© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
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 2023 Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions]At this time, it's my pleasure to hand over to Mr. Giacomo Balzarini, CEO of PSP Swiss Property. Please go ahead, sir.
Yes. Good morning, everybody, and thanks for attending this Q1 conference call on our results. I'm very pleased with the reported results. For us, it's always special to report Q1, which is shortly after publication of the full year results and after the publication of the AGM outcomes. But I think we are able to report a solid set of results, which are in line with our expectations. As always, I give you a quick intro on the results, and then I open for Q&A as we normally do in the Q1 and Q3 reporting period.We reported as expected, a solid top line results with rental income growth of 2.6%, which is basically reflecting the indexation. On the like-for-like basis, the results were plus 4%, which I think are a little bit above the expectations. Please note that we had valuation gains in the Q1 of last year and that we had some disposal gains in the last year in Q1. So on this space, clearly, the operating income came down despite the relatively strong rental income growth. We report as always, a strong focus on our operating expenses slightly reduction in the operating expenses. I think this goes in line with our ambition to have an EBITDA margin above 80%.And what you see also clearly a slight increase in the financial expenses. This is clearly due to the changed interest rate environment, and we start seeing that increase going through the P&L. And I think this is something we continue to see also going forward. However, as we mentioned with the full year results, and we can reconfirm that the visibility we have on the top line development, on the cost development, despite the increased financial expense development, we are very positive that we can continue on our dividend path. Also clearly, the financial expenses will increase going forward.We are confronted with a solid rental market. We're able to lease out well also during Q1, especially in Zurich CBD and Geneva CBD. We had some good lettings. And on the other hand, as also mentioned in the press release, we are confronted with a more delicate transaction market, less transactional evidence. Clearly, on that, we don't have yet evidence for substantially widening or invading. However, we feel that the transaction market is subdued. In that view, we also indicated that we are not worried about the valuations, clearly, but that this trend of yield compression, probably will stop and that we will see eventually slight valuation corrections starting midyear or end of the year.However, as we focus on the operating results, we confirmed our EBITDA guidance. We have confirmed our vacancy guidance below 4% and are very positive in that sense that we can continue on that path. Having said that, I would like to hand over to the participants and start the Q&A.
[Operator Instructions] The first question comes from Ken Kagerer from Zurcher Kantonalbank.
This is Ken Kagerer from Zurcher Kantonalbank. I would have 4 questions which I would take one after the other. The first one goes a bit to the point that was mentioned on the transaction market evidence. What is currently the best guess of where the valuations could go in ABC properties in terms of the market probably.
I think this is really a question for the valuation companies. This is not a question of us. I think we can observe that maybe we get a bit less inflows for potential acquisitions, but we cannot give any view on where the valuations can go midyear. I think that's really up to the valuation company.
Yes and no, because I mean we talk to many companies, obviously, in funds and investment foundations. And we just hear that the yield expectations have gone up a lot. And you obviously also have yield expectations, which have probably changed over the last month. And you also know if you have properties for sale, what you have to expect or what you can expect. So that's a bit more the flavor that you have in terms -- and you tell us already in your press release that you have a feeling that the valuations go down. But could you give us a bit more granularity on, say, high street retail and top office properties. There's something on the market now on Bahnhofplatz as opposed to probably less attractive regions. Where do you see the different areas going at least in your view.
These are 2 sets of questions. First question was related to valuations in ABC. And I think here, it's really the value who has to make a judgment and the view of the valuations are. Clearly, our yield expectations changed, but it depends always on the single asset and always on the potential behind. I would say, overall, we still see that if there is a negative valuation, we are in the low single digits. I think that's what I would expect overall. But I wouldn't give now numbers on the specific is because it depends also based on what in place is it's based on the potentiality of the building.But clearly, we have also changed our metrics because our funding cost has changed. But I would reiterate it clearly, I don't expect any dramatic development. But I would expect, based on what we see also from the [ seeds ] which are coming in a potential slight correction.
