Earnings Call: H2 2018

Feb 26, 2019

Ladies and gentlemen, welcome to the PSP's Property Results 2018 Conference Call. I am Alessandro, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. 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. Good afternoon to everybody, and welcome to the conference call on our results for the full year of 2018. I will refer to the presentation and the press release we published earlier this morning. My presentation will be structured the following way. I will start with some general comments on the Swiss real estate market and plans on the key company developments on Slides 4 to 5. Then I will review the key Consell figures for the full year 2018 on Slides 7 to 10. I will address the development of the vacancy rate on Slides 1415, followed by the expiry profile of the leases on Slide 16 and the changes in fair value on Slides 17 18. Thereafter, I will provide an update on our current debt and capital structure on Slides 2021. With respect to development sites and projects, which are detailed on Slides 23 and following, I will provide a quick update on the ones under construction and comment on the investment plan. Before concluding with the outlook for 20 19 on Slide 37, I will provide an additional information on the recently announced acquisitions and disposals under section Subsequent Events on Slides 3435. Let me start on Slide 4 with our view on the current market environment, followed by the main developments in 2018. Experts foresee a further growing Swiss economy. We expect that the predicted economic expansion will have a positive impact on demand for office space, at least in central locations. The office market further improved in 2018, but not equally throughout the country. In city centers, Zurich's Central Business District, for instance, demand picked up visibly, while supply and vacancies declined. Here, it is virtually impossible to expand the overall commercial area. Consequently, building activity is restricted to conversions and modernizations. In Zurich West, we are also particularly active. There is considerable interest in modern office space as well. On the outskirts of the main cities, including due north and in various locations further away from city centers. On the other hand, new constructions keep rising without corresponding demand. Lowering vacancy rates in these locations will, therefore, remain difficult. In Geneva, in certain market sections, there is overcapacity. In addition, a number of new developments will come on the market in the near future. We consider adoption will therefore be slow. In Bartle, the supply of office space decreased slightly, while in the short term short to medium term, new construction will come on the market here as well, we think that this additional space should be absorbed quite easily. In general, demand for office space is driven not so much by the traditional office sectors such as banks and insurance companies, but increasingly by companies from a wide variety of industries from IT to architects to consulting firms and law firms. This has the welcome side effect to improve tenant diversification, which lowers class risks. There are not much positive news from the retail sector. Shopping, tourism and above all, the rise of online shopping remain great challenges, especially for shops near the border and old fashioned shopping malls. We were largely unaffected by these developments. Most of our properties with retail space are located in highly frequented and renewed central locations, which seem to be much less affected by changes in customer behavior. Locations such as the Dierks Bahnhofstrasse still benefit from the luxury shopping tourism of wealthy foreign visitors. The price for office and commercial properties remained high in 2018. Many investors accept lower and lower net initial yields for high quality objects in business centers. Please turn to Slide 5 for the main developments of our property portfolio. 20 18 was driven by a continuous quality enhancements of our property portfolio, vacancy reductions through proactive letting activities, pre leasing of our development pipeline and further portfolio optimization through disposals. We did this by means of renovations and modernizations of investment properties and, on the other hand, by further developing our sites and projects. Regarding the letting activities, we focus not only on reducing the past vacancy, dealing with leases being terminated and pre letting of our development pipeline, but also on the proactive management of lease that are due for attention in the next years. Overall, we are very satisfied with the rental success we achieved so far, in particular considering the standing of our new tenants. The value of our property portfolio rose to $7,400,000,000 up 5.6% compared to the year end 2017. Thereof, the carrying value of development sites and projects valued under IAS 40 at market is CHF 624,600,000. In 2018, we sold a property in Petitinos, Si, Geneva for $55,000,000 and a development project in Rheinfeld for $16,700,000 As disclosed on the subsequent events, we finalized also sale of the Berenstrasse suit for €31,000,000 and of a property in Vribourg for €30,000,000. Dollars More details on the acquisitions in Bern are provided on the section Subsequent Events on Slide 34. The vacancy rate came down to 5%. Of the leases maturing 2019, as per end of December 2018, 70% were already renewed. The balance sheet is as strong as ever, with an adjusted net loan to value of 31.8 percent and a low passing average interest rate of 0.87%. Now let's look at the key consolidated