PSP Swiss Property AG

Yes. Good morning to everybody, and thank you very much for attending this conference call.

As always, I will just give a quick intro, and then I will give back to you for Q&A. And I apologize that we do this -- for some in the middle of the summer holiday season, but that's with our reporting calendar.

We reported today our half year results. We are very pleased with the results per se.

Even more, we are pleased with the market environment, which allowed us really to have basically all lights on green. On the letting side, on the transaction side, on the market side, we are, I think, I believe, what I can see in a very good situation.

We have confirmed our vacancy guidance for the year-end at below 4%. We come in with a 3.7%.

And we are also positive for the reletting of the expiry profile of next year based on today's perspective. We were able to improve our EBITDA guidance, also marginally we improved it to CHF 290 million for the full year based on a slightly better sales achievements in Lugano Paradiso, which will lead us probably to a record operating result for the full year compared to the historical results.

I think to be mentioned is also the valuation gain, also differentiated per asset, but back on still a solid and healthy transaction market on the prime locations, but also due to letting successes on the development side. I think this is good to see that we are really also able to let the surfaces we have developed, we have planned.

In some cases, like the project in Zurich on the EPRA side or the Globus and Limmatquai even before we vacated the building and even before we started to build the new building we are basically a full letting situation. I think this is a strong signal for the asset, but also a strong signal for the micro occasion of the building despite clearly the general economic challenges we are facing and also the capital market challenges.

But overall, PSP is in a very solid position also with regard to the organization, we are very positive for the coming quarters to come. From that side, as always, I'd like to give back to you.

I think it's most important to have your questions answered and then go through that point. So I appreciate it.

Thank you.

Three, if I may. The first 1 on revaluation gains.

It was more than 1% of your portfolio. You already mentioned some comments.

But could you please give us also some more flavor probably by region or by property use? And then a second question linked to that.

Of your revaluation gains, like 25% were driven by own development. So going forward, what is your best guess?

What can we assume for contribution from your own development on average per year? Or for instance, in relation to the total investment, so it would be just interesting to hear your assumptions here as a tailwind from discount rates is probably about to stop very soon.

And then just you mentioned the transaction market, could you give us here some more flavor, maybe on probably monthly development. So I'm not sure whether the summer was in general more quiet, but just to get some more flavors on at site.

Thank you, Pascal, for those questions. I think with regard to the revaluation gains, if I take the top 10 positive ones, I would say, 8 out of 10 are coming out of Zurich CBD.

One additional is the Hôtel de Banque in Geneva, which is backed by reletting of the surveys above the underwriting rent. And together with that, still also a slight decompression.

And I think the -- and the third 1 is in Basel. I think this is clearly driven by CBD locations.

If you look on the negative side because we have always positive contributions, but clearly in the portfolio so negative contributions. The negative ones are little bit assets a bit more on the periphery.

I would say not based on the underlying development on the letting side. But probably by the buyer anticipating perhaps a little bit more difficulties on the letting, so going down with market rents or going slightly up with discount rates.

Also on the negative side, we had much less of an impact size-wise than the positive contributor here, it's obvious it's a Globus and their view it's a Bahnhofplatz. It's a Bahnhofstrasse, it's Hôtel de Banque.

It's also Limmatquai based on those lettings. With regard to the -- and if you look on -- sorry, is of regions and produce.

As you know, in the CBD buildings, you have often mixed use retail and office. Now if you take Kirschgartenstrasse 12, we have relet the retail space, and we have relet the office space.

So I think it's both combinations which come in. We still see a very healthy and good prime retail market.

We were -- yesterday we had our Board meeting in Geneva and discussing also with local brokers post the high street jewelry, watch shops in Geneva are doing very well. So this prime retail is still, as far as we can see at the moment, still quite healthy, and clearly contributes then to this valuation or stability of the valuation.

I think on the forward-looking on development contribution, if I may, we never made forward guidances on valuations. I think what I can say is that clearly, as we progress and we are letting successes, there will be a contribution.

As you know, we have a rather smaller part of development. So I would also expect that the general contribution out of those development projects will be on the smaller side.

But there are a variety of factors which come in clearly letting success, letting above the underwrite or the expectations, but then you never know how the market develops, what happens on the discount rates. So I would leave this really to the value.

And I think it's not so material that this has a significant impact on our balance sheet. On the transaction market, I think my statements are primarily foremost backed by discussions with the value, which in those regions where we are active, still sees a healthy transaction market.

No evidence of clearly less attractiveness. Obviously, during the summer period, a bit less liquidity.

It's always a momentum analysis. But I think that's predominantly backed by a value statement and he makes also up and comes up with his assessment of the values.

So I think that's from my -- derive my statements.

First question relates to Page 16, where you show the expiry profile of leases. Obviously, there's a bit of a peak coming in 2023.