Okay. Then I would take the second one. Obviously, you have shown quite a nice like-for-like growth development. And I would assume that a large part of that has been due to these inflation links in your contracts. Could you give us a bit of a feedback how those tenants have reacted? Did you get any feedback? Was it like really easy to pass it on? And it was just a letter that was sent or did you get some feedback from your tenants, what they thought about those increases and especially also the increases that one can expect going forward?
Yes. I think it was a very good operational process linked to the normal invoicing, basically no feedback or no critical feedback. And I think this is part of the rental contracts known to the tenants, known to the landlords. And also in a magnitude, which I would say is absolutely digestible. So this is a contractual aspect, which has been put in place and implemented.
The third one is on the financing costs. There, I would like to have a bit more granularity, especially also on your duration outlook. I mean you have mentioned with the full year results already that you would be more opportunistic and that you could reduce the duration? Where do you stand there? And where do you see the sweet spots now? And where do you think this is going to develop for you?
I think here, we will continue on the path that we have a maturity profile which basically is pretty similar from year-on-year over the next 10 years. And this will lead to a duration of 4 to 5 years because you need besides trying to lengthen the duration, you need also market to absorb and provides capital and secondly, also not to be exposed in a single year. I think here, we are now around 4 years. We'll continue to look at the market and try to raise that -- renew that depending on the opportunity, perhaps 1 to 3 years, 1 to 5 years. If the market is deep enough, we will clearly go also longer. If it's always also a trade-off on overall all-in costs. But I think here, you should expect the similar things we have done in the past, that we have a profile, which doesn't put our refinancing on risk at with regard to the magnitude. And that if we have a CHF3 billion debt portfolio, we basically have every year a similar amount to be refinanced over the next 8 to 10 years. And so that's a bit the strategy we have.
Maybe a follow-on on that. Did you see any change in the financing conditions following the combination of the planned intended combination of UBS and Credit Suisse or does it worry you or...
It doesn't worry us because we have a very diversified lender base as we disclosed always. So I think from that end, we are not worried.
Okay. And the last one, maybe more general question. What were the consequences that you have seen with the introduction of a Green Finance concept.
Yes. We introduced firstly the Green Bond framework because we thought, first of all, we wanted to align the financing strategy to the overall corporate strategy on the sustainability aspects. So this was really more of an alignment. Then we implemented the [ SLLs ] because we want to have a fully sustainable debt finance book. And we expected a deeper capital market for us. But we were surprised that we got a lot of inquiries from the banks to do SLLs. And I think here, it's very positive for us that we were able also to enlarge our lender base on the debt side with the banks. And I think that was the first and foremost effect that we were able to increase and enlarge our financing also with the banks being a fully sustainable finance company.
The next question comes from Holger Frisch from Zurcher Kantonalbank.
I have 2 questions from my side, if I may. First one would be, could you share your thoughts on the refinancing of the upcoming CHF300 million bond maturity in September. So what are your preferred options there for the refinancing? Will it be another bond offering or a secured bank financing as an option that you consider? And the second one would be about the indexation in the press release, it was stated that 90% of your rental contracts are indexed. Could you remind us of the average indexation level for that contract and maybe share your thoughts if you see some changes in negotiations for renewals? Or do tenants ask for adjustment of that indexation level.
To the first point, just to remind everybody, we have no secured financing. So it's all unsecured. I think tactically, we have really the optionality depending on where the capital market is, where spread levels are to do either a new bond, magnitude wise up to 300, duration-wise, as I mentioned, we have our new credit lines. We can draw. We can do private placements depending on the appetite for the investors base. I think clearly, we look into it and early on to find a bit the strategy. But when we talk about opportunistic approach, it's really then in this way, moment look at what is, I think, the best market to ensure a certain duration to also ensure that we have overall attractive financing conditions and that we get also for our portfolio, respective spread levels, which, in our view, expect with the quality of the company.With regards to the indexations, overall, we transferred roughly 2.4% of the inflation to those impacts on the P&L. And as I mentioned beforehand, I think on those levels and on those inflation levels, that's a contractual aspect, and we will transfer indexations based on the November CPI. And as I mentioned, this is pretty much an automated process.
[Operator Instructions] The next question comes from Andreas von Arx from Baader-Helvea.
