PSP Swiss Property AG

Good morning, everybody, and thank you for dialing in to this update call on our half year results. As always, I will do a quick introduction.

I will highlight some key figures and some key events we had during the half year. But then I would rather rapidly open to the Q&A for a matter of interest.

In general, as we explained in the documentation, the press release and the report, we are confronted with a healthy letting market. We are very happy with our underlying operating performance.

We had some significant letting successes in the second quarter, which bring us to a positive tone for the overall year, especially one in Basel and a couple of ones in Zurich. And we see in the CBD areas, especially of Zurich Geneva, quite low incentive requests and quite strong demand for high-quality products.

So that trend continues. I don't want to sound euphoric.

But overall, for the products we are offering in those regions, we are very positive. On the transactional market, as an update, and we will come later when we talk about valuations, I think the market doesn't give evidence of strong moves on the yields.

You have seen that we have a slight yield-out movement on the valuation, but the underlying transactional market reflects that. We don't see leveraged buyers which need to sell.

We don't see forced sellers. Clearly, we are confronted with a rather illiquid market on the CBD areas.

But overall, we did a sizable transaction in Q2, which I will go into it, but we are confronted with a rather healthy transaction market, but clearly slightly, I would say, illiquid. That's unchanged towards what we have observed in the Q1.

If you go into some key figures, Slide 8, the rental income, an important number for us. We saw rental income growth of 3.5% on a back of a 2.4% contribution coming from the indexation and the like-for-like of 5%, which is perhaps a bit inflated due to some events in the first half, will come down over the full year.

But overall, I think in our view, a reasonably strong number, which underlines the operating performance of the company. I will quickly evidence later on the valuation losses of CHF 90 million in the second line.

The property sales, we have already mentioned, one is the Wädenswil disposal that we have seen beginning of the year; and then Lugano-Paradiso which, by the end of the year, will be basically closed as an overall project. On the cost side, Slide 9, here, our focus is to continue on our cost discipline.

On the single lines, I think it's more rounding errors than everything else, but our aim is to keep with our target to have an EBITDA margin of above 80%. I think the organization is very lean, very professional.

We have seen that throughout also Q2 that this operational excellence holds on. And then finally, on those numbers on Slide 10, 2 numbers: one is you start seeing the upwards movement of the financial expenses, so an increase H1 '23 towards H1 '22; you have seen also average cost of debt moving out and just seen also clearly that our marginal cost of funding moved up, but that's something we have always signaled.

We are not surprised with it. And over the term, we can digest it without implication now we own the dividend.

But clearly, now you start seeing this outwards movement of the financial expenses. The second line item is the release of the deferred taxes, the release of the deferred capital gain taxes due to the treatment of the effective value 20 years ago, which now starts to materialize.

And we will come through in a lesser effect going on to the next years, but clearly has a quite significant impact this year on our P&L. If you go quickly on Slide 17 on the valuations, as a nutshell, the valuation loss of CHF 94 million overall of existing portfolio comes through a valuation loss of the investment portfolio of CHF 100 million and valuation gains of CHF 10 million on the development portfolio.

If you look overall, the largest loss on a single property was not more than CHF 2 million, CHF 2.5 million, so rather a moderate impact on a variety of assets. The yield widening overall was 7 basis points.

If you look on the next slide, you see that the value adjusted -- this inflation adjusted -- this inflation expectation from 1% to 1.25%, so the overall yield widening effect of the portfolio was 7 basis points. Slide 22, quick overview on the balance sheet capital structure.

You see here now with a solid LTV of 36%, which went up due to the acquisition of the Westpark, which I quickly will mention. And as I mentioned, the increase of the average cost of debt with a continuation of the average interest period, I think here, we feel very comfortable with these metrics.

To close my introductory remark, you see on Slide 33, the announced transaction during Q2, the Westpark in Zurich West, which we were able to acquire. It had already a slight impact on the rental income.

We adjusted our guidance already with the Q1 numbers due to this acquisition. We continue to adjust our guidance for the full year EBITDA now midyear to CHF 295 million.

Clearly, this is one of the contributing factors of this EBITDA adjustment. With that, I will stop for a moment on my introductory remarks, and I would like to hand over for the Q&A.

I have a few questions. Firstly, could you detail the like-for-like growth of 5% a bit more, please?

Yes, you have clearly a retail divergence with the strongest contributions coming from Zurich, Lausanne, Geneva, Bern, Basel, in that respect, was flat. If you take the indexation into account, which I said is roughly 2.4%, we had some letting success [ to invest ], which were quite significant also on the Hürlimann site due to new letting contracts.

