Ladies and gentlemen, welcome to the PSP Swiss Property Q3 Results 2020 Conference Call. I am Alessandro, the conference 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 1 on your telephone. For operator assistance, please press star and 0. 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, good morning to everybody from PSP. As always, I will conduct a very short introduction and then go directly into the Q&A. The introduction will go for a couple of minutes in order to have really best use of time on your question. Perhaps to start with regard to COVID-19 and our situation within the company, to say we, I think, internally weathered the storm pretty well so far, touch wood. We had, as I mentioned, the mid-year during the first lockdown. We have also had some employees at home. As per today, the majority of the employees are in the office. We can ensure and guarantee all the safety measures. We see, first of all, a high willingness of the employees to come to the office. They have the possibility 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. We feel in this context, by being able to provide a reasonably good office product, that the efficiency is quite high and that also the mood within the company and within the employees is high. This is something which leads us always through the reflection, how will this working from home implicate the future need for office? 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.
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 in 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 second 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 the demand, 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 Canton Vaud. The whole city in that region has a bit slowed down. We are, on the other hand, also in letting activities, in discussions, Clearly the decision-taking process has slowed down. Nevertheless, as you have seen, we confirmed our vacancy guidance around 3% for the year-end. 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. 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.
We are getting towards the end of the year, the amount of transaction has been reduced, still there are 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, accessibility to capital is there. In our view, it's always important to be very prudent, anticipate your capital needs, 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 well-positioned also for that. 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 sides. We will clearly come into it when we have the Q&A. We have no major changes on development sides and on the income perspectives. From that end, I think it was a very good Q3. 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&A and take advantage of addressing basically all your questions.
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 their 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 who has a question or a comment may press star and one at this time. The first question comes from Ken Kagerer from ZKB. Please go ahead.
Yes, good morning, everyone, and thank you for taking my questions. I would have three. The first one is, could you please indicate what to expect in terms of P&L impact in Q4 and maybe also in 2021, in terms of earnings contribution from the sale of further apartments in Parco Lago?
Well, for the final of the year, it is clearly embedded in our EBITDA guidance. I would say we had a contribution now of roughly CHF 5.5 million in these first three months. There is an additional, I would say CHF 3 million, we would say we expect in the fourth quarter. It is clearly a bit depending on the pace we can hand over the apartments. All the 60 sold apartments have been terminated in terms of timing dates where we hand over. We have a cross-border lockdown to Italy, 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. What we see currently still is that we are handing over these apartments. From that end, I would say we are pretty positive on the 2020 and this additional CHF 3 million-CHF 4 million.
If you don't mind, with regard to 2021, we will comment when we present the full year results, 2020.
Okay. Thank you. The other one is basically on a discount rate. You provided the nominal discount rate for the half year of 3.29%. Would it be also possible to give us the nominal discount rate that Wüest Partner applied on the assets in Geneva that you have acquired from UBS?
We don't disclose the single asset discount rates. If you have seen, one asset has been put on the investment portfolio and one asset has put into development portfolio. 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. We are, I would say, in that range, and you will see it then with the full year numbers. 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. I think for 2021, what I can say is from the 10 largest expiries, and we talk here about up and to roughly CHF 600,000 of rent due. From the top 10, we have already settled nine. Clearly, we're working through the others. For some, we know that they are going to move out or reduce. 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.
Thank you for taking my questions.
Thank you.
The next question comes from Álvaro Soriano de Miguel from Bank of America. Please go ahead.
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? They are rationalizing their footprint. Are they willing to stay or to commit for longer leases? 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 tenant base, it's quite a strong tech base, strong innovation elements. For those companies, I'm just coming out of a video conference of one of 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. The bottom line is that they probably don't need less space, but different space. 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. We have also a lot of conversations where tenants are doing well. They are working well. They want to have their people back in.
We have, I would say, also in all these renewals, which I mentioned for next year, less space was not the argument. Duration of the lease contracts, by matter of fact, the largest expiry next year was prolonged by 10 years, which triggered also a 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 +5 year basis. Interesting enough, we had two renewals on the highest retail. Might be specific cases, we renewed them at higher rents in 2021. I would say, clearly also if you look beyond 2021, 2022, if I look at the largest tenant there, I think for a large part, office is important. Getting people together is important.