Also some questions from my side. With the risk of sounding like a broken record, but could you give an update on B2B letting? Maybe I mean also an update on how you did with Google. I think you have delayed some modernization projects there, but maybe you have some views on that one. That will be the first one.
There's no broken record. We're still on the bank floor. Perhaps the music is a bit tuned in the [ wings ]. I think we are progressing well with the development. We had, as I think all development sites, a little bit delays on the developments. We are in negotiations with roughly 80% of the surface. Clearly, the light industrial part is a bit more challenging because there's a very attractive part to it and there's a bit less attractive and we try to combine it. We are not under pressure as once you ablated, obviously, then you have to set up.So if you have to divide the spaces, you're then left with less stores, and that's something you can prevent doing at the beginning. So if you would say, are we behind schedule on the letting side, based on what we thought, yes. Are we work? No. I think it's a very attractive property. Clearly, quality-wise, a bit upper mark in that region, and that has also a little bit at the edge, a bit higher rent expectations and I think here we need to move that. But yes, if you ask concrete letting science, 0, but we are in advanced discussions, in some cases, also negotiations. So I think here, we work according to plan.With regard to Google, as a reminder, we have renewed the leases end of last year. Clearly, the increase of the one building, DL3 at the moment is on hold, but we are in discussions with the counterparty. I think here also there's no [Technical Difficulty] has more of a tactical stop and to see on how to develop it. But overall, we have renewed lease agreements. So from that end, we are also confident that we will continue that plan, most probably not by '25, '26, but it's still not late.
In the press release and also on the call today, you stress that the rent increase will offset the higher financial expenses. I mean, I assume this is only on the actual financial expenses. I mean -- but of course, a large part of your financial debt is in bonds, higher interest rates do not have an immediate effect. So theoretically, on the total debt, I mean, the impact on the financial costs will be significantly higher than what you can offset by the rent increases, right?
I think if you have -- if you look at the financial expense projections, it's pretty easy to calculate, and you would assume that we end at roughly CHF20 million, CHF21 million by year-end. So you have another CHF10 million and you add this 2.5%, 3% top line growth indexation to the CHF310 million, CHF320 million. Basically, it's in line. So I think from that end, you have a compensating factor. Going forward, clearly, you have then a bigger impact on the financing expenses, but we have also a pipeline which comes into maturity. So from the top line, we have a compensating factor, but it's not a full compensation if you continue that inflation path. That's something we have never said. But if I look at the number for this year, it should have an offsetting element.
I mean you mentioned pressure in B&C locations. I mean, if you do a renewal of contracts like you did in Wallisellen or you get new tenants? I mean, is there still, let's say, similar lower rents you have to accept them, let's say, 3 or 6 months ago, perhaps here the situation worsened so that it would be, I don't know, clear double-digit lower rents if you go for a new tenant here.
Ceiling wise, it worsened, evidence showed that we signed 2 leases. So I think what we see is that when there's a maturity coming up, the tenant tends to reduce the space. But we have signed also a lease contract in Q1, a larger one at reasonably good range, which above what we have on our books. I think the sentiment is still very subdued in Wallisellen. There is quite a lot of availability. We are partially holding a bit back because we want also to view if there is an alternative project, [ not an ] utilization in that area. But clearly, demand is very difficult. However, if you look on the rents, we have in place, I think we are at market. It's more really a question of almost demand than just purely rents.
Okay. If you -- I mean, for you as a real estate expert, I mean, if you compare, let's say, if you own a central location office building versus a large-scale building a bit outside. And now you assume there is a trend for more flexible working, let's say, more home office, so you need to adjust space and so on. So which property owner is better off. The one who sits in the center with smaller spaces, which are more difficult to change or the one with the large space outside, it's cheaper rent where it's probably easier to change the floor layout and so on. Who will be the beneficiary if there is a flexible work environment in the midterm.
