PSP Swiss Property AG
SIX:PSPN
Earnings Call Analysis
Q3-2023 Analysis
PSP Swiss Property AG
PSP Swiss Property has delivered a strong performance in the third quarter of 2023, demonstrating solid operations in a stable market environment. The company successfully maintained its top-line growth trajectory from the first half, achieving a 4.5% increase, which was supported by robust like-for-like growth. The re-letting process performed better than anticipated in Q3, which positions the company well with a low vacancy rate of below 4% heading towards the year-end. They have also confirmed that their earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance will be met. The balance sheet remains strong, with leverage below 35%, while maintaining an impressive cost discipline leading to an EBITDA margin above 80%.
The company's like-for-like rental growth has significantly excelled, reaching 5.2% for the year, with contributions coming from various successful re-lettings and renewals, including a notable one at the Hurlimann site in Zurich West. Turnover rents also experienced a resurgence this year. Although expectations for Q4 are positive, they may not be as high as earlier in the year due to expected changes in inflation indexation levels, which could potentially result in still positive but lower like-for-like growth for the upcoming year.
The B2Binz project, despite facing a slower absorption rate due to its light industrial elements, has a bright outlook. The building and its micro location are well-regarded, with anticipated rents increasing slightly. Currently, negotiations are underway for roughly 25% of the space, and the company remains optimistic about renting it out, expecting to report incremental successes in subsequent quarters.
PSP Swiss Property has experienced valuation gains on two of its assets in the third quarter, thanks to successful lettings and an adjustment of discount rates favorable to properties in the Binz and Bahnhofplatz areas. Additionally, the company is actively embracing sustainable financing by integrating green finance concepts into its bonds and loans, which could be beneficial following the UBS and Credit Suisse merger.
While PSP Swiss Property enjoyed significant contributions from the release of deferred taxes in 2023, they anticipate the contributions will be modest in the following year, estimated at around 5 to 10 million. Though smaller, the continuous positive contributions are expected to contribute to the company's financial position going forward.
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Ladies and gentlemen, welcome to the PSP Swiss Property Q1 Q3 2023 Results Conference Call. I am George, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and 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.
Yes. Good morning, everybody. Welcome to our third quarter results release of PSP. As always, in the first quarter and third quarter, really we'll make a very short introduction of the highlights. And I think after a few minutes, we'll give back for the Q&A. I see that there's quite a lot lined up.The results we report today, I think, are confirmation of a very solid operating environment. We were able to keep the top line growth we have seen in the half year results with top line growing by 4.5%, backed by a very strong like-for-like growth. Re-letting went a bit better than we thought for the third quarter. So we have almost no contracts opened towards the year-end, which gives us the confirmation to see, again, a vacancy rate of below 4% and confirming our EBITDA guidance.Balance sheet confirms to be strong with a value of below 35%. And as you have seen, we continue to operate with a very strong cost discipline with an EBITDA margin above 80%. So I think all in all, as expected from our side, solid operations. The market environment that we'll discuss it probably in the Q&A is very stable. But clearly, there are challenges. But I would say, all in all, we are comforted in our areas with a very strong letting market and with a healthy transactional market.With that, I would like to really hand over directly to the Q&A and then going through all your questions. Thank you.
[Operator Instructions] Our first question comes from the line of [indiscernible] from Kempen.
Could you please elaborate a bit more on the like-for-like rental growth? In H1 you were guiding for a slight decrease and now it has even accelerated? And also perhaps could you highlight what your expectations are for Q4? And would this momentum also continue into next year?
Yes. Thank you very much. On the like-for-like, as I already mentioned, mid-year 2.4 percentage points come from inflation indexation. On top of it, we had some successful re-lettings, especially in Zurich West. We had a renewal of a large contract of the Hurlimann site, which clearly passed out through the full year. We have seen the first time, again, a turnover rent. Also you know that we have a rather moderate proportion of turnover rent. But on the [indiscernible] side we had, again, the turnover rent compared to the last year. Then we had some letting successes in Lausanne, which contributed to the like-for-like growth in the CBD of Geneva. And then last but not least, also in 2 instances in Basel. So overall this leads to this 5.2% like-for-like growth. And I would say it will probably go into the Q4. So where we will end at year-end, we'll see, but I think we should build this magnitude.For next year, I think here, it depends on the indexation level. We'll know that by the end of this week what the CPI indexation is. If you look at actually, it's a bit lower than what we have seen for 2 '23. And then we should see still positive like-for-like, but I wouldn't expect in this magnitude. I think here, we can say a bit more with the release of the full year results, if you don't mind.
