Ladies and gentlemen, welcome to the PSP Swiss Property Q1 2019 Results Conference Call. I am Ira, the conference call operator. 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&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 must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Giacomo Balzarini, CEO of PSP Swiss Property. Please go ahead, sir.
Thank you. Good morning to everybody, and welcome to this Q&A call. Thanks for taking your time. As the last quarters, I will do a very short introduction on a few highlights. Then I open for Q&A. I think it's, also from the feedback I got from you, it's the most efficient way to proceed. With regard to the Q1 results we released this morning, we are very pleased to show letting successes, that we're able to increase our top line, and that with that, we're able to improve our vacancy guidance for the full year to 4.5%. Meanwhile, we continue to show a 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 were also able to close some additional swaps to partially lengthen the duration.
We advanced also in the portfolio optimization, things we already mentioned, the full year results, the subsequent events, the disposals, and acquisitions. Overall, it was a very active Q1. Thus, we are very pleased with the outcome. If you're okay with that, I will directly go into the Q&A session.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you are entered in the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands up when asking a question. Anyone who has a question may press star and one at this time. The first question is from Pascal Furger, from Vontobel. Please go ahead, sir.
Yes, good morning. Three questions from my side, maybe starting with the first one. You increased basically your vacancy rate guidance to 4.5%. At the same time, you left your EBITDA guidance unchanged. Is it fair to assume that this EBITDA guidance is a bit conservative also when basically, checking your track record over the past few years? That was my first question.
Yes. Do you want to add the other two, I might answer all 3 together?
Yes, maybe. The other 2, the 2nd on revaluation gains. The CHF 75 million from Bern. Why this uptick in valuation there? Is this because they took into account your renovation works, which you have planned there? Second point with regard to your revaluation gains in Geneva. It's now fully let. Does this mean that all the potential is reflected basically in the valuation at this point in time? Has the discount rate changed there at this property in Q1, or has this 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 expected vacancy reduction from the 5 to 4.5 comes on the back of letting successes and agreements which start towards the 3rd and the 4th quarter. The spot vacancy rate is not a surprise to us. The improved vacancy expectations come through late vacancy reductions, especially in the Herrengasse, which we didn't factor in our forecasts. As they come in Q3, Q4, they are not fully material economically for the full year. We will see the rental income normally next year. 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 EBITDA guidance at today's point. With regard to the valuation gain, with regard to Bern, that's a valuation from the valuer.
We as the partner did a full valuation on all the basically 10 properties, three around the Waisenhausplatz and the Kornhausplatz, and that's the value we take into account. It's not reflecting any future value add work beside the normal CapEx which is expected by the valuer at this point in time. With regard to the Rue du Marché, it's a development project which is marked to market. We had benefits from better rental conditions we were able to let, and also slight reduction in discount rate. This is then developing in the future, it's something I cannot answer. Clearly, it's an asset which is fully let, and it's marked to market, and we are close to the end. I'd say the development risk is also rather limited to that end. 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. Generally, we continue to actively work with intermediaries.
The next question is from Robert Haldiman from Kempen. Please go ahead.
Good morning. It's Robert Kempen. First question, I know you do not publish the EPRA first quarter EPS. First question, why? Second question, would you be able to give a bit of guidance to where we are for the first quarter? 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?
No, I think it's fine.
Okay. A positive surprise, and I think this is one of the reasons why the market is doing so well as well, is on your EPRA like-for-like change. Any funny things in this change? That's one. Should we really read this into are the brokers becoming more positive on Zurich in general? Is that also what you're seeing in the market? On the valuation, the CHF seven and a half million that you do on your acquisition, how is that possible given the fact that you're active in a pretty competitive market? 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 EPRA EPS, I think it's just also a recognition and of complexity. We do a Q1, we do a full Q1, also doing the EPRA Q1 is something which we think is, until now, not really needed from the market. If you do the math, if you would go to page eight or slide eight, basically, we have a bit more condominium sales if you want, compared to last year, CHF 1 million. I would say overall, this is the big difference. It's rather neglectable in comparison to Q1 last year on the EPRA EPS. It should come through basically systematically to the EPRA 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, we have a little bit of real better EPRA EPS on Q1. We think about if there is a desire, we'll check if we have add also the EPRA Q1 and Q3 EPS, maybe this is 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, that they say a more active demand in especially Zurich CBD and Zurich West. It doesn't translate yet into rental growth. The predominantly like-for-like increase was coming from vacancy reduction, which comes through. On the acquisitions, as I said beforehand, if you look at it on the assets and on the raw portfolio, it's rather neglectable.
It comes from the pure valuation, and I think there's not much more to say to it.
In the bigger scheme of things, I fully agree. If you isolate for the price paid, then a CHF seven and a half million uplift on that is pretty decent. Putting differently, can I also basically have as a read-through that perhaps the market was not as competitive or 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 CHF 230 million transaction, so it's quite a sizable transaction.
Yeah.
It was a share deal. I think overall, this was what came out. As you know us, I think on the valuations, we take what comes from the valuer in general. I wouldn't take it as a read across. We had a negative impact on Rothschild last year and a few years back on Swiss Re, I wouldn't see it as a read across.
