Earnings Call: H1 2018

Aug 17, 2018

Ladies and gentlemen, good morning. Welcome to the PSD Swiss Property Half Year Results 2018 Conference Call. I'm Maria, 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. After a short introduction, there will be 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 morning to everybody, and welcome to the conference call on our results for the first half of twenty eighteen, whereby I will refer to the presentation and the press release we published this morning. I will start with some general comments on our view about the Swiss solid state market and grants on the key comments of our company developments on Slides 4 to 5. Then I will review the key consolidated figures for the first half on Slides 7 to 10. I will then address the development of the vacancy rate on Slides 1415, followed by the expiry profile of the leases on Slide 16 and then go into the changes in fair value on Slides 1718. Thereafter, we'll provide an update on our current debt and capital structure on Slides 20 21. With respect to development sites and projects, which are detailed on Slide 23 to 33, I will provide a quick update on the ones in construction and comment on the investment plan. I will then conclude with our revised outlook for 2018 on Slide 37. Let me please start on Slide 4 with our view on the current market environment, followed by the main developments for the first half on Slide 5. The forecast for Switzerland's economy are promising. We expect that the predicted economic expansion will have a positive impact on demand for office space, at least in central locations. Letting office space remains challenged, although the supply of office space has stabilized in Zurich, Geneva and Basel. However, there are differences among submarkets. In Zurich CBD and the trend in the U. S. Demand for modern office space, in our view, is accelerating. In peripheral areas of Zurich, however, reducing vacancies will be lengthy and arduous, particularly in those regions where new construction projects will further increase supply. The situation is also difficult in Zurich North. The air building activity continues and vacancies keep rising accordingly. In Geneva, a number of new developments will come on the market in the near future, which will put pressure on older office properties in less attractive locations. In Basel, the supply of office space decreased slightly, while an increasing number of new construction will come on the market soon. However, this additional space can be absorbed from today's perspective. In the retail sector, not much has changed in recent months. Times remain difficult for assets in peripheral regions as well as traditional shopping centers, online business and exchange rate are the main determinants. High street retail remains and is much less affected by external factors. Most of our retail properties are in such excellent location. The prices for office properties remain high. Demand is still strong, especially for high quality objects in business centers. Given the already very low yields, average initial yields on the transaction marks declined only slightly, and we expect a stabilization at those low levels, at least from prime assets. Please turn to Slide 5 for the main developments of our portfolio. In the first half of twenty eighteen, our main focus was on the continuous quality enhancement of our property portfolio and, of course, on the letting activities. We did this by means of and modernizations of investment properties and on the other hand, by further developing our sites and projects. Regarding the letting activities, vacancy reductions, the pre letting of our development pipeline and the proactive management of leases that are due for exchange were on top of our agenda. Overall, we are very satisfied with the rental success we achieved so far, in particular considering the standing of some of our new tenants. The value of our portfolio rose to $7,300,000,000 up 4.2% compared to the year end of 2017. Therefore, the carrying value of the development sites and projects value under IS forty at market is EUR 563,000,000. The developments for sales account to €49,200,000 We successfully sold the property in Geneva, on Abri del Margin in Petitlonsi and are in process of selling the Ener Strauzer suite in Zurich. Furthermore, we expect to sell a development project in Rheinfelden by the end of this month. Vacancy rate came down to 6.8%, of which 1 percentage point can be attributed to renovations. And of the leases maturing 2018 as per end of June, 87% were already renewed. The balance sheet is as strong as ever with an adjusted loan to value of 33.4% and a low passing average interest rate of 0.92%. Now let's look at the key consolidated figures on Slide 7. The EBITDA for the 1st 6 months of 2018 amounted to SEK 117,700,000. This increase by EUR 3,200,000 or 2.8 percent is among various factors, mainly attributable to the rental income increase of 1.7%, stemming from the acquisition of the Rothschild portfolio as per February 1 this year and various other new leases. Verisk, the