the setups and what kind of implications they have. But the bottom line is that they probably don't need less space, but different space. So overall, we will for sure have tenants, which are currently optimizing and streamlining and come to the conclusion that they might need a bit less space. But we have also a lot of conversations where tenants are doing well. They are working well. They want to have the people back in. And we have, I would say, also all these renewals, which I mentioned for next year, there was not less space was not the argument. Duration of the lease contracts, by a matter of fact, the largest expiry next year was prolonged by 10 years, which triggered also revaluation judgment in the Q3 and therefore, revaluation gain. We don't see now requests for early breaks. We see that contracts are prolonged on a 5 plus 5 year basis. Interesting enough, we had 2 renewals on the high single retail. Might be specific cases, but we renewed them at higher rents in 2021. So I would say, clearly, also, if you look beyond 2021, 2022, if I look at the largest tenant there, I think a large part for a large part, office is important, getting people together is important, having being at point of interest is important. And it's our duty to really have these interactions and to try to help those tenants on how to best fulfill their needs. But we don't see now really an exodus on office space. Okay. And thank you very much for that. A last question on your portfolio on the valuation of the assets. What could we expect in full year? And could you explain a little bit the devaluation suffer on Geneva acquisition, those three buildings? It is something normal or is something related with this specific transaction? Plus to the second point that if you look back into the records, whenever we do an asset deal, the valuer values the asset. In this case, Tel de Bong, he matched the purchase price. On top, we have transaction cost of roughly 3 Bern and when we bought an asset also in asset in Bern and when we bought an asset also in Zurich West, the year's back. So this is not a surprise to us. When we did put in the bid, we knew that we'll have a little first time reevaluation loss due to transaction costs. With regard to the full year evaluation, and this is really my sentiment and my read without having talked to the valuer is that the activities on the transactional market might lead to a stable or little further yield compression for prime assets. I think that the valuer will review assets with an operational angle and might consider there to be a bit more prudent on earnings visibility. In our cases, this is rather limited as we don't own shopping centers and only a limited amount of hotels, but these are typical assets, which he would review with regard to earnings visibility and risk. And then in general, the overall recession elements, economic development might lead him to review selectively market trends. So net net, I would expect a flat development. If it's a slightly positive or negative, it's more of a judgment call. I think you will have 2 elements, which are going opposite depending now on the I think also the general sentiment on this development of the vaccines. This might have also a bit of an element in the judgment on visibility going forward. But I would say generally the value should be stable from what I see and observe in the market from today's point of view, knowing that we have another 2 months in front of us. Okay. Makes sense. And the last one, perhaps on more strategic angle. If you are right and PSP is right on the polarization of the office market and we start to see different performance between core or A offices and B and C, what is the what sort of strategy is the company will implement the company? Should we expect any streamline of the portfolio disposing those offices where upside is very limited or risks may increase? Or actually, you are quite happy with your portfolio in this new office world? Thank you. No. Generally, I think generally, if you look over the last years, we had quite a strong disposal program. Also, every year, a little bit, we have sold for more than SEK 600,000,000 So I think this streamlining of the portfolio has already taken place. And if you go on Slide 60 of the presentation, if you look at the portfolio grid, I think generally, we our assets are there where we want them. I think we have identified, 1st of all, assets where we believe there is a higher and better use, and we are evaluating if we should extrapolate that. These are examples like we did Thor Lindenstraasse, we did in Oosterve, we did in Geneva, where we developed a project and sold it. We have earmarked another few assets of this kind and are working on context. And secondly, clearly, we have looked at perhaps assets on more A- or B plus B plus locations, which we might give in a certain time where there is no need. I think net net also considering the loan to value of 36%, we feel quite comfortable with the portfolio size. We might add here and there an asset, but we are also not shy of then trading it with another one either through an asset swap or a straight sale. Our focus is in improving earnings quality and continuous improving earnings quality. And there are no really specific assets, which we now feel uncomfortable and where we think we have to sell it. The next question comes from Andreas Broom from Credit Suisse. Please go ahead. Hey, good morning. I have 2 topics. First one, can you