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Edited Transcript of PSPN.S earnings conference call or presentation 25-Feb-20 2:00pm GMT

Q4 2019 PSP Swiss Property AG Earnings Call

Zug Mar 6, 2020 (Thomson StreetEvents) — Edited Transcript of PSP Swiss Property AG earnings conference call or presentation Tuesday, February 25, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Giacomo Balzarini

PSP Swiss Property AG – CEO, CFO & Member of the Executive Board

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Conference Call Participants

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* Andres Toome

Green Street Advisors, LLC, Research Division – Research Associate

* Kai Malte Klose

Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst

* Pascal Furger

Bank Vontobel AG, Research Division – Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the PSP Swiss Property Q4 Results 2019 Conference Call. I am Myra, 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.

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Giacomo Balzarini, PSP Swiss Property AG – CEO, CFO & Member of the Executive Board [2]

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Thank you, and good afternoon to everybody, and thank you for your availability on, I guess, quite a busy schedule. So therefore, I will do a rather quick introduction on the highlights of the financial year 2019, and then we can go immediately into the Q&A.

The highlights. We report an EBITDA number for the financial year 2019 of CHF 256.1 million. And more importantly, we guide for an EBITDA of above CHF 260 million for the year. We report a vacancy rate of 3.5%, and we guide for a further reduction of the vacancy rate, and we expect it to be below 3.5% by the end of the year.

Rental income went up by 4% to CHF 290.5 million translating a like-for-like of 1.2%. And for the full year of 2019, we report a valuation gain of CHF 244 million on the back of yield compression of 16 basis points, which then translates into loan-to-value for the year at balance of the 31st of December of 32.3%, and the passing cost of debt of 0.73%. This leads us to a dividend increase proposal to the AGM from CHF 3.50 to CHF 3.60 on the back of an EPRA EPS of CHF 3.94 or an EPS, as we calculate at PSP, EPS of CHF 4.69 on an operating basis. And we propose also to the AGM, the new Board — the new Board member, the CEO of Castellum, Henrik Saxborn, to be joining the Board of PSP.

Besides that, to highlight sustainability improvements, with regard to the ratings, we disclosed them Page 5 of the presentation and in the Annex. And last week, we have been certified as a Great Place to Work, conducting an employee survey and a culture audit throughout the firm, which clearly enforces also the yes in the whole ASG equation.

But with that, I would like to directly go into the Q&A and I’m happy to take in the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Kai Klose from Berenberg.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [2]

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I’ve got a quick question on Page 111 of the report, annual report, where you show the EPRA like-for-like change by areas. We had a plus 2.3% in Zurich and minus 6.8% for Lausanne and plus 4.6% for other locations. I just was wondering could you give more details on the other locations, which contributed positively to the like-for-like? That was the first question.

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Giacomo Balzarini, PSP Swiss Property AG – CEO, CFO & Member of the Executive Board [3]

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Okay, I didn’t hear you very well. But I think you referred to Page 111 and the like-for-like, I guess?

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [4]

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Exactly. What was the 4.6% for the other locations plus?

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Giacomo Balzarini, PSP Swiss Property AG – CEO, CFO & Member of the Executive Board [5]

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Yes, the other locations were rental renewals predominantly coming out of Biel. We had quite a good letting success in that area. And this leads then to the rental, the like-for-like growth in that end. Lausanne is in expiry at — in the Sevelin, but we are already now in advanced negotiations for that surface. So I think these are the 2 main highlights.

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Operator [6]

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(Operator Instructions) The next question is from Pascal Furger from Vontobel.

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Pascal Furger, Bank Vontobel AG, Research Division – Analyst [7]

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So first question on the Parco Lago property in Lugano. So there, your preselling [quote] stands at 29% versus 15% in H1 last year and 7% in a year ago. So in your presentation, you mentioned you are confident that you will fully sell basically all the condominiums by mid of this year when the project is about to be completed. Can you please share with us why you are so confident in this? That would be my first question.

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Giacomo Balzarini, PSP Swiss Property AG – CEO, CFO & Member of the Executive Board [8]

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Thank you. I’m not sure where we said that we are confident to fully sell. I think what we wrote, where you read completion, we said what we wrote is the completion of the project and that the units are…

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Pascal Furger, Bank Vontobel AG, Research Division – Analyst [9]

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You mentioned all units to be sold…

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Giacomo Balzarini, PSP Swiss Property AG – CEO, CFO & Member of the Executive Board [10]

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Yes, to be sold that we are ready then really to start changing ownership. So I think that would be then a misread with that. We want to say that starting in June, we will start with the first handover and then full profit booking of the sold apartments and that we’ll have continued sales until the end of the year, but it’s not meant that we have sold all the apartments by mid-2020. So that is — if that was the interpretation, it was a misread from us. But we are confident — sorry, if I may add, we have seen an increase in demand and an increased amount of reservations and we are quite confident that we’ll continue to improve the disposal process of Parco Lago. With regard to the development site, we are on time, and we are in budget. So from that end, we have no constraints.