Could you just tell us where you stand with the 17% that are up for renewal? That's the first one.

Well, if you look, for instance, on the 2023, the biggest 1 is a retailer which has an option to terminate the contract, which we are very confident that he will not terminate that contract. And this is...

How much does it make?

I will not tell you, and I cannot tell you how much it is, but it's a significant contribution of the reletting of it. It's -- I would say, in general, you can say, it's 4x higher than the second largest.

Besides that, I think we are on all the others working, some we know that they will leave and we are already in discussion with potential new tenants. And on others, we know that they stay.

So I think here, in general, we don't have other very big ones where you say, okay, you need a significant longer time. I think that's always a bit the challenge on the reletting.

You have always some which expire, which will not renew. But as long as they are smaller or the reasonable size you have 1 year, you have time, perhaps it takes a bit longer, but you have time.

Clearly, if it's a larger junction, obviously, we often with the build back and the reposition takes a bit longer time. But here, I would say, the largest 1 is taking care.

And the others are really staggered around the portfolio, and I'm not so worried about this.

Okay. And you don't want to do that usually, and I'm sure you will not this time, but I still ask.

Can you give us already some insight where you believe the vacancy rate should tend towards '23?

Ken, it's always with this expiry always difficult, especially because we are so accurate. But I don't really expect negative surprises on the expiries.

But if you don't mind, we are 1.5 years ahead. Yes.

Yes. And then the wall, I mean, it's relatively short.

And I know why. I mean there's a tendency towards shorter-term contracts, but do you think it will get longer term again from the 4.2 years.

Or do you think we will hover around 4 years now going forward?

Well, the contracts are typically 5-year contracts. You have, in certain cases, 10-year contracts.

And then in some cases, just the early break, and this brings the wall down. I think what has to be seen when we give early breaks we have quite significant penalties in these early breaks.

And the early breaks are often asked just to have flexibility in emergency cases or new settings, but not because they believe they want to go out. So from that end, I think, honestly, this is the role we have to expect.

If we would have a longer 1 is because we have larger, longer leases. That means that we have large single tenant that speaks against diversity.

So we want those to have quite a diversified tenant base. Clearly, if we sign now, I say Gartenstrasse for 10 years doesn't have a big impact really on that specific asset.

But if we have a tenant, which makes an impact for the wall, that is also a significant tenant and then you have more of a concentration risk. So we are pretty happy with this world class margin growth.

Second question. On the debt side, I mean, the average fixed interest period is now 4.5 years.

It's coming down all the time. Obviously, you can refinance very attractively on the short end.

But do you have a midterm target where you want to end up with that? And could you also indicate where the interest rate could go at the average interest rate?

Well, I think here, if we take a bit longer perspective on PSP, we are on record long durations because we originally and historically were more the 2, 3 years and less in the 4, 5 years. I think what we did over the years 2021, we tried to go long term because we were in a negative environment.

One has to see that every hedge expires. So I think also if you have a 6- or 7-year duration, I think 1 can be safe in the short term, but it comes to moment where this expires.

Now we -- when we look at our maturity profile, we factor in, on the 1 hand, the overall loan to value, which is reasonably low to say, okay, we can be a bit on the short rent. Secondly, we factor in the quality of the earnings where we believe that we have viewed and thanks to the position of the assets and the solidity of the tenant and now also thanks to the low vacancy rates, solid top line, which can afford a little bit of more interest rate because I think this is the typical business and the cyclicality.

So it's not -- we have a short amount of short-term debt. We have the next larger expire in September next year.

So I would expect, and I think we are comfortable with a little bit shorter duration backed on the fact that clearly rates might rise also bit, but they will not stay high forever. And with the balance sheet and the quality of the earnings, as we did in last cycle, we believe we can go a bit shorter.

Now giving you a number is difficult because of the reason by opportunities on the debt market. But I would tend to say we will go a bit shorter on duration, and we feel comfortable with it.

Okay. Third question, changes in fair value.

I mean I would like to come back to that as well. I mean you explained pretty well the change in the development portfolio CHF 22.3 million that was due to letting successes.

However, on the investment portfolio, the roughly CHF 100 million, the CHF 97.7 million is that only due to the yield compression, which was if I calculated it correctly, 3 basis points? Or did there also have been some positive changes in the DCF assumptions by the value?

Well, first of all, thanks for the question. If you take Q1, we had a very strong letting success in Gartenstrasse, which was a letting.

We have letting success on the retail sale side on the Bahnhofstrasse. We had letting success on Wallisellen, also on the in-place portfolio.

We had letting success, which then clearly give comfort on all the discount rate, but with a stable vacancy rate, there's not much which comes out of the reletting. It's clearly driven by the overall 3 bps yield compression.

But clearly, here and there, there was materiality on reletting which -- yes, which came through.

Okay. And maybe very short.

