Ladies and gentlemen, welcome to the PSP Swiss Property Half-Year Results 2019 conference call. I am Haley, the conference call operator. I would like to remind you that all participants have been 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 one on your telephone. For operator assistance, please press star and zero. The conference is 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.
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&A session. I think this has proved to be valuable for all participants. In a nutshell, as you have seen from the results, we benefit from the good underlying letting market, which helped us, and combined with our efforts taken on the letting side, helped us to bring down the vacancy further to 4% and to improve our guidance for year-end. The strong investment market in the prime locations, combined with the vacancy reduction, led to a further valuation gain of a bit more than CHF 100 million. 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%. Currently, we are a bit north of 82%.
We are further optimizing financial expenses. Average cost of debt on June 30th was 73 basis points. After that, we issued a negative bond. This morning, currently we are in the market with a new corporate bond, 11 years to 2030, with a zero coupon. The reported release of deferred taxes came in the same amount as we always informed the market. In a nutshell, I think we are happy with the results, both operationally as financially. I think at this point, I really would like to go into the Q&A and into the questions.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their push-to-talk 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 handset while asking the question. Anyone who has a question may press star and one at this time. The first question comes from the line of Pascal Furger of Vontobel. Please go ahead.
Yes, good morning. Three questions from my side, a little help and probably one after the other. First one would be on vacancy rate. Here, you could take it down 1% to 4%. Could you please provide us with sort of a bridge? Basically, which properties contributed to this and what was the impact also of the properties that you have sold? Maybe with regards to next year, 10% will expire of rents. Where do you see the biggest risk there?
To the bridge from the five to four. Clearly, we sold the Bernstrasse and the Rupiz Arsenal, which contributed roughly 0.3 percentage points to it. There was the reletting in Waisenhausplatz, Gurten, big one. Zurich Erbenstrasse 5, which was a renovation, and then basically completely relet. Letting successes in Biel, Bahnhofplatz. The renovation on Bärenplatz is fully let. To a few smaller lettings in Zurich West, and Lausanne. On the other hand, we had also an increase in the vacancy portfolio. You see that also in detail. On the Uraniastrasse, we are marketing now 2 floors and also Hardbrückstrasse. Due to reclassification from development property to investment property, we had a net increase in the vacancy. All in all, this 1% is, I would say, 70% letting, 30% disposals.
With regard to the expiries of 2020, we have no major expiry which provides a headache. I hope you understand that we provide then a guidance for the 2020 with the full year results. We are confident and on good tracks.
Second question with regards then to like-for-like. It was strongly up 1.9%. You renewed most of the contracts for this year, so there's limited risk for the remainder of the year. Is it fair to assume that this like-for-like will remain on this level and maybe any contractions going forward on that?
Like-for-like clearly came through vacancy reduction. This happened compared to last year, predominantly the first half of the year. This 1.9 probably will translate into a full year 1.2, I guess 1.1.2, as we guided year-end vacancy to spot vacancy mid-year. Big driver is the vacancy reduction. We see a positive like-for-like growth for next year. Also here, I would refer more perhaps then to the February numbers. Depends a bit on indexation and clearly depends then on the renewals. 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. Still a positive number.
Okay. Maybe the last question on revaluation gains. Here could you just please share with us maybe the major changes of the portfolio and were there negative changes as well? For instance, when I look at Geneva, here you report CHF 12 million gains. If I look at Rue du Marché, it was already like CHF 18.5 million. Was it negative on an underlying basis?
If you look on 170 assets, you have always pluses and negatives. I think what we can say from the CHF 170 million report on the existing portfolio, CHF 95 come from the investment portfolio and CHF 22 come from the development portfolio. The drivers are the yield compression, nine basis points. It is the vacancy reduction, and it is also adjustment through the value from the structured vacancy. If you look at the biggest pluses, these are clearly assets which have been either it's Rue du Marché, which is the single biggest revaluation gain, or then assets in prime locations with a strong vacancy reduction. The largest negative ones are rather small value-wise. These are assets where you have the expiry coming closer. We anticipate the renovation. 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 letting side. Clearly, the Rue du Marché had a double impact. First, good progress on the letting prime spot and then the letting of retailers above market. As you remember, one part of it was ready to take in Q1. A second part was taken in Q2. The rest is broadly diversified through the portfolio.
Thank you very much.
Thank you.
The next question comes from the line of Ken Koger at Deutsche Bank. Please go ahead.
Morning, everyone. Some of my questions have been answered already now. I would still also like to highlight the expiry profile again. I understand you don't want to talk a lot about 2020. 2021 and 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? I would also like to know with regards what your strategy is for the Swing Business Park in Wallisellen and how it looks going forward with Microsoft.