Okay. 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 Basel, where they changed the tax rate from roughly 22%-13%, which had an impact on CHF 5 million on our deferred taxes, whereby CHF 1.3 million goes into the operating income as they were billed through amortizations. The same procedure we adopted two years ago with the Canton of Vaud.
Yeah. Okay. That is clear. That was it from my side. Many thanks.
Thank you.
The next question is from Andreas von Arx from Baader Helvea. Please go ahead.
Good morning. Just quickly, on page 15, your largest vacancies, the Avenue de Sévelin 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. If you could just give some additional information on that object. Also on the same page, when I calculate the vacancy square meters that are vacant apart from the top 10, the difference between the top 10 you show and the total investment portfolio. There's quite a significant reduction from around 30,000 to 23,000 in the first quarter. Is that mainly the objects you sold in Zurich and Fribourg, or have there been additional, let's say, letting successes that would be worth mentioning?
The third question on your developments on the Steinentorberg in Basel, which I think first time on the list. Could you indicate when you will start with that development? Could you indicate how much rental income you might lose, once the development starts? It's quite a big object theoretically with, I think, 14,000 sq m. Will there be a significant impact on your rental income, let's say, starting from mid-year? If you could share here some information. Also, if the CHF 10 million 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 de Sévelin, it is one asset on 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 EPFL Nord for a third development. The vacancy which arise to that is a move out of a tenant. The large surface, it was originally a former industrial area as was Zurich West perhaps 15 years back. For that surface, we are already in discussions. We have let one part in the neighboring building, and we are in discussions with a unit from the canton, for some additional office space. On the vacancy delta, you mentioned it rightly, it is predominantly the disposal of Rue de Berne and from Fribourg and additional smaller lettings.
On the Steinentorbergstrasse, we are typically not disclosing the single rents of buildings. What we can say here is that the works started. It will take a time of roughly one year, and it's already basically fully let. We have signed in the phase of the planning a lease agreement with a bank, and we are in negotiation now of the remaining floor of that building. 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.
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? This is all office, and they sell some retail or on the bottom or on the ground floor? Yeah, that would be great.
Yeah. No, it's the full building they're vacating. It's predominantly office. Even though 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. The biggest tenant which is moving out is Roche, that we can say. It's not coming back. One tenant we are moving up, and it's coming back. It's predominantly an office building, and it's a full renovation. It's basically fully let when it's finished.
Thank you.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Ken Kagerer from ZKB. 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 first quarter. What can we expect here going forward, and especially how are the renovations, going to do in the future? Do you think that the 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 have basically reclassified Rue de Berne in Geneva and Uster for sale. The question is, do you intend to sell some properties going forward. Is there any strategy behind, or is there some opportunistic view on that?
At the same time also, do 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 Bahnhofplatz currently doing, especially also with the area that has been suffering from the fire? The last question would be, I've seen that the EPS, where you've basically per share, where you mentioned that this is a relevant figure for dividend payouts, has increased by 70% in Q1. 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 accounting Q1, and it would be quite useful and helpful to show it there as well. Thank you very much.
Thank you, Ken. On the cost, 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, it goes towards fit-outs, and you have limited demand on that building, that these are costs you bear. On the other hand, we observe now that on the majority of the areas where we are active, we have quite of active demand. Also negotiation power on that end is a bit stronger for us. If I look at our medium, longer term cost development, I don't see a worthwhile movement which go in a deterioration direction.
With this, sorry to just interrupt you. These fit-out costs, do you typically book them in the P&L, or do you capitalize them? Because now it sounded a bit like these would be costs that you would put into the P&L.
You book it into the P&Ls.
Okay. Thank you.
We activate investment costs in the building, typically depending on the activation rate, but the others are booked to the P&L. With regard to the reclassification of Rue de Berne and Uster, here, this is not opportunistic. It goes in line with what we did in Rheinfelden. We look, since now be 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 residential is of high value. So we have developed for both a project of repositioning in residential and are pursuing a disposal of those assets. If we see that the market is not so strong as we believe, an own development and a disposal of those lands.
We see, based on the current demand, that this should go through in Q2, Q3 of both. With that, clearly we screen our portfolio a bit more actively on which asset is worthwhile keeping and developing and which asset is worthwhile to sell or to redevelop. With regard to the acquisitions-
Sorry, just again, short interruption. It's probably difficult, in combination, what type of gains would you expect if you sold those assets in Q2, Q3?
I would say it's also that it's factored in into the EBITDA guidance that we go through. I would say it's not in the interest now of us in a disposal mode to disclose an exact number.
Of course.
It's also, I would say, not so relevant. I think you can capture it, that 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 assets, yields are continuously low. We look at opportunities, but we continue on the path that we want to find things where we believe that we can generate some additional value going forward. There's nothing imminent now, which is on our radar on the acquisition side. On the Bahnhofplatz building, we had a fire. We submitted the permission. We have a very good interaction with the city authorities, and we have no new news on the tenant side. We continue as planned.
