Earnings Call: H1 2019

Aug 15, 2019

Ladies and gentlemen, welcome to the PFP Swiss Proficy Half Year Results 2019 Conference Call. I am Hayley, 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 a Q and A. Gautamos Alberini, CEO of USBC Trust Properties. Please go ahead. Good morning to everybody, and welcome to the half year results 2019 of PSP. After a very short introduction, I will go directly into the Q and A session. I think this has proved to be valuable for all participants. In a nutshell, and as you have seen from the results, we benefit from the good underlying lating market, which helped us and combined with our efforts taken on the letting side, helped us to bring down the vacancy 34% and to improve our guidance for year end. The strong investment market in the prime locations combined with the vacant reduction led to a further valuation gain of a bit more than €100,000,000 The operating costs are under control, stable. We try to improve those operating costs continuously in order to keep at least an EBITDA margin of 80 percent. Currently, we are a bit north of 82%. And we are further optimizing the financial expenses. Average cost of debt on June 30 was 73 basis points. After that, we issued a negative bond. And this morning, currently, we are in the market with a new corporate bond 11 years to 2,030 with a 0 coupon. And the reported release of deferred taxes came in the same amount as we always inform the market. So in a nutshell, I think we are happy with the results, both operationally and financially. And I think at this point, I really would like to go into the Q and A and into the questions. And the first question comes from the line of Pascal Ferge of Santovo. Please go ahead. Yes. Good morning. So three questions from my side, a little absent from the one off the other. First one would be on vacancy rate. Here, you projected down 1% to 4%. So could you please provide us with sort of a bridge? So basically, which properties are due to the base and what was the impact also of the properties that we have sold? And maybe with regards to next year, so 10% will expire of rents. So when do you see the biggest risk there? To the bridge from the 5% to 4%, clearly, we sold the Bernersdraf and the Ruppes Arsenal, which contributed roughly 0.3 percentage points. Then there was the reletting in Vauburnberg, Guten, big one. Then during the Erbogloss V, which was a renovation and then complete basically completely let the letting successes in deal, Barnoff Plots, then the renovation on Prada Plots is fully let and then to a few smaller lettings in Zurich, Zurich West and Lausanne. On the other hand, we had also an increase in the vacant portfolio. You see that also in the retail. On Urania Strasse, we are marketing now 2 floors. And also Harte and Fernbuk Strasse, we had due to reclassification from development property to investment property, we had a net increase in the vacancy. Overall, this 1% is, I would say, 70% letting, 30% disposals. With regard to the expires of 2020, We have no major expiry which provides a headache. And I hope you understand that we provide any guidance for the 2020 with the full year results, but we are confident and on good track. Okay. So second question with regards to light. For light cost, it was strongly up 1.9%. So you renewed most of the contracts for this year, so there's limited risk for the remainder of the year. So is it fair to assume that this like for like will remain on this level? And maybe any projections going forward on that? Yes. Like for like clearly came through vacancy reduction. This happened compared to last year predominantly in the first half of the year. So this 1.9 probably will translate into a full year 1.2, I guess, 1.1, 1.2 as we guided year end vacancy to spot vacancy midyear. The big driver is the vacancy adoption. We see a positive like for like growth for next year. But also here, I would refer more perhaps then to the February numbers. It depends a bit on indexation and clearly depends then on the renewals. But I would expect next year from today's point of view a less strong like for like growth as the majority of the vacancy reduction happened, but still a positive number. Okay. And maybe the last question on revaluation gains. So if you could just please share with us maybe the major changes of the portfolio and were the negative changes as well. For instance, when I look at Geneva, the year you reported €12,000,000 gains. But if I look at Bougueux, mark rate, it was already like €18,500,000 So was it negative on an underlying basis? If you look on 170 assets, you have always pluses and negatives. So I think what we can say from the €100 and €17,000,000 report on existing portfolio, €95,000,000 come from investment portfolio and €22,000,000 come from the development portfolio. The drivers are the yield compression, 9 bps. It is the vacancy reduction and it is also adjustment through the value from the structural vacancy. If you look at the digit losses, these are clearly assets which have been either it's the Rue du Marche, which is the single biggest revaluation gain or ten assets in prime locations with a strong vacancy reduction. The largest negative ones are rather small value wise. But these are assets where you have the expiry coming closer or we anticipate the renovation, but they are not value wise as big as the single largest positive ones. With regard to Geneva, there's nothing particular to say. We are progressing well on the legacy side. Clearly, the Rivier Marche had a double impact. 