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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to the PSP Swiss Property Q1 2022 Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. 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.
Thank you, and good morning to everybody. More than a short presentation, it will be, as always, a short introduction. And then I would really like to give the floor to the questions in order to have more live interaction. We are glad and happy with the reported results of this morning. With regard to the market, we are confronted with healthy market in the CBD of Zurich and Geneva. We experienced a good business sentiment, which is continuing from what we said in February with the full year results with sound letting activities. Also demand for letting activities in the other cities we are active is improving, especially also in Basel where, I would say, until end of last year. Beginning of this year, we experienced a bit more difficult market. We are seeing signs of recovery. I think this is positive and has been translated also, I guess, as you have seen in our results. And we are confronted with a still quite active transaction market. On the one hand, we were active in the few transactions you have seen. And secondly, also, we see market transactions at in-place yields as we have seen them in the full year results.
So overall, I think we are -- we have started well into the year with also vacancy rate of 3.5%, allowing us to confirm the vacancy rate guidance of below 4% by the year-end. And we improved slightly our EBITDA guidance to above CHF 285 million, which is a sign of confidence that we are quite positive on the remaining of the year with regard to the stability of our business and the stability of our earnings base. I think this is a very short introduction. And I think I would like to hand over back to you, participants, for Q&A. Thank you.
[Operator Instructions] The first question comes from Pascal Furger from Vontobel.
The first question is on your guidance. Can you please share with us what made you more confident in order to raise your EBITDA outlook? And also in light of your very low vacancy rates and having like 80% of your maturities already relet, do you see even more potential coming from the vacancy rate side? And then second question on your revaluation gains. Can you please remind us what has triggered those? Typically, you update the value of your portfolio only with full year and half year results. And then maybe last question is a bit more general in terms of interest rates. So rates have risen quite meaningfully. What is your view on that and the fact that your yield spread might become tighter?
Thank you, Pascal, for the question. On the guidance, as you know, we are, meanwhile, quite highly tuned machine. So clearly, these are narrow movements. I think it's a sign of confidence on the underlying, a combination of, on the one hand, the project in Lugano where we see that we are on a very good path. Also, the vacancy rate and the closed rental agreements helped on that end, and then also clearly a bit the visibility on the overall business made us confident that we can improve our EBITDA guidance. On the revaluation gains, the trigger is, as you know, we have, for instance, the stock exchange to do a 2x full year revaluation of the full portfolio. As we have an official quarterly reporting and disclosure, we would have theoretically to revise the full portfolios in the quarter. We have since, I would say, more than a decade, a waiver that we only review and revalue the assets where we have material sign of change in valuation based on the rental contract changes. So that's an assessment we are doing in the Q1 and Q3. And if we are of the opinion that this could trigger a valuation change of plus or minus CHF 5 million, we have to ask the value to review that specific asset. It happened so in the first quarter with an asset in Zurich CBD, Gartenstrasse, where we signed a lease agreement on the full building. And happens so in the building Hôtel de Banque, Corraterie, the Confédération, the asset we bought almost 2 years ago where we had some letting successes. And those triggered the CHF 5 million just slightly, but that contributed then to the revaluation gain of the plus CHF 11-so million. On the third point, I think, here, clearly, we have seen of the beginning of the year this quite strong interest movement on the long end. I think this will have potential several implications. One is on the refinancing side. I think whatever we refinanced now on the short term has a limited impact. We have a larger -- for us, larger refinancing in September 2023 with overall CHF 300 million of maturities. But until then, I think we are still operating on the short-term refinancings. On the valuation side, I think, here, the value looks predominantly a transactional evidence. And I mentioned at the beginning, the signs we have especially for assets in the CBD that the transaction evidence still shows a confirmation of in-place yields. I think, here, one has to monitor the situation as, on the one hand, interest rates develop and selectively how investment appetite of investor changes. So far, our observation is that this is still quite stable.
The next question comes from Ken Kagerer from ZKB.
I have some questions on the inflation links in the contract. Have you been in touch with your tenants on those inflation links and on this topic? And do you think this is going to go through easily? And do you think that once those rents have been increased following increased inflation, assumptions in the future that you can keep those levels once the contracts are renegotiated? That's one part. The other one is also going a bit into the valuation topic of the external value, two things there. Firstly, the inflation assumption is going to change in the future. Does this have an impact on values? And if not, why? And then you've also seen that the Adler Group has had issues with their external auditor, KPMG, and valuation was a big topic there. And it came up in the press again that with rising rates, the valuations are at risk. You have just touched it briefly that currently the transactional evidence is still confirming those valuations. But could you just give a bit of your view on the long-term development there? And the third question is on the split of the net gains between Grand-Pré and Lugano Paradiso, please, pre and post tax.
