Earnings Call: Q1 2019

May 7, 2019

Ladies and gentlemen, welcome to the PSD's East Property Q1 2019 Results Conference Call. I am Myra, the Chorus Corporation. I would like to remind that all participants will be in listen only mode and the conference is being recorded. After a short introduction, there will be a Q and A session. Conference must now be recorded for publication of purpose. At this time, it's my pleasure to hand over to Mr. Gautam Alzarini, CEO of PSP Swiss Property. Please go ahead, sir. Thank you, and good morning to everybody, and welcome to this Q and A call, and thanks for taking your time. As in the last quarters, I will do a very short introduction on a few highlights, and then I open for Q and A. I think it's also from the feedback I got from you is the most efficient way to pursue. With regard to the Q1 results we released this morning, we are very pleased to show betting successes that we were able to increase our top line. And with that, we were able to improve our vacancy guidance for the full year to 4.5%. Meanwhile, we continue to show very stable cost base and can further improve our financial expenses. We were able to issue bonds and a tap at very interesting conditions. We're also able to close some additional swaps to partially lengthen the duration. And we advanced also in the portfolio optimization, things we already mentioned, the full year results, disposals and the acquisitions. So overall, it was a very active Q1, but we are very pleased with the outcome. And if you're okay, I with that, I would directly go into the Q and A session. We will now begin the question and answer session. The first question is from Pascal Fouge from Fotopoulos. Please go ahead sir. Yes. Good morning. Three questions from my side. So maybe starting with the first one. So you decreased basically your vacancy rate guidance to 4.5%. At the same time, you left your EBITDA guidance unchanged. So is it fair to assume that this EBITDA guidance is a bit conservative also when basically, yes, checking your track record over the past few years? That's my first question. Yes. Do you want to add the other 2, so I might have to answer those Yes. Maybe then so the other 2, the second one, revaluation change. So that SEK 7,500,000 from Fern. Why this uptick in valuation there? Is this because they continue to account your renovation works, which you have planned there? And then second point with regards to your evaluation gains in Geneva. So it's not fully led. What do you think that all the potential is reflected, basically, in the valuation at this point in time? And also, has the discount rate changed there at this property in Q1? Or has it left unchanged? Last question with regards to Geneva also. Maybe in general, did you have to pay basically some fee to a third party or not? Thank you. Yes. Thank you. With regard to the EBITDA guidance, we left it unchanged because the agency reduction expected vacancy reduction from the 5% to 4.5% comes on the back of letting successes and agreements which start towards the 3rd Q4. So the spot vacancy rate is not a surprise to us. They improved the vacancy expectations from through late vacancy reductions, especially the Helvergasse, which we didn't factor in our forecast. And as they come in Q3, Q4, they are not fully material economically for the full year. We'll see the rental income predominantly next year. So I wouldn't say it's conservative. We clearly are convinced that we get to our EBITDA guidance, but we have no substance to say we increased the GAAP IT guidance at today's point. With regard to the relation gain, with regard to burn, that's evaluation from the value. So we still partner did a full valuation on all the basically 10 properties, 3 around the Permplatz and to the Carba. Bar. And that's the value we take into account. It's not reflecting any future value add work besides the normal CapEx, which is expected by the line at this point in time. With regard to the Rivi Marche, it's clearly now it's a development project which is mark to market. We had benefits from better rental conditions we were able to let and also slight reduction discount rate. How this is then developing in the future, it's something I cannot answer. But clearly, it's a development that's an asset which is fully let and it's mark to market and we are close to the end. So I'd say the development risk is also rather limited to that end. And there were no fees involved in general on this letting. We had last year a quite significant amount of letting fees to third parties. For the overall year, we expect a bit less fees on that end. But generally, we continue to actively work with intermediaries. The next question is from Robert Waldemann from Kempen. Good morning. This is Robert Kempen. First question, and I know you do not publish the EPRA 1st quarter EPS. First question, why? Second question, would you be to give a bit of guidance