And then one more question on the B2Binz project. I'm not sure if I pronounced it quickly. Could you indicate why this one is a project that is more challenging to let? Is it the location and also perhaps your expectations in the near term?
Pronunciation was perfect. It's the B2Binz. I think here, we are very positive on the building per se and on the micro-location. Also the development, how we were able to develop it, finish it as we planned. On the cost side, We were able even to slightly increase our expected rents. So it doesn't help much, obviously, if it's not rented. I think the difficulties or the challenges here is that we have an element of light industrial. And I think this takes a bit more time to get absorbed. Although we are in discussions with roughly 25% of the surface at the moment. The product is very well located. It's a very nice product.So we are not worried about letting it. It takes a bit longer than we thought. And by a matter of fact, in the presentation, you have even 2 different letting statuses. We reported 7%, but with the leases which are out, we think that we are already at 14%. So I think here, we will see letting success quarter-by-quarter. But as I said, it will take a bit longer than what we thought. But at the end, it's a very nice asset in an outgrowing area.
Our next question comes from Ken Kagerer from ZKB.
I would have 3 short questions. The first one, with the revaluation of the 2 assets in Zurich, did you also look at the discount rates or the value-added discount rates? The second one, could you give us an update on the situation with Globus? And the third one, could you just tell us what happens with the credit portfolio following the merger of UBS and Credit Suisse?
As you mentioned, we had 2 valuation gains in third quarter. One was in the Binz, that's a Swiss government building and one was Bahnhofplatz. Just as a slight reminder, we -- as we do full quarter reporting, we would also theoretically be in a position where we would have to do a full valuation of the portfolio. We have a waiver from the stock exchange that we have only 2 value assets where we have an evidence that let -- based on letting successes or default, there is difference of more or less 5 million. This happened in these 2 incidents. That was even the third one, the letting success in the client. In this instance, we then asked the valuer to review the valuation. The value looks obviously at the full model and comes to the conclusion, including the letting success and the judgment of the discount rates that especially in the Binz and in the Bahnhofplatz, there was a surplus of more than 5 million. On the client, there was a positive impact, but below 5 million. And therefore, this is something which will go into the full valuation of the year-end.On the Globus, from our side, there's no big update. We are -- we have a lease agreement with Globus. We are fitting out or building or redeveloping the building. They are providing their contributions. We had already a lease agreement before they were our tenant, already before we started the positioning. And then I think whatever is rumors around it is not really super material to us. First of all, it's a relatively small lease agreement overall, and it's in the best spot frequency wise in our portfolio.So I think here [Technical Difficulty] and with the combination of the UBS Credit Suisse, I think here, we were in a position to even increase the exposure due to the fact that we have implemented our green finance concept on the bond side and the loan side. So what we would have maybe in such an instance, expect that combination could reduce the exposure.I think the whole green finance concept in our hand helped us to even further foster the relationship with the combined entity.
Our next question comes from [indiscernible] from Zurcher Kantonalbank.
Just one question from my side. You already guided for the positive contribution with respect to the release of deferred taxes for this year. Could you already give an indication what you expect here in 2024?
At 2024, there will be a rather small contribution in the magnitude of 5 million to 10 million will be the contribution. We'll have continuously positive contributions going forward, but the biggest contribution was driven in 2023.
[Operator Instructions] Our next question comes from Andreas von Arx from Baader-Helvea.