I would change, if I may, a bit the question. If I look it from a tenant point of view, a tenant who leases today 800, 900 square meter in the centers, which is our average tenant. Working from our own flexibility is not such a big issue. So his approach is not really there and material to -- I have to reduce the space. Now he wants to be in that location. What we observe if you take now Wallisellen as an example, but I think it's pretty much true for many of the larger corps which utilize larger space that they are reviewing a bit the floor plans. They are usually reviewing the utilization.So I would say at maturity, depending on the importance of the rent levels to their overall P&L, they might say, okay, there is some savings around and that those assets might suffer a bit more. I think that's what we experience. We have very limited view that our tenants in the city centers are really affected by a large trend home office. They will probably apply flexibility, but this is not leading to reduced spaces. Whereas the ones the few we had or have outside where we saw that this had an impact on the surface requirements.
Okay. I don't know what you saw, but yesterday in Germany, Vonovia sold high-quality or highest quality residential units in Berlin and Tier 1 cities for a price 10% below book. So not adjusted NAV, 10% below book value. Do you think that could be possible for commercial space in Switzerland as well in a year or 2?
I thought it was 11%, but...
Yes, I'm just rounding, I'm just rounding.
No, no, because you asked if I saw clearly we also observe. It is -- it's such with all respect, it's such a vague question because it depends really very much on the asset or the tenant structure. I think it's really a question which is almost impossible to answer with just the number. We have seen historically always prices going up and down for a variety of reasons, also varieties of stone, which we want to sell. At the moment, we don't experience that because we are not on the sale. We sold a little asset in Interlaken at a premium of 50%, but it is not representative. So it's a minor element. But there might be cases where you have 4 sellers and in a specific asset, you might have those prices. But I think from the outside now, without real case, it's very difficult to answer on it.
Okay. Then last one from my side. I mean, I can see that, I mean, it's the external values job to come up with the valuations and not yours. But do you think given the approach of the external valuation company, do you think that in the half year 2023 assessment, they will already fully reflect the raise in the interest rates we have seen over the last year. But do you think their models actually do not -- are not really capable of fully reflecting that. What's your opinion on that one?
Well, now I would say no. I think we'll not. I think that's not what I see in my view. I said it's up to them. But clearly, they are based as far as I understand, are based on transactional evidence, and there's no evidence for such an impact on even what you have seen on the interest rate because the underlying market is very solid. We are letting well. There's still a demand for those assets. So I would not expect that. Absolutely not.That they are reflecting a certain element of interest increases, yield driving, that's what they said, what they would expect. However, the underlying, and I think that's also important to see if we compare markets. If you compare the Swiss office market with the U.S., New York office market, these are 2 different galaxies or different worlds. And so that's very difficult to do a read across. We have here, we are confronted with the company, which in the city center [ to West ] has almost no vacancy, which sees as rental growth and can fully index and which is not affected from working from home.So the underlying cash flow, the earnings stream are very positive. And clearly, if you go to New York, you see buildings which are 50% empty. And so I think here, it's a bit difficult, and I think the valuer as far as I can judge has a sound reasonable approach to it. There is clearly a change in yield expectations and if they materialize, they will have an impact on respective values. We have prepared ourselves always for this. We are in a cyclical business. First of almost, we want to generate earnings, which ensure the shareholder a constant growing dividend, especially in a rising inflation environment.I think we guided and we indicated that we have a visibility for the next 5 years, we see this dividend growth despite of what the values do. If they come down very strongly, this provides us opportunities for us. And that's the reason why we have always kept the strong watches also on the balance sheet. But don't forget that we are in a cyclical business. And the interest rate moves and values will change eventually.
Yes. I would just add that I see your point on the cash flows that they will not change for your brand properties in Zurich. However, that's only half of the equation. The other part of the equation is that what discount rate do you then calculate that fair value. And I wonder a bit whether what the external values do in Switzerland really fully reflects the new interest rate environment, if they just base it on a couple of transactions. Is that a fair judgment given that we have a completely different discount rate environment?
I think you will look at transactional evidence and then apply and take conclusions out of it. As far as I can see, I don't see this approach to the full adjustment because there's not enough transactional evidence to do it. And we have still seen also in Q1 transactions going through the market at reasonable market rent, market yields which were in places. So I think from that end, I wouldn't expect absolutely that it applies this change in interest rates to the yields. But at the end, as I mentioned, it's the responsibility of the valuer. We are in a position where we have a balance sheet, a P&L, which is strong enough to be confronted with the majority of the scenarios.
