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Ladies and gentlemen, welcome to the PSP Swiss Property Q3 Results 2020 Conference Call. I am Alessandro, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] 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, sir.
Thank you, and good morning to everybody from PSP. As always, I will conduct a very short introduction and then go directly into the Q&A. So the introduction will go for a couple of minutes in order to have really best use of time on your question. So perhaps to start with, with regard to COVID-19 and our situation within the company. To say we, I think, internally weathered the storm pretty well so far, touch wood. We had, as I mentioned, in the midyear, during the first lockdown, we have also had some employees at home. As for today, the majority of the employees are in the office. We can ensure and guarantee all the safety measures. We see, first of all, a high willingness of the employees to come to the office. They have the possibility to come by car, so avoiding all the traffic elements. We have all the sanitary measures, the social distancing. And we service food in order to avoid traffic over lunch going outside. But we feel, in this context, by being able to provide a reasonable, good office product that the efficiency is quite high, and that also the mood within the company and within the employees is high. And this is something which leads us always through the reflection how will this working from home implicate the future need for office. And we have had a variety of discussions with larger corps. I think throughout, as soon as you have innovation element, if you have activities where people need to meet together, the employees want to go back to the office, and also the companies want to have the people back into the office. So I think we have fostered a bit our view that this forced home office has proven to be digitally viable, but that there is room and space for good products in the city centers with good accessibilities, good floor plates and that not necessarily there's a need for less demand, but perhaps a bit of a different demand. If you go, in a nutshell, in what we see in the letting market that we have written also in our presentation and comment later this morning, is clearly after a good start beginning of the year. We had a slowdown during the spring. Recap during the summer and, clearly, the second wave which is on the numbers side, also in Switzerland, increasing. However, if you look at the traffic of the flow of people outside, it's not so perceivable. Had a bit of an impact also on the demand. And I would say more or less on the demand, but more on the interaction with potential tenants. We have a semi lockdown in Geneva and semi lockdown in Canton of Vaud. So the whole system, that region has a bit slowed down. But we are, on the other hand, also in letting activities in discussions. But clearly, the decision-taking process has slowed down. Nevertheless, as you have seen, we confirmed our vacancy guidance around 3% for year-end. So we are convinced that we can achieve this number. Two words on the transactional market. Here, we continue to see quite a strong appetite for CBD assets with good, visible income streams. So I would say here, from a yield perspective, we don't see widening of yields. We see rather a stable or, in certain cases, also narrowing. And now we are getting towards the end of the year, so the amount of transaction has been reduced. But still, there's still enough transactions out there to have certain data points. Last but not least, the capital market. If you look at today, I think it's in a healthy position. Spreads came in a bit. So accessibility to capital is there. In our view, it's always important to be very prudent, anticipate your capital needs because if all of a sudden you need a bit too much of funding, there's a risk really that you you're dependent from the market. That's the reason why we have staggered all our fundings over the next years in a reasonable manner to be very well positioned also for that. So in a nutshell, we confirmed our EBITDA guidance for the year. We have confirmed our vacancy guidance of the year. We feel strong about our balance sheet, about our visibility on the earnings, also the development aside, and we clearly come into it when we have the Q&A. We have no major changes on development sites and on the income perspectives. So from that end, I think it was a very good Q3, and we are positive on the Q4 and to finalize this full year result according to our expectations. With that, and I apologize this was only a very quick intro, I'd like to really go into a Q&A and take advantage of addressing basically all your questions.
[Operator Instructions] The first question comes from Ken Kagerer from ZKB.
I would have 3. The first one is could you please indicate what to expect in terms of P&L impact in Q4 and maybe also in 2021 in terms of earnings contribution from the sale of further apartments in Parco Lago?