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. We don't see now really an exodus on office space.
Okay. 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? Could you explain a little bit, did the valuation suffer on Geneva acquisition, those three buildings? It is something normal, or is something related with this specific transaction? Thank you.
As to the second point, if you look back into the records, whenever we do an asset deal, the valuer values the asset. In this case, Hôtel des Banques, he matched the purchase price. On top, we have transaction costs of roughly 3%, which are activated, therefore, is a hit in the P&L. We have seen that when we bought an asset in Bern, and when we bought an asset also in Zürich West years back. This is not a surprise to us. When we did put in the bid, we knew that we'll have a little first-time revaluation loss due to transaction costs. With regard to the full-year valuation, 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. These are typical assets which he would review with regard to earnings visibility and risk. In general, the overall recession elements, economic developments, might lead him to review selectively market rents. 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 two 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 and the judgment on visibility going forward.
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 two months in front of us.
Okay, makes sense. The last one, perhaps on more a 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 sort of a strategy 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.
I think generally, if you look over the last years, we had quite a strong disposal program. Every year, a little bit, we have sold for more than CHF 600 million. I think this streamlining of the portfolio has already taken place. If you go on slide 60 of the presentation, if you look at the portfolio grid, I think generally, our assets are there where we want them. I think we have identified, first 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 Zurlindenstrasse, we did in Uster, 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 concepts.
Secondly, clearly we have looked at perhaps assets on more A- or B+ 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 continues into improving earnings quality. There are no really specific assets which we now feel uncomfortable and where we think we have to sell it.
Okay. Thank you very much for your time.
Thank you.
The next question comes from Andreas Brun from Credit Suisse. Please go ahead.
Hey, good morning. I have two topics. First one, can you actually please comment on your city hotels and what you expect in terms of rent reliefs going forward also in 2021? With regards to the hotel at Rue du Marché in Geneva, how much of rent do you expect by 2021?
Perfect. On the city hotels in general, as you know, we have three of them. We have one in Basel, which up to now fulfill their obligations. Clearly now, if the situation is prolonged, we might consider a support into 2021, but this is in a moderate manner. It's a franchise from the Accor Group. It's owned by a French family, which owns a large part of a few hotels in Switzerland. They have closed a few ones in this phase, they keep our Ibis Styles open, they're committed to keep it open. Here we are in a dialogue. It's in a reasonable manner, we are discussing a certain liquidity relief and not rent relief. 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 citizenM, 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 I might add this, Andreas, you wrote me a mail asking what were the rental incomes from the projects, Bahnhofplatz, Baufeld C, and Grubenstrasse in 2020. From all the three projects, the rental income we captured was zero. The projected income is all coming in at completion, starting then end 2021 and going through 2023.
Okay, thank you. I have a last one. Could you elaborate on the expected rental income from the UBS building for this year and next year? 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? Could you elaborate a little bit more on that building, please?
The Hotel des Banques will contribute CHF 2.5 million this year in the fourth quarter and CHF 10 million next year in rental income. It has not been included because we just acquired. We'll put it on the full-year presentation. We're 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 Corraterie and Cité, analogy to the Confédération 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 reliefs to come from going forward in 2021 as well? Do you still expect that the spas will be weak or could you maybe give us some qualitative assessment?
It very much depends on the development now also from the lockdowns. If you look at Geneva, clearly this lockdown will have an impact on the bath, which was expected to pay the rent. 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 two hotels, and it will be the three spas. I think from that end, it's quite a 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 two months. Whatever worst-case scenarios has been embraced in our EBITDA guidance. I think from that end, we should be safe.
I hope you understand that in this circumstance, we are not negative, we are not super critical for 2021, but we have really to digest now the latest news, the latest lockdowns, observe the numbers and the policies. I'm sure in February, we'll be in a much better position to give also a good view 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 Arx from Baader Helvea. Please go ahead.
