Earnings Call: Q3 2019

Nov 12, 2019

Ladies and gentlemen, welcome to the PSD's Property Q3 Results 2019 Conference Call. I'm Alice, the Chorus Call operator. I would like to remind you that all participants will be in a listen only mode and the conference is being recorded. The presentation will be followed by Q and A session. The conference is not recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Giacomo Balsarini, CEO of PSBC's Property. Please go ahead. Thank you, and good morning to everybody for this Q and A call on our Q3 results. As we outlined in our press release, we're obviously very pleased on the Q3 numbers and therefore also improved our full year guidance on the EBITDA and on the vacancy rate, also moderately. But it's a sign of confidence, clearly pleasing with continuous top line growth and all of that on the back of an even stronger balance sheet. I think in the merit of time and also as we did in the last quarters, I'd like to offer the time to questions. So I would really directly hand over to you to shoot with questions, and we take the best time of it. First question comes from the line of Ken Kagura, Zevgeny. Please go ahead. Yes. Good morning, everyone. I would have 3 short questions. Firstly, one with regards to the vacancy outlook into 2020. The second one is related to our potential revaluation gains in the second half. After the strong transaction evidence that we have seen? What can we expect here? Some companies have given the guidance there. The third one is a special one on the portfolio. What do you expect as a development with the global sale for the globus on Belvieu? What can we expect there? I think in past, certain developments have been mentioned. Is there something concrete you can tell us? Thank you, Ken. With regard to the vacancy rate outlook for 2020, as you know, we typically give the guidance with you with our full year results. I think what I can say based on the expiry profile, which is also evidenced on Slide 16, knowing that we have 10% of leases expiring, considering currently our discussions on these preletting and retention plans, I think we are pretty confident that we can continue on this low vacancy rate. The exact number and exact times will come out in February, but we feel pretty strong that we can continue to be around this 4% number. But please allow us the full year numbers guidance to come out in February. 2nd, with regard to the Revoloration Gate guidance, we refrain from giving Revoloration Gate guidance. I think this is not appropriate. It's clearly the task of the valuer. What we observe is, as you mentioned, some transactional evidence. We clearly are letting well, and we bring our vacancy rate further down towards the year end. So I would expect, based on these factors, clearly rather a positive connotation on the valuation. But overall, the valuation is a task of the value, not our. With regard to the Globus and Malvi, I would say that's nothing to go with the dual sale of the Globus, the project we have launched. We have briefly informed a few months ago. We have aligned lease expiries, and we are working on a set of projects and set of discussions with potential tenants to either do a refer stronger or weaker and bring this building, which is placed at one of the best spot on a newer shape and obviously with a certain adequate rent uplift. But there's been a few years to go. We are working now with a variety of architects on this project, but it's independent of the Mogadishu's global sale. Thank you very much. Thank you, The next question comes from the line of Robert Woderman with Kempen. This is Robert. Apparently, there is a great difference in pricing between, let's say, prime assets, where we see yields of 2% or slightly above that versus value add properties where apparently there is hardly any market for and arguably there is a number of those assets potentially in the market. Would this be a segment, given the fact that your platform is obviously stronger than average property companies, would this be a segment that you could potentially act in and look at, let's say, mispriced assets? Well, to you, your first point, I think it's pretty clear in this negative interest rate environment that prime assets with a good visibility on rent linked competitors are going at the mentioned yields. I would say there is not much value add around because I think investors who have the value add opportunity work on this value add opportunity. I think it's not so it has to be seen. If there are mispriced opportunities, we clearly look at value add opportunities, but still in our perimeter, so close to city or transportation notes. We are currently concretely working on a pit for a land plot with the project close to the city of 1 of our cities, not huge, so it's not very sensitive. But obviously, we look at it. I think what Anne has to be a bit careful that you are paid still for the risks you are entering within these relevant projects. So although it might be a value add story, we are not talking about 5% yields. You're still talking about quite the Crepes E yields. So it's been also finding really the right risk return profile for this value add project. But yes, we are looking at those, but they have to be still in our environment where we see also future potential rent to growth and then job creation. Yes. Okay. So can I summarize that as you might be adding, let's say, obsolete offices on good locations if the opportunity comes by? I would say very good locations. Yes. Okay. We're not looking at secondary cities where we are not in. Yes. Okay. Also on the transaction and that's strong, I think, that is great here. Would you be considering also potentially stepping into place of, let's say, the tail end of your portfolio and or, let's say, the assets where there's literally no growth anymore? Or is this something that would affect earnings too much and that you actually want to safeguard your future earnings? Well, I think we want to look continues to improve our earnings quality. So if there are bad earnings, we are not willing to safeguard them for the future because they will deteriorate. So we started a few years back with more active on the portfolio rotation on the first hand looking at really can we extract the extra returns from the CapEx we have to do in a few years? Or secondly, also what we did now with Ooster, are there better uses to our properties? Can we develop a project and sell the project? So this portfolio rotation will continue. But over the last years, we have really very much streamlined and optimized our portfolio. So yes, we will continue, but we will not step up now and start selling prime assets. Yes. No, that's perfectly clear. And for the 1st 9 months, it was decent 1%. What happened? And how should we read it? Yes. For the full year, you will see