Well, for the final of the year, it's clearly embedded in our EBITDA guidance. I would say we had a contribution now of roughly CHF 5.5 million in this first 3 months. There is an additional, I would say, CHF 3 million, we would say, we expect in the fourth quarter. It is clearly a bit depending on the pace we can hand over the apartments. And all the 60 sold apartments have been terminated in the sense of timing dates where we hand over. We have a cross-border lockdown to Italy. So there might be slight delays in deliveries of furnitures or kitchens or bath elements. However, we don't see the impact to be so imminent. So what we see currently still that we are handing over these apartments. So from that end, I would say we are pretty positive on 2020 and this additional CHF 3 million, CHF 4 million. If you don't mind, with regard to '21, we will comment when we present the full year results 2020.
Okay. The other one is basically on a discount rate. You provided a nominal discount rate for the half year of 3.29%. Would it be also possible to give us the nominal discount rate that Wüest Partner applied on the assets in Geneva that you have acquired from UBS?
We don't disclose the single asset discount rates. Plus, we have, if you have seen, one asset has been put on the investment portfolio and one asset has put into development portfolio. So it's clearly part of the overall yield now in Q3. But as we don't value the whole portfolio in Q3, it's not meaningful. But we are, I would say, in that range. And you will see then with the full year numbers. But we are not disclosing discount rates of the single assets.
Okay. Maybe a last one. In terms of the maturities in 2021, you have 14% then. Could you just tell us where you are currently standing? And how much has been worked off already?
Yes, Ken. For the -- I think for '20 and '21, what I can say is from the 10 largest expiries, and we talk here about up to roughly 600,000 of rent due, from the top 10, we have already settled 9. Clearly, we're working through the others. For some, we know that they are going to move out or reduce. For others, we know that they will stay in. Also here, we don't see a dramatic move. What the implications will be overall on the vacancy rate for the full year I will -- we'll also disclose in February. I would anticipate, based from where we're coming from, 3%, the current circumstances that the vacancy moves up a bit, but I don't see dramatic moves.
Next question comes from Alvaro Soriano-De-Miguel from Bank of America.
Yes. Just a quick one, a follow-up on the last one from my colleague. I would like to know what sort of conversations are you holding with your tenants, not only in regards to 2021 renewals, but also 2022. How your customers are confronting those conversations? Are they -- I mean, they are rationalizing their footprint, are they willing to stay or to commit for longer leases? Yes, a bit of color on the day-to-day of those conversations.
Well, thank you. I think, generally, if you look at our 10 base, it's quite a strong tech base, strong innovation elements. And for those companies -- I'm just coming out of a video conference of one of the larger tenants, which clearly have currently home office in place that's predominantly for health measures, but they're eager to come back to the office. They are reviewing, obviously, their setups and what kind of implications they have. But the bottom line is that they probably don't need less space, but different space. So overall, we will, for sure, have tenants which are currently optimizing and streamlining and come to the conclusion that they might need a bit less space. But we have also a lot of conversations where our tenants are doing well. They are still working well. They want to have their people back in. And we have, I would say, also all these renewals, which I mentioned for next year, there was not -- less space was not the argument. Duration of the lease contract, by a matter of fact, the largest expiry next year was prolonged by 10 years, which triggered also a revaluation judgment in the Q3 and therefore, innovation gains. We don't see now request for early breaks. We see that contracts are prolonged on a 5 plus 5 year basis. Interesting enough, we had 2 renewals on the highest retail, might be specific cases, but we renewed them at higher rents in '21. So I would say, clearly, also, if you look beyond '21, '22, if I look at the largest tenant there, I think a large part -- for a large part, office is important. Getting people together is important. Are they being at point of interest is important. And it's our duty to really have these interactions and to try to help those tenants on how to best fulfill their needs. But we don't see now really an exodus on office space.
Okay. And a last question on your portfolio on the valuation of the assets. What could we expect in full year? And could you explain a little bit the devaluations suffer on the -- on Geneva acquisition, those 3 buildings? Is it something normal? Or is something related with this specific transaction?