Thank you, Ken. No, it's not that we do not want to talk about 2020, 2021, 2022. I think what we can say, for instance, in 2020, the largest expiry we have is a rental contract of CHF 1.2 million, which has already prolonged. We talk about single expiries, the largest ones between CHF 400,000-CHF 700,000. I would say we're working on those. We have a good visibility. There's not a big one coming up.
Sorry, Giacomo, just to clarify, the CHF 1.2 million that you have prolonged, is it still part of the 10%, or is it already excluded?
No, it's still part.
Okay.
It is still part because it expires. It will come out then once the deadline comes.
Okay.
If you look at the 2021, we have also there, I would say, the largest ones, which are around CHF 1.4 million, where we have a very good visibility that they want to be there. There we have one larger one in Basel, Hochstrasse, which we will prolong for one, two years, and then this building will be renovated. On the other hand, if we look at our top-line projection, we see continuous growth through 2020, 2021 and 2022. If you look then into the 2022 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 Richti Park, 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 in Zurich North, the supply is strong, that alternatives are there for tenants. We try to compete through product and through price, and are working also on this expiry of the mentioned tenant. Also there, one has to put into perspective that the single largest leases are below 1% of total rental income.
Sure.
It's relatively modest. It is one of our focus point, absolutely.
Maybe two short ones. One is again, on the vacancy, obviously. 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. 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 and the evaluation. Clearly they had, and they will have to adjust DCF based on the fact that we reduced the vacancy. I think we said that on a CHF 8 billion portfolio, a run rate vacancy rate should be around 4% to 5.5%, 6%. You always can have, once one 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%. Obviously, Andrew will try to further optimize the vacancy rate.
I think this is a plausible range, 4%, 5.5%, and then it can be that once you are 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 will not be relet, and that rather quickly and efficiently we can fill up the space.
Sure. Maybe the last one on Paradiso Residenza Parco Lago, is this going to be the new Löwenbräu Areal, 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 Löwenbräu, because Löwenbräu was a success.
Took a while.
We were left with three apartments out of 58, and the last one was sold later. I think on Parco Lago, we have now the mock-up of the apartments. The development progresses as planned. We are behind schedule on the disposals, but we still believe this is a good product. Result-wise, we are also a bit independent from it, but we are confident at the end it comes good. Clearly, it is a bit disappointing, and we said that the disposal is moving ahead a bit less speedy as we thought. 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.
Yeah.
Thanks a lot for all the questions. Thanks.
Thank you, Ken. We will take it up with the taxes, and we thought we'd take it up with the full year and starting then with respective interim. Thank you.
The next question is the line for Robert Woudsma 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. From 31.8 to 34.6, which is a little bit surprising given the fact that you acquired not too significant amount. You have your revaluation. Is the letting success accompanied with a lot of additional CapEx, or what are the moving parts in this higher loan-to-value?
Thank you, Robert. I think the letting success is not followed by relevant CapEx. We bought for CHF 450 million, roughly. If you look at Bern, Geneva, clearly we had a revaluation gain. We had also now a full dividend payment. If you cross rate, we are around 34%. Clearly, the loan-to-value is creeping up, but not on a level which we are worrying. 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. I reiterate, this letting successes embed some fit outs. In certain cases, you have to provide fit out, but it's in no way in any magnitudes compared to loan-to-value considerations.
Okay. That's clear. Is it more or less that you need to spend on fit out costs, let's say, compared to two or three years ago?
It's interesting. We just run a bit of an incentive overview, 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 two months on average. We provide an additional incentive in fit-outs and step-up rents of another three to five months. Whereby these fit-out investments, I would say historically said, can be reused every second time. I would say net-net, we are to this three, four, five months of incentives on average.
Okay.
That's, as I said, in Q1, coming slightly down.
Okay, that's clear. Again, the two months/the three to five months that you were referring to, that's based on a 10-years lease, I reckon.
No, this is based on five plus two five-year options.
Yeah.
Generally, I would say even on a 15 year, because typically after five for sure, sometimes after 10, the contract is renewed based on indexation.
Yeah. All right. That's clear. Obviously, lots of things have been said on the letting markets and 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? Where is the higher demand coming from? 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 on the right spot. It's still a competitive environment. I think we said also that we are seeing a good demand, it's not as strong that we really can increase rents. We have shown also in the presentation that on average, we don't have yet rent growth. It's probably letting success on seeing a good product. The supply in the areas of the CBD are limited, the trend to move into modern space in Zurich West are intact. As I told before, when Ken asked, assets in Zurich North, like Richtistrasse, may suffer significant competition. Also in Geneva, the supply around the city is creeping up. Clearly on smaller spaces in good locations, we are letting well. I think we are positive on the market.
