Earnings Call: Q1 2018

May 8, 2018

Ladies and gentlemen, good morning. Welcome to the PSP Swiss Property Quarterly Results Q1 2018 Conference Call. I'm Myrto, the caller's call operator. I would like to remind you that all participants will be in a listen only mode and the conference is being recorded. After the presentation, 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 Walzarini, CEO of PHD Swiss Property. Please go ahead, sir. Thank you, and good morning to everybody. I might correct this is a Q and A only call. There will be only just a short introduction. As you know, we do a presentation followed by Q and A on the half year and the full year results. On the quarter results, we never had one. We start in the fall, and we thought to have a short Q and A, giving analysts in best opportunity to ask questions is worthwhile. Just to set the scene before I open for questions, we released our quarterly results this morning. We had a quite successful start in 2018. We're able to confirm our EBITDA guidance and to improve our vacancy guidance for the full year to 3.5 7.5 percent based on better letting visibility. And we did also important progresses on the letting on development pipeline. We had a property news 2 weeks ago with the letting at the Banafplatz 1 to the tenant number 18, which is owned by the IBG Group. So also that project is well on track. And I think we released a couple of updates also on our disposals. But if it's okay for everybody, I would like to open the line really for questions. If there are, so I think we can go more efficient through the call. So please be ready for your questions. Thank you. We will now begin the question and answer session. The first question comes from the line of Kang Yer Ken of Jukir Kandolf Bank. Please go ahead. Yes. Hello, Giacomo. It's Ken from ZKB. I just have a quick question regarding the vacancy. Could you just highlight a bit your successes or advances that you have done with working on those vacancies? And maybe give us also a quick update on the maturities in 2018? Yes. I think the successes came on the one hand in Volusellen, where we signed 2 lease agreements, 1 in BILD on the Barnoff Platts 2, a new one. Then also in Lothan, we had a lasting success and also on the Rangestraas in Zurich. So there were a few smaller midsized lettings plus clearly also then a better visibility on gross paid tower. The forecast is always a mix between letting success and some visibility and probabilities. So I think it is better visibility also on some open and in negotiation agreements where we have the feeling that we are ready to close. With regard to 2018 maturities, we are quite well ahead with the mergers we work on, And the expiries are factored in, in our new forecast. So we are very confident that we can open ones, which we know that they are not moving out that we can prolong them. So that's already factored in the forecast. What's not in the forecast is any potential vacancy reduction from disposals. So the vacancy reduction of the guidance is only through letting successful and not through disposals. Thanks a lot. That would have been my second question. Where do you stand with potential disposals? And what would the vacancy impact of those be? Well, the vacancy impact, if we talk about 3 disposals, one is in Geneva, one is in Fribo and one is Zurich. We talk about potentially considered oxygen of slightly more than 1%. With all the 3, we are in progress. There are all various reasons why they have not been closed, being procedural reasons, being divisions reasons, being political reasons. But we are on plan. And I would say, we hope to be able to give more concrete evidence by midyear or later than in Q3. This is a bit the time line of the 3 disposal processes. Excellent. Thanks a lot. And maybe one last one, if I may. And it's probably of less importance, but could you just highlight what's the reason for the EUR 3,900,000 write down on the Portuguese portfolios first? Well, in Geneva, you pay we pay roughly EUR 5,000,000 of transfer taxes on the overall portfolio. And clearly, they are those are not part of the valuation of the value. So when you acquire, you pay the transfer taxes, and the value typically doesn't factor in those transfer taxes. So this is a tax hit of EUR 5,000,000 compared to valuation hit of EUR 3,800,000. Excellent. Thanks a lot. Thank you. The next question comes from Mr. Bessel Mike of Bank of America. Please go ahead. Good morning, guys. Thank you for the update. A couple of questions from me, please. 1 on Bahnhof Platts in or 2 on actually on Bahnhof Platts in Zurich. The first is, what sort of IWG Group covenant have you got on that leasing? And the second is an update on other interest in that scheme. And then I'll come to a question on guidance, if I may. Yes. Well, if you don't mind, we are I think that the covenants we got are typical covenants we require from tenants. I think more important, I think that's where you're coming from. It's a fixed term lease. It's a 10 year lease plus options on a fixed rent on, I would say, interesting market rent for us and not as you would observe in today's markets from cob working type operator, which are turnover based. That was an important element for us. On the other hand, I think we have a couple of activities in the co working service office type of field that we try really to look what is the best operator for the respective building and how can we add flexibility to that building. But all the contracts we had so far beside 1 in Walliselleen are fixed rent contracts. In Walliselle, and we have a mix between the base fee and the turnover fee. But they are we are working on a variety of themes, but it's not now the new big theme which we see coming up from the portfolio. We are active, but we always look what is the best tenant to that building to add flexibility. Okay, cool. And additional interest in the remainder of the building? The building is basically full. We have a very small space on the ground floor of roughly 200 square meter where we negotiate with a fitness club, which would fit best to this co working at the hotel. We signed a large lease with the hotel operator, Ruby, Hotels and Resorts. And then we are left with a space, which we will lease to restaurants and will start basically an auction process end of Q2 because the demand is very high. But with that, the building is full. Perfect. And then on your guidance, sort of your EBITDA guidance of greater than €235,000,000 the better vacancy guidance