Yeah, good morning. I'll start on the revaluations. If I calculated correctly, you had CHF 6.8 million positive revaluation on your existing portfolio. Did I understand that correctly, that this is coming from the renewed rental contract at the location in Urdorf? Is that so?
Yes.
Yes. What are here then the kind of the rules that trigger in third quarter revaluation? Surely you're not doing that at every single rental renewal that you're doing. Why 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, we're the only one, basically, the quarter results should also contain a full revaluation of the portfolio because it should be accordance to the half-year results. We got more than 10 years back a waiver that we say in the first quarter, in May, the second quarter, November, we are reviewing on an asset-by-asset side if there have been material changes to the rental contracts. We're not looking at the market factors, but at rental contracts. If we have the impression that the change of the rental contract has an impact of more than ± CHF 5 million on that asset, that we have to ask the valuer to review that valuation of that building.
Happened in Urdorf because the tenant renewed the contract by 10 years. We knew that the potential CapEx in the model was likely too high, so we asked the valuer to review that value. They came to the conclusion that it's more than CHF 5 million, so we disclosed it. We had instances where a case was less than CHF 5 million, so we are not disclosing it, and it goes into the full year results. The main trigger for this revaluation 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. This triggered this revaluation.
Okay. On the asset swap. Here you booked the CHF 7.6 million gain. Is that for the disposal only, or is that for the combination of the disposal and taking in the other asset?
Now, if you look on slide seven.
In other words-
Yeah, no, I understand. If you look on slide 17, the change in fair value, the CHF 7 million you mentioned, which we booked, were the pure gain on the disposal of Zurlindenstrasse. The footnote six, this CHF 10.2 million, contains a first-time revaluation loss from the Hôtel des Banques, which was roughly CHF 12 million or 3% of the purchase price, and the CHF 1.9 million revaluation gain from the Seilerstrasse, which was the swapped asset we bought, which basically is a revaluation gain which should reflect the efficiency gains and the premium you get by having the combined entity. The CHF 7.9 is Zurlindenstrasse. Seilerstrasse is CHF 1.9. Hôtel des Banques, CHF 12. Gives net CHF 10.2.
Very clear. On the COVID-related lockdown rent receivables, these came down from CHF 5.2 to CHF 4.7. How much do you expect here to work off, let's say, until the full year? If you would have to make a guess, given we are now entering a second lockdown, or there are certain lockdowns now, will that number rise again until the full year? What is your view here?
Clearly, we will work down this number. The lockdown in Geneva and Canton de Vaud, which we have in place now, will increase this number slightly. What I can say is that our expected rent reliefs we have to give from these receivables has been factored in into our projection.
I think-
Yeah. 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 mid-year.
Is this pure negotiation thing, or is that also related to legal decisions in the?
The legal decision from the government costs us, worst case, CHF 500,000. Mid-year, it was CHF 700,000. We worked down the case, it's CHF 500,000. These legal decisions. This is pure negotiation, discussions with those single tenants. Yes.
Okay, last one from my side. I have seen a clear increase in the capitalization of own services in the third quarter, 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 Hôtel des Banques. 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 own services.
Thank you very much.
Surprising. Thank you.
As a reminder, if you wish to register for a question, please press star and one. The next question comes from Pascal Boll 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% I see a reservation. How much of this 40% sold apartments is already recognized in the P&L or has been recognized?
You can say from a percentage of completion point of view. From a handover point of view, we have handed over in Q3, five. In Q4 now, we are at 10, and we expect another 29 to go through. You can say basically, another 2/3 will go through into Q4.
Two- third of what?
From the number of the apartments. We do percentage of completion, so every quarter, we recognize a little bit of profit of every part we have already sold in the past, based on how much we have completed of the project. If you look that we had, let's say, a CHF 5 million P&L positive impact in the mid-year. As I mentioned beforehand, we'll have another CHF 3 million-4 million, which will come in into the fourth quarter, plus then potential additional reservation we'll do. We are currently having another three, four reservations, which then will be recognized in percentage of completion. The moment we hand over the apartment, then it's fully recognized on the profit 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 email, give us a call. Happy to discuss and answer, and especially wish you all the best and a lot of health, and then talk to you soon. Thank you. Bye-bye.
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