actually please comment on your city hotels and what do you expect in terms of rent reliefs going forward also in 2021? And with regards to the hotel at Rue du Marche in Geneva, How much of rents do you expect by 2021? Perfect. On the city hotels in general, as you know, we have 3 of them. We have 1 in Basel, which up till now fulfill their obligations. And clearly now, if the situation is prolonged, we might consider a support into 2021, but this is in a moderate matter. It's a franchise from the Agua Group. It's owned by a French family, which owns a large part of or a few hotels in Switzerland. They have closed a few ones in this phase, but they keep our EV style open. They are committed to keep it open. So here we are in a dialogue, but it's in a reasonable manner. We are discussing a certain liquidity relief and not rent relief. So here it's more of a liquidity judgment. The second one is the Hotel B2 in Zurich, which is doing well on the weekends and obviously suffering a bit during the week, also due to the fact that Google is in a complete home office models. Also here, we are in continuous discussions. There is no need and no urgency from our point of view, but clearly, we are in discussions with the operator. With regard to the citizen M, it's open. We had recently discussions with them. Clearly, the occupation ratio is much lower than they expected, but they have very strong shareholders behind the company. They pay their rents. We are not disclosing what is the single rent they're paying, but they're fulfilling their obligations, and it's according to what we have fixed in the rental contract. You had a second question. If you might add this, Andreas, you wrote in EMA asking what were the rental incomes from the projects Berenplatz, Baufeldsee and Grobenstrasse in 2020. From all the 3 projects, the rental income we captured was 0. So it's all coming in the projected income is all coming in at completion, starting then end 2021 and going through 2023. Okay. I have a last one. Could you elaborate on the expected rental income from the UBS building for this year and next year? And then on your CapEx slide on page 31 in the presentation, the Geneva building from UBS is not included there. What is the reason? Or is it that it will be renovated to elaborate a little bit more on that building, please? The Hotel de Banc will contribute $2,500,000 this year in the Q4 and $10,000,000 next year in rental income. It has not been included because we just acquired. We'll put it on the full year presentation. We are working on the final concepts. We have launched now all marketing efforts and pitches for the brokers. However, investment wise, it's a very small investment we have to it's really more an opening of the side parts from Cora 3 and CITP in analogy to the conference, conference entry. And it's more about accessibility and facelift, but we are talking about the single digit CapEx from our side. Okay. Thank you. Maybe a last one, if I may. Where do you expect actually the rent release to come from going forward in 2021 as well? Do you still expect that the spas will be weak? Or could you may be give us some qualitative assessment? It very much depends on the development now also from the lockdowns. If you look at JV, clearly, this lockdown will have an impact on the VAT, which was expected to pay the rent. So I think for us, the parts which will be on the focus are the restaurants. Some are doing very well. Some have a bit more difficulties. It will be, I would say, the 2 hotels, and it will be the 3 spots. I think from that end, it's quite sizable but reasonable overview we have, and we're working through. Giving now a magnitude for 2021, honestly, it's too early. We are still working through the last 2 months. Whatever worst case scenarios has been embraced in our EBITDA guidance. So I think from that end, we should be safe. And I hope you understand that in these circumstances, we are not negative. We are not supercritical for 2021. But we have really to digest now the latest news, the latest lockdowns, observe the numbers and the policies. And I'm sure in February, we'll be in a much better position to give also a good year on 2021. Also from today's point of view, 2021 will be a very good year for PSP. Where we will be and how it will be, we'll disclose more in February. Perfect. Thank you very much. Thank you. The next question comes from Andreas von Aks from Badger Hvea. Please go ahead. Yes, good morning. I'll start on the revaluations. If I calculate it correctly, you had EUR 6,800,000 positive revaluation on your existing portfolio. Is that did I understand that correctly that this is coming from the renewed rental contract at the location in Urthorf, is that so? And if yes, what are here then the kind of the rules that trigger in quarter in Q3 revaluation? I mean, surely, you're not doing that at every single rental renewal that you're doing. So why is that was that so significant in that case? It's an excellent question. We have from the stock exchange the obligation to report or to do a full portfolio valuation twice a year. As we have also quarterly results and we are the only one, basically the quarter results should also contain a full revelation of the portfolio because it should be accordance to the half year results. We got more than 10 years back a wafer that we say in the Q1, in May and the Q2 November, we are reviewing on an asset by asset side if there have been material changes to