is welcome. Does that give us upside, any potential upside to this year's EBITDA? Or do you think the timing is going to be late enough this year that we should think of that vacancy as an improvement to next year's EBITDA? I have to say it's the latter. Whatever you close today, also we see improved business sentiment. You have to give incentives. So basically, it's eaten off by the rent free. So the guidance on the top line has not and will probably not substantially improve due to the lettings. This is an impact for 2019. Perfect. Thank you. Thank you, Mike. The next question comes from the line of close Kai with Berenberg. Please go ahead. Good morning, gentlemen. Just two questions. You mentioned in your presentation stabilization of rent levels across the portfolio. Could you maybe indicate about the new lettings, what amount of what level of incentives you had to give for that higher than expected, lower than expected? And the second question, what is the ongoing what would be the CapEx you expect to spend for the investment portfolio as a rough indication for the full year? Thank you. Yes. On the incentives, I think we don't observe a substantial change over the last since the last 6 months. On average, we are renewing flat, slightly positive. So for the year, I would expect a slight positive like for like. What we continue to see if we have a large lease expiry that the tenants will come up with incentive requests being a little fresh up or an additional rent free, things we have not seen perhaps 4, 5 years ago, but things which are common in today's market practice. But incentives for good assets in central location have not deteriorated. So I think that we are pretty well ahead. What we see still is that the decision process with the tenants is quite long, is still cumbersome. So we see an improved business sentiment. On the other hand, it's still, I would say, a tenant market. With regard to the CapEx for the full year, you should expect on investment portfolio similar amount to last year. It will be around €40,000,000 €50,000,000 which goes then into if you take it with the maintenance line, it will be around, I would say, SEK 17,000,000, SEK 18,000,000 on the P and L. And this is always a split between maintenance and CapEx. No big surprises on that end. Thanks so much. It's helpful, my time. Thank you. The next question comes from Wunderman Robert with Kempen and Co. Please go ahead. Good morning. This is Robert Kempen. I like the announcement of Wonderman. But aside, first thing, you have made some improvements on letting on the gross Peter tower and also the ban off bloods, definitely derisking the development pipeline. All things equal, how will the appraiser take this into consideration? And what kind of potential development additional development profits can we expect for, let's say, the Q2 or the Q4 results? Well, I think this is really up to the appraisal. I think that the letting on the Barnoff plot, I would say, should have a positive impact from a pure letting point of view on the half year and also the growth paid there. But I would say it's something we will have to see in the midyear because it depends also on how the value sees the yields. And if you don't mind, I cannot comment more on valuation expectations from the value. I think we are focused on letting, on letting as close as possible or above at market. And as you said rightly so, derisking the development portfolio. Now we have, I think, with the burn off plots, we are close to 90%. With Dimarche, we are at 70%. And by year end, we will get to 100 because we are close to sign agreements for the retail space. Hartungstrasse, Hollebuchstrasse, we are well advanced. And I said last time with the full year report that we are close of signing a lease agreement with a larger tenant. And also on the Oryon, we are close. So I think our priority is letting. How the buyer sees it, then it's up to the buyer. I fully acknowledge the yield comment, obviously. But just put it differently then, to what extent have you been able to potentially outpace the estimates with respect to ERV on those gross beta tower and the Banoff Platts? I would say on the first one flat, on the second one slightly above. Okay. That is clear. Then with respect to investment opportunities, is there aside from acquisitions, is there also a potential for you to start new developments? Or have you identified additional development potential? Well, it's clearly a point and the focus point we look at. The issue is, 1st of all, that the prices for development projects often our view don't reflect the risks associated with it. So in that sense, no, we have not identified at the moment. We are looking. We are assessing. But we have not seen yet the opportunities which we think fit into the portfolio. On the acquisition side, we work on a few potential acquisitions of single properties, also smaller ones. I think that's a common priority we have, But there's nothing now in the pipe where we say we are very close of or short of closing it. Okay. That's clear. Then last one on the pace of flattening, and we already discussed this earlier, but it seems like the Q1 pace of flattening is going faster than, let's say, over the last 5 years, quite significantly faster. Is there a different way of incentivizing your letting team? Or what has changed, put it differently? I would say, 1st and foremost, I think it's clearly also due to the market. It's market improvement, and it often depends also on what kind of building comes up to the market. Clearly, we did some organizational adjustments. We fostered our letting team. We tried to get closer to our intermediaries and to tenants, and all those elements helped to progress. Clearly, we are not operating on a direct incentive of single people on the lating side. We try to motivate and give them the instruments to be close to the market. So I think it's a process. Is this new trend we will see? I think now we work on this new 7.5%. We work on the additional the vacancy we have disclosed in the report. We work on the disposals, and we take it from there. I think it's a medium term goal to further reduce our vacancy. Okay. That's perfectly clear. Many thanks. Thank you, I think we're good. If there are no other questions, we are happy to close the call. We thank everybody for dialing in and listening to this Q1 of the Q1, and we look forward to talk to you on the Q2 in August. Thank you very much to everybody. 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.