U.S. Markets closed

Edited Transcript of SPSN.S earnings conference call or presentation 8-Aug-19 8:00am GMT

Half Year 2019 Swiss Prime Site AG Earnings Presentation

Zurich Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Swiss Prime Site AG earnings conference call or presentation Thursday, August 8, 2019 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Hans Peter Wehrli

Swiss Prime Site AG - Chairman of the Board

* Markus Meier

Swiss Prime Site AG - CFO & Member of Management Board

* René Zahnd

Swiss Prime Site AG - CEO & Member of Management Board

================================================================================

Conference Call Participants

================================================================================

* Andreas Brun

Crédit Suisse AG, Research Division - Swiss Equities Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Hans Peter Wehrli, Swiss Prime Site AG - Chairman of the Board [1]

--------------------------------------------------------------------------------

Good morning. Welcome to our media conference today. Same thing [thrice] to you. One person is saying nothing. That's me. And then there will be people who get up and say something and we'll go along this usual line: Rene and then Markus. Who is going to kick off? Okay. It's Rene.

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [2]

--------------------------------------------------------------------------------

Thank you very much, translator. Well, there was a slide for you, but you skipped it. This was it, or this would have been it. But I will cover it.

Well, a warm welcome this morning at this media conference, strategy conference, particularly Luca Stager, warm welcome. He is joining from Canada with a 6-hour delay. So early good morning, Lucas. But he is going [to back] for the important sale process, of course, but he is on holiday at the moment.

So let's start with the most important figures, half yearly results. The real estate portfolio, 6% growth to approximately CHF11.5 billion. We have grown in operating income too due to growth within Tertianum to CHF608 million. This is a 3.8% growth in percentage points.

The rental income dropped slightly at 0.7% minus. This is due to the asset swap with Sihlcity, which we sold off, and another factor is redevelopments that still ongoing and so we're not generating any rental income yet, for example, the Stucki Mall and the A1 Mall in Oftringen and also on the [Fair Ground] Tower also in Basel has some vacancies where Roche moved out, and we haven't been able to fill the space yet. By the end of the year, all of that should be much improved and we should also be better than at the end of the year 2018.

EBIT has grown by 22.8% to CHF 286 million, driven by revaluations, and revaluation, whether these are special effects or not is open to interpretation. But my opinion is that it is partly special effects. But of course, in those areas where revaluation has come from the development business, that's the strategic factor, CHF 140 million come from development business. And so that part certainly isn't really random special effects. But it's something that we've worked for.

Earnings. Here we have this clear rise to CHF 357 million. Here we have a special effect -- which is through special effect -- which is the deferred tax liabilities which were released, and we also were able to increase equity ratio to 43.6%. Earnings per share has declined a little. However, 6.2% in weighted number of shares, increase. So this has to be taken into consideration when comparing this to the semiannual results of 2018.

And we also saw an increase in net asset value to CHF 68.64. This is an increase by 5.2%, and this is only the services segment included at book values only.

Now let's look at the details. Revaluation gains are shown here. Approximately, a little more over 85% revaluation effects, and very likely split half on existing properties, and here also Beethovenstrasse [held] because we were able to get better rent rate. And this also is part of our -- due to our work, and then approximately half from development projects.

Vacancies, 4.7%. That's very positive results. We already said that this would remain below 5%, and that is being confirmed as we speak.

And here, now let's take a look at our core business. New and renewed leases, 61,000 square meters have been rented or leases have been renewed. This includes Lonza, 8,000 square meters, at the Stucki Park, that's one of the docks; and 80% of YOND areas, and Schonberg in Berne, which is almost fully rented out already, even though it won't be ready for moving in until November this year.

Divestments. We have sold a property in Geneva in the first quarter of 2019 and started the sale of building A at the Plan-les-Ouates -- building A, project in condominium ownership. That is a new project and that is being started in the next few days.

There's also been an acquisition in development area in Geneva called Praille-Acacias-Vernets. This is the largest area of the Canton and City of Geneva. We managed to acquire a small property right at the center of the area, and it already has a net income of [4.5%]. We are going to be able to acquire more in order to be ready for the development to come underway once the canton and the city have approved it.

Now let's take a look at our project development. We have (inaudible) Olten has been filed. The building permits have been filed for [approvement]. We have received some approvals for the Tertianum project in Richterswil and 1 in Monthey and Stucki Park and Weltpost Park in Bern, we have also been able to get some topping up permits.