Then we had letting successes in Lausanne, Saint-François; we had letting successes in Rue des Bains in Geneva and Cours de Rive; and then in Bern, especially on the Haslerstrasse, Effingerstrasse and Bärenplatz. I think these were a bit the single highlights.

We had also started to see some turnover rents, which came back in. But I think that was a bit, in a nutshell, the like-for-like detail.

The next one is on the debt side. The average debt maturity stand at 4 years now.

I know that you're a bit more opportunistic, but could you just highlight a bit to us where you would want to end up in 1 or 2 years with that figure?

Yes, the figure will not materially change in 1, 2 years. We have roughly CHF 300 million maturing per year, which is at 10%.

Clearly, the curve is pretty flat. So at the next upcoming refinancing, we might look more into 6, 7 years, but it depends also very much on the appetite of the market on implication spreads.

I wouldn't call it opportunistically. But clearly, we will look at if it's a 5-year, a 6-year, if it's perhaps a private placement to bridge a certain part, we have CHF 1 billion of unused credit lines.

I think we have now with our refinance scheme full access to the capital market. So I think we will try also to take advantage of spread levels, of windows, but this is a range which I think will continue this line.

And the last one, the third one is on some specific tenants. Firstly, I would like to have a quick update on Google, where they stand, what the current situation is and which discussions are that you're currently having also on the Hürlimann site?

And secondly, I have heard that Rothschild is moving out of most of the buildings they are renting in Geneva, and it would be interesting to hear what your plans are with regards to that.

Thank you, Ken. Perhaps just as a reply to your maturity, it's clear that we will look at -- tend to look at 6, 7 years when we do new bonds, but our focus was always very much also on spread levels.

So that might have some opportunistic tweak, just to reply on that one. If you come to Google, we have renewed our letting agreement with Google in December.

I think there is, from our side, no update. In general, what we observed in the market is that in certain surfaces, which they have apparently let, which apparently they have started to refurb and to prepare, that it seems that they're not moving in into all those surfaces.

So I think they are generally viewing their location. But I think there's some more to say today.

What we hear is that they're very committed to the city and to their existing properties. So from our end, we are not worried on that site.

On the Rothschild, it's correct, the lease comes to maturity on the Geneva Bank assets on the majority of it, which are rather small in surface. They will vacate probably towards the end of next year.

We are here in a planning modus, which was already, I would say, partially foreseen when we underwrote it, that this is coming up. The beauty of it, in our view, is that these are predominantly single assets and reasonable surfaces.

We look at multiple usages. I think that's asset management activity which we're undergoing.

But time line is more or less in a bit more than a year when we talk about the move of the tenant.

With regards to the letting success, are you capturing positive reversion here?

I think what we continue to see is that when we are able to offer a refurbed product, then we have substantial positive reversion. When we have relettings, I would say, in Zurich West, we had some uplift, yes.

But generally, you index it and that's the reversion rate. I think selectively, you have it.

But then on the big size, it doesn't really materialize. We had, I would say, a very nice letting success on prime retail beginning of the year, which stand-alone was outstanding.

But if you put it in the context of CHF 360 million, you get somehow lost. So I would say mainline is the trend, a refurbed product, a new product.

You can, I would say, translate your investment in higher rents in majority of the cases. If it's a good product, which comes to maturity, the tenant is in since 5, 10 years, typically, it's prolonged at the same levels plus indexation.

What we don't see, and we have seen that for a period, selectively, you had some incentive requests at those breakpoints. That's something we don't necessarily see at the moment.

Okay. That's clear.

And does that also mean that on your pipeline that you're potentially able to push higher rents than currently underwritten?

Yes, I think on the overall pipeline, I think here, when we started with the projects, we have typically high rent ambitions, and we should be able to capture them. To increase them on the way, I think it's somehow sometimes also difficult because we were already very ambitious.

If you look at the Bellevue or Zürcherhof, I think we should be able to achieve those, so we achieved those. So I wouldn't say that once we have underwritten a year or 2 years ago, there's a material impact; perhaps selectively, you can.

But honestly, there are also elements or sites where you have to review new lettings and then potentially adjust it downwards for a few percentage points. So that's, I think, in the nature of the business.

Okay, that's fair. On your deferred taxes, your report mentioned that there's another CHF 60 million to be released in H2.

Is that everything? Or should there be more to come in the following years?

No, there will be clearly more to come because the [ mechano ] is that, as we did always, every 6 months, clearly, we review the valuations which have the new valuations, no impact on this release. But for the single assets, we will always have then a new value which was 20 years ago.