net income, excluding valuation gains, was 80 $5,600,000 an increase of 6.8% compared to the first half of last year. Including the revaluation gains, the net result amounted to EUR 158,300,000 up 68%. The main reason for this increase was positive valuation result of €91,500,000 Therefore, the overall net income per share went up from €205,000,000 dollars to 3.45 dollars or 68 percent, whereby the EPS, excluding derivation gains, went up by 6.8% from 1.75 percent to 1.87 percent. Compared to the year end of 2017, the NAV per share went up by 0.2% to 0.87 percent. So did the NAV before deducting the deferred taxes amounting nearly to 105.14. The April NAV, which is not on the slide, amounts to CHF106.21. Please keep in mind that the ordinary dividend for the full year was paid in April. Please kindly turn to Slide 8 for a more detailed review of the consolidated figures. The rental income went up by $2,300,000 or 1.7 percent from $136,400,000 percent to 138.7 percent. This increase was largely driven by the before mentioned integration of the Rothschild portfolio. On a like for like basis, the rental income went up by 0.2%. The region of Zurich showed a negative like for like of minus 0.6%. This is mainly due to one large lease agreement, which was renewed in 2016 with the start mid-twenty 17 at a significant lower rent level. We explained this fact already a year ago. Excluding this one contract, the like for like for Zurich would have been positive with 0.3%. Geneva was positive with a like for like growth of 3.1%, vis a excluding the sold property in Petitlan Sin. For the first half of twenty eighteen, we incurred a renovation gain of €91,500,000. I will provide some details on Slide 17 and following. During the first half of twenty eighteen, we sold the remaining condominiums in Rhein Felsen. We sold development projects in Southern Park 2 during 2017 and are now in process of selling the development project Arnulf Ariel in Rheinfelgen by the end of this month. The demand for those type of conversion or development projects is currently very high. The EUR 3,300,000 capitalized owned services is mainly due to activated advisory fees related to the acquisition of the Rothschild portfolio. The $1,700,000 other income is again mainly driven by opting ILVAT refunds. In summary, total operating income for the first half of this year went up by 50.3% to 239,300,000. Slide 9 shows details on the expenses. The properties operating expenses increased by 7.2% to €6,200,000 mainly to the increased property taxes related to the acquisition of the Rothschild portfolio. On the other hand, ancillary expenses related to vacant space came down due to the lower vacancy rates. The property maintenance and renovation expenses increased slightly by 1.2 percent to 8,200,000 euros During the first half of twenty eighteen, euros 30,400,000 were spent overall in renovations for the investment portfolio, of which 12% or $3,700,000 were charged maintenance and renovation lines. The difference of $4,400,000 reflects the pure property maintenance expenses. The CapEx for development portfolio, which is not on the slide amounted to EUR 34,000,000 for the reporting period. Personnel expenses increased by 10.1%, mainly due to changes in the pension plan, which led to a higher temporary accounting charge deriving from IAS 19. And general and admin expenses also increased by 7.5 percent to $3,600,000 primarily due to legal costs related to the Steiner case. Total operating expenses went up by 6.8% to EUR 29,000,000. The EBITA 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 would amount to 15.6%. More details on the calculations are evidenced on Slide 49, together with additional disclosure under the EPRA best practice recommendations and the all EPRA KPIs have been positively reviewed by our auditor E and Y. On Slide 10, we see that the financing expenses fell by 11 0.7 percent to $11,500,000 and the taxes for the first half twenty eighteen amounted to $40,500,000 of which EUR 30,800,000 are deferred. Please turn now to Slide 14, where we see development of the vacancy rate and portfolio size over the last years. As already mentioned, the vacancy rate come down to 6.8% from 8.5% percent as of end of the Q1 of this year. On Slide 15, you see the top 10 vacancies in our portfolio with an indications of action taken. I will leave this for the Q and A session if questions arise. Turning to Slide 16, we illustrate the expiry profile of our leases of the CHF 29,100,000 rents originally maturing in 2018 or 10% at that time of the portfolio, 87% were renewed as per June 2018. The average maturity of the lease portfolio amounts to 4.66 years at June 2018 and shows a moderate expiry for next year. The relation gains from the existing portfolio, as summarized on Slide 17, including the fair value changes of the development sites, amounts to 91,500,000. As reported in the Q1 of this year, we incurred a first time valuation loss of 3,900,000 from the acquisition of the Rothschild portfolio. From the valuation gain of $91,500,000 $58,100,000 stem from the investment