We see good sentiment on the demand. On your question on sectors, it's across a variety of service sectors, of technology-affined sectors, clearly government entities. I would say, having said that, it's not an overall letting market.
Yeah.
If you reduce the vacancy from five to four, this has an impact on the BCF. If the vacancy ones come down from nine to four, this will have an impact on structural vacancy. If on larger contracts, a new product we can underwrite better than 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 stemming from the value.
Excellent. That was it from my side. Many thanks.
Thank you, Robert.
The next question comes from the line of Tim Leckie of JPMorgan. Please go ahead.
Hi. Just one question. I think you've touched on market conditions quite well. Unless I missed it, I'll just ask for some specific comments on supply, particularly in the submarkets around Zurich, if that's okay. Thanks very much.
No, no. Thank you, Tim. On the surroundings, as I mentioned, you have supply coming in on the airport. This is The Circle product. It's a new product. Which is a bit more priced than Zurich North, but will attract tenants. With our own assets, for us, it's important that this project is a success because it's the entry point to Zurich. You see new supply coming in Zurich North. That's what I was referring to. There is limited, really, supply in the CBD and Zurich West. You see there repositioning of assets. There's always a bit of a product coming in, but not large surfaces. From that end, we are confronted with a rather moderate supply view in our markets. 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 Mirabaud & Cie AG. Please go ahead.
Hello. I just wanted to touch on taxes. You have had these tax benefits, one time, and what will be the benefits in the future of lower tax rates that you could pay a higher dividend? This is my first question.
Thank you, Rolf. As you mentioned, this tax reform has two impacts. One is the one-time effect coming especially from Geneva and Basel. The recurring tax impact, we said also in past calls, is quantified in between CHF 0.05-CHF 0.07 per share. If we say from an average 20.5% tax rate to an 18.5% tax give or take, from today's perspective. We say CHF 0.05-CHF 0.07 per share. I wouldn't link it to a dividend payment. Our dividend policy, we'd like to pay out at least 70% of the earnings per share, and we look there predominantly to EPRA earnings per share. Having said that, we also look at a very stable dividend development in Swiss franc-wise. I wouldn't link now this effect directly to the dividend.
Okay. My second question, can you give us a little bit an update on the Bahnhofplatz? You mentioned in the presentation that it looks like the same. Can you say what is going on, really, in Did you start reconstruction, and how is it going with the Heimatschutz? Maybe then you could touch a little bit on your talks in Atmos for further lettings.
Yes. Thank you, Rolf. On the Bahnhofplatz, Waisenhausplatz, we are working full speed on both. As you know, the building is fully let. On the Bahnhofplatz with the IWG, we have a very small, little surface on the ground floor, which we are marketing, but this makes up 5%. It's fully let on the makeup side with the Ruby Hotel and the Cameron. We have cleared all the items with the building protection authority. We expect the final go from the building permission, which is expected shortly. We have a clear view on timeline with completion mid 2021 on the Bahnhofplatz and completion end 2021 on Waisenhausplatz. From that end, we are running on plan. Is that okay for you?
I was just wondering whether there could be problems or not, but it seems that you are on track, and therefore, it's okay. You don't have to renegotiate with IWG, I think. What you discussed then.
No, we have in-place contracts, and we work according to those and according to our development plan.
Okay. Mm-hmm.
On the second question on Atmos, we are working full speed on new lettings. On the one hand, we are working on the whole leasing up of the conferencing, restaurant, fitness part, which is more geared towards the tower where we have on in with Headquarter, and this is a close relationship with them. On the other side, we are currently in talks for a further 5,000 to 6,000 sq m with three large companies. 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. They take a bit longer. 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, Rolf.
As a reminder, if you wish to ask a question, please press star followed by one on your telephone. The next question comes from the line of Kai Klose of Berenberg. Please go ahead.
Good morning. Just a quick question. This is on page 13 of the presentation. Just to clarify, the lower expected CapEx for Rue du Marché 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.
The second question would be on page 51 of the first half report. Just to understand the 6.1% like-for-like change in other locations. Obviously, other locations is a small portion, but the amount is relatively high. What's behind that? Also on the same page, the like-for-like CapEx spend on a like-for-like basis was a bit lower compared to first half last year. Do you expect that to ramp up in the second half, or is this a lower level overall for the full year to be expected?
The like-for-like growth on the other locations, I am lucky that Pascal Furger asked about the vacancy reduction, the delta, because that was predominantly Biel, which contributed to this like-for-like increase in the vacancy reduction. On the CapEx comparison, half year, half year, I see slightly higher CapEx on the retro, and this is linked towards the Bern acquisitions compared to the lower Geneva acquisitions.