figures on Slide 7. The EBITDA before Eurasian gains year over year gains for 2018 amounted to $241,700,000 The slight decrease of $500,000 or 0.2 percent is exclusively driven by much lower income from condominium sales, dollars 9,200,000 less in 2018 compared to 2017. The net income, excluding revelation gains, of $176,200,000 was therefore also slightly lower. Including revelation gains, the net results amounted to $308,200,000 up 20%. Main reason for this increase was a positive revaluation result of $166,700,000 compared to the revaluation gain in the same period in 2017 of €83,300,000 Therefore, the overall net income per share went up from CHF 5 0.60 to CHF 6.72, whereby the EPS, excluding origination gains, was CHF 3.84. Dollars Compared to the year end of 2017, the NAV per share went up by 4.2% to CHF 90.63. So did the NAV before deducting deferred taxes amounted to CHF 109.2. The EPRA NAV, which is not on the slide, amounted to CHF 110.2. We will propose an ordinary dividend of CHF 3.50 to the AGM of April 4, 2019. This is a CHF 2.90 increase compared to 20 17. Please turn to Slide 8 for a more detailed review of the consolidated figures, especially the rental income, the renovation gains, the income from property sales and the other income. The rental income went up by $6,900,000 or 2.5 percent from $272,500,000 to $279,400,000 This increase was largely driven by the inclusion of the Rothschild portfolio and the vacancy reduction. On a like for like basis, the rental income went up by 0.9%, mainly driven by Geneva, Bern and Zurich. For 2018, we incurred a revaluation gain of 166.7 percent. Details will be provided on Slide 17. During 2018, we sold the remaining condominiums and the commercial units in Rheinfelden, the former project Salveen Park and the development project Panofareal in Rheinfelden. Furthermore, in 2018, we accounted for 12 apartments disposed in Lugano Paradiso and 1 apartment in Zug Levenbroi. Overall, those sales contributed $10,500,000 As disclosed on the subsequent trend and evident also on Slide 35, early this year, we sold the last apartment in the Leuvenbroi tower. The EUR 4,600,000 capitalized owned services is mainly due to the related advisory fees related to the acquisition of the Rothschild portfolio, and the $3,500,000 other income is again mainly driven by opting in VAT refunds. In summary, the total operating income for 2018 went up by 22.6% to SEK 467.2 1,000,000. Slide 9 shows details of the consolidated expenses. The properties operating expenses increased by 8.9 percent to $12,800,000 mainly due to the increased property taxes related to the acquisition of the Rothschild portfolio. On the other hand, ancillary expenses related to the vacant space came down, thanks to lower vacancy rate. The property's maintenance and renovation expenses remained stable at $17,000,000 During 2018, a total of EUR 63,300,000 was spent for the renovation of the investment portfolio, of which 12% or EUR 7,600,000 were charged to the maintenance and renovation line. The difference of EUR 9,400,000 reflects the pure property maintenance expenses. The CapEx for the development portfolio, which is not on the slide, amount to EUR 62,300,000 for the reporting period. Personnel expenses increased by 4.1%, mainly due to the modifications of the pension plan, which led to higher temporary accounting charges deriving from IAS 19. The general and admin expenses also increased by 8.9 percent to $7,700,000 primarily due to slightly higher IT expenses and legal costs related to the Steiner case. Total operating expenses went up overall by 4.9 percent to 58,600,000 The EBITDA cost ratio amounts to 18.3%, excluding direct vacancy costs. Considering CapEx as a pure investment item and eliminating its P and L impact, the cost ratio, excluding vacancy costs, would amount to 15.6%. More details on the calculations are already evidenced on Slide 50, together with the additional disclosure under the EPRA best practice recommendations. All EPRA KPIs have been reviewed by all our auditor E and Y. On Slide 10, we see that the financing expenses fell by 39.8% to $22,000,000 and that the taxes for 2018 amounted to $78,400,000 of which $57,300,000 are deferred. Please turn now to Slide 14, where you see the development of the vacancy rate and the portfolio size over the last years. As already mentioned, the vacancy rate came down to 5%. On Slide 15, you see the top 10 vacancies in our portfolio with an indication of actions taken. I will leave this for the Q and A session if questions arise. On Slide 16, we illustrate the expiry profile of our leases. Of the R31 million originally maturing in 2019 or 11% of the portfolio, 70% were renewed as of December 2018. The weighted average unexpired lease term of the portfolio amounts to 4.5 years Of the 10 largest tenants, representing roughly 30% of the total rental income, the vault is 6.2 years. The revaluation gain from the existing portfolio, as summarized on Slide 17, including the fair value changes of the development side accounting for EUR 40,000,000 amounted to EUR 166,700,000. As reported in the Q1 of this year, we incurred a 1st time valuation loss of EUR 3,900,000 for the acquisition of the Roadchain portfolio. Footnote 7 elaborates on the revaluation effects per reporting year 2018. Slide 18 shows discount rates applied by Visteon Partner for value in PSP's real estate portfolio. The weighted average discount rate on a nominal basis, not like for like as the road trip portfolio, the gross pit tower are newly included, came down by 13 basis points to 3.49%. The continuous low interest