Ladies and gentlemen, good morning. Welcome to the PSP Swiss Property quarterly results Q1 2018 conference call. I'm Myrtle, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, 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.
Thank you. Good morning to everybody. I might correct this is a Q&A only call. There will be only just a short introduction. As you know, we do a presentation followed by Q&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&A, giving analysts and investors the opportunity to ask questions is worthwhile. Just to set the scene before I open for questions, we released our quarter 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 7.5%, based on better letting visibility. We did also important progresses on the letting of development pipeline.
We had a property news two weeks ago with a letting at Bahnhofplatz One to the tenant Number 18, which is owned by the IWG Group. Also that project is well on track, and I think we released a couple of updates also on our disposals. If it's okay for everybody, I would like to open the line really for questions, if there are. I think we can go more efficient through the call. Please be ready for your questions.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press Star and one on the touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from a question queue, you may press Star and two. Participants are requested to use only headsets while asking a question. Anyone who has a question may press Star and one at this time. The first question comes from the line of Ken Kagerer of Zürcher Kantonalbank. 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 Wallisellen, where we signed two lease agreements, one in Biel on the Bahnhofplatz 2, a new one. Also in Lausanne, we had a letting success, and also on the Rainstrasse in Zurich. There were a few smaller mid-size lettings, plus clearly also then a better visibility on Grossmünster Tower. The forecast is always a mix between letting success and some visibility and probabilities. I think it is a 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 our new forecast.
We are very confident that we can, the open ones, which we know that they are not moving out, that we can prolong them. That's already factored in the forecast. What's not in the forecast is any potential vacancy reduction from disposals. The vacancy reduction of the guidance is only through letting successes 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 three disposals, one is in Geneva, one is in Fribourg, and one is Zurich. We talk about potential vacancy reduction of slightly more than 1%. With all the three, we are in progress. There are all various reasons why they have not been closed, being procedural reasons, being decision reasons, being political reasons. We are on plan, and I would say we hope to be able to give more concrete evidence by mid-year or latest end Q3. This is a bit the timeline of the three disposal processes.
Excellent. Thanks a lot. Maybe one last one, if I may, it's probably of less importance, could you just highlight what the reason for the CHF 3.9 million write-down on the real estate portfolios were?
Well, in Geneva, we paid roughly CHF 5 million of transfer taxes on the overall portfolio. Clearly, those are not part of the valuation of the valuer. When you acquire, you pay the transfer taxes, the valuer typically doesn't factor in those transfer taxes. This is a tax hit of CHF 5 million compared to a valuation hit of CHF 3.8.
Excellent. Thanks a lot.
Thank you.
The next question comes from Mr. Basil Mike of Bank of America. Please go ahead.
Morning, guys. Thank you for the update. A couple of questions from me, please. Two on Bahnhofplatz in Zurich. The first is, what sort of IWG Group covenant have you got on that leasing? The second is an update on other interest in that scheme. I'll come to a question on guidance, if I may.
Yes. Well, if you don't mind, 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.
I would say, interesting market rent for us. Not as you would observe in today's market from co-working type operator, which are turnover-based.
Yeah.
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, we try really to look what is the best operator for the respective building and how can we add flexibility to that building. All the contracts we had so far, beside one in Wallisellen, are fixed rent contracts. In Wallisellen, we have a mix between a base fee and a turnover fee.
Okay.
We are working on a variety of themes, it's not now the new big theme which we see coming up from the portfolio. We are active, we always look what is the best tenant to that building to add flexibility.
Okay, cool. 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 300 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.
We are left with a space which we will lease to a restaurant, and we'll start basically an auction process end of second quarter because the demand is very high. With that, the building is full.
Perfect. On your guidance, your EBITDA guidance of greater than CHF 235 million, the better vacancy guidance is welcome. Does that give us any potential upsides 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. Basically, it's eaten off by the rent-free. 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 Kai Klose with Berenberg. Please go ahead.
Good morning, gentlemen. Just two questions. You mentioned in your presentation a stabilization of rent levels across the portfolio. Could you maybe indicate about the new lettings, what level of incentives you had to give for that? Higher than expected, lower than expected? The second question, 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 since the last six months. On average, we are renewing flat, slightly positive. 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 four or five years ago, but things which are common in today's market practice. Incentives for good assets in central locations have not deteriorated. I think that we are pretty well ahead. What we see still is that the decision process with the tenants is quite long, it's still cumbersome. 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, a similar amount to last year. It will be around CHF 40, 50 million, which goes then into, if you take it with the maintenance line, it will be around, I would say CHF 17, 18 million on the P&L. This is always a split between maintenance and CapEx.
Yeah.
No big surprises on that end.
Thanks so much. That's all from my side.
Thank you.
The next question comes from Robert Camp with Kempen & Co. Please go ahead.
Good morning. This is Robert Camp. I like the announcement of Wonderman, but that aside. First thing, you have made some improvements on letting on the Grossmünster and also the Bahnhofplatz, definitely de-risking the development pipeline. All things equal, how will the appraiser take this into consideration? What kind of potential additional development profits can we expect for, let's say, the second quarter or the fourth quarter results?
Well, I think this is really up to the appraisal. I think that the letting on the Bahnhofplatz, I would say, should have a positive impact from a pure letting point of view on the half year and also the Grossmünster. I would say it's something we will have to see on the mid-year, because it depends also on how the valuer sees the yields. If you don't mind, I cannot comment more on valuation expectations from the valuer. I think we are focused on letting as close as possible or above at market. As you said, rightly so, de-risking the development portfolio. Now we have, I think with the Bahnhofplatz, we are close to 90%. Rue du Marché, we are at 70%. By year-end, we will get to 100 because we are close to sign agreements for the retail space.
Häusernstrasse, Holligenstrasse , we are well advanced. I said last time with the full year report, that we are close of signing a lease agreement with a larger tenant. Also on the Orion, we are close. I think our priority is letting. How the valuer sees it, then it's up to the valuer.
I fully acknowledge the yield comment, obviously. Just put it differently then. To what extent have you been able to potentially outpace the estimates with respect to ERV on those Grossmünster and the Bahnhofplatz?
I would say on the first one, flat. On the second one, slightly above.
Okay. That is clear. With respect to investment opportunities, aside from acquisitions, is there also a potential for you to start new developments or have you identified additional development potential?
Well, it is clearly a point, the focus point we look at. The issue is, first of all, that the prices for development projects often now don't reflect the risk associated with it. 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 is a common priority we have. There is nothing now in the pipe where I say we are very close of short of closing it.
Okay, that is clear. Last one on the pace of letting. We already discussed this earlier, but it seems like the first quarter pace of letting is going faster than, let's say, over the last five years, quite significantly faster. Is there a different way of incentivizing your letting team? What has changed? Put it differently.
I would say, first and foremost, I think it is clearly also due to the market, bit market improvement. It often depends also on what kind of building comes up to the market. Clearly, we did some organization adjustments. We fostered our letting team. We tried to get closer to our intermediaries and to tenants. All those elements helped to progress. Clearly, we are not operating on a direct incentive of single people on the letting side. We try to motivate and give them the instruments to be close to the market. I think it is a process. Is this new trend we will see? I think now we work on this new 7.5%. We work on the additional vacancy we have disclosed in the report. We work on the disposals. We take it from there. I think it is a medium-term goal to further reduce our vacancy.
Okay, that is perfectly clear. Many thanks.
Thank you, Robert.
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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 first quarter, and we look forward to talk to you on the second quarter in August. Thank you very much to everybody.
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