1st, good progress on the letting prime spot and then the letting of retail space above market. And as you remember, one part of it was ready to make in Q1. A second, the relation year was taken in Q2. But it's broadly the rest is broadly diversified through the portfolio. Thank you very much. Thank you. The next question comes from the line of Ken Caiper of ZKB. Please go ahead. Good morning, everyone. Some of my questions have been answered already now, but I would still also like to highlight the expiry profile again. I understand you don't want to talk a lot about 2020. 20 21 2022 are anyway some kind of peak years with 16% each. Are there any larger contracts that you're worried about or locations that you're worried about? And then I would also like to know with this regards what your strategy is for the swing business park in Walliswelen and how it looks going forward with Microsoft? Thank you, Ken. It's not that we are not, do not want to talk about 2020, 'twenty one, 'twenty two. I think what we can say in, for instance, in 2020, the largest expiry we have is a rental contract of €1,200,000 which has already prolonged. So we talk about single expiries, the largest ones between $400,000 $700,000 That's not I would say, we're working on those. We have a good visibility. It's not a big one coming up. Sorry, Giacomo, just to clarify, the $1,200,000 that you have prolonged, is it still part of the 10% or is it already excluded? No, it's still part. It's still part because it expires. It will come out then once the deadline comes. Then if you look at 20 21, we have also there, I would say, the largest ones, which are around 1,400,000, where we have a very good visibility that they want to be there. So there we have one larger one in Baartel Hoogstraat, which will prolong for 1, 2 years, and then this building will be renovated. On the other hand, we have if we look at our top line projection, we see continuous growth through 2020, 'twenty one and 'twenty two. And if you look then into the 'twenty two one, also there, we have, I would say, good visibility on the expiries. From that end, we don't have really big cost. With regard to reach the part, I hope you understand that I will not talk specifically about the tenant. It is public that Microsoft will move out. It is not clear yet what the date will be. Our strategy has been now since a year a more aggressive letting approach. We updated the surrounding area. So we have a big park in this business park, which has been upgraded. We have shown letting success through a tech company last year, and we are in advanced negotiation for another letting, which we hope comes through in Q3. It's clear that Indore ignore the supply is strong, That the alternative is there for tenants, but we try to compete through product and through price and are working also on this expiry of the mentioned tenant. But also there, one has to put into perspective that the single largest leases are below 1% of total rental income. So it's relatively modest. But it's one of our focus points, absolutely. Maybe 2 third ones. I mean, one is again on the vacancy, obviously. I mean, you have achieved a very impressive 4% now. And if I understood correctly, 1% is even due to renovations, brings us down to 3%. You also talked about the reduction of the structural vacancy in some properties by the external value. So now could you give us an update where you see the structural vacancy of your portfolio going forward, especially as you seem very confident with the renewals in the coming years? I think here, I would say the structural vacancy is set by the value of the valuation. And clearly, they had and they will have to adjust this view based on the fact that we reduced the vacancy. I think we said that on an €8,000,000,000 portfolio, a run rate vacancy rate should be around 4% to 5.5%, 6%. You always can have once a tenant moving out. I think what we need to have is if that happens that we have an explanation, a clear answer, what we do and how we intend to bring it down. We have, today, no visibility that it moves up to 6%. But obviously and we'll try to further optimize the vacancy rate. But I think this is a plausible range, 4%, 5.5%, And then it can be that once you're below and it can be once up. You have a multitude of tenants behind. I think important is really that we have an answer. Once we have an expiry coming up, which we know which we will not be relet and that rather quickly and efficiently, we can fill up the space. Sure. And maybe the last one on Paradiso, Residencia Taco Largo. I mean, is this going to be the new Lufthroy area? Or do you really think you will be able to sell those units in a sensible time horizon? I hope it will be the new Lebenbrau because Lebenbrau was a subject. Lebenbrau was a new Took you a while. No, we were left with 3 apartments out of 58 and the last one was sold later. I think on Parcovago, we have now a mock up of departments. The development progresses as planned. We are behind schedule. We are behind schedule on the disposals, but we still believe this is a good product. And result wise, we are also a bit independent from it, but we are confident that at the end it comes out. Clearly, it is a bit disappointing, and we said that the disposal is moving ahead a bit less speed as we thought. But if you go on spot, it's not that that's a bad product. It's a good product and we now view well priced. Okay. Just the wish