obviously again close to 1% of like for like growth. What we had in the Q3, and this is nitty gritty, we had a tenant arrear. So we didn't book this rental income coming from this tenant, which then was settled and we will rebook in the Q4. And this was a larger tenant payment, which had nothing to do with the credit of the tenant. There was a delay on his side, but we still booked it as an arrear, and so it didn't reflect a like for like. Okay. That's all clear. Many thanks. Thank you, Robert. Next question comes from the line of Pierre Perren, BMO GAN. Please go ahead. Hi, good morning. Thank you for taking my question. Just on the back of the last question from Robert on the like for rental growth, which was lower in Q3. If I understand correctly, you're guiding somehow for 1% like for rental growth for the full year. I don't really reconcile it with occupancy gains that you saw year on year, which is going to be more than 100 basis points year on year because you should get to vacancy level below 4%, one could expect that your like for example growth is much better than 1%. So if you could help me reconcile those 2 aspects. And also on the relative that you've done so far this year, could you give a bit more indication in terms of the regression you achieved, whether it's negative or positive as well as lead duration? Any detail on the relative would be helpful. Yes. Thanks. I would say on the first question, is it at 1% or 0.9% or 1.1%. I think today, it's difficult to see. We will see that at the year end, you have to factor in clearly also the disposals on this like for like calculation. But overall, what we see on the pure like for like growth is coming predominantly through the vacancy rate reduction. It's not coming through, and that's linked to your second question, to rent growth. So we have not seen across the portfolio rent growth in the first half, and we don't see across the portfolio rent growth in the 3rd quarter. We see that for lettings of repositioned assets, refer assets, we can get quite a strong uplift compared to market rents, to Eastern border rents. But overall, if we factor in really the re letting of the existing tenants and we factor in additional potential rent free periods or a big fit out contribution, the rent is flat. So that has not continued towards the half year now that we are getting to even lower vacancy rate. Clearly, the task will be to be a bit stronger on the renegotiation side. But as you know, on a €7,800,000,000 portfolio with re lettings of 10%, until you see the materiality of it, this will take some time. So I think that's it. And based on the like for like, you have also seen that we have basically no inflation adjustment in it. So it's basically 0 coming from the CPI. Just as an indication on the rental uplift you managed to lock in post repositioning of an asset, Are we talking high single digits there, double digits? Just to get an idea. If I take the 6 largest, which we did in Q3, the range is from 0% to 18%. There are some single digits, and there is one strong one. Yes. Okay. And as I said, but it's I think it's important. We have also slide in it in the annex that the rental income growth is coming, thanks to obviously the acquisitions, net of the disposals. It's coming through the effect from the development pipeline, which comes into the portfolio maturing, and about €3,000,000 are coming through to take with this. However, the underlying net effect from the rental market is flat. We see improving signs in the CBD of Zurich and in Zurich West. But this is clearly with a lower maturity profile, not really coming in into the top line as quickly as one would perhaps expect from reading the news that the market is strong. Okay. That's clear. And then last one on the relating for next year on the experience you've got for 7 20. Do you have a rough geographic split of those renewal? Are we more looking at some Zurich assets? Or is it kind of widespread? If I look at it, it's basically spread through the portfolio. Clearly, Zurich is due to the size of the portfolio, the dominant part. But if I look at the top 10, we have 4 of Zurich, we have 3 Berne, we have 1 Geneva, 1 Lausanne. So it's quietly spread. But as I mentioned in I think it was 10 point, We are looking at the largest upcoming expiries quite ahead with our renewal discussions. So we have a very good visibility of 2020. The next question comes from the line of Pavel Silver with Santovo. Please go ahead. Yes, good morning. It's a good question, Dola, from my side. The first one is just related to OXXO here. You actually increased your pre letting by 16%. Is the name of the Swiss company public? And also, you mentioned the third and last in June. Hasn't the Valeator basically reassessed this project? I assume you must know these numbers sometimes in Q4. Is it fair to assume that you will see quite substantial revaluation gains related to OPTIMOS? That was my first question. Thank you. Yes, the name of the brand is public, but you cannot disclose it. They will inform, I think, internally in the Q1. So as soon as they will inform, clearly, we will also disclose it. Secondly, we are in very far advanced negotiations for another 20% of ATMOS, which will lead up to more than 80%. And with regards to the manual, you have seen it in Q1 that we had the evolution in Rue du Marche du collecting to HHPOC. But there, the closing of the lease agreement happened in Q1. Here, the closing of the lease agreement happened after Q3. And therefore, the valuer will, of course, take all this information into the consideration for valuers property for the year end. So we have no indication now on it. We'll disclose it then with the full year results. And then just a question on your inventory sales of €6,600,000 in the 3rd quarter. Can you give us a rough indication how does this break by the Partizio project and the Oslo one? And maybe in terms of Portuguese, also here, could you please share with us what kind of basically selling of departments do you expect by the end of 2019? And what can we expect by the end of 2020? Yes. Well, the split is, I think, quite transparent. We have disclosed on Page 5 that the Usto contribution was €5,800,000 If you take out the Leuvenbroi of €2,200,000 we have disclosed, I think, Q1 or half year, we are at the Lugano contribution of roughly 1.6. For the full year, we think from this condominium sales, we will get close to 13%, plus or minus. We are, I would say, improving our sales pattern in Lugano. And if it's fine for you, I would leave further guidance for 2020 at our February communication of the full year results. Thank you. Thank you very much, And thanks to everybody for attending this Q and A call. And I wish you all a pleasant day and a great year end rally. Thank you. Bye bye. Ladies and gentlemen, the conference is now over.