PSP Swiss Property AG

Yes. Good morning to everybody, and thank you for this introductory remarks.

Just to make a little corrective statement, we will start pretty quickly into the Q&A session. As always, I make a few comments, general comments, but I think there was also always the feedback from investors and analysts that you have time to go through the documents, and that there's a preference that we will direct in Q&A to leave up for questions.

So thank you for that. I think generally, we can say, we had, clearly, as I think every company, quite a challenging year throughout 2020.

However, we are very proud of how we managed the year, on the one hand, as an organization. From the people side, I think we went out.

We are coming out of this crisis even stronger than before. And secondly, we were able to meet our improved guidance with a strong EBITDA result, a strong vacancy number.

And I think with a pretty sound outlook for 2021. So from that end, we are positive.

We are confronted, obviously, with, I would say, a slightly challenging letting market. Also, I say challenging, not in the sense of dramatic, but clearly, at renewals or for new lettings, tenants take a bit more time to consider, there's a bit more uncertainty on their business environments, less so in CBD areas, a bit more in secondary locations.

But clearly, it's a bit more demanding on the letting side. On the other hand, and we saw that there was also from the results, continuously strong investment market, especially in prime location with assets with high visibility.

So from that end, I think we are well positioned to attack that. The highlights on the results, I think, are clearly a vacancy rate of 3%, which is a record low, I think, which is also substantially below structural vacancy assumed by the value, around 5% and the 5.5% for such a portfolio.

We guide for a slightly higher vacancy rate for '21 due to some expiries in Q4. Nevertheless, still with a very low and reasonable 4.5%.

The second highlight is, in our view, clearly an EPRA EPS of more than CHF 4.30, which allows us to increase the dividend and to have it fully funded and fully earned. As you know, EPRA EPS takes out all non-core activities.

And the dividend increase we will propose to the AGM is, as I said, fully earned and shows that we are working on a recurring CHF 1-plus per quarter EPS, which gives us also a good headroom for the future development on that line. And the third highlight is with an even higher EBITDA guidance of around CHF 275 million compared to CHF 271 million, is that despite the continuous lockdown.

We also seen Switzerland now in Q1, which we hope now is starting to come back starting March 1. We see a higher EBITDA guidance for the year for PSP at CHF 275 million despite a slight increase in the vacancy rate.

So it means also that also in '21, we are confronted with, for us, a quite stable development. The overall balance sheet situation with a loan-to-value of roughly 35%, passing cost of 47 basis points, I think, it demonstrates our strength to be able to go through on a very stable basis through the crisis and to be positioned for opportunities, although we are very diligent in considering them.

I think this is a very quick snapshot intro. I would leave it kindly up to you to address questions, address areas of interest where I can dive in and answer.

So I will give back to the operator for questions.

Congratulations on your results. I have 2 questions for me.

The first one would be on the like-for-like performance in Zurich. I've noticed that it was negative 80 bps for the full year.

However, at Q3, it was negative 30 bps. I was wondering if you could add some more color around the performance in Zurich over Q4.

And the second question I had was around the vacancy guidance for 2021. If you could add a little more color around the increases and where would it be, whether it would be office or retail and in which cities more specifically?

Yes. So the vacancy guidance and the -- for the full year, we have some expiries in -- for instance, in Basel, where we have to reposition slightly asset.

When the asset comes back, we have to build it back to surface. So at the inception date, December 31, '21 it will be empty.

Also we are currently already in negotiations. One case is in Basel, Freie Strasse, a lease agreement with Zara Home, where we know they're living.

But at inception date, it will be empty. A second one is in Zurich West.

One space, we have to build back, but we think it's well positioned to be relet. On the other hand, we have a Swisscom, which will partially move out in Bill.

And there, we are currently in letting discussions also with city for some governmental activities, but our projection is that it will not be led by the year-end. So I think it's a bit a mix of tenants.

We know they will move out. And on the other hand, clearly, assets which, at inception date, will be empty, but we are positive that we can renew them and bring them back into the market.

That was the second question. On the first one.

We had, on the like-for-like side in Q4, rent concessions, especially on the Zurich portfolio from the COVID. And this was hitting the like-for-like.