portfolio and $33,500,000 from the development portfolio. Slide 18 shows discount rates applied per Houston partner for Valium PSP's real estate portfolio. The weighted average discount rate on a nominal basis, and this is not like for like as the Rocel portfolio is included, came down by 7 basis points to 3.55%. The continuous low interest rate environment and the transaction evidence of prime real estate transactions explain this further year compression. The second driver of this valuation gain is the reduced vacancy rate, which you have from letting successes. Especially for the development projects, those letting successes were a key driver of the valuation result. On the other hand, the market rents were reduced by the value by a further 2% across the portfolio and maintenance CapEx and fit out contributions for new electrics selectively increased. The biggest positive contributing assets were the properties at Barnafplatz Barnafsky in Zurich, the Gross Peter Tower in Basel and the Hartungstrasse, the Ferrybuchstrasse in Zurich. The single biggest negative ones, the Hochstrasse and Steinde Thorberg in Basel and Tevere Espini in Locarno. Let me now conclude the financial part of this presentation with some short comments on the capital structure and our financing activity on Slide 20 and following. We have started discussions on our bank loan maturities due in 2019 and expect from today's point of view a successful refinancing route, either through a new syndicated loan or through bond issuance. As you know, we have fixed term loans or loans based on a multiyear structure with an automatic rollover close. Additionally, we issue regularly sweepstake funds. The weighted average maturity of the loans is 3 years. And as per today, the undrawn committed credit facilities amount to €850,000,000 Turning to Slide 21. You can see that total shareholders' equity amounts to SEK 4,000,000,000 or 53.2 percent of total assets. Preferred tax liabilities amount to EUR 823,800,000 or 11% of total assets. Total interest in Biddec amount to EUR 2,600,000,000, an increase of 4%. This results in a loan to value of 34 0.5% or an adjusted loan to value of 33.4%, excluding bonds and prior placements of EUR 100 and 25,000,000 related to temporary fixed term deposit. All financial liabilities are on an unsecured basis and at the holding level. The long term debt represents 95% of total indebtedness, and the average interest charge for the reporting period amounts to 1.02%. The passing average interest charge was 0.92%. ICR amounts to 10.2 times and about 91.5 percent of the full debt was with fixed interest over more than 1 year. The average fixed interest period increased to 3.4 years. And with that, I will kindly ask you to turn to Slide 23. As you see from the current project pipeline, the gross pit tower has been reclassified into investment property. In this, therefore, not anymore in this section. However, it's worth mentioning that Bayer moved into the building and that we just this month signed 2 further lease agreements with a bank, Vigro Bank and with Spaces, a subsidiary of the IBG Group. With those leases, we are almost fully occupied. The renovation works for the property on Hartungstrassefuhllebruggstrasse, evidenced on Slide 2425, are progressing very well. Completion is expected least at least at least at this latest beginning of 2019. And the building, as you know, is undergoing a substantial renovation of the construction structure and tackling installations, coupled with a soft facelift fee. We finalized a large lease agreement with UBS recently and have currently a letting level of 80%. For the remaining space, we have various interested parties and are positive to further let to attractive tenants and at attractive levels. What is more important for us in this building and in this area is that we are able to attract tenants ranging from the telecom industry to energy, METEK and governmental entities to modern co working activities and even innovative units from global banks. The works at Panof Kparnofplatz evidenced on Slide 26 rests well for Stage 1 at Panofke 9 to 15 and Panofplots 1, 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 lithium ion door signed with No. 18, the premium co working brand of the IBG Group. With regards to the 2nd stage on Weiznaustra set 2 4 and Banoff Care 7, evidenced on Slide 27, we have announced in Q1 that we signed a lease agreement with the German hotel group, Ruby Hotels and Resort. They plan to open the hotel with 2 10 rooms after completion of the renovation works. The submission of the building permission occurred last month, and we expect the building permission by end of this year. The remaining surface, we have started a contest for the best restaurant operator for the location and signed and expect signed lease agreement by the Q4 of this year. The development in Lugano Paradiso on Slide 28, delivering mainly condominium apartments beginning of 2020 is on track. The planned investment sum is EUR 80,000,000 As we will adopt the new IFRS 15 standard, the applicable percentage of completion