I want to reiterate from last time to give a bit more detail on the taxes in the interim report, if that would be possible because I saw it hasn't happened yet. Thanks a lot for all the questions. Thanks. Thank you, Ken. We will take this up with the tax system. We thought we'd take it up with the full year and starting then with respective interim. But thank you. The next question is from the line of Robert Wodgeman of Kempen. Please go ahead. Good morning. This is Robert. Question, if I look at the loan to value that's creeping up perhaps a little bit faster than anticipated, As you know from €31,800,000 to €34,600,000 which is a little bit surprising given the fact that you acquired people to a significant amount and you have your revaluation. Is the lifting success complete with a lot of additional CapEx? Or what are the moving parts in this higher loan to value? Thank you, Robert. No, I think the letting success is not followed by relevant CapEx. We bought for €450,000,000 roughly. If you look at Perm, Geneva, clearly, we had a reevaluation gain. We had also now a full dividend payment. So if you adjust rate will be around 34%. But clearly, the loan to value is creeping up, but not on a level which we are growing. We always said that for acquisition opportunities, we are happy to move up the LTV, but we want to be short of 40% clearly, and we are far off from it. But I reiterate, it's letting such classes embed some fit outs. In certain cases, we have to price it out, but it's in no way in any magnitude compared to loan to value considerations. Okay. That's clear. But is it more or less that you need to spend on direct costs, let's say, compared to 2 or 3 years ago? Yes. It's interesting. We just run a bit of an incentive overview. And if I look generally on incentives today, on the largest leases we have signed year to date, we talk about rent free periods of roughly 2 months on average. And then we provide an additional incentive in sit downs and step up rents of another 3 to 5 months, whereby this fit out investments, I would say historically said, can be reused every second time. So I would say net net, we are at least 3, 4, 5 months of incentives on average. And that's, as I said, in Q1, coming slightly down. Okay. That's clear. And again, the 2 monthsthe 3 to 5 months that you were referring to, that's based on a 10 years lease, I reckon? No. This is based on 5 plus 2, 5 year options. So generally, I would say even on a 15 year because typically after 5, percent for sure, sometimes after 10 percent, the contract is renewed based on indexation. Yes. All right. That's clear. Obviously, lots of things have been said on the lending markets and that that's improving perhaps faster than anticipated. Is it a function of lower supply being added to the market or a higher demand for just office space? And where is the higher demand coming from? And to what extent is this, let's say, a strictly higher demand for the foreseeable future? Well, as I said at the beginning, our vacancy reduction comes through having the right product in the right spot. It's still a competitive remark payment. I think we said also that we are seeing a good demand, but it's not as strong that we really can increase rent. We have shown also in the presentation that on average, we don't have yet rent growth. So it's probably betting success on single goods products. The supply in the areas of the CBD are limited and the trend to move into modern space in Syerg West are intact. But as I told before, when Ken asked, assets in Zurich Nord like Bristolase based off significant competition. And also in Geneva, the supply around the city is creeping up. Clearly, on smaller spaces in good locations, we are letting wail. So we are I think we are positive on the market. We have we see good sentiment on the demand. On your question on sectors, it's across a variety of service sectors of technology, of thin sectors. Clearly, government claims that this. But I would say, having said it's not an euphoric electric market. But if you reduce the vacancy from 5 to 4, this has an impact on the DCF. If the structural vacancy come down from or the vacancy ones come down from 9 to 4, this will have an impact on structural vacancy. And if on large contracts, new products, we can underwrite data, then from the value, this has an impact on value. I think these are the elements which come through based on then also on the yield compression standing from the value. Excellent. That was it from my side. Many thanks. Thank you, Robert. Your next question comes from the line of Tim Leckey of JPMorgan. Please go ahead. Hi. Just one question. I think you've touched on market conditions quite well. But unless I missed it, I'll just ask some specific comments on supply, particularly in the submarkets around Zurich, if that's okay. Thanks very much. Thank you, Tim. On the surroundings, as I mentioned, you have supply coming on the airport. This is the circle product. It's a new product, which is a bit more price trend to ignore, but will attract tenants. And also, we don't own these assets. For us, it's important that this project is a success because it's an entry point in Zurich. You see new supply coming in Jughe North. That's what I was referring to. There is limited really supply in the CBD and C West. You see their repositioning of assets. So there's always a bit of a product coming in, but not larger basis. So from that end, we are confronted with a rather moderate supply view