Ladies and gentlemen, good morning. Welcome to the PSP Swiss Property Half Year Results 2018 conference call. I'm Moira, 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&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. 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, welcome to the conference call on our results for the first half of 2018, 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 real estate market and glance on the key comments of our company development on slides four to five. I will review the key contracted figures for the first half on slides seven to 10. I will address the development of the vacancy rate on slides 14 and 15, followed by the expiry profile of the leases on slide 16, and then go into the changes in fair value on slides 17 and 18. Thereafter, we'll provide an update on our current debt and capital structure on slides 20 and 21.
With respect to the 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 conclude with our revised outlook for 2018 on slide 37. May we please start on slide four with our view on the current market environment, followed by the main developments for the first half on slide five. The forecasts 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 a challenge, although the supply of office space has stabilized in Zurich, Geneva, and Basel. However, there are differences among sub-markets. In Zurich CBD and the trend in Zurich West, 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. There, 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 locations. 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 market declined only slightly, and we expect a stabilization at those low levels, at least from prime assets. Please turn to slide five for the main developments of our portfolio. In the first half of 2018, 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 renovations and modernizations of investment properties and, on the other hand, by further developing our sites and projects. Regarding the letting activities, vacancy reduction, the pre-letting of our development pipeline, and the proactive management of leases that are due for extension 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 CHF 7.3 billion, up 4.2% compared to the year-end of 2017. The carrying value of the development sites and projects valued under IAS 40 at market is CHF 563 million. The developments for sale account to CHF 49.2 million. We successfully sold the property in Geneva, Avenue de Miremont in Petit-Lancy, and are in process of selling Bernstrasse Süd in Zurich. Furthermore, we expect to sell a development project in Rheinfelden by the end of this month. The vacancy rate came down to 6.8%, of which one percentage point can be attributed to renovations. Of the leases maturing in 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%. Let's look at the key contracted figures on slide seven. The EBITDA for the first six months of 2018 amounted to CHF 117.7 million. This increase by CHF 3.2 million or 2.8%, 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 1st of this year, and various other new leases. The net income excluding valuation gains was CHF 85.6 million, an increase of 6.8% compared to the first half of last year. Including the valuation gains, the net result amounted to CHF 158.3 million, up 68%. The main reason for this increase was a positive valuation result of CHF 91.5 million.
The overall net income per share went up from CHF 2.05 to CHF 3.45 for 68%, whereby the EPS excluding valuation gains went up by 6.8%, from CHF 1.75 to CHF 1.87. Compared to the year-end of 2017, the NAV per share went up by 0.2% to CHF 87.17. Did the NAV before deducting the deferred taxes amounting newly to CHF 105.14. The EPRA NAV, which is not on the slide, amounts to CHF 106.21. Please keep in mind that the ordinary dividend for the full year was paid in April. Please kindly turn to slide eight for a more detailed review of the consolidated figures. The rental income went up by CHF 2.3 million or 1.7% from CHF 136.4 to CHF 138.7. 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 -0.6%. This mainly due to one large lease agreement, which was renewed in 2016, with the start mid-2017 at a significantly 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%. This excluding the sold property in Petit-Lancy. For the first half of 2018, we incurred a valuation gain of CHF 91.5 million. I will provide some details on slide 17 and following. During the first half of 2018, we sold the remaining condominiums in Rheinfelden. We sold the development projects in Salmenpark II during 2017, and are now in process of selling the development project, Bahnhof Areal in Rheinfelden, by the end of this month.
The demand for those type of conversion or development projects is currently very high. The CHF 3.3 million capitalized own services is mainly due to activated advisory fees related to the acquisition of the Rothschild portfolio, and the CHF 1.7 million other income is again mainly driven by opting in VAT refunds. In summary, total operating income for the first half of this year went up by 50.3% to CHF 239.3 million. Slide 9 shows details on the expenses. The property's operating expenses increased by 7.2% to CHF 6.2 million, mainly due 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% to CHF 8.2 million.