You mentioned, I think as well, is very challenging environment for secondary locations. If I look at your portfolio and if we exclude Zurich and Geneva, I would point out to, let's say, if I look at buildings with around 10,000 square feet of office space. We have around 10 of those [ EL ], 3 in Lausanne, couple in [indiscernible] 3 in Basel and one in Bern. I get to around 15% of total portfolio. Would you agree that number makes sense and that's the highest risk area? Is there any of these locations that you see as a specific risk? So [indiscernible], Sevelin and San Francois and Lausanne, [indiscernible] Sedan Lasan, [indiscernible] as I mentioned [indiscernible]? That's my first question.
I agree with you on the size. I think they make roughly 10%, 15%. I will disagree on the risk. All [indiscernible] 12:43, whenever we had vacancies, were able to let it. It's a fully let building. Sevelin, we are in discussion with the city to further develop that area. We have a [indiscernible] with the project. We have interested parties. Clearly it's -- 10, 15 years ago, but it's for us a potential another risk. San Francois, I have to say, it's prime CBD. So I don't know how you honestly can say this is outside. If you look what happened in [indiscernible] with development, the new development of [indiscernible], I think that's an area where, I would say, clearly, it's a bit larger surface, but we are pretty much positioned. And the [indiscernible] is next to the main station of [indiscernible]. So it's not B location.So if I would, I would take your argument of the B locations. I really would look at the Zurich North, the [indiscernible] area, where we are, I would say, we have an issue with regard to vacancy rate. However, meanwhile, we are on a potential level because we are trying to reposition that area through a reloading.So I start seeing it more as a potential risk. And then we have, I would say, if I look at the portfolio in Ruschlikon, a little services where we see this is something we have difficulties, but honestly not the areas you mentioned. So they are not prime. But if you look [indiscernible] it's at the main station of [indiscernible]. And we have excellent tenants there, especially also the university and the hospital, which are in for the long term. So I will tend to disagree.
And then could you provide an update on Pfingstweidstrasse? I mean we know the tenants and planning, if there's any modernization plan.
If you refer to the Pfingstweidstrasse, West Park we bought, there's no re-modernization in place. This building is basically new. We had a little vacancy rate of 3% when we bought it. We are in the reletting. We have very strong interest from a variety of tenants. There is a tenant which we knew on the underwriting that they might move out. We are basically in discussion for the full surface to be relet. So we are very confident on the reletting of the potential all the expiring leases.As I mentioned, there's no CapEx that we put in, in the short to medium term. So for us, this is one of the top line contributor of this year and will be also one of the like-for-like contributor strength the year after. So -- and we talk about rents based on what we underwrote or even slightly higher. So I think that's for us, no CapEx, but we have never mentioned also that we would have CapEx there.
And the last question, last week, Mr. [ Jordan ] from Central Bank again said that the Swiss real estate market is clearly overvalued. He specifically pointed also to the residential segment. Is that a view that you share? And in case not, why not? And that would be it from my side.
I think on the valuation, if we look at the driver of the valuation, which are cash flows, we see and we heard also from [indiscernible] last year or 2 weeks ago on their reports that on the areas where we are located, that's a very healthy rental market. So I think cash flow wise, I think this is supporting the valuations. Secondly, if you look at the demand supply line, clearly, there's limited supply coming in the market. So I think also that end should help with healthy demand. And thirdly, if we look at the transactional evidence, some recent transaction also from that end, we see some supporting elements. So at the end, the value is driven by the judgment of the valuation company.So we don't see, at the moment, a situation as you would describe it as overvalued. But I think here, we have seen a very slight correction mid-year. If you would ask me towards end of the year, I would say, a flattish slightly yield out shift of a few basis points. That's what I would guess that I don't see value corrections at the moment.Then what the President of the National Bank says, I think, he is in a different position, and he has perhaps also a different view and talking lines in general towards the sector. But what we see from a pure valuation, transactions, and as I said, it's the responsibility valuer, we see healthy underlying driving elements.
[Operator Instructions] There are no more questions at this time. Mr. Balzarini, I hand back over to you for any closing comments.
Thank you very much, everybody, for attending this call. As you know, if there are any follow-up questions, please reach out. And we wish you -- 1.5 months in advance, but I think it's the last time we hopefully speak this year. Otherwise, we have a major event. All the best, and talk soon. Bye-bye.
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