to where we are for the Q1? Also to make it better comparable with obviously the run rate that you have shown in 2018. Do you want me to go through all the questions first and then do the answers or Yes, I think it's fine. Okay. Then a positive surprise, and I think this is one of the reasons why the market is doing so well as well, is on your APA lifelike change. Any funny things in this change? That's 1. Or should we really read this into hydro brokers becoming more positive on Zurich in general? And is that also what you're seeing in the market? Then on the valuation, the €7,500,000 that you do on your acquisition, and how is that possible given the fact that you're active in a pretty competitive market? So I reckon that you buy at market and that there is no lucky buys. That was it for now. Thank you very much. Thank you, Robert. On the APRA EPS, I think it's just also a comment of complexity. Now we did Q1, we do a full Q1, but then also during the April Q1 is something which we think is, until now, not really needed from the market. If you do the math, you basically, if you would go to Page 8 or Slide 8, basically, we have a bit more condominium sales Q1 compared to last year, dollars 1,000,000 But I would say, overall, this is a bit different. It's and then it's rather neglectable in comparison to Q1 last year on the EPO EPS. So it should come through basically systematically to the EPO EPS because the big driving part is the rental income and the cost base and they were stable. We have a big benefits on the tax side, and we have a little bit of deal debt direct rate in Q1. We think about it. If there is a desire, we'll check if we add also the EBITDA Q1 and Q3 EPS and NAVs, something we will pick up. On the like for like, I wouldn't call it funny. I think it's a reflection of vacancy reduction. Clearly, we observe also what the brokers are starting to say, what they say, a more active demand in especially due to CBD and divest. It doesn't translate yet into rental growth, the rent growth, but predominantly like for like reduction was increase was coming from ETC reduction, which comes through. And on the acquisitions, as I said beforehand, if you look at it on the assets, it's and on the raw portfolio, it's rather negligible. It comes from a pure valuation, and I think there's not much more to say to it. Yes. It's in the bigger scheme of things, I fully agree. But if you look at if you isolate for the price paid, then EUR 7,500,000 of this on that is pretty decent. Put it differently, can I also basically have as a read through that perhaps the market was not as competitive or that you had a pretty decent one of or sorry, that you were pretty much in exclusive discussions wherewith you were able to get it pretty much lower than the market? I wouldn't frame it that way. It was a €230,000,000 transaction. So it's quite a sizable transaction. And these were 2 it was a share deal. So I think overall, this was what came out. But as you know, us, I think on the valuations we take, what comes from the valuer in general. So I wouldn't take it as a read across. So we had a negative impact on load shield last year and a few years back on Silk West. So I wouldn't see that there is a real growth. Okay. And then what you said is you have one big benefit on taxes that affected the earnings. Would you be able to share how much that was? Yes, it was the tax reform in the Canton of Parcel where they changed the tax rate from roughly 22% to 13%, which had an impact on €5,000,000 on our deferred cost of paying taxes, whereby €1,300,000 goes into the operating income as they were billed through amortizations. It's the same procedure we adopted 2 years ago with the compound. The next question is from Andreas von Hart from Bordeaux. Please go ahead. Yes, good morning. Quickly on Page 15, your largest vacancies. The avenue distributing in Lausanne is new on the list. Could you give here some insights what's going on there? Also when I look at the annual report, it's not really clear to me what kind of usage there is. There's a large part of other. So if you could just give some additional information on that object. Then I mean also on the same page, when I calculate the vacancy square meters that are vacant apart from the top 10, So the difference between the top 10 you show and the total investment portfolio is quite a significant reduction from around $30,000 to $23,000 in the Q1. Is that mainly the object you saw in Zurich in Freiburg? Or has there been additional, let's say, lasting success that would be worth mentioning? And then the 3rd question on your developments on the Stein and Torbjerg in Basel, which I think is first time on the list. Could you indicate when you will start with that development? And could you indicate how much rental income you might lose once the development starts? So I mean it's quite a big object theoretically, if I say 14,000 square meters. So