method should lead to initial profit recognition already into 2018. However, with the larger portion following to 'nineteen and to 'twenty. As per day, we have 24 more reservations and expect notarization of those reservations within the next months. The renovation works for the building on the William Marche Fort in Geneva, evidenced on Slide 29, are in progress. The building will undergo a complete renovation of the retail space and the reconversion of the current office space on floors 2 to 7 to modern state of the art city hotels. In this respect, we signed a lease agreement with the city group the hotel group citizen end, and we expect completion to occur end of 2020. The planning phase for the project oriented West and the demolition of the 2 buildings is progressing. The final demolition should occur by the end of September. The two buildings are located in Hartungsraas and Sohlebuk Strasse as evidenced on Slide 30 to 32. The red dot on Slide 30 shows the before mentioned building at the Hartungstrasse and Furlebuch Strasse. All white buildings on Slide 33 31 are buildings of PSP. Both buildings will be replaced by a modern state of the art office building. On Slide 32, you see first renderings of the building, and we talk about the surface of 22,000 square meter. With regard to the marketing of Orion, we have appointed CBRE and are today in final negotiations with an anchor tenant for a surface of 45%. On Slide 33, we summarize all planned investments for development side and for the investment portfolio. The overall investment plan amounts approximately EUR 320,000,000 for the development project. At completion and once fully rented out, these 6 projects should deliver an aggregate annual rent income of approximately EUR 35,000,000. Besides the mentioned development projects, which are working on we are working on a series of other initiatives on the existing portfolio, which will turn into projects in the coming years. They happen to be in Zurich, in Basel and in Lausanne. Let me now conclude on Slide 37 with a few words on the outlook for 2018 and our revised guidance on EBITDA at the year end vacancy. As mentioned, the acquisition market for prime commercial assets remain highly competitive. This is still due to the continued investment side of institutional investors. The lending market remains challenging compared to the previous years. However, we try to become more proactive and closer to market. In this ongoing competitive market, location and context of properties remain the key assets and the key success. The focus of PSP remains on the renovation and modernization of selected properties, the further development of our sites and projects as well as letting. Acquisitions are an option, but only if there is shareholder value creation in the future years. For 2018 business year, we now expect an improved EBITDA of EUR 240,000,000. With regard to the vacancies, we now forecast a lower rate, which should be below 6% at year end of 2018. Finally, we will report our consolidated financial results for the Q3 on the November 13 this year, And that would end my comments on the financial results for the first half. And I'm now ready to take questions. We will now begin the question and answer session. The first question is from Robert Wortenmann from Kempen. Please go ahead. Good morning. This is Robert Kempen. Page number 16, you referred to as well as potentially coming into the Q and A. So herewith, the gross paid of tower, obviously, some good letting successes. If you look at, let's say, the last 6 months, you've signed a number of leases. How does the level of these leases compare to what the appraiser has taken into account? Well, as I mentioned, Robert, the growth paid to tariff was one of the main contributors on the valuation gains. And it's clearly driven by the letting success, which is not yet including, obviously, the leases we signed with Negro Bank and with spaces. So I think this is a case where we will have, in the Q3, to review if these lettings have an impact on the valuation and then eventually disclose that in November. Generally, we are closing at or even slightly above the expectations on the market rents. Okay. So based on what you have done so far, it's fair to assume that in the H2 revaluation result, there will be still an uplift, thanks to letting. Is that a fair conclusion? Yes. What I said and what we have to do, if you have letting success, we will review if there's an impact on the single asset. As we have closed now 2 large lease agreements, we will check with the Valuer if this deserves a reversion check for the Q3 on this asset. As you know, we do full portfolio review half year, full year. But in the quarter, we have to review an asset if there's a material impact on the letting. And if the impact is more than EUR 5,000,000, we would book it and disclose it. So that's something we will look at it in the next months. Okay. That's perfectly clear. And maybe I've missed it in the presentation, but are you already in discussions for the last 10% still to be signed? Yes. These are 2x1.5 