rate environment and the tractional evidence of prime risk transaction explain this further yield compression. The second driver of this valuation gain is the reduced vacancy rate. Especially for development projects, those letting successes were a key driver of the valuation result. On the other hand, the market rents were reduced by a further 0.4% across the portfolio, and maintenance CapEx and fit out contributions for new lettings increased selectively. Finally, the structural vacancy rate of the portfolio assumed in the valuation by Western Partner was reduced from 6% to 5.9%. Let me now conclude the financial part of this presentation with some short comments on the capital structure and on our financing activity on Slide 20 and following. We have started the refinancing round of our bank loan maturities during 2019 successfully. As you know, we have fixed term loans or loans based on the multiyear structure with an automatic rollover clause. Additionally, we regularly issue Swiss franc bonds. The weighted average maturity of the loan agreements is 3 years. As per year end 2018, the undrawn committed credit facilities amount to EUR 930,000,000 As per today, Janjohn committed credit facilities amount to €820,000,000 Turning to Slide 21, you can see that total shareholders' equity amounts to SEK 4,200,000,000 or 54.6 percent of total assets. The deferred tax liabilities amount to SEK 851,900,000 or 11.2 percent of total assets. Total interest bearing debt amounted to EUR 2,500,000,000 increase of 0.8%. This results in a loan to value of 33% as per end of 2018. The adjusted loan to value, which excludes the temporary fixed term deposit of EUR 100 and 25,000,000 amounts to 31.8%. All financial abilities are on an unsecured basis and at the holding level. The long term debt represents 75.3% of total indebtedness. The reduction compared to the previous years is due to the fixed term loans that will be renewed as evergreen structure at their maturity in July of this year. The average interest charge for the reporting period amounted to 0.94%, And as mentioned, the passing average interest charge was 0.87%. We expect a further reduction in 2019 to almost 0.8%. The interest coverage ratio amounts to 11 times, About 76.5 percent of all indebtedness was with fixed interest over more than 1 year. The average fixed interest period decreased to 3 years, as mentioned. So please kindly turn now to Slide 24 for an update on the projects. The renovation work for the property on the Hartungstrasse 161, Fjellbergstrasse 150, evidenced to Slide 20 4 25, are getting to the end. HILTI went through a substantial renovation of the construction structure and technical installations, coupled with a soft face lifting. Recently, we finalized a large lease agreement with UBS. Our tenant West High took additional space. We are currently a letting level of 90%. For the remaining space, we are fair as interested parties and are optimistic to be able to close those negotiations at attractive levels. What is important for us in this building and in this area is that we are able to attract tenants ranging from telecom industry to energy, medtech and governmental entities to modern co working activities. There will be an additional 1800 square meter up for renovation, which we'll tackle during the second half of twenty nineteen. The works at Panof K, Panof Platts in Zurich, evidenced on Slide 26, progressed well for Stage 1 at Panofka 9eleven-fifteen, delivering 4,200 square meter of office space and 8 60 square meter of retail space. 95% of the space is pre let. The latest lease agreement was signed with the IVG Group. With regard to the 2nd stay in the Weizenhaus Class 2.4 and the Banoffke, evidenced on Slide 27, The building is now fully leased to the German hotel group, RUTI, Ruby Hotels and Resorts and to the Canjuan catering for a new restaurant. The submission of the building permission occurred last year, and we expect the building permission shortly. This building is already fully met. The development in Lugano Paradiso, evidenced on Slide 28, delivering mainly condominium apartments beginning of 20 20, is on track with regards to development of the project. The planned investment sum is EUR 80,000,000. As per today, 7% of the total units have been sold. We are slightly behind plan with regard to total number of sold projects sold apartments as per today, but are confident on the outcome of the final project. The renovation work for the building on Louis de Macher Fort in Geneva, evidenced on Slide 29, is in progress. The building will undergo a complete renovation of the retail space and the reconversion of the current office space on the floors 2 to 7 into a modern state of the art city hotel. In this respect, we signed a lease agreement with international operating boutique hotel group, Citizen M. We expect completion to occur end of 2020. We finalized also letting agreement of the high strength space last week. With this, the building is also fully let. The planning phase for the Project Orion in Zug West, now called Project Atmos, and demolition of the 2 existing buildings is progressing well. The 2 buildings originally located at the Hartungstrasse and Fernleybuchstrasse will be replaced by a modern state of the art office building. On Slide 30, you see the first renderings of the building. 