will there be a significant impact on your rental income, let's say, starting from midyear? If you could share here some information. Also, if the €10,000,000 project costs, whether that's just for the retail space or for the overall project, just some additional color would be nice. Thank you. Thank you very much. On the Avenue Cevalla, it is one asset on the overall site We own there, which we acquired through a portfolio acquisition from Swisscom, which is close to the floor and which by the way we have also a project, which is called Picanha North preferred development. The vacancy which arise to that is a move out of a tenant. And the large surface, it was originally a former industrial area as it was as it was to invest 15 years back. But for that surface, we're already in discussions. We have left one part in the neighboring building, and we are in discussions unit from Canton for some additional office space. On the vacancy delta, you mentioned it rightly. It is predominantly the disposal of Kwarenestraß and from Friebour and additional smaller lettings. And on the Steiner Torbjergstrasse, we are typically not disclosing the single rents of billings. What we can say here is that we've completed works, it will take a time of roughly 1 year, and it's already basically fully let. We have signed in the phase of planning a lease agreement with the bank and we are in negotiation now of the remaining floor of that building. So it's basically fully let, I would assume, once it's completed next year. With regard to the loss of rental income, that's already factored in into our EBITDA guidance of the year. But is that is it the full building, so the full square meters you're showing so the full 14,700 square meters? Or is it just one floor? And it's all office and they have some retail on the bottom or on the ground floor? I mean, yes, that would be great. Yes. So it's the full building evacuating is predominantly office. What we even do, we were able to move one tenant in order to have really a full renovation to move one tenant into another building where we had some vacancy because the biggest tenant which is moving out is Roche that we can say. So it's not coming back. But one time, we are moving out, but it's coming back. So it's predominantly an office building, and it's a full renovation. And it's fully laid basically fully laid when it's finished. Thank you. Thank The next question is from Ken Karger from ZBB. Please go ahead. Good morning, everyone. I have also a couple of questions here. The first one refers to the fact that your cost base has been relatively stable in the Q1. What can we expect here going forward? And especially how are the renovations going to do in the future? Do you think that maintenance and renovation expenses are at a stable level here as an absolute amount or as a percentage of the total rents? Or do you think that this has to go up going forward? The second one I've seen that you've basically reclassified Rivebern in Geneva and Oosters for sale. Now the question is, do you intend to sell some properties going forward? Kind of strategy behind or is there some opportunistic view on that? At the same time also you plan to buy some larger properties like you have done in the recent future? The next question, and I think you want to have all the questions first, is what is the development on Banoff Blotts currently doing, especially also with the area that has been suffering from the fire? And the last question would be, I've seen the TPS where you've basically per share where you mentioned that this is the relevant figure for dividend payout has increased by 70% in Q1. What I mean, it's early days now, but what can we expect in terms of dividend increases if the situation continues like that? The last one is not a question, but a request. I've seen that you only show the split of the tax into deferred and current tax in the presentation, but there's no comment in the financial commentary of the reports in the account in Q1, and it would be quite useful and helpful to show it there as well. Thank you very much. Thank you, Ken. On the costs for with regard to the full year, I think here, we can expect a continuation of what we have seen in Q1. We don't expect an increase on the operating expense and neither on the maintenance and renovation expenses. We don't see neither a substantial trend of really increase of a cost base. What we clearly see is that selectively the tenant demand, if it goes towards fit outs and we have limited demand on that building, but these are costs you'll be here. On the other hand, we observe now that the majority of the areas where we are active, we have quite of active demand. So also the negotiation power on that end is a bit stronger for us. So if I look at our medium, longer term cost development, I don't see a worthwhile movement which go in the situation direction. And with sorry to just interrupt