in our market. Then you have in the outskirts of Geneva and also in Basel supply coming into the market, but less so in our specific locations. Okay. That's helpful. Thank you. Thank you, Tim. The next question comes from the line of Rolf Frey of Murphy, Brammer and Co. Hello. I just wanted to touch on taxes. Now you have had these tax benefits, a onetime. And what will be the benefit in the future of lower tax rates that you could pay like a higher dividend? This is my first question. Thank you, Rolf. As we mentioned, this tax reform has 2 impacts. One is the onetime effect coming especially from Geneva and Basel. The recurring tax impact, we said also in past calls is quantified in between $0.05 to $0.07 per share or if we say from an average 20.5 percent tax rate to an 18.5 percent tax rate, give or take, from today's perspective. But we say $0.05 to $0.07 per share. I wouldn't link it to dividend payment. Our dividend policy, we'd like to pay out at least 70 percent of the earnings per share, and we look there predominantly to Eppri earnings per share. And having said that, we also look at very stable dividend development in Swiss franc wise. So I wouldn't link now this effect directly to the dividend. Okay. And my second question, can you give us a little bit an update on the burn off plots? You mentioned in the presentation that it looks like the same, but can you say what is going on really in did you start reconstruction and how is it going with the high matures? And maybe then you could touch a little bit on your talks in Osmot for further latitude. Yes. Thank you. Well, on the bond of plots, Weisenhaus plots, we are working full speed on both. As you know, the building is fully let. On the bound of parts with the IVG Group, we have a very small, little surface on the ground floor, which we are marketing, but this makes up 5%. And it's fully let on the back up side with the Ruby Hotel and The Condion. We are we have cleared all the items with the Building Protection Authority. So we expect the final go from the Building Commission, which is expected shortly. We have a clear view on time line with completion mid 'twenty one on the Barnoff Tots and completion end 'twenty one of Zeissenhau spots. So from that end, we are running on plan. With regard to is that okay for you? Yes. I was just wondering whether there could be problems or not. It seems that you are on track. And therefore, it's okay. You don't have to renegotiate with IWG, I think. What is that then? No, we have in place contracts, and we work according to those and according to our development plan. Okay. On the next question on Othnos, we are working full speed on new lettings. On the one hand, we are working on the whole leasing up of the conferencing restaurants fitness part, which is more geared towards the tower where we have on in with the headquarter, and this is a close relationship with them. And then on the other side, we are currently in talks for a further 5000 to 6000 square meters with 3 large companies. And we hope to be able to announce letting successes in the next couple of months. Clearly, these talks with those tenants are also linked to their ability to move out of letting agreements in 2021, 2022. So they take a bit longer, but we are positive really on the development, on the construction side, together with our general contractor and on the letting discussions with also the type and quality of tenants. Okay. Thank you. Thank you, Oof. The next question comes from the line of Kai Close of Berenberg. Please go ahead. Yes, good morning. It's a good question. On Page 13 of the presentation. Just to clarify, the lower expected CapEx for Roti Marghery and Atmos by June compared to March is simply because of the progress and the amount you spent in Q2, I guess? Absolutely. Okay. Absolutely correct. And the second question would be on Page 51 of CE first half. Just to understand the 6.1 percent EPO like for like change in other locations. Obviously, other locations is a small portion, but the amount is particularly high, what's behind that? And also on the same page, the like for like FX spend on a like for like basis was much lower compared to first half last year. Do you expect that to ramp up in the second half? Or is this lower level overall for the full year to be expected? Well, the like for like growth on the other locations, I'm lucky that Pascal Fulker asked about the vacancy reduction, the delta, because that was predominantly been, which contributed with like for like reduction like for like increase in the vacancy reduction. On the CapEx comparison, half year, half year, I see slightly higher CapEx on the Repra. And this is linked towards the Bern acquisitions compared to the lower Geneva acquisitions. Yes, sure. But in the table, if you show slide portfolio, H1 'eighteen was 24.9 percent and H1 'nineteen was 20 point 9 percent. I was on the April Slide 49, I apologize. You are on Page 51 in the year. On the presentation on 51 No, in the first half report. Sorry, sorry, I was on the presentation slides. I apologize. 