Thank you, Ken. One point on the inflation links, it's pretty standard. We have an inflation-linked setup in the contract, which means that we take the November CPI, apply that in full on the rental income starting January 1. Having said that, we have roughly 90% of our rental income linked to inflation. And that means that this is a mechanical issue as we have done it in the last years, and there's not much to discuss, I would say, with the tenants. Practically, the head property management takes the CPI, puts the number into the system, which, in our case, is REM and the letters are printed January 1. On your second question, with regard to the inflation assumptions from the values. You're right, the value indicates that they will increase. There are some from 0.5% to 1%. This will have basically no impact on our case based on the first rundown of the value, predominantly because our top line is fully indexed to inflation. Thirdly, I will not comment on the Adler case, although I followed it. I think what I can say is that, in our case, our auditor and the valuation team of the auditor -- our valuation team of the auditor does always selected analysis of the portfolio. They do pick always a few assets and do a full independent valuation. And over the last, I would say, quarters and half years, there have been never a major discrepancy on those valuations. So I think, here, independently on how this valuation evolves, it's the values responsibly to do the external valuation. The auditors checks the assumptions and makes their own assumptions. I think, here, what I have to say as a management where I see a bit our protection is, first of all, in the stability of the portfolio, the centrality of the portfolio, the visibility of the cash flows still the demand for those assets but then, first and foremost, on the strength of the balance sheet. And I think then that's a bit at the end also the market that we will see how this develops. On this last point on asset...
Sorry to interrupt, because maybe your view on the mid-term valuation that you have commented that, currently, the transactional evidence is confirming those values. But what's your take? I mean that's also important when you take acquisition decisions and so on, on the future development of those values, if you may.
No, no, I think we have seen it when we did the acquisition of Hôtel de Banque. And I think at that time, yields were basically at those levels. If you look at an asset where there is a certain vacancy or an upcoming large vacancy, we talk a bit about other yields. And clearly then, with a view on letting activity and letting success, we get some extra value extraction we can generate. If you look at the recent transaction we did in Place de la Synagogue, we did it, I would say, in a reasonable low yield. But we sold an asset, we sold an asset at a much lower base yield. So I think, here, we try piece and piece to try to generate an additional value in a very difficult market with regard to transactions. Then if that's okay, I would go to your fourth question. If I recall correctly, it's the split Grand-Pré and Parco Lago. Grand-Pré was, I think, as disclosed in Annex, roughly CHF 16.1 million or CHF 16.2 million. Parco Lago, CHF 2.3 million. The tax rate in Lugano is roughly 10% to 12%. On the Grand-Pré, it was pretty ordinary tax rate that is around our 18%.
The next question comes from Andreas von Arx from Baader-Helvea.
I would like to start discussing 4 properties. First, I might have missed it, but on Parco Lago, could you provide an update where you are with levels of selling and reservations? First one. Then on the Bienne project with regard to letting, also on the Bahnhofplatz. And then could you give an update on that property in deal, which is your new leader in terms of vacancy. That's the first part. Shall I continue? Or shall we go by one by one or...
You can continue.
Yes. And then on the developments, here also with the inflation environment. I mean on the projects that you have, do you have everywhere a general constructor contract where already everything is fixed? Or are there risks with regards to higher construction costs? And also, if you look at the ongoing developments, have there already been issues where contractors have showed -- have not showed up or there are delays or contractors that seem a bit unwilling to fulfill the contract, which all could lead to higher costs? That's the second question. And the third one, coming back also to that inflation. So do I -- maybe on the other side of the metal, I mean, your cost side, I assume that's all basically hedged. I mean, let's say, your energy costs and so on for the next year, are they not also based on that CPI index from November? So basically, there's not really any delay risk here. I mean whatever CPI then is in November, you increased the contract and you already hedge for the energy? Or are there timing -- potential timing issues?
I come with the last point. We are not energy trader, if you talk about hedge. So I misunderstand the question. Whenever we have consumption costs increasing for the tenants, they have passed over to tenants. There's nothing to hedge. And for the 3 buildings where we have our floors in, there's nothing to hedge in Wollishofen, in Geneva and in Basel. So I think we are quite immune on the ancillary expenses, as I would call it, because they are borne by the tenant. To your Lugano question, we are left, I think, roughly with 2 little commercial spaces when you enter the building, where we are in discussions for disposal. And we are left with roughly 10 apartments where we have, on the one hand, a bit interest. Some have yet no interest. But we are in, I would say, very positive that we'll sell those apartments. As we continue to say, we have no urgency. We have since been not giving discounts, and we will continue to do that. On the Bahnhofplatz, we have signed the last lease agreement on the newest development just a few days ago. So also Bahnhofplatz 2 is now fully leased. On your Biel, that's the right observation. There's always a leader also in the low levels. Biel is the surface where Swisscom gave back space and moved out of Biel. We are there in, I would say, not advanced but in positive discussions with a tenant to take up some space. The buildings are very central. And here, we are through our local team in discussions for leasing up this Biel surface. It's interesting. It's still a quite active market. And I think also here, we are quite positive also considering now the magnitude of the overall vacancy. On the development portfolio and the 2 questions, I would say, linked to it, on the one hand. If I recall your question correctly, the total construction costs on the one hand and then secondly the no shows of potential parties, which should do the work, I think, here, the positive note of having a smaller development pipeline is that your exposure is smaller. Clearly there, on the other hand, the fantasy sometimes is missing. But on the other hand, if we go through, we have selectively relation with a total contractor. In certain cases, we do it our own. But in no instance, we have a material impact from building material inflation. We had some projects -- I'll take some water. We have in little -- in some instances, sometimes a bit of delay in the material procurement, a bit of cost inflation, but there's no way material for our pipeline. So I would answer it on that way, that we are confident that we can deliver on those costs and incomes. That also...