you, these fit out costs, do you typically book them in the P and L or do you capitalize them? Because now it sounds like these would be costs that you would put into the P and L. You're booked into the P and L. Okay. Thank you. We activate investment costs in the building, typically depending on the activation rate, but the orders are booked to the P and L. With regard to the reclassification of Ulyburn and Ooster, Here, this is not opportunistic. It goes in line with what we did in Rheinfelden. We look since now we're more than a year more active in highest and best use of the buildings. Both assets we work since longer time on a project of repositioning. And with both assets, we identified that repositioning that asset into a residential is of high value. And so we are we have developed for both a project of repositioning in residential and are pursuing disposal of those assets or if we see that the market is not so strong as we believe, then an old development and then a disposal of those plants. But we see, based on the current demand, that this should go through in Q2, Q3 of both. And with that, clearly, we screen our portfolio a bit more actively on which asset is worthwhile shipping and developing and which asset is worthwhile to sell or to redevelop. With regard to the acquisitions sorry, just again, short interruption. I mean, it's probably difficult, but in combination, what type of gains would you expect if you sold those assets in Q2, Q3? Yes. I would say it's also that it's factored in into the EBITDA guidance that we go through. And I would say it's not in the interest now of us in the disposal mode to disclose in a cash number, But it's also not, I would say, not so relevant. I think you can capture it, but we have factored it in our EBITDA guidance and that we are working on these disposals, but they're also not really relevant. On the acquisitions, what we see is that for prime, prime assets yields are completely low. We look at opportunities that we continue on the path that we want to find things where we believe that we can generate some additional value going forward. So there's nothing imminent now which is on our radar on the acquisition side. On the Barnoff plots, on the building, we had a fire we submitted to the commission. So we have a very good interaction with the city authorities and we have no new news on the tenant side, so we continue as planned. We are in full mode planning and redeveloping, and we stick to the opening scheme we have disclosed. And the spare meters you're achieving under the new format has increased by how much or not at all or? Not at all. Okay. Not at all. I didn't understand your EPS question with regard to the 70%. You mentioned 17%. 17%, 17%, as you said. And the number of rate rises you're up from 0. Or is it 94,000,000 to 1.1,000,000,000,000, right? Yes. One element was clearly then also the tax effect from Basel. This SEK1,300,000, which is for the Q1, Clearly, if you go through, we should see probably slightly higher EPS for the full year. With regard to the dividend, it's correct. This is the number we base our dividend. And as we said, we are following a dividend policy where we would like to pay out more than 70% of this number. And we want to have also a quite a continuity on the dividend development. So if you look on the past, I would say I would not be surprised that we can keep the end of the year with the board and then something for the AGM. With regards to taxes, we take at this point. The next question is from Arben Hoehner from BMO. Good morning. Can you hear me? Yes. Hi. Yes, thanks for the presentation. I basically had four questions. The first one is on the like for like, whether you could break down the 3 components CPI uplift on basically releasing spreads and the vacancy impact. Impact? Well, if you look basically on Slide 44, you see the development of the rental income. And you basically see that the rental uplift overall is collectible, and the majority part comes through the vacancy reduction. We have a negative effect of €1,000,000 on the disposals and the positive effect of €2,500,000 on the acquisitions and the €1,200,000 effect of the vacancy changes plus then the effect on the development and the new construction. So it's basically a €1,800,000 like for like contribution. Great. Thanks. It's a new slide, yes, in the presentation. No, that's very useful. The second one was on the cost of debt. I was sorry, the interest rate expenses. The cost of debt was marginally down, but the interest rate expenses went down 15%, so quite a significant savings despite the fact that the debt was an average the average debt was 7% higher. So is there any other impact there in terms of capitalized interest or others? I think the impact is that we refinanced the bond at cheaper conditions. And what we are able to do is a bit of technicality. We have one loan agreement with the bank where we can draw