Let's take a look at the project pipeline, our projects under construction. We still have CHF 2 billion. There's a slight shift compared with previous slides. We now have CHF 800 million under construction, CHF 900 million in development and CHF 400 million reserves. This is a shift to the well-known slide. If you look at the second and the third line on your left, you can see the Tertianum building which used to be part of the development projects. But now that we have approved the building permits, they're being reallocated to the under construction category and are therefore included in here.

Here, there are just a few details on rental income expected. So on the left, YOND, 80% have already been let out, and we are expecting rental income of CHF 4.3 million per year once it's fully let. At Bern, Schonburg, we already have a rental rate or letting rate of 95%. This is a mix there: hotel, retail, fitness -- gym and also some apartments. And on November 1, it's going to be ready for moving in. The hotel is going to start in January. And the West-Log Zurich is a logistics building; 85% let already.

And Schonburg, by the way, it's CHF 5.4 million. CHF 4.3 million, YOND; CHF 5.4 million, Schonburg; and CHF 3 million, West-Log in Zurich. Those are the rental incomes projected. And here you can see the Plan-les-Ouates project. As you know, 2 buildings were sold, buildings C and D were sold to the Hans Wilsdorf Foundation and we are now selling the floors in building A.

JED in the old NZZ Printing building. JED I in Schlieren, 70% has already been let. We are expecting considerable rental income here too and also first phase has started. And Stucki Park too, the first phase started. The first 2 buildings rented -- let to -- Lonza, CHF 5.3 million per year, let to Lonza, the entire building.

And also some new projects for assisted living. Monthey on the left and Richterswil on the right, CHF 1.2 million in rental income and CHF 1.9 million in rental income respectively. In Monthey, 28 apartments and 50 beds and Richterswil has 26 apartments and 54 beds. So it's always more beds than apartments. So that means that is more of a service center. This is important because the beds are usually filled immediately. These -- usually we can achieve let rate of about 95% and then the apartments would usually come afterwards in terms of being rented out.

Now here are the projects in planning, the blue curve. As I already said, 2 projects have now been transferred to the under-construction category that used to be in this category. So now we have a new slide, which is to help you get some orientation. Planning business is our core business, which is why we are presenting this. And we hope that this slide gives you a good idea of what's going on and where we are.

And starting on the left, another Tertianum project in Lugano, and here we are in the design plan phase. We have already filed for approval and a building application has been submitted and we have a pre-letting status of 100% in -- the beds have been let, but the apartments still need to be let.

In Olten, we have the new building. We have already published the design plan and we still have to make some changes before we can start with the building application -- getting the building application. Again, pre-letting status is 100%.

In Alto Pont-Rouge, there is a new interesting development area next to the Praille-Acacias-Vernets by the way, and we have submitted building application, are expecting it to be approved this year. So we could start construction next year.

JED II. This is the development of Schlieren on the former NZZ property, and we are already negotiating some pre-lets before submitting the building application. Stucki Park II already has received building permits, and we are now going to construct Docks 2 and 3 just before the building of the first phase has been let. That will mean having let out 50% of the buildings and that will trigger the second phase.

And this year, we are starting here at the Maag site, with an architectural competition for the additional smaller tower, and it's important to have a competition here because we want to have top quality and we also want to give different architects a chance to show their solutions and choose the best one.

And long-term planning also includes another project in Geneva near the airport. And you may have heard about the airport in Geneva being quite complex. So Riantbosson and the other project near the airport in Geneva has been very successful, 90% pre-letting status. And so also with this projected construction, we can also expect excellent demand.

Now let me talk about the services segment now.

Starting with Wincasa. The assets under management have shown excellent results. First time we exceeded the CHF 70 billion mark. And the growth in area -- mixed use site management has been excellent. I think our clients appreciate the one-stop shop for services, and that is something that we often hear when we talk to our clients. We are also working on transforming operation into a digital environment. This doesn't just require the infrastructure to be in place, but also the organization to be adapted to it. That means that we have people responsible for core business operation, but also we have key people for the transformation into the digital world.

Markus Meier, our CFO, will tell you that we have an EBIT margin of 10% at the moment. And I'm with Oliver Hofmann here. We projected 12% EBIT margin, which we're going to achieve. Oliver is nodding. So we will achieve the 12% by the end of the year. This is due to the fact that we have a cyclical business. For example, the bills cannot be invoiced until the end of the year, and that means that some of the income is not generated until the second part of the year.

Generally, we were able to open 2 watch boutiques: Breitling and Hublot. We are now converting the beauty department in the basement. So everything is going to become much easier for people to find their way around. And then the Pallas Klinik is going to be opened in September, with around 900 square meters. We are all looking forward to that.