During the first half of 2018, CHF 30.4 million were spent overall in renovations for the investment portfolio, of which 12% or CHF 3.7 million were charged to the maintenance and renovation line. The difference of CHF 4.4 million reflects the pure property maintenance expenses. The CapEx for development portfolio, which is not on the slide, amounted to CHF 34 million 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. General and admin expenses also increased by 7.5% to CHF 3.6 million, primarily due to legal costs related to the Steiner case. The total operating expenses went up by 6.8% to CHF 29 million. The EPRA Cost Ratio amounts to 18.3%, excluding direct vacancy costs. Considering CapEx as a pure investment item and eliminating its P&L impact, the cost ratio would amount to 15.6%.
More details on the calculations are evidenced on slide 49, together with the additional disclosure under the EPRA best practice recommendations, and the all EPRA KPIs have been positively reviewed by our auditor, EY. On slide 10, we see that the financing expenses fell by 11.7% to CHF 11.5 million, and the taxes for the first half of 2018 amounted to CHF 40.5 million, of which CHF 30.8 million are deferred. Please turn now to slide 14, where you see the development of the vacancy rate and portfolio size over the last years. As already mentioned, the vacancy rate came down to 6.8% from 8.5% as of end of the first quarter of this year. On slide 15, you see the top 10 vacancies in our portfolio with an indication of action taken. I will leave this for the Q&A session if questions arise.
Turning to slide 16, we illustrate the expiry profile of our leases. Of the CHF 29.1 million 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 the next years. The valuation gain from the existing portfolio, as summarized on slide 17, including the fair value changes of the development sites, amounts to CHF 91.5 million. As reported in the Q1 of this year, we incurred a first-time valuation loss of CHF 3.9 million from the acquisition of the Rothschild portfolio. From the valuation gain of CHF 91.5 million, CHF 58.1 million came from the investment portfolio and CHF 33.5 million from the development portfolio. Slide 18 shows discount rates applied by Wüest Partner for valuing PSP's real estate portfolio.
The weighted average discount rate on a nominal basis, this is not like-for-like as the Rothschild portfolio is included, came down by seven basis points to 3.55%. The continuous low interest rate environment and the transactional evidence of prime real estate transactions explain this further yield compression. The second driver of this valuation gain is the reduced vacancy rate, which derives 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 valuer by a further 2% across the portfolio, and maintenance CapEx and fit-out contributions for new lettings selectively increased. The biggest positive contributing assets were the properties at Bahnhofplatz/Bahnhofsgasse in Zurich, the Grosspeter Tower in Basel, and the Hardturmstrasse/Förrlibuckstrasse in Zurich.
The single biggest negative ones, the Hochstrasse and Steinentorberg in Basel, and the Via Gioacchino Respini 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 following. We have started discussions on our bank loan maturities due in 2019, expect from today's point of view, a successful refinancing route, either through a new syndicate loan or through bond issues. As you know, we have fixed-term loans or loans based on a multi-year structure with an automatic rollover clause. Additionally, we issue regularly Swiss franc bonds. The weighted average maturity of the loans is three years, and as per today, the undrawn committed credit facilities amount to CHF 850 million. Turning to slide 21, you can see that total shareholders' equity amounts to CHF 4 billion or 53.2% of total assets.
Deferred tax liabilities amount to CHF 823.8 million or 11% of total assets. Total interest-bearing debt amounts to CHF 2.6 billion, an increase of 4%. This results in a loan-to-value of 34.5% or an adjusted loan-to-value of 33.4%, excluding bonds and private placements of CHF 125 million related to a 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% of the full debt was with fixed interest over more than one year. The average fixed interest period increased to 3.4 years. With that, I will kindly ask you to turn to slide 23. As you see from the current project pipeline, the Grosspeter Tower has been reclassified into investment property.