Yes. Sure. In the table, you show like-for-like for H1 2018 was 24.9%, and H1 2019 was 20.9%.
I was on the April slide 49. Apologize. You are on?
Page 51 in the annual report. In the half report.
On the presentation on 51?
No, in the first half report.
Sorry. I was on the presentation slides. Apologize. 51. Sorry. 51. The CapEx like-for-like 24 to 20.
Yes.
This has predominantly to do with last year, we finished up the Hard- und Förrlibuckstrasse, which this year we classified, and includes also the repositioning of the Rue Saint Martin, which was reclassified and finished. I wouldn't expect now substantial creeping up of this CapEx number for this year, considering what we are working on the CapEx.
All right. Thanks so much.
Thank you.
The next question comes from the line of Andreas von Arx of Vontobel. Please go ahead.
Hey, good morning. I have four points I would quickly like to touch. First one is on chart 18 of your presentation on the discount rates. The biggest improvement that you show is in the weighted discount rate is in the other locations. Is that due to the Biel development and Fribourg? Which other region is here developing so attractively? Whereas, in your normal comments, you say biggest improvements are normally in the big city centers of Zurich and Geneva. Shall we go one by one, or shall I continue with the questions?
Oh, no. I can answer this. I think it is also linked to the disposal. We disposed two assets in the other locations, and this might have had an impact. I think value-wise, it has not such an impact that I would have to say one asset specifically comes out.
It's like, I don't know, the Zug region being.
No.
More favorable.
No.
Okay. Slide 16 on the renewals. Maybe a quick comment on contracts that you have renewed in the last quarter, how that compares to the existing contracts. 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 for vacant space, so not like-for-like, we are 5%, 6% above the valuer. But this includes clearly the lettings of projects under development, which are not comparable on the like-for-like. On the like-for-like, it's slightly positive.
Very clear. Thank you. On the disposals of Uster and in Geneva, could you provide here an update? Should we expect here maybe already something to happen in the third quarter?
Well, we will report the results of it in Q3. The updated forecasts include the disposals.
Already announced, though?
Yes.
Okay. Then just some-
They are rather on the small side, so value-wise.
Just quickly on the Uster one, because I saw in the January report the project, Langstrasse, Uster.
Yes.
That's not related to that disposal.
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 and best use standard. Clearly, we screened the portfolio, which asset has or would have a better use. We launched a project, offer potential repositioning of that, this office building, into a residential building with residential apartments. We eventually sold it this summer. We are not yet through the whole process. We are very confident that this goes through, and we will report on it in Q3.
Then last one, just also on the project. Could you remind me, because I am not familiar with that project, Spiegel in Köniz, and what is the P West in Zurich?
Spiegel in Köniz is a little piece of land we are left with around the Gurten site, where we are working with the local municipalities that we can build something on this land, and then we would sell this land with the project. Here we talk about two single-family homes we could sell.
It's a piece of land we have, and we have to disclose. The P West is our parking. We own opposite of the Atmos, opposite of the Artus, the opposite of the stock exchange, which we are repositioning, and expect higher rentals after this CapEx is done. If you go there, you see that this parking is quite outdated. With the markup of this neighboring building, we thought it's a good timing also to improve this building. As you see, it's rather low in magnitude. It was important to show that we look also that neighboring buildings benefit from this upgrade here.
That's the project that you show in the project list for the charts.
Yes.
On Förrlibuckstrasse. Okay, very last one, because it was in the news this morning. I thought someone else would ask. 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 investment will be?
Yes. This is a project which is now on the planning since more than two years, where we have seen, obviously, that the whole area around the Opera clearly improved materially. That our building, from the technical infrastructure and also from the look and feel, being outdated. We are, in advance in discussions with the tenants, terminated the lease agreements to the end of 2022. We're working on a variety of scenarios. We're talking to a variety of tenants. At the end game, it will be still a mixed-use building with probably food, retail, and office, which is ideal for that spot. It's premature now to talk about CapEx. We clearly think that on this spot, a refresh of the building has its merits.
Two years? That's a good guess, so, of the modernization time.
Yes. I think this is the best guess from today. It depends clearly, is it a renovation? How deep the renovation is. I think it's a less relevant question for us today.
Thank you.
Thank you.
Once again, to ask a question, please press star and one on your telephone. There are no more questions at this time. I would like to turn the conference back over to Giacomo Balzarini for any closing remarks.
Thanks to everybody. I look forward to the discussions the next couple of days. I appreciate that we were able to have this Q&A call. I think it is the most efficient use of time of everybody. I look forward to next Q&A call with these Q3 numbers in November.
Thank you.
Thank you, and have a good day, everybody.
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.