As to the second point, and if you look back into the records, whenever we do an asset deal, the valuer values the asset. In this case, [indiscernible], he matched the purchase price. On top, we have transaction costs of roughly 3%, which are activated and, therefore, is a hit in the P&L. We have seen that when we bought an asset in Bern and when we bought an asset also in Zurich West years back. So this is not a surprise to us. When we did put in the bid, we knew that we'll have a little first time revaluation loss due to production costs. With regard to the full year evaluation, and this is really my sentiment and my read without having talked to the valuer, is that the activities on the transactional market might lead to a stable or little further yield compression for prime assets. I think that the valuer will review assets with an operational angle and might consider there to be a bit more prudent on earnings visibility. In our case, this is rather limited, as we don't own shopping centers and only a limited amount of hotels, but these are typical assets which he would review with regard to earnings visibility and risk. And then in general, the overall recession elements, economic developments might lead him to review selectively market rents. So net-net, I would expect a flat development. If it's slightly positive or negative, it's more of a judgment call. I think you will have 2 elements which are going opposite. Depending now on the, I think, also the general sentiment on this development of the vaccines, this might have also a bit of an element in the judgment on visibility going forward. But I would say, generally, the value should be stable, from what I see and observed in the market, from today's point of view, knowing that we have another 2 months in front of us.
Okay. Makes sense. And the last one perhaps on more strategic angle. If you're right and PSP is right on the polarization of the office market, we have started to see different performance between core A offices and B and C. What is the -- what sort of strategy is the company -- will implement the company? Should we expect any streamlining of the portfolio disposing those offices, where upside is very limited or risks may increase? Or actually, you are quite happy with your portfolio in this new office world?
No. Generally -- I think generally, if you look over the last years, we had quite a strong disposal program. Also, every year, a little bit, we have sold for more than CHF 600 million. So I think the streamlining of the portfolio has already taken place. And if you go on Slide 60 of the presentation, if you look at the portfolio grid, I think generally, we -- our assets are there where we want them. I think we have identified, first of all, assets where we believe there is a higher and better use, and we are evaluating if we should extrapolate that. These are examples like we did to Zurlindenstrasse, we did in Uster, we did in Geneva, where we developed a project and sold it. We have earmarked another few assets of this kind and are working on concept. And secondly, clearly, we have looked at perhaps assets on more A- or B+ locations, which we might give, in a certain time, where there is no need. I think net-net, also considering the loan-to-value of 36%, we feel quite comfortable with the portfolio size. We might add here and there an asset, but we are also not shy of then trading it with another one, either through an asset swap or a straight sale. Our focus is in improving earnings quality and continues into improving earnings quality. And there are no really specific assets, which we now feel uncomfortable and where we think we have to sell it.
The next question comes from Andreas Brun from Crédit Suisse.
I have 2 topics. First one, can you actually please comment on your city hotels and what do you expect in terms of rent reliefs going forward also in '21? And with regards to the hotel at Rue du Marché in Geneva, how much of rents do you expect by 2021?
Perfect. On the city hotels in general, as you know, we have 3 of them. We have one in Basel, which up until now fulfill their obligations. And clearly now, if the situation is prolonged, we might consider support into '21. But this is in a moderate manner. It's a franchise from the Accor Group. It's owned by a French family, which owns a large part of or a few hotels in Switzerland. They have closed a few ones in this space, but they keep our Ibis Style open, and they are committed to keep it open. So here, we are in a dialogue. But it's in a reasonable manner. We are discussing a certain liquidity relief and not rent relief. So here, it's more of a liquidity judgment. The second one is the Hotel B2 in Zurich, which is doing well on the weekends and, obviously, suffering a bit during the week. Also due to the fact that [ Google ] is in a complete home office models. Also here, we are in continuous discussions. There is no need and no urgency from our point of view. But clearly, we are in discussions with the operator. With regard to the citizenM, it's open. We had recently discussions with them. Clearly, the occupation ratio is much lower than they expected, but they have very strong shareholders behind the company. They pay their rents. We are not disclosing what is the single rent they're paying, but they fulfill their obligations and it's according to what we have fixed in the rental contract. You had the second question, if I might add this, Andreas, you wrote me a mail asking what were the rental incomes from the projects, Bärenplatz, Baufeld C and Grubenstrasse in 2020. From all the 3 projects, the rental income we captured was 0. So it's all coming in, the projected income is all coming in at completion, starting then end '21 and going through '23.