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Pascal Furger, Bank Vontobel AG, Research Division – Analyst [11]

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Okay. And maybe 1 more question with regards to project you sold, 2 projects in the course of last year, which basically mitigated a bit your total turnover from the this promotion business, I mean, the lower sales basically from Lugano, one in Uster and Rue de Berne in Geneva. Is there basically more project which you can sell in the next 3 years?

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Giacomo Balzarini, PSP Swiss Property AG – CEO, CFO & Member of the Executive Board [12]

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Yes, we have put in the annual report that we reclassified 3 further assets where we see a better use in a conversion in residential. These are — this is an asset in Zurich on the Seestrasse, which is currently an office building, but it’s a residential area, it’s Sihlamtsstrasse and it’s Zurlindenstrasse since a bit of time we are working on highest and best use projects. And it is not excluded that we will sell the one or the other this year. It depends really on the stages of the project. We will then decide if this is a project we want to develop and then dispose the apartments ourselves or — and considering the demand in the market, if it’s not more wise to dispose of the project and taking so upfront the — I would say, now [view] a larger part of the profit. But we are transparent in the annual report. You see the reclassified buildings where we plan to sell them as a project.

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Pascal Furger, Bank Vontobel AG, Research Division – Analyst [13]

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Okay. That is very helpful. And maybe just the last question on the real estate operating expense, it’s a direct one. So it’s quite a good job on the cost side. So you’re now at 9% — 8 percentage of rental income. Are you confident that you can keep basically those direct costs basically at this rate? Or will we see an increase related to, for example, new project in 2020 onwards?

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Giacomo Balzarini, PSP Swiss Property AG – CEO, CFO & Member of the Executive Board [14]

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On the — yes. No, I think on — with regard to the property operating expenses, we should see a slight further reduction in the costs as we aim to be even lower on the vacancy rate and, therefore, can further transfer the ancillary expenses to the tenants. And as we are able to reduce the vacancy rate, we should also incur less letting expenses.

On the CapEx, I think we — half year, I would say, a run rate of CHF 17 million, which is plus/minus quite stable. So I think from those 2 lines, I’m pretty confident that this is kind of a run rate or that we can also slightly further optimize it.

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Operator [15]

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The next question is from Andres Toome from Green Street Advisors.

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Andres Toome, Green Street Advisors, LLC, Research Division – Research Associate [16]

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My question is about your like-for-like rent growth expectations in 2020 on the back of 85% lettings…

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Giacomo Balzarini, PSP Swiss Property AG – CEO, CFO & Member of the Executive Board [17]

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Yes, the like-for-like expectations for 2020 are around 0.8% compared to the 1.2% of ’19 predominantly driven by the fact that we were able to reduce the vacancy rate last year from 5% to 3.5%. And then the road down from 3.5% to below 3.5% is a bit steeper. But still, we expect like-for-like for the year around 0.8%.

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Andres Toome, Green Street Advisors, LLC, Research Division – Research Associate [18]

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And 1 more question from my side, if I may. You noted quite high interest for properties in the transaction market. What is your kind of sense when you’re looking at pending transactions? Are we going to see more yield contraction to come in the next year?

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Giacomo Balzarini, PSP Swiss Property AG – CEO, CFO & Member of the Executive Board [19]

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It’s clearly, the beginning of the year, as always, there were not so many transactions. Considering, however, the interest rate environment and the need to invest, I have today, I would say, no signs that we have yield widening. If that leads — if that environment and the low interest environment now leads to further yield compression really is subject to transactional evidence and I think we have to observe that over the next 3 to 6 months. So from that end, it’s really early stage to say, but the general parameters are here to say the transaction market is healthy. The demand is strong. So I don’t see yet any signs that yields go out.

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Operator [20]

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(Operator Instructions) It seems we have no further questions, sir.

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Giacomo Balzarini, PSP Swiss Property AG – CEO, CFO & Member of the Executive Board [21]

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Thank you very much. I appreciate the call. Wish you all a good afternoon and talk to you soon. Thank you.

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Operator [22]

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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.

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