And this triggers a continuous release or rebuild of deferred taxes. Now having seen how the values developed from 20 years ago to today, we expect, and we know it by calculation, that the release will continue for the next 20 years over the whole portfolio under the assumption that the assets stay in our ownership, so an unchanged portfolio and an unchanged tax law.

Under that premise, yes, we will continue to release not in this magnitude that we have seen this year because this has triggered first to the first instance that we have effective IFRS externally divided in lines 20 years ago, plus we did 2003, 2004, a merger -- a big merger, which clearly brought in some values. So this CHF 90 million for the year are an exceptional in the magnitude, but you will see probably another CHF 5, CHF 6 per share coming through over the next 20 years, distributed year-by-year.

Under the assumption that we are not disposing assets -- prime assets in Zurich, I think that's the mainline assumption.

Following up on the release of capital gain taxes. If I understand well, they are included in the EPRA EPS, just to understand why because in my understanding, deferred taxes and capital gains shouldn't be in the EPRA EPS.

So this would be my first question.

It's an operating release on the deferred taxes on the valuation we have reviewed, plus it's a recurring element of the buildup. What it is not, I think if that's what we also stated, it will not be part in our estimates on the dividend distribution part.

But I think it's predominantly an NAV change from the NAV to the triple-net NAV. But we have reviewed it, and it was part of it.

Okay. Then on the like-for-like rent growth, just to try to understand how the second half will look like.

I don't know if you can share your H2 assumption you have in your new guidance you gave? Or if in the 5%, maybe you can give us the similar exceptional items, so to see exactly the indexation part within the 5% we had in H1?

Yes, I think on the like-for-like, the like-for-like number will come slightly down. In which magnitude?

It's a bit difficult to say. What we will see is clearly an increased top line due to the acquisition of the Westpark.

I think that, as I mentioned, drives obviously the EBITDA guidance, a bit lower costs, but we have perhaps foreseen in our projections contributes as well. So I think these are the drivers of this EBITDA guidance increase.

On the rent growth, I think that will continue to be positive. Giving you a like-for-like guidance, I would expect that it is perhaps rather around the 4-ish without getting me hooked up on the number.

Okay. No, very helpful.

My last one would be, just if you could remind your combined UBS and Credit Suisse exposure, tenant exposure?

There's no combined exposure because we have [ all-in ] exposure to UBS in Geneva in Hôtel de Banque. And we have an exposure, a small exposure to UBS in Gilly.

We have no exposure to Credit Suisse.

Okay. And the UBS, how much does it represent as your rental income?

It's overall, I would say, neglectable. I think we are below 2%.

I have 2. First one would be on the renewal of expiring leases.

So at this point, 68% of the 2023 maturities are renewed. This is lower compared to the last 4 years.

Could you give us some insights for this lower renewal level and, let's say, the challenges in the renewal process? Or don't you expect any additional renewals for this year?

And then on the note of private placement that was due in July, I assume you refinanced that note. Did you use a new note?

Or did you use your unused credit lines? And I would be interested in the conditions that you had for this refinancing.

Thank you. On the second one, we refinanced it with the credit lines.

We did meanwhile also, due to the purchase of the Westpark, also a private placement. I think generally on the cost side, if you go, the capital market spread levels are, give or take, 40 bps.

If you go on the credit side, the spread levels are, give or take, 50 bps and then you add the curve to it. On the [ BPs ], selectively, we are between 30 and 40 on the shorter-term windows.

So I think that's generally a bit the funding conditions we have. On the expiry profile, I think here, we are well on track.

We have some buildings like also the Saint-François, which we are vacating towards the year-end. So those leases will not even mature, and we will then reclassify the buildings into development projects as we do large refurbs, as we did with the Bellevue or the [ Limatov ] or the Zürcherhof or Hochstrasse.

So something not unusual for us. And also, especially if you look at the next year, I think we have quite a moderate expiry profile, which comes due with the one which has already been mentioned by Ken, which comes in towards the end of the year.

Another large one or larger one we had was in Bern on the [ Karlsbadhaus ] area, and this was prolonged. So also for next year, we have a pretty solid view on the maturity of those leases.

I'm referring to Page 18 of your presentation on the discount rates. I mean you typically make the claim that there is a difference between the prime and secondary locations in Switzerland with regard to demand levels.

Why is that not shared by your external valuer who seems to increase the discount rate by all regions the same? I mean if the risk would be higher for the secondary locations, shouldn't that then reflect in the discount rate?

That will be my first question.