Last one, if I may, on Lugano Paradiso. I mean, obviously, you were very successful there now.

What is still open. And I think you were in discussion with some retail spaces with Q1.

And what is the benefit we can expect for the second half of the final, hopefully, closure of this project.

Well, overall, we have 24 units open from the 140 we had. We have 7 reservation.

We have 4 notary contracts. And then we have 13 which are still open.

One part is this commercial activity or so. Please keep in mind, this is a very small area and for us, really a question more of more or less gain.

I think there will be a contribution also by year-end. But most of them, I would expect comps then in the next year and the next year, I would expect that the project is closed.

I was at several ones. The first 1 is on the vacancy rate for 2022.

I mean you're at 3.7% and your guidance is for lower than 4%. If I look at the Slide 15 -- Page 15 of the presentation, you have a lot of expected lettings in the second half.

I mean, if I add that together, I mean, that should be like at least the 0.5% impact positively on the vacancy rate. So is there basically significant tenants that are leaving in the second half of the year?

Or I mean, is there any reason why the vacancy rate should go up from 3.7%? Or should it not actually rather go more towards 3%?

That's the first question.

Well, we have in Q4, 2 contracts which will not be renewed, which we already know, which will bring up slightly the vacancy, you will see probably in Q3 and even lower vacancy because those relettings come in. Net-net, we will be probably at those 3.7% plus/minus, that is enough to be below 4%.

But I think this is -- we have in Q4 some expiries which we are very confident that we can relet next year because we're in discussion. But then you have a bring back of the surface until you can relet, you have this phase over the year-end, but this is, I would say, the biggest part.

I'm just going through the list, but this is predominantly 2 expires in Q4 which will bring them back up the vacancy rate, which will come down in Q3 by a few basis points this comes back then. But we are on a materiality level, which backed on a few thousand lease agreements and on a CHF 10 billion portfolio, I think, is normal.

Okay. Second question then on -- I mean, on potential portfolio changes I mean, are there -- can you give some color whether there would be significant disposals in the second half?

Or is it just the usual fine-tuning? Or is it now the time to use the still supportive transactional market to adjust the portfolio.

Well, I think and I think this is, I would say, my point of view, very important, we have significantly worked on our portfolio over the last years. We are very, very happy with the assets we have.

Clearly, there are a few which qualify for fine-tuning and there are a few which qualify for asset swaps, but without urgency. So we don't see in our portfolio assets we need to sell and to take advantage of the market because at the end, we want to have also a size and liquidity, earnings quality, which allows to continue our dividend path.

So from that end, I wouldn't expect significant changes in the Q3, Q4. But clearly, we are working on a variety of options, but nothing really, I would say, super material.

And then on the outlook for the discount rate. I mean your external value has increased the inflation component of your nominal discount rate.

I mean, is it really realistic that you increase the nominal inflation. So the inflation component, I guess, that's based on a long-term view while actually the real interest rates are not expected to also move up in the future.

I mean shouldn't -- I mean, isn't it more realistically that actually the real discount rate should then also increase given the new interest rate environment which should have an adverse impact of your revaluation -- on your revaluations?

I give you my read, but this is a question for this part you can address today. But my read is that based on the transaction market, there has enough evidence that there's no move on the effective field.

He has adjusted long-term inflation expectations by 50 bps as we have a portfolio which is based in fully indexed, we have the full catch up on the rental income, and so there was no material impact on the valuation per se. I think from a pure technical point is adjustment of the inflation on the discount rate and on the top line had a negative impact of CHF 2 million on the overall portfolio.

I think if you -- yes, this is the technical really material model view. The rest is, is you on the market.

And I think that's also a bit -- yes.

But I mean, with a stable real interest -- with a stable discount rate. I mean, he surely does not reflect the changed interest rate environment given the new policies of the National Bank.

So doesn't that mean the second, the transaction market are not as supportive as in the first half, but revaluations will go down.

You make 2 statements. You make 1 statement on the history at the moment and 1 is on the future.

I think here is a point to move to take on what he sees in the transaction market and the demand on the market support the yields we have in the portfolio. What the impact will be going forward is an analysis will do in Q3, Q4, which will lead to the variation towards year-end.

But the move of the interest rate has probably more an effect on the expectation of the yield gap of the investors rather than the overall yield. But he observes we have transactional evidence, that supports the values of the portfolio.

Otherwise, we would have disclosed it. But I think this has to be separated to what the view is going forward.

But at the moment, if we talk to them, if we see the reports, supports what he sees in the market.

And then the last question from my side. Maybe your view as a long-term real estate expert.

I mean if I look north of Switzerland to Germany, if I'm investing in listed real estate of the largest European real estate company, Vonovia, I can get the value of the assets at a 50% discount if I buy the shares. Whereas in Switzerland, I mean share prices are more or less on the book value.