It is therefore not any more in this section. It's worth mentioning that Bayer moved into the building and that we just this month signed two further lease agreements with a bank, Migros Bank, and with Spaces, a subsidiary of the IWG group. With those leases, we are almost fully occupied. The renovation works for the property on Hardturmstrasse/Förrlibuckstrasse, evidenced on slide 24 and 25, are progressing very well. Completion is expected at least latest beginning of 2019. The building, as you know, is undergoing a substantial renovation of the construction structure and technical installations, coupled with a soft facelift. 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 these areas is that we are able to attract tenants ranging from the telecom industry to energy, MedTech, and governmental entities, to modern co-working activities, and even innovative units from global banks. The works at Bahnhofstrasse / Bahnhofplatz evidenced on slide 26, progress well for stage 1 at Bahnhofstrasse nine to 15 and Bahnhofplatz one, delivering 4,001 sq m of office space and 860 sq m of retail space. 95% of the space is pre-let. The latest leasing agreement was signed with No18, the premium co-working brand of the IWG Group. With regard to stage 2 on Waisenhausstrasse 2-4 and Bahnhofstrasse seven, evidenced on slide 27, we have announced in Q1 that we signed a lease agreement with the German hotel group Ruby Hotels and Resorts.
They plan to open the hotel with 210 rooms after completion of the renovation works. The submission of the building permission occurred last month. We expect the building permission by end of this year. For the remaining surface, we have started a contest for the best restaurant operator for the location and signs. We expect to sign lease agreements by the fourth quarter 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 CHF 80 million. As we will adopt the new IFRS 15 standard, the applicable percentage of completion methods should lead to initial profit recognition already in 2018. With a larger portion following in 2019 and 2020. As per today, we have 24 reservations and expect notarization of those reservations within the next months.
The renovation works for the building on Rue du Marché four 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 a modern state-of-the-art city hotel. In this respect, we signed a lease agreement with the hotel group CitizenM. We expect completion to occur end of 2020. The planning phase for the Project Orion to invest and the demolition of the 2 buildings is progressing. The final demolition should occur by the end of September. The 2 buildings are located in Hardturmstrasse and Förrlibuckstrasse, as evidenced on slide 30 to 32. The red dot on slide 30 shows the beforementioned building at the Hardturmstrasse and Förrlibuckstrasse. All white buildings on slide 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 a surface of 22,000 sq m. 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 sites and for the investment portfolio. The overall investment plan amounts approximately CHF 320 million for the development projects. At completion, and once fully rented out, these six projects should deliver an aggregate annual rent income of approximately CHF 35 million. Besides the mentioned development projects, 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 and the year-end vacancy. As mentioned, the acquisition market for prime commercial assets remains highly competitive. This is still due to the continuing investment slide of institutional investors. The letting 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 quality of the properties remain the key assets to 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's business year, we now expect an improved EBITDA of CHF 240 million.
With regard to the vacancies, we now forecast a low rate, which should be below 6% at the year-end of 2018. Finally, we will report our consolidated financial results for the third quarter on November 13th of this year. 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. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Robert Woerdeman from Kempen. Please go ahead.
Good morning. This is Robert Wordeman. On page number 16, you referred to as well as potentially coming into the Q&A. Herewith, the Grosspeter Tower. Obviously, some good letting successes. If you look at, let's say the last six 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 Grosspeter Tower was one of the main contributors on the valuation gains.
Yep.
Is clearly driven by letting success, which is not yet including obviously the leases we signed with Migros Bank and with Spaces. I think this is a case where we will have in the third quarter to review if these lettings have an impact on the valuation, then eventually disclose that in November. Generally, we are closing at or even slightly above the expectations on the market rents.
Okay. Based on what you have done so far, it's fair to assume that in the H2 revaluation results, 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 we have letting success, we will review if there's an impact on the single asset. As we have closed now two large lease agreements, we will check with the valuer if this deserves a revaluation check for the third quarter on this asset. As you know, we do full portfolio review half year, full year. 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 CHF 5 million, we would book it and disclose it. That's something we will look at it in the next months.