Much appreciated.
The next question comes from Markus Kulessa from Bank of America.
I just wanted to follow up on your dividend. So you're clearly confirming when you're talking about the dividend up, it's a growing dividend, even with declining or stable EBITDA going forward? This would be my first question.
You have talked about the declining EBITDA. We indicated that we have a top line development, a project development pipeline, which ensures us a certain growth. We have in place a cost discipline, and that's on the cost saving program, but the discipline demonstrated over the years that we can work on an EBITDA margin of 80-plus percent. And clearly, this will allow us, in our view, for the next 5 years to continue on that path of, let's say, the CHF0.05 increase. Then it's, of course, it's every year, which we will do the judgment in which environment are we is the baseline still confirmed. But this is based on our top line expectations, inflation expectations, pipeline on the development side that we have the visibility now with a payout ratio of 70% and an EPRA EPS of [ CHF1.10 ] per quarter to continue on that path.
Okay. So even this year because this year, the EBITDA guidance is slightly down versus the year before, you should continue increasing the dividend.
Yes, because the one element, which is -- and that's -- it's always a bit difficult because ones, tens and that's not the critique. It's obviously with so much news flow tends to look at the bold part of a press release. But it's a disposal gain, which is a nonrepeat. We had last year of CHF15 million, which was -- which is a nonrepeat. And therefore, the EBITDA guidance is a bit lower, but you see that we have a top line growth of 2.6% in the first quarter. So I think that's the relevant basis for us. And if you look at the EPRA EPS, that's our underlying result the disposal gain, which is still part of the EBITDA.
And following up on the rent growth, so we had a 4% like-for-like but only you said earlier, 2.6% was indexation or 2.4%. So my question is, do we -- what should we expect for the full year? Is it more 4%? Has the rent go for like-for-like -- rent go for the full year? Or is it going to be closer to the 2.4%, so on the indexation.
Let's do a compromise and take the midpoint. That's my best guess.
Okay. And you guided -- I had right, CHF20 million to CHF21 million in financial expenses in '23 yes?
I think there are 2 official guidance, which is the EBITDA guidance and the vacancy guidance, I think the other 2 are indications on what we see. So I would say if I look at the financial expenses, it's more on a CHF21 million per year, can be a bit lower, a bit higher. I think it depends also on how we refinance. But I think that's a bit the indication where we should go.
Yes. But my question was because I go there, but I had this for next year only. So my question was, is it this year already -- are we going to be close to the CHF20 million also this year.
Yes. No, no, no, no. I think we will be there. Yes.
Good. And last question, just not bothering too much on the valuations. But do you have -- or do you see a difference in how your assets are valued versus, let's say, the CBRE also market values? So do you have a buffer, which would -- could help explain a low single-digit decline as you expect for your assets versus what we see as a broker, where the assets are already down more double-digit since June '22.
I think on the asset valuation, we don't rely on brokers view. We have an appraisal company, which values our portfolio twice a year. And that's our reliable base. And there's no -- we don't talk about buffers. That's a mark-to-market view. In the first quarter and the third quarter, we are obliged to review our valuations. And in case we see valuation changes based on rental contract changes, we have to single that to the valuer and ask for a valuation as we did last year in Q1. We had no such evidence in Q1 of this year.
Okay. And H1 will be the first one when transactions should impact.
H1 will be a full valuation of this part of our portfolio.
The next question comes from [ Alexander Potomanof ] from Green Street.
In the press release report, you mentioned that the lease contracts matured in '23, 66% were renewed by the end of March. Could you give us the rent level sentiment on those negotiations? Were there was it a senior rent? Or was there a positive or negative rent reversion?
It was positives, which translated in the like-for-like growth differential for the rental income growth.
Mr. Balzarini, further no more questions.
Thank you very much to everybody. And clearly, as always, we will be able for bilateral discussions. I wish you all a great summer, which seems to started now and all the best. Thank you. 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.