We are in full mode, planning and redeveloping, we stick to the opening scheme we have disclosed.
The square meters you're achieving under the new format have increased by how much? Or not at all?
No, not at all.
Okay.
Not at all. I didn't understand your EPS question with regard to the 70%. You mentioned 17.
17.
Okay.
The number we raise is up from.
Nine four
nine four to 1.1. Right.
Yeah. One element was clearly also the tax effect from Basel. This CHF 1.3 million, which is for the first quarter. 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. As we said, we're following a dividend policy where we would like to pay out more than 70% of this number. We want to have also quite a continuity on the dividend development. If you look on the past, I would say I would not be surprised that we can keep the dividend of last year or slightly increase it. I think that's something then we will discuss end of the year with the board, then something for the AGM. With regard to taxes, we take at this point. Yeah.
Thanks very much.
Thank you, Ken.
Bye.
The next question is from Arnaud Luynes from BMO. Please go ahead.
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 three-component CPI uplift on basically releasing spreads and the vacancy impact.
Well, if you look basically on slide 44, you see the development of the rental income. You basically see that the rental uplift overall is negligible and the majority part comes through the vacancy reduction.
Okay. Thank you.
We have a negative effect of CHF 1 million on the disposals and a positive effect of CHF 2.5 million on the acquisitions and the CHF 1.2 million effect of the vacancy changes, plus then the effect on the development and the new construction. It's basically a CHF 1.8 million like-for-like contribution.
Great. That's-
That's a new slide we added in the presentation.
That's very useful. The second one was on the cost of debt. Sorry, the interest rate expenses. The cost of debt was marginally down, but the interest rate expenses went down 15%. Quite a significant savings. Despite the fact that the average debt was 7% higher. Is there any other impact there, in terms of capitalizing interest or others?
I think the biggest impact is that we refinanced the bond at cheaper conditions. What we are able to do, it's a bit a technicality, but we have one loan agreement with a bank where we can draw on a negative basis, and we swapped in that leg immediately. From one bank, we get back their refinancing cost. We fund 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. 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. Two weeks back, we closed two forward starting swaps, which start next year, basically at zero for seven and eight years. Clearly here we capture on a quite large loan agreement. The other agreement is on this margin reduction, is on a yearly basis. Quite clearly, we will keep on negotiating.
Okay, thanks.
The capitalized loan services, we had even a slight reduction compared to the previous year's quarters.
Okay. Thank you. The third one was on the tax. Just trying to make sure I understand correctly on slide 10. You now break down current and deferred. The current is really the cash payable.
Yes
tax that goes through the equivalent of the FFO, net income excluding revaluation. Is that correct?
It's the IFRIC tax. It's not the cash tax, it's the IFRIC tax without the revaluation and without the amortization.
Okay. That's the figure you take into account in the net income?
Exactly.
Okay.
Exactly.
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 quarter I might want to look at is the Q2. As you might know, on the 19th of May, there's a big vote on the corporate tax reform in Switzerland. Simultaneously also 19th of May in Geneva. If the tax reform will be approved on the federal level and also the canton level, I would look at it for the second quarter. I probably wouldn't read across it for the full year.
Okay. Thank you. In Q1, the actual current tax rate increased to CHF 11 million from CHF 3 million last year. Is that the way I should read it?
Yes, because we had higher net income plus revaluation gains compared to slight revaluation losses last year. That's right.
Okay. The current tax rate, it's used to calculate the net income excluding revaluation, itself takes into account the tax on revaluation?
Well, the tax from slide 10, from 10 to 14,
Yeah
is on the profit, which includes also revaluation gains and disposals. That tax line is obviously higher.
My point was last year in Q1, the current tax of CHF 3 million, this year it's close to CHF 11 on the current. That CHF 3 million and that CHF 11 million, are these impacted by revaluation?
Yes.
Okay. 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, JTI, two years ago, whether the building was now fully relet?
I think it's difficult for me after a year of disposal to say where they are. What I heard last is that they had a partial letting.
They are in repositioning modes and are on the market with quite lower rents. That's really street noise I heard. It's not a qualified statement.
Okay. 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.
Okay.
Clearly, at the moment, we don't have a full pipeline on the acquisition side.
Great. Thank you very much.
Thank you.
Once again, to ask a question, please press star then one on your telephone. The next question is a follow-up question from Ken Kagerer from ZKB. Please go ahead, sir.
Yes, hello. I've got just one quick follow-up question on Parco Lago. I've seen that 10% of the units are sold. Obviously, it's early days, but, as we all know, the market is quite tough there. You're investing CHF 80 million. What is your plan and how do you see the market evolve, and how do you see the project evolve there?
Well, I think 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 apartment that we really can also show how it is. We have a quite high amount of reservations. We have eight reservations plus 16 strong interests 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. 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. We are generally quite positive on the efforts. We are positive on the product.
There's, at the moment, no signs of worries from our end, also from the end of our local partners. We are quite intensively involved also with our people from here.
Okay. Thank you.
There are no more questions at this time, sir.
Thank you very much to everybody, also from our side. We talk to each other in August. Thank you. Bye-bye.
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