Okay. That's perfectly clear. 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 two times one and a half floors. With one party we are, I would say, quite advanced negotiations and discussions, and for the others, there are interest. We are clearly working to also fill up the remaining space.
Is that part of the reason why you actually lowered your vacancy expectations to 6%? Is this not yet taken into that consideration?
The one is taken in with the 25% chance, the other one not.
Okay, clear. 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 first quarter, we had a fixed-term loan agreement, which we did break and did a bond to lengthen that. Clearly, we are looking now into how to structure this renewal of the syndicated loan. Therefore, I mentioned that I wouldn't exclude that we do a longer-dated bond. I think we look at it at the moment when we get there, but clearly, that's an option we consider.
Okay. That's clear. That was it from my side. Many thanks.
Thank you, Robert.
The next question is from Stefan Schürmann from Bank Vontobel. Please go ahead.
Yes, good morning. Just two questions, maybe following up on the revaluation gains. You mentioned CHF 58 million from the existing portfolio development, CHF 33.5 million, mostly from the Grosspeter Tower. Maybe first one on the development side, were there other major projects contributing other than Grosspeter? On the existing portfolio, can you maybe give some qualitative color, how much maybe the office segment contributed and how much on the retail side has been stated for the first six months? The second question, just a very small one on the, I haven't checked yet on the P&L, is there an impact from the swap structure 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 Grosspeter Tower, but the biggest contributors were the Bahnhofstrasse, Bahnhofquai, were the Grosspeter Tower, but also Hardturmstrasse, Förrlibuckstrasse, and also Waisenhausstrasse. This is clearly a contribution from the letting successes of all the development projects. That explains that point. With regard to the standing portfolio and investment portfolio, here, we don't have a split of the office and the retail. I think generally it is a split between some letting successes and/or by a slight yield compression for super prime assets due to comparable transaction evidence.
That's it, yeah.
We don't have expiries on the retail, that is not visible. If you look on the Q2 2018 and also on the comprehensive income for the half year, the hedge impact was roughly CHF 6 million positive on the comprehensive income.
Okay, thank you.
The next question is from Ken Kagerer from ZKB. Please go ahead.
Yes, hello. I just have a quick question with regards to the vacancy rate. You have achieved some very significant improvements there and also guiding for further improvements for the full year. When I look at the expiry profile, you also have some bigger expiries over the next years. 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. We will strive to further improvement. Honestly, one has to say, once you have a CHF 7.5 billion portfolio and CHF 200 million of rental income, you have expiries. That might have an impact on the vacancy rate, 0.5% or 1%. I think this is not to be excluded. I think from today's point of view, to give a guidance on the next year is a bit difficult, because we have clearly the work on the expiries. As we anticipated, we will renovate one or two buildings, so we are working on the timeline there. 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-risked that quite substantially. When we will have Bahnhofplatz, Waisenhausplatz coming into the portfolio, that's fully let, or almost fully let. Clearly, the reclassification of Hardturmstrasse, Förrlibuckstrasse will have a slight impact on the vacancy rate, but that's not dramatic. I think we are quite positive on getting to a new normal of a vacancy rate.
Thank you very much.
As a reminder, if you wish to register for a question, please press Star and One on your telephone. We have a follow-up question from Stefan Schürmann. Please go ahead.
Yes, just a small follow-up question on the bid. You acquired a plot of land in Bern, I think, recently for CHF 8 million. Can you just explain what you intend to do with that going forward?
We didn't acquire land. We owned the building, but we didn't own the land. It was on a land lease. We exercised our option to get also the land, it's in the middle of the city.
Okay.
It's a restaurant and a hotel.
Okay. Yeah. Okay, thank you.
Thank you.
For any further questions, please press Star and One on your telephone. Once again, to ask a question, please press Star and One on your telephone. Gentlemen, there are no more questions at this time.
Well, thank you very much from our side. Appreciate it. Look forward to discussions in the next couple of days. Thank you. Have a great weekend, everybody. Bye-bye.
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