We had overall rent relief of CHF 4.6 million, which translates in overall, as I said in the presentation, negative like-for-like of minus 0.2. If we exclude that, we have a positive 1.5.

The large part of this rent concession came in Zurich.

Understood. That's very helpful.

And in Zurich, that would be on the office portfolio? Or is it more skewed towards the retail portfolio within Zurich?

Neither nor, it's restaurants and hotels. And some bars.

Well, we had our best ever operating year, and we had our second lowest questions ever with one, that ones, no one.

No, it's not accepted. Not accepted, time is over.

Yes, just a quick one. If you would look out into the first half and with regards to revaluations, what would be your feeling?

I mean, probably lower interest rates, but now like-for-like, it seems to be go a bit against you. And also, the environment is getting challenging.

I mean, do you still think flattish? Or are we now seeing more like negative developments in 2021?

If I look at transaction evidence, I would see a flattish or even selectively a stronger market. Then clearly, the value we look at what could be potential COVID implications, rent implications.

But if I look purely on the transactions, which went through January so far, we see them at or -- even at slightly lower yields. What then the value does with it, that's very difficult to say because it clearly looks then also a rent situations.

And so -- but I'm -- I would say the short term, I'm not so concerned. I'm not concerned on the long term, but you're asking in the short term.

So I'm not so concerned. But I cannot say if it's red or green.

It's difficult to say.

And just a quick follow-up. The situation in Wallisellen with Microsoft moving out, is that reflected in the valuation?

Or is that something that could be addressed in a few quarters?

No, the Wallisellen Microsoft asset has been marked down with adjusted market rents and the increased discount rates over the period already. I think the value are rightly so when you have an expiry of a lease agreement and a nonrenewal, he has to reflect that in his estimates.

And we saw also in the full year, Q4 last year, that this was marked down on the rent side. It was already being marked down a bit beforehand.

So it's, I would say, reflected in the valuations. It's reflected also in our EBITDA guidance.

For the year. We are currently preparing for the build back, but we're also already in discussions with potential tenants on the surface.

So I think we're working on the case. But on specific on your question, it has been reflected on the valuation.

And just a quick last one. A lot of peers -- some of your peers are now basically looking at their portfolio and using the good environment to get rid of some, let's say, yes, lower quality assets.

I mean, specifically, I mean, wouldn't that be a good opportunity to review your Rheinfelden asset, which is kind of a bit of an outlier in your general portfolio? Or how do you see Rheinfelden going forward?

I don't see it as a lower quality asset. So I think there's no urgency.

China -- no, no. I understand.

It's not really on the -- I would say, on the scheme of super prime, I agree. On the other hand, this is an asset which is stable, has a good rental income [ to them ].

We can still work a bit on the vacancy. Honestly, it could be an asset which could be swapped for something more central, but there's no urgency to sell it for us.

But if there are opportunities where we say, well, we could trade it for an asset more in our areas, then this is something we would consider. But there's no reason to do a straight sale on that.

I'm going to take the opportunity to ask some questions, if possible. The first one on financing.

Yes, your thoughts on where are we heading in terms of cost of debt for PSP. I mean the all in, not 0.22%, 10-year bond issued in February, I think it's a milestone.

But should we expect continued trend to 0%? Then the second question is about banks and financial institutions.

How does it look on the label market and the office use from financial institutions and banks in Zurich and Geneva? We are reading a lot of headlines in London and Paris, some banks reducing their third quarters.

And then, the third one, what sort of like-for-like assumption are you taking on your EBITDA guidance? And finally, and maybe much more wishful thinking or long-term trend, I think we are entering in a new CapEx era for offices, if they need to adapt to the new world.

So have you think about the CapEx needs, your office portfolio will need over the next 10 years? That will be all taking opportunity of your time, of course.

No, thank you very much for the questions, interesting question. On the financing side, we are clearly, I would say, heading towards a floor.

We have a CHF 3.1 billion debt book and CHF 13 million of financial expenses. Clearly, the bond issued for 10 years at '22, we'll trade it further down.

We did a private placement for the year at minus 40 bps. We continue to try to optimize financial costs.

If rates stay at the levels they are, I think we can further optimize as long as we refinance below 47 bps, but I think we get to a certain natural floor. Is this a 12?