negative on a negative basis and we swapped in that leg immediately. And from one bank, we get back their refinancing costs. We refund basically on that volume at 50% of the margins. That clearly had quite an impact on the quarter and will have also an impact on the full year. Okay. And is that sustainable? Can you carry on doing this for a few quarters or few years? Well, on the negative drawing, that's part of the loan agreement. And we closed 2 weeks back, we closed 2 forward starting swaps, which start next year basically at 0 for 7 8 years. So clearly, here, we capture on a quite large loan agreement. The other agreement is on this margin reduction is on a yearly basis. And clearly, we will keep on negotiating. Thanks. On the capitalized loan services, we had even a slight reduction compared to the previous year's quarters. Okay. The third one was on the tax. Just trying to make sure I understand correctly on Slide 10. So you can now break down current and default. The current is really the cash payable tax that goes through the equivalent of the FFO, net income excluding revaluation. Is that correct? It's without it's the IFRS tax. It's not the cash tax. It's the IFRS tax without the revelation and without the amortization. Amortization. Okay. So that's the figure you take into account in your net income? Exactly. And is it fair to say that we should not really look at this on a quarterly basis because it swings around quite a lot? It's correct. The only one I might want to look at is Q2. As you might know, on the 19th May, there's a big vote on the corporate tax reform in Switzerland and simultaneously also 19th May in Geneva. And if the tax reform is approved has been approved or will be approved on a better level and also the Tantan level, I would look at it for the Q2. I think we wouldn't read across it for the full year. Okay. And so in Q1, the actual current tax rate increased to €11,000,000 from €3,000,000 last year. Is that the way I should read it? There was a Yes, because we had high net income plus regulation gains compared to slight regulation losses last year. That's right. Okay. But the current tax rate, so it's calculated it's used to calculate the net income itself taking some tax on revaluation? Well, the tax from on Slide 10, from 10 to 14 is on the profit, which includes also origination gains and disposals. So that tax line is obviously higher. Martin, lastly, in Q1, the current tax of €3,000,000 this year is close to EUR 11,000,000 on the current. That EUR 3,000,000 and that EUR 11,000,000, are these impacted by revaluation? Yes. Yes. Okay. And Understood. And the last one was on the just to get an update, I guess it's fully let now. But there was a large tenant departure with Japan Tobacco International GTI 2 years ago, whether the building was now fully realized? I think it's difficult for me after a year of disposing where there are. My last question was my last what I heard last is that they had a partial headwind, but they are in repositioning modes and on the market with quite lowering. That's really street noise I heard. So it's not a qualified statement. Okay. And on the whole, do you see any opportunities to buy assets which are partly or largely vacant and reposition them? Unfortunately, not where we want to buy assets. But clearly, we look at that moment. We don't have a full pipeline on the acquisition Great. Thank you very much. Thank you. The next question is a follow-up question from Ken Kogner from ZKG. Please go ahead, sir. Yes. I've got just one quick follow-up question on Parco Largo. I've seen that 10% of the units are sold. Obviously, early days. But as we all know, the market is quite tough there. And you're investing €80,000,000 What is your plan? And how do you see the market evolve? And how do you see the project evolve there? Well, I think on the I have to say on the general construction side, we are very positive. We are progressing very well and we will finish within a month the first mock up department that we really can also show how it is. We have a quite high amount of reservations. We have 8 reservations plus 16 strong interest. Additionally, it's clear that the sales process was slower than what we expected. On the other hand, we put a lot of efforts in with regard to understanding the market. And we are still positive that we can successfully conclude this project. It might take perhaps a bit longer than we thought, but we're not talking about years. So we are generally quite positive on the efforts. We are positive on the product. So there's, at the moment, no signs of worries from our end and also from the end of our local partners. But we are quite intensively involved also with our local with our people from here. Okay. Thank you. There are no more questions at this time, sir. Well then, thank you very much to everybody also from our side. And then we talk to each other in August. Thank you. Bye bye.