floors. With 1 party, we are, I would say, quite advanced negotiations and discussions and for the others, there's interest. So we are clearly working to also fill up the remaining space. And is that part of the reason why you actually lowered your vacancy expectations to 6%? Or is this not yet taken into that consideration? The one is taken in with the 25% change, the other one not. Okay. Clear. Then with respect to the fixed interest rate maturity, still 3.5 years. Would you be willing to proactively lengthen this over and above what you're going to refinance in 2019? Well, what we did already in the Q1, we had a fixed term loan agreement, which we did break and did a bond to lengthen that. And clearly, we are looking now into how to structure this renewal of the syndicated loan. Therefore, I mentioned that they wouldn't exclude that we do a longer dated bond. So I think we look at it at the moment when we get there, but clearly, that's an option we consider. The next question is from Stefan Schurman from Bank Vontobel. Please go ahead. Yes, good morning. Just two questions, maybe following up on the revaluation gains. You mentioned €58,000,000 from existing portfolio development, €33,500,000 mostly from the gross paid tower. Maybe first one on the development side, were there other major projects contributing other than gross paid? And on the existing portfolio, can you maybe give some qualitative color how much paid in the office segment contributed and how much on the retail side has been stated for the 1st 6 months? And then the second question, just a very small one on I haven't checked yet on the P and L. Is there any impact from the swaps structures that was impacting earnings in the first half? Yes. Thank you, Stefan. I think as I mentioned in my comments, it was not only the gross paper tower, but the biggest contributors were the Barnovsk, where the growth Peterfauwer, but also then Hartungstrasse, early book Strasse and also Weizenaustrasse. So this is clearly a contribution from the leading successes of all the development projects. With regard to that, that explains that point. With regards to the standing portfolio and the investment portfolio, here, we don't have a split of the office and the retail. Generally, it is split between some letting successes and part by a slight yield compression for super prime assets due to comparable transaction evidence. Let's see. As we We don't have expiries on the retail. That is not visible. And if you look on the Q2 to 2018 and also on the comprehensive income for the half year, the hedge impact was roughly EUR 6,000,000 positive on the comprehensive income. Okay. Thank you. The next question is from Ken Cagerie from ZKB. Please go ahead. Yes. Hello. I just had a quick question with regards to the way expiry profile, you also have some But when I look at the expiry profile, you also have some bigger expiries over the next years. And with all the developments, it's a bit difficult for me at least to see where the vacancy rate could or should go going forward. Do you think that you can keep this level? Or do you think there is even more improvements to come on the vacancy rate and why? Thank you. Thank you, Ken. Well, we will strive to further improvement. Honestly, one has to say, once you have a 7.5 €1,000,000,000 portfolio and €200,000,000 of rental income, you have expirrence. And that might have an impact on the vacancy rate, 0.5% or 1%. I think this is not a big solution. I think from today's point of view, to give a guidance on the next year is a bit difficult because we have clearly we work on the expiries. As we anticipated, we will renovate 1 or 2 buildings. So we are working on the time line there. But I wouldn't see a kind of a shooting up of the vacancy rate again. If there's a further room downwards, we are full speed working on the lettings and we are full speed working on the maturities. With regard to your comment on the development pipeline, I think we de risk that quite substantially. So when we will have Barnoff Platts, Weisenhaus Platts coming into the portfolio that's fully wet, so almost fully wet. Clearly, the reclassification of hard two slots, fully booked slots will have a slight impact on the vacancy rate, but that's not dramatic. So I think we are quite positive on getting to a new normal We have a follow-up question from Stefan Schurman. Please go ahead. Yes. Just a small follow-up question on the you acquired a plot of land in Bern, I think, recently for €8,000,000 I mean, can you just explain what you intend to do with that going forward? Yes. We didn't acquire land. We owned the building, but we didn't own the land. It was on a land lease. So we exercised our option to get also the land. And it's in the middle of the city. It's a restaurant and hotel. Okay. Okay. Thank you. Thank you. Gentlemen, there are no more questions at this time. Well, thank you very much from our side. Appreciate it and look forward to discussions in the next couple of days. Thank you, and have a great weekend, everybody. 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.