Yes, I think it was, as always, it's clearly a question to the valuer. But what I have observed and I think it's also reasonable that on the prime lease came substantially down.

And this magnitude, he did a slight adjustment, which has clearly much higher sensitivity than on the non-prime. I think in our case, the majority of the assets are prime.

So there, you had the adjustment in our portfolio. It's always difficult to competing companies on the sales snapshot.

It is not the same value or within the value, it's not the same valuer. But in our portfolio, we had, as I mentioned, generally a 5 basis point adjustment on the discount rates, I wouldn't say across the border, but pretty much that was a bit his assumption in his adjustment.

And I think in that respect, it didn't have really a signal, well, prime is not so strong as non-prime because the majority of our assets are prime. The non-primes, I think he took already down before, so they trade already at a much high yield.

If you take Wallisellen, there was not much to work on the yield because I think much was already in that. So that's the reason why you have probably not seen it.

Okay. And then on Page 4, I think you point to working-from-home risks.

Could you elaborate a bit more? So does that mean -- I mean I'm here interested with regards to, let's say, space of the tenant.

Is it just like this affects more the larger tenants? Or does it affect all tenants, larger and smaller, just everybody goes to these smaller spaces?

And why you see that difference in effect between prime and secondary? So you clearly see that in secondary locations that your tenants say due to home office, we reduced large bases.

Is that kind of the situation or no?

I think, honestly, that's what we have seen in Biel in 2 tenants and in Wallisellen. In Biel, we were able to completely replace that upcoming vacancy.

In Wallisellen, we are holding back because we have a large rezoning project ambition. So we're holding EBITDA back with the reletting.

We are not observing that in the city centers. In our portfolio that -- when I say that's something which is affected, typically, the move, if you take Zurich over the last decade of the larger, let's say, financial institutions or larger corporates, which took space in Zurich North, in Adliswil, larger floor plates, I think there is evident that they are reviewing a bit their setup and that this -- the new model has potential implications.

We are not affected by it, as mentioned. We absolutely don't see it in the city center.

Our average tenant in the city center leases 900 square meters, we don't observe working-from-home trends there. I think it's even more so that there's a strong push to bring people back.

In Switzerland anyway, it was never a big issue. But I think it's fair to say that in secondary locations, larger floor plates, more cost-sensitive tenants that this is a topic.

We have read also that Swiss Post is reviewing their setups. We are not affected because our building has a very, very long contract and is a more logistic center.

But clearly, those large organizations are reviewing their setup. I think that's -- and also, that is ongoing business.

Then maybe, I mean, more for you as a real expert of the Swiss market, I mean I can see that your direct exposure to UBS, Credit Suisse is very limited. But now, I mean, it's expected that potentially several -- 10,000 people are going to lose their jobs, and these working spaces will no longer be needed.

I mean, do you expect here a significant impact, especially on the market in Zurich, I mean, residential and office space given that there is such a big change coming here in the next month? Or do you think this can easily be absorbed?

I think it's an important question we clearly address also internally at the beginning. I think to be as transparent as possible and focusing on our locations, and so not talking about the residential part, so talking about the prime exposure.

I think, first of all, it will take years until they went through their review of their strategies because it's public knowledge that UBS is more on the chain Opfikon, Altstadt and Paradeplatz. And Credit Suisse is more on the chain Uetlihof, Paradeplatz.

So the question is on how the newco will prioritize. We are around the Paradeplatz, Bernerstrasse.

We believe there's not too much potential vacancy which could come up. I think it would be rather positive because some of those buildings need some refurb, and this will increase the attractiveness of that area.

What implication then is in Opfikon, which obviously will be one day end of life in 7, 8, 9 years; or Uetlihof, which has apparently a long-dated contract still underlying? I think this is something which will not happen so quickly.

I think attractiveness -- decreased attractiveness of the last years of the CBD of Zurich is strong. I don't believe that this combination has significant impact on vacancy in the city center through other lease opportunities.

The same holds partially true for Geneva. I think there, the presence is also not so enormous in the city center.

And so we are pretty positive on it, I would say. But clearly, it has then more of an impact on secondary locations, secondary cities depending on how, and that's something which is not known yet, really, the end game looks like.

So I'm not aware of this multi-thousands, we are not aware of what happens to the Swiss bank. These will have implications, but perhaps more in markets where we are not present.

Okay. And I'll finish off with maybe a bit tougher question.

Your recent acquisition that you've made, you had there a minimal, let's say, minor initial revaluation gain on it. So let's say, you bought it on market level.