Okay. I have a last one. Could you elaborate on expect rental income from the UBS building for this year and next year? And then on your CapEx slide on Page 31 in the presentation, the Geneva building from UBS is not included there. What is the reason? Or is it that it will be renovated? Could you elaborate a little bit more on that building, please?
The Hôtel de Banque will contribute CHF 2.5 million this year in the fourth quarter and CHF 10 million next year in rental income. It has not been included because we just acquired. We will put it on the full year presentation. We are working on the final concept. We have launched now the all marketing efforts and pitches for the brokers. However, investment-wise, it's a very small investment we have to do. It's really more an opening of the site parts from Corraterie and Cité in analogy to the Confédération entry. And it's more about accessibility and facelift, but we are talking about the single-digit CapEx from our side.
Okay. Maybe a last one, if I may. When do you expect actually the rent relief to come from going forward in 2021 as well? Do you still expect that the spas will be weak? Or could you maybe give us some qualitative assessment.
It very much depends on the development now also from the lockdowns. If you look at [ Genève ], clearly, this lockdown will have an impact on that, which was expected to pay the rent. So I think for us, the parts which will be on the focus are the restaurants. Some are doing very well. Some have a bit more difficulties. It will be, I would say, the 2 hotels and it will be the 3 spas. I think from that end, it's quite sizable, but reasonable overview we have and we're working through. Given our magnitude for '21, honestly, it's too early. We are still working through the last 2 months. Whatever worst-case scenarios has been embraced in our EBITDA guidance. So I think from that end, we should be safe. And I hope you understand that in this circumstance, we are not negative. We are not super critical for '21, but we have really to digest now the latest news, the latest lockdowns, observe numbers and the policies. And I'm sure in February, we'll be in a much better position to give also a good view on '21. Also from today's point of view, '21 will be a very good year for PSP. Where we will be and how it will be, we'll disclose more in February.
Next question comes from Andreas von Arx from Baader-Helvea.
I'll start on the revaluations. If I calculate it correctly, you had CHF 6.8 million positive revaluation on your existing portfolio. Is that -- did I understand that correctly that this is coming from the renewed rental contract at the location in Urdorf? Is that so? And if yes, what are here then the kind of the rules that trigger in quarter -- in third quarter revaluation? I mean, surely, you're not doing that at every single rental renewal that you're doing. So why is that -- was that so significant in that case?
It's an excellent question. We have, from the stock exchange, the obligation to report or to do a full portfolio valuation twice a year. As we have also quarterly results, and we are the only one, basically, the quarter results should also contain a full revaluation of the portfolio because it should be accordance to the half year results. We got, more than 10 years back, a waiver that we say in the first quarter, in May; and the second quarter, November, we are reviewing on an asset-by-asset side if there have been material changes to the rent contracts. So we're not looking at the market factors, but at rental contracts. And if we have the impression that the change of the rental contract has an impact of more than plus/minus CHF 5 million on that asset, that we have lost the value to review that valuation of that building. So happened in Urdorf, because the tenant renewed the contract by 10 years, we knew that the potential CapEx in the model was slightly too high, so we asked the valuer to review that value. They came to the conclusion that it's more than CHF 5 million, so we disclosed it. We had instances where a case was less than CHF 5 million, so we are not disclosing it and it goes into the full year results. This was the majority -- the main trigger for this revaluation gain was that the value has not expected the prolongation of 10 years and had a bit higher CapEx than what we have effectively had or will have over the next 10 years. And this triggered this deliberation.