Is it at 11? I don't know.

But somehow gut feeling tells me we are getting there. So what we try to do is when we have refinancing needs that we try to lock in longer-dated money at the interested rates, if for whatever reason, spread levels are not on a level, we think are appropriate, then we fund it short-term because we have not much on the short-term side.

So we try to optimize and try to time it a bit. But now with the duration of 5 years and the rates I mentioned, I think we are well positioned.

But we are getting, as I said, a bit to a natural floor. On the banks and the office needs, I think here, compared perhaps to London or Paris, they went through some restructuring exercise already many years ago.

I think the financial crisis in Switzer did specifically hit the larger banks. They went out of third-party leased office into their own offices and they started to sell leaseback and reuse.

So they operated already on a 0.7, 0.6, 0.7, 0.8 percent ratio. I would expect that they continue to optimize.

On the other hand, I think also there, there is a kind of a natural level where you are not able to further optimize. We, for ourselves, we bought the headquarter of UBS in the city of Geneva, where they did a sale-leaseback and they will lease back 45% of the whole building.

Within the next 18 months, we have a rent guarantee. And by the end, they move out of the 55%.

But for us, it's an opportunity because it enables us to really create a prime product in a prime spot. So we are currently in discussion negotiation with a variety of tenants.

And we are talking about market rent levels, which we are on the road. And this leads me a bit to your fourth question on the CapEx.

Our average space, the average space per tenant in our portfolio is a bit less than 1,000 square meter. So clearly, when you have relocations and moves out, you might talk about 10 fit outs, but the property portfolio, the quality of the assets is grade A.

Many of those assets are either new or are historically protected, but we have renewed them. Those projects where we see some repositioning potential, clearly, we will have higher CapEx that was already projected, but we expect also higher rents.

So we don't see so much of new additional CapEx. Clearly, you have, at the moment, to provide a bit more fit-out contributions depending on the asset, depending on the location.

But I don't see now that our CapEx line, which was CHF 60 million, CHF 70 million, would shoot up to CHF 25 million or CHF 30 million. I don't see that.

Based on also our ESG targets to reduce CO2 emission by half in the next 10 or so years, that's already all projected in the investment plan we have per asset. So this, I think, is a normal trend we have basically anticipated.

On the third question, if I go one back, on the EBITDA guidance. I think here, we have assumed basically a flat like-for-like development.

Considering also a COVID impact, which was similar to the one we had in 2020.

Well, this is great. Last question, I'm going to go for it.

We are listening in like other cities and other companies across the continent about reproposing some office space, if demand weakens over the next 5, 10 years, yes, reproposing that space into residential. What is your view?

Can it be done in Zurich and Geneva? Does the math works on those cities, moving from office to resi?

It's something we observe, something we are also doing ourselves. I think I would question the scalability.

It's a bit mentioned as the new flavor of the moment, but you cannot turn down 50, 100 office buildings in resi. I think you will do it individually.

We have one project we sold in Zurich last year, Zurlindenstrasse. Well this will happen.

We have one here in Zurich in Kilchberg, which is planned. We are working on one in en Geneva, where there is some additional floor plates you can generate due to utilization rate.

And with that, you can convert it because it's a resi area. We have in Basel, an office building, which was leased for many years to an office tenant but was more on a resi area and due to the strength of the resi area and this micro occasion, we are considering it.

But it needs really, on the one hand, a resi micro area. And secondly, it needs also the kind of either asset, which allows this repositioning or if you have to tear it down, you need some extra utilization to make the mass work.

So at the end, you will see those cases, how material they are for the individuals company, it's a big question, because also the company has to digest it. We cannot go there and say, now we turn down 5 assets in 1 year.

You have an organization to work with it. But yes, it's predominantly -- at least in Switzerland, we saw it.

It's possible because the resi market on a yield base is even lower. So you can, even by investing more, sale it with a gain because you have to direct to -- the right direction.

You turn an office asset on a 3% yield into resi asset of a 2% yield. So the direction is the right one.

But I would say, I would question scalability.

So from my end, many thanks for your interest, for your questions. And if there is any follow-up, don't hesitate to send us a mail, and we clearly talk over the next couple of days to each other.

Thank you very much, and bye-bye.