Yes. There's also no update on the Binz. That's the one.
On the what, on the Binz?
B2Binz.
B2Binz, we are working on a variety of discussions with potential tenants. There's this interesting element that we need a little bit of light in those on the ground base. We have interested tenants on certain parts, but we don't want to forgive us a full concept. So I think here, the quality of the building and the centrality of the building makes us confident that no hurry to put in place and that we can continue developing this project.
May I add a quick follow-on question?
Yes.
I mean you paint a very positive picture on your developments and rightly so, looking at the numbers. But if I look at the market, let's say, SMB with some partner figures, I can see office base rents being down slightly, not much, flattish to slight negative. And I can see retail rents being down quite significantly 3% in the first quarter, having been down 3% last year. I mean is this just you're enjoying, let's say, a more favorable exposure? Or would you paint that in a more optimistic picture really for the overall Swiss market?
I think generally, I'm not painting. I'm trying to tell what we see. In Hôtel de Banque which is a repositioning asset, basically development, we are leasing above underwriting rents. In Bärenplatz, we are developing restaurants and office. And I think in our view, we have signed a very, very attractive office rent. If you look at those projects, also the Zürcherhof, Limmatquai, we signed very attractive office leases. During COVID, beginning of 2021, if I recall correctly, that this triggered also valuation gain in Q1 '21, we renewed high street retail, I think, 6%, 7% above in-place rents. I'm not saying -- I'm not talking it up. But we see, especially Zurich CBD, Geneva CBD, a healthy office markets for renovated assets, modern surfaces. Perhaps here, we have a double effect. We have, on the one hand, the centrality and we renovate the building. So with Mont-Blanc, we did a complete renovation, and we're basically full with state-of-the-art tenants.
So I think it's still a bit perhaps the combination where our view perhaps deviate slightly from a general assessment. That's a bit a snapshot to you for what they see when I go through the rental agreements. Gartenstrasse, we signed above in-place rents at very attractive terms, and this triggered evaluation change by the value because it puts the contract into the DCF model. I think that's a bit, I think, our observation.
The next question comes from Holger Frisch from Zürcher Kantonalbank.
I have a question on the WAULT, a clarification because there seems to be a different information in the press release and the presentation. So my question is, is the WAULT for the top 10 tenants down to 3.4 years like it is said in the presentation? Or is it up to 4.6 years like it is said in the press release?
I can't answer that.
Because I was wondering...
No, no, just now [indiscernible]. I thought that's more for the presentation, perhaps it's a time point in the press release. We will come back on that. I apologize if it's something I cannot.
So could you just...
I have to check. I have to check.
Yes. Could you just maybe say something in general about the rent extensions? Were there any concessions from your side for the extensions? Or are the conditions so far unchanged?
Yes. No, I think what we observed on generally perhaps also on the WAULT, we don't observe a shortening of the rental agreements. We observed a continuation of 5-year contracts with 2 5-year extensions. In certain cases, like, for instance, Schaffhauserstrasse, we have also 10-year contracts with options. We see here and there a request for early breaks with clearly then potential penalties to be paid. But in general, we don't see a change in the duration of the contract. Secondly, with regards to the conditions, especially in the CBD areas, we see the normal requests on fit-out contribution of entries rather a bit more in certain cases in favor of the landlord. But there also depends very much on the single asset.
The next question comes from Alexander Toome (sic) [ Andres Toome ] from Green Street.
It's two questions, really. So first, you mentioned that your -- 80% of your leases are indexed, and you use it in November. Index level and everything is indexed on January 1. So I assume this is -- there is no indexation. As leases mature, it is your entire portfolio indexed once a year. Just wanted to confirm that. And second question, given that 80% of the leases expiring in the year have been secured, could you please comment on reversionary -- any reversion capture on those? And any -- are there any regions or CPs outperforming in relation to others?
Yes. On your first question, that's correct. I think when we renew contracts, we review the rent, but the indexation happens in November. Also if we renew a contract during the summer, you might then individually decide that you say, okay, this new rent includes the first indication -- indexation. But generally, it's once a year where we capture the CPA adjustment for the following January 1. On the reversionary, yes, we -- if you look, that's a bit difficult then to do a read across. But if I look at the largest renewals we did now in the first quarter, we are above in-place rents and we are also 4%, 5% above. But there are clearly some specific outliers, which drive that element. We have then to see on how this falls down on the overall portfolio. But especially and if you ask me for regions, it's the two, which I mentioned, the CBD Zurich and the CBD Geneva. In one case, also a bit Basel.
[Operator Instructions] Mr. Balzarini, so far, there are no more questions.
Well, thank you very much. And if okay, we'll go bilaterally back on this WAULT question to the experts from the take a bit. Thank you, everybody, and I wish you a successful day. Bye-bye.
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.