51, sorry, CapEx like for like 24 to 20. This has predominantly to last year, we finished up the Hard Kompurle Buchstrasse, which this year we classified and includes also the repositioning of the Rue Saint Martin, which was reclassified and finished. And I wouldn't expect now substantial creeping up of this CapEx number for this year, considering what we are working on the CapEx. The next question comes from the line of Andreas von Axt, Baader Helvea. I have four points I would quickly like to touch. First one is on Page 18 of your presentation on the discount rates. I mean, the biggest improvement that you show is the weighted discount rate is in the other locations. So is that referring is that due to the yield development and Freiburg? Or which other region is here developing so attractively, whereas in your normal comments, you say biggest improvements are normally in the big city of Zurich and Geneva. Shall we go 1 by 1? Or shall I continue with the questions? No, I can answer this. I think it's also linked to the disposal. We disposed 2 assets in the other locations, and this might have had an impact. But it's not I think value wise, it has not such an impact that I would have to say one asset specifically comes out. So it's not like, I don't know, the Zug region being more favorable. No, no, no, no. No, no, no. Okay. Then Slide 16, on the renewals. Could you maybe please comment on contracts that you have renewed in the last quarter, how that compares to the existing contracts? I mean, is that higher level, lower level or similar level going forward? If we look at the renewals, overall Q1, Q2, we are overall marginally above. If you take the largest closings, which include also fill up from vacant space, so not like for like, we are 5%, 6% above the valuer. But this includes clearly that lettings of products on the development, which are not comparable on the like for like. On the like for like, it's slightly positive. Very clear. And then on the disposals of Uchter and in Geneva, could you provide here an update? And should we expect here maybe already something to happen in the Q3? Well, we will report the results of it in Q3. The updated forecasts include the disposals. Already announced. Yes. Yes. Okay. And then just They are on the they are rather on the small side, so value wise. Just quickly on the Ustur one because I saw in January but that's not related to that. That's this one. That's the only asset we have. This was an office building, quite central, with some residential apartments. You might remember when we had to introduce this highest best use standard, clearly, we screened the portfolio. Which asset has or would have a better use. We launched a project of a potential repositioning of Pilates' Philadelphia's office building into a residential building with residential apartments. And we eventually sold it this summer. We are not yet through the whole process, but we are very, very confident that this goes through and we will report on it in Q3. Okay. And then last point just also on the project. Could you remind me because I'm not familiar with that project Spiegel in Kornit and what is in Western Zurich? Spiegel in Konitz is a little piece of land we are left with around the Gorten site, where we are working with the local commonalities that we can build something on this land and then we would sell this land with a project. But here we talk about 2 single family homes we could sell. This is a piece of land we have and we haven't disclosed. And the P West is our parking. We own opposite of the Atmos, opposite of the Horton's Sauce, opposite of the stock exchange, which we are repositioning and expect higher rent rolls after this CapEx is done. If you go there, you see that this parking is quite outdated. And with the markup of this neighboring building, we thought it's a good timing also to improve this building. But as you see, it's rather low in magnitude. It was important to show that we look also that the neighboring buildings benefit from this upgrade of the That's the project that you show in the project lead from the charts on Fairleigh book. Okay, very last one because it was in the news this morning, I thought someone else has asked. Can you comment on that Globus building? And when we should expect here basically that to happen? And do you already have an idea of what the investments would be? Yes. This is a project which is now on the planning since more than 2 years, where we have seen obviously that the whole area around the Opera clearly improved materially, but that our building was from the technical infrastructure and also from the LUK company being outfitted. So we in advance, in discussions with the tenants, terminated the lease agreements to the end of 'twenty two. We are working on a variety of scenarios. We are talking to a variety of tenants. At the end time, it will be still a mixed use building with probably food, retail and office, which is ideal for that spot. But it's premature now to talk about CapEx. But we clearly think that on this spot, a refresh of the building has its merits. 2 years? That's a good guess of the modernization time? Yes. I think this is the best guess from today. It depends clearly, is it the renovation and how deep the renovation is. But I think it's the less relevant question for us today. Thank you. Thank you. And there are no more questions at this time. I would like to turn the conference over to Giacomo Bazzarini for any closing remarks. Yes. Thanks to everybody. I look forward to the discussions in the next couple of days. And I appreciate that we were able to do this Q and A call. I think it's the most efficient use of time of everybody. And I look forward to next Q and A call with these Q3 numbers in November. Thank you, and have a good day, everybody. Ladies and gentlemen, the conference is now open. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.