Okay. Then on the asset swap. Here, you booked the CHF 7.6 million gain. Is that for the disposal only? Or is that for the combination of the disposal and taking in the other asset?
If you look on Slide 17...
I mean was that...
Yes. And I understand. If you look on Slide 17, the change in fair value. The CHF 7 million you mentioned, which we booked, were the pure gain on the disposal of Zurlindenstrasse. The Footnote 6 contains -- this CHF 10.2 million contains a first-time revaluation loss from the Hôtel de Banque which was roughly CHF 12 million or 3% of the purchase price. And the CHF 1.9 million revaluation gain from the Seilerstrasse, which was the swap asset we bought, which basically is a revaluation gain, which should reflect the efficiency gains and the premium we get by having the combined entity. So the CHF 7.9 million Zurlinden, Seilerstrasse is CHF 1.9 million, Hôtel de Banque CHF 12 million, gives net CHF 10.2 million.
Very clear. On the COVID-related lockdown rent receivables. I mean, these came down from CHF 5.2 million to CHF 4.7 million. I mean how much do you expect here to kind of work off, let's say, until the full year? And if you would have to make a guess, given you are now entering a second lookdown or there are certain lockdowns now, I mean, will that number will rise again until the full year? What is your view here?
Clearly, we will work down this number. The lockdown in Geneva and Canton de Vaud, which we have in place now, will increase these numbers slightly. What I can say is that our expected rent release we have to give from these receivables has been factored in into our projection. I think it's difficult to say or to tell now from this CHF 4.7 million how much are we working down number-wise and how much do we have to give as a concession. I think what we can say is based on our judgment on the single cases, we feel comfortable that we can hold on with our increased guidance of midyear.
I mean is this pure negotiation thing? Or is that also related to legal decisions and [ the legal department ]?
The legal decision from the government costs us, worst case, CHF 500,000. Midyear it was CHF 700,000. We worked down the case, it's CHF 500,000. This is legal decision. This is pure negotiation, discussions with those single tenants and -- yes.
Okay. Last one from my side. I have seen a clear increase in the capitalization of owned services in the third quarter also going through the cash flow statement. Is here a special item? Or is this driven by a change in your methods? What's the reason here?
Well, this is purely the fact that according to IFRS, we can activate our own transaction costs linked to Hôtel de Banque. Whenever we do an acquisition, we can activate our costs according to IFRS. That's always the situation we had also in the past, and this goes into this capitalization, this increase of the capitalization rate or this capitalized owned services.
[Operator Instructions] The next question comes from Pascal Boll from MainFirst.
I have one question regarding Parco Lago. When I look at your presentation, then I see that 40% of the apartments were sold, 15% or half are -- I see a reservation. How much of this 40% sold apartments is already recognized in the P&L or has been recognized?
You can say, from a percentage of completion point of view or from a handover point of view, we have handed over, in Q3, 5; in Q4, now we are at 10, and we expect another 29 to go through. So you can say, basically, yes, another 2/3 we go through in the Q4.
2/3 of what? Of...
Yes, it's from the number of the apartments. But we do percentage of conclusion. So every quarter, we recognize a little bit of profit of every apartment we have already sold in the past basing -- based on how much we have completed of the project. So if you look that we had, let's say, a CHF 5 million P&L positive impact in the midyear, as I mentioned beforehand, we will have another CHF 3 million, CHF 4 million, which will come in into the fourth quarter, plus then potential additional reservation we do. We are currently having -- we're having another 3, 4 reservations, which then will be recognized in percentage of completion. The moment we hand over the apartment, then it's fully recognized on the profit side.
Ladies and gentlemen, this was the last question.
Well, thank you from my side. If there are any follow-up questions, unfortunately, road shows are virtual, so please send me an e-mail. Give us a call. Happy to discuss and answer. And I especially wish you all the best and a lot of health. And then talk to you soon. Thank you. Bye-bye.
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