Now your own stock trades in 10% discount to your portfolio value. I mean, would there not have been more shareholder value to use that capital alternatively, let's say, with a buyback and not -- would it not be more in shareholders' interest to actually sell properties instead of buying new ones?

Thank you, Andreas. First is I'll -- I would say, 2 questions.

First, we bought it at a discount to the various assumptions, which then translated to this uplift midyear. Probably there were some potential other buyers around, and the market assumption for the [ task ] was a bit higher.

So for us, secondly, it has an asset view, but also a regional view. I think on asset level, we bought at a 4% yield, I think, which is quite attractive also compared to a share buyback.

Secondly, which is more important, it fosters our regional presence in Zurich West, which for us was also very important. Thirdly, clearly, a shareholder -- a share buyback is something which we never exclude.

But in our view, it is not so easy as it seems to say, well, we buy for 200 million shares overnight at those discounts. We did it once, 2008, '09, where we had a stronger discount, where the market was under distress and you were able to buy back shares.

But I can tell you, it was very difficult to buy back those shares. So a short answer would be not possible, not even possible to buy back the shares, CHF 200 million worth of shares in such a period on such a discount because the market will then also react.

Think of the share buyback, our philosophy is we would need a real shock, which then will trigger also liquidity in the stock with an underlying view on the performance of the market, and that clearly will trigger for us a review of the share buyback. This would have been an opportunistic one, which I think is not even feasible, in my view.

But that's a bit my technical view. That's good enough as an answer?

Yes. And why then not sell properties?

No, I think on the disposal, this is separate, something we continue to look at. We feel very comfortable with our capital structure.

We don't need to sell in order to buy, but we have clearly always a view also on further concentrating the portfolio. But if we look at our underlying capital structure on where our covenants are, we have plenty of headroom to say, okay, we buy now this Westpark.

It's an opportunity. There's a sense of urgency on the timing from the seller, which allowed us, in our view, to buy it at an interesting price, which doesn't need to go hand in hand with disposal because we are not in the need to do it.

We should not exclude that we are considering disposals. At the end, we want to be a long-term investor.

We want to be highly visible, transparent and, I would say, reasonable dividend play. I think with this, but also without this acquisition, we have a very high visibility that we can continue in our growing dividend policy over the next years.

So the dividend will continue to go up for the next 4, 5 years from today's point of view, probably also longer, but I would say, if I say 5 years, it's already long enough.

I have 2 questions specifically regarding tenants. The first one regarding the newly acquired Westpark, if I'm not mistaken, only 1 week after your communication, it has said that the shareholders will probably move to your back office, and I think it has been confirmed by now.

So what is the current status there? And how much space is shorter renting in the Westpark?

And the second one is regarding the Bahnhofplatz. Also there, I think the final tenant is supposed to be Google.

What is your update there? And as you said before, will they move in?

Or is this one of these locations that they are rethinking to move in? And what would be the consequences if they do not as you are not directly renting to Google?

Thank you very much. So on the Westpark, the [ shueda ] surface was not a surprise to us.

This was part of a bit our underwriting. And meanwhile, we are in letting negotiations for a variety of the surfaces in the Westpark with also here more than long tenants.

So we are very positive on that upcoming vacancy as we are already in negotiations with different tenants. The exact amount, I think, is roughly around 2,500 square meters on the Westpark.

But here, we are not worried on the letting based on the interest we have already in this surface. On the Bahnhofplatz, you're right, the tenant -- he is a tenant of one of our tenants.

We have heard that they're not moving in. I think as you said, we have a lease agreement with the IBG Group.

They are continuing to let on their original strategy. I think it's enough today with Google to figure out on how to resolve their agreements.

But for us, there is no impact because our underlying -- our original underwriting was with the IBG based on a business model of IBG, based on the conviction that on that location, this is an outstanding tenant. I think even they have been hijacked a bit by a tenant who wants to take hold.

So I think for us, to your question, nothing changes.

Can you name the details for how long is the contract with IBG and maybe what they pay on average?

I think it would be not professional that I would share something which I'm not part of it, I'm not even aware exactly...

No, I mean what you have with IBG, not what they have in Google.

No, with IBG, I think that the rents at the time were even written out. I think they are around CHF 780 per square meter or CHF 800 per square meter.

And it's a typical contract of 5-year-plus to 5-year options, if I'm not mistaken. I think that is a bit the typical contract we have.

But it was also written out, yes.

We'd like to thank everybody for participating in this Q&A. As always, feel free to send us an e-mail, and we definitely will talk to each other over the next couple of days.

And I wish you a nice Friday and a happy weekend. Thank you.