the rental contracts. So we look not looking at the market factors, but at rental contracts. And if we have the impression that the change of the rental contract has an impact of more than plusminus €5,000,000 on that asset that we have to ask the buyer to review that valuation of that building. So happened in Urdorf because tenant renewed the contract by 10 years. We knew that the potential CapEx in the model was likely too high, so we asked the value to review that value. They came to the conclusion that it's more than EUR 5,000,000, so we disclosed it. We had instances where a case was less than EUR 5,000,000, so we are not disclosing it, and it goes into the full year results. This was the majority the main trigger for this regulation gain was that the valuer has not expected a prolongation of 10 years and had a bit higher CapExes than what we have effectively had or will have over the next 10 years. And this triggered this liberation. Okay. Then on the asset swap. Here, you booked the EUR 7,600,000 gain. Is that for the disposal only? Or is that for that for the combination of the disposal and the excess and taking in the other assets? If you look on Slide 17 yes, I understand. If you look on Slide 17, the change in fair value, the EUR 7,000,000 you mentioned, which we booked were the pure gain on the disposal of Thor Linenstrasse. The footnote 6 contains this $10,200,000 contains a first time reevaluation loss from the Hotel de Bank, which was roughly $12,000,000 or 3 percent of the purchase price and the $1,900,000 revaluation gain from the Seiler Straß, which was the swapped asset we bought, which basically is a revaluation gains, which should reflect the efficiency gains and the premium you get by having the combined entity. So the 7.9% is Tor Linden, Silas Trust is 1.9% hotel de bonk 12% gives net 10.2%. Very clear. And on the COVID related lockdown rent receivables, I mean, these came down from 5.2% to 4.7 I mean, how much do you expect here to kind of work off, let's say, until the full year? And if you would have to make a guess, given we are now entering a second lockdown or there are certain lockdowns now, I mean, will that number will rise again until the full year? What is your view here? Clearly, we will work down this number. The lockdown in Geneva and Coton de Vaux, which we have in place now, will increase this number slightly. What I can say is that our expected rent release we have to give from these receivables has been factored in our projection. I think it's difficult to say or to tell now from this 4.7 how much are we working down number wise And how much do we have to give as a concession? I think what we can say is based on our judgment on the single cases, we feel comfortable that we can hold on with our increased guidance of midyear. You mean it's just pure negotiation thing or is that also related to legal decisions in the The legal decision from the government cost us, worst case, CHF 500,000. Median was CHF 700,000. We worked down the case, it's CHF 500,000. This legal decision. This is pure negotiation, discussions with those single tenants. And yes. Okay. Last one from my side. I have seen a clear increase in the capitalization of owned services in the Q3 also going through the cash flow statement. Is here a special item? Or is this driven by a change in your methods? What's the reason here? This is purely the fact that according to IFRS, we can activate our own transaction costs linked to Hotel de Vanc. Whenever we do an acquisition, we can activate our costs according to IFRS. That's always the situation we had also in the past. And this goes into this capitalization, this increase of the capitalization rate or this capitalized owned services. Thank you very much. Thank you. The next question comes from Pascal Bole from MainFirst. Please go ahead. Yes. Good morning from my side. I have one question regarding Parco Lago. When I look at your presentation, then I see that 40% of the apartments were sold, 15% have I see a reservation. How much of this 40% sold apartments is already recognized in the P and L or has been recognized? You can say from a percentage of completion point of view or From a handover point of view, we have handed over in Q3, Q5 in Q4 now, we are at 10, and we expect another 29 to go through. So you can say basically, another twothree we go through into Q4. 2 third of what? Yes, if you're from the number of departments, but we do percentage of conclusions. So every quarter, we recognize a little bit of profit of every part we have already sold in the past. Basing based on how much we have completed of the project. So if you look that we had, let's say, a $5,000,000 P and L positive impact in the mid year. As I mentioned beforehand, we'll have another EUR 3,000,000, EUR 4,000,000 which will come in, into the Q4 plus then potential additional reservation will do. We are currently having we are having another 3, 4 reservations, which then will be recognized in percentage of completion. The moment we hand over the apartment, then it's fully recognized on the property side. Thank you. Ladies and gentlemen, this was the last question. Well, thank you from my side. If there are any follow-up questions, unfortunately, roadshows are virtual. So please send me an e mail. Give us a call, happy to discuss the Lancet. And especially wish you all the best and a lot of help. And then talk to you soon. Thank you. Bye bye. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.