45% of the surface is pre led to ON, an innovative Swiss running shoe brand. For the remaining surface, advanced discussions are underway and the interest is high. On Slide 31, we illustrate a new project, which we are currently launching in Basel. We are going to replace an existing building next to the Gross Peter tower, and we're able to secure Swisscom as an anchor tenant. Construction time will take from 2020 to mid-twenty 22 with an overall investment amounting to €33,000,000 We expect to generate an overall rental income of €2,200,000 dollars 1,350,000 more than before. Slide 32 summarizes all planned investments for development side and for the investment portfolio, excluding the new Baofen sale in Basel. We will include that one once we officially started and committed the funds. The overall investment plan amounts to approximately SEK 295,000,000 for the development projects. At completion and once fully rented out, these five projects should deliver an aggregate annual rental income of roughly $35,000,000 whereby $8,600,000 were already earned in 2018. Beside the mentioned development projects, we are working on a few other initiatives on the existing portfolio, which will turn into projects in the coming years. As shown on Slides 3435, we disclosed a number of transactions occurred since January of this year on the subsequent events. Those include the 2 acquisitions in Bern and the disposals in Zurich and Fribourg. Besides this transaction, we also issued a new 8 year corporate bond amounting to €100,000,000 at very attractive conditions. I will leave comments for the Q and A session at the end of this call. Let me now conclude on Slide 37 with a few words of the outlook for 2019 and our guidance on EBITDA and year end vacancy. Switzerland's economy is in a good shape. Growth, however, seems to have peaked, and most economists predict a deceleration and normalization of growth rates in 2019. Nevertheless, the outlook remains positive. Significant changes in interest rates are unlikely in 2019. In the U. S, the Fed began raising interest rates in small steps, but as long as the European Central Bank keeps its rate more or less unchanged, no significant rate hikes are expected in Switzerland. This has a positive side effect that our refinance costs will remain low for the foreseeable future. Due to the positive economic situation in Switzerland, demand for office space is expected to stay at good level, especially in the regions we are active. Consequently, the outlook for property companies such as PSP focusing to a large degree in office buildings in prime locations are promising even if the economy should slow down slightly during this year. Our focus remains unchanged. We modernize individual properties, develop our projects and concentrate on our lifting activities. We will only consider acquisitions if the allow for add value in the long term. In financing, we'll continue to proceed our proven conservative approach. And as in the past, we'll consider tapping the debt capital market if required. For 2019, we expect an EBITDA of EUR 250,000,000. With regard to the vacancies, we expect the vacancy rate by the year end of below 5%. We will report our consolidated financial results for the Q1 of 2019 on May 7. That would end my comments on the financial results 2018, and I'm now ready to take questions. The first question is from Mr. Robert Bilderman from Kempen. Please go ahead. Good afternoon. This is Robert Kempen. Just a question on like for like growth and the vacancy. So the vacancy is down 3.2%. The like for like rental growth was 0.9%, obviously taken into consideration that you improved your occupancy rate. Is it fair to assume that on the re lettings that you did over 2018, you locked in quite a market discount on the re lettings? Or how do we reconcile back to the 0.9% like for like rental growth? Thank you, Robert. I think from the what we have to say, from 3.2% vacancy reduction, roughly 1% was due to the disposal. Secondly, the vacancy reduction in 20 18 will mostly translate in rental income 'nineteen as you have typically the incentives of 3 to 6 months on the rent freeze. So with that, I would expect roughly 1% like for like rental growth for 2019. Okay. That's very clear. Then a follow-up question. Since you took over as CEO, you have been quite active on portfolio rotation. Is this a trend that we can expect to continue? Or have you pretty much sold off the entire tail end of the portfolio that you want? Well, on the 10 years previous to my job as CEO, we sold roughly EUR 600,000,000 of properties. So I think clearly, we sold some assets, which we had in mind to on the disposal side, and we were able to acquire some properties because the opportunities arise. So clearly, we continue to be active on the portfolio rotation side, but we need the right opportunities on the acquisition side. And clearly, we've skim and glands our portfolio for disposals. But I wouldn't say that, by definition, every year, we have to rotate. That's not a target we have. Okay. Okay. That's clear. Then last question, that would nitty gritty, but on the Atmos building, you mentioned that there was great interest. What would be the rental levels of Atmos? Or if you don't want to give the absolute level, is this higher, lower or in line with what you have been underwriting the project with? I think we are at the underwriting level. Seeing the strong interest, we see that we might be a bit harder on the incentives. I think that's a bit the trend, but we are clearly in a solid market. And the demand we see is from pet caffeine companies to co working activities for that area. Okay. That's all clear. Many thanks. Thank There are no more questions at this time. Thank you very much. I wish everybody a great day, and we will talk the next days. Thank you. Bye bye. 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.