I mean, is that sustainable in your view and in which market should correct rather?

Thank you. I think this is really -- I think that you had different premium discounts between the Swiss market and other markets, is it a German now were in the U.K.

when you had the financial crisis, I think you see the also kind of a reflection in the currency, what the currency did over the last 3, 4 weeks. I think it's a perception on the safety, on the safety on the earnings, on the visibility on the earnings or the stability of the market per se, which gives trust that the company will be able to deliver in future on that earnings.

And clearly, if you look on the height you have on the German resi, there we were lagging behind. But there, I didn't get the question.

So I think -- it's very difficult to compare. But I would tend to say that's the market and there are a variety of reasons.

I remember in the financial crisis, where we were trading at CHF 50 and the NAV was at CHF 65. The U.K.

ones, they were trading at 70%, 80% discount. So there was probably a reason for that.

As there is the reason for this current bifurcation between German resi and Swiss leased companies. This is a question also of liquidity, this is the question of international capital flows.

This is a question on dividend stability. I think it's a variety of points.

We feel pretty confident with our earnings quality. We feel very comfortable with our balance sheet and with our dividend policy.

And this all leads probably also into certain kind of valuation. What in the market will do for us, it's also not so important.

I think we need to be confident on the rate results and to continue to work on those.

Basically already discussed about my question. But as you know, Swiss National Bank already announced that they will increase interest rate to 2.5% or 0.5%.

Can you remind me what is your working assumption? Point 1.

And point 2 is you have -- you take an inflation rate of 0.5% this is on Slide 18 is not too low? And then certainly, what kind of impacts you then expect on the tenant side, we would expect some failures or as you mentioned in the beginning, that you had also negative impacts on the valuation due to lower rents with some on the pre-fill areas and the discount rates were declining.

Do you see more digital content on the horizon? And yes, well, if you could give me some more flavor or color on that.

Just -- and thank you very much, Serge. Just to be clear, we don't take a 0.5% assumption devaluation.

That done by the valuer. The valuer is an independent body who buys our portfolio in the recent part in Q1 made adjustment of 0.5%.

There were other values in Swiss, which didn't do that in Q1. So I think this is not by payoffs.

Secondly, on the third question on valuation, on 170 assets in the portfolio, you have always positive and negative. Model-wise, if you change nothing the portfolio, generally, the assets become older and there is an embedded devaluation based on the model.

So I think if you don't do anything, and don't change the discount rate and they don't change the rental contract as the asset becomes older and it's independent if it's a new asset or it's an old asset, you have an embedded model-driven devaluation. So that's in the portfolio.

So I think from that end, I don't see also something specific on the tenants. We don't have any insights besides the usual bonds, which is a little, I don't know, a little restaurant, which might have difficulties, but I don't have evidence of anybody in difficulties.

And then to your first question, which is probably the most challenging and the most interesting, what is the working assumption? Clearly, we are confronted with the capital market and with a stock market, which thinks very, very short term.

And they had employees briefing this morning, and I tried to explain the bridge between our results towards the market, which read into like-for-like indexation, valuation. But the other side of the coin is, we have assets super CBD in the most important cities of Switzerland, which is 1 of the most stable countries for the long term.

So taking out the working assumption on interest rates implies also that you start to trade a bit. And I think we have set up the company to go through cycles.

And clearly, the assumptions we have taken with this very low loan to value is historically driven that rates will move up. And if they move up, we should have enough comfort to be able to take action if there are opportunities that is our working assumption.

Otherwise, we would run with a much higher loan to value. On the single expires, as I explained beforehand, I believe we can go a bit short of the duration because we have the strong balance sheet and the core earnings.

So we might go a bit shorter on duration, but not because we have a very strong interest view, but because I believe we can afford without jeopardizing our dividend capability. And I think this is I would say, the base assumption, we have a very, very low view on our assets and on the core portfolio, which is, let's say, 90% of our portfolio is untouchable in our view because it's really part of the core.

And then you will have interest which move up and down will take advantage opportunistically and clearly, financial expenses will go up, and we will pay them. And so we will try to take more rents as inflation goes up.

And so it's really, I would say, trying to be on the operational excellence side with a very strong balance sheet and quality-driven portfolio.

That was very helpful. But probably an add-on here, do you see any fluctuations?

So do you expect higher bad debt going forward then if interest rates are increasing?

I would say, under the institutional players in Switzerland nor significantly. There might be, I would say, not public entities, private, where you have those elements.

But if I look on the non-institutional players, I think these are all solid assets, solid funding. Under the current assumptions, 1 can see going forward, I wouldn't see really a bad debt problem as it.

Okay. Cool.

Perfect. So [Foreign Language] for the second half.

Well, thank you very much to everybody attending, and I wish you all the best and look forward to your bilateral discussions in the coming days. Thank you.

Bye-bye.