Now, our assets under management are slightly better than in the second half of 2018. So you may wonder whether you can assume that this is going to continue in the same way until the end of the year. Well, yes and no. We're going to start with the CIRCLE investment, that's the interior construction. So there is going to be some additional costs in the second half of 2019 and the first half of 2020.

Well, in terms of Jelmoli, I don't just want to read all these titles, but I would like to take this opportunity to [ask] Franc for 7 years of doing an excellent job for Jelmoli. And I think everyone will agree with me that we all wish you the very, very best for your future career and endeavors, and thank you very much for your great work.

So for the future ahead of Jelmoli, well, we have prepared an excellent team and well positioned department store. And also working in one of the most beautiful properties of the City of Zurich, newly opened branch with a Pallas Klinik and a new beauty concept, which will be presented in November, with a new ground floor area, and the potential of opening areas near Zurich airport, not until the autumn 2020. We've had to move the opening from spring to autumn 2020. And ultimately, also the successor of CEO of Jelmoli also have the opportunity to work on the opening of the online shop. And so this is a very exciting task, and this is official opening on our quest for a successor.

Now, with Prime Site Solutions, we are very proud to this young new segment. The assets under management have increased by an impressive 48.5% to CHF 2.2 billion, and we have been able to acquire 2 real estate packages in the first half year. And the rental income from them have managed to offset the lack of rental income from the previous ones, and so really well managed. And capital increase was carried out in the first of half of the year, and we are expecting a 5th issue in the second half of this year to be launched. And there is also a strong increase in profitability for Swiss Prime Site Solutions.

Well, now the particularly interesting topic of services. What's the status of Tertianum today?

We now have 78 sites in 16 cantons in Switzerland. So a lot of new sites have been added. This is a image of June 30 this year, and we are expecting a total turnover of CHF 5 billion this year, EBIT of over CHF 30 million. And we have 4,700 staff now; 3,323 care beds; almost 2,000 apartments for assisted living. And you can see the growth phases that we have gone through. By the end of the year, we are going to have approximately 80 operations and will be able to continue our growth course based on our own development pipeline to approximately 100 operations by 2014.

So you may wonder why we are selling Tertianum or -- well, let's talk about what we're selling. We are selling the operative business. We're not selling the properties in our portfolio. We're simply selling the operations.

Now, let's take a look at 2013, which is when we truly started in the sector. What was our motivation? We wanted to grow our core business and we were interested in Tertianum's real estate portfolio. These were 12 properties that we were able to acquire and 11 rented properties, and this opens the door for us to implement growth in the core business in an area that we wouldn't have been able to enter without the operative business. And so we were able to open up a new usage segment, which was assisted living.

In the following years, we had a sharp growth rate from 23 to 80 operations. This was mainly due to acquisitions of SENIOcare and the Boas group as – French-speaking citizens -- and we didn't just grow, but we also managed -- and I'm talking here about the Tertianum team, not just SPS, but the operations team managed to make Tertianum ready. We invested in processes, in training, care workers. We introduced SAP, careCoach and also we managed to increase the -- or to decrease the vacancy rates of care beds and apartments.

So we now have an EBIT margin, which is very competitive. So we believe that for the last 6 years, we were the right owner at the right time for this great growth phase. So as I showed, we could now continue to grow to 90 to 100 operations particularly because we have our own development pipeline. But what we cannot manage is to generate additional synergy.

So this applies to synergy potential within the Group but also outside. For example, purchasing care materials. I'm sure that there are possibilities for procuring more cheaply. We're just not equipped for it. And also we are not able to expand the value-added chain of Tertianum. But maybe other owners would be able to do that. In other words, the first reason is we were the right owner during that phase, but now in the next phase another owner would be more suitable. So that's the first reason.

And the second reason for the sale is the negative interest environment, which we are expecting to continue for a few years to come. This means that our core business, real estate, can only generate a limited growth by acquisitions, particularly not in the size that we are interested in, simply because properties are too expensive. And that is why we decided on concentrating on development business.

And of course, you need a lot of cash for development, and we've always been able to cover this need with capital increases. The cash influx from selling Tertianum is going to allow us to finance future growth for the next business plan years, that would be the next 3 years, '20 to 2023, without capital increases, which means that we would not water down the existing shares anymore, and that's like-for-like basis. Of course, we don't know what other opportunities the future holds, but that was the second reason.

The third reason is selling Tertianum is going to strengthen our balance sheet. And the fourth reason -- and let me explain this. We've been told very often that we're very complex, and Markus Meier and myself were told that during our road shows again and again. But I think the dynamics of calculated risk is part of this company, and that also means choosing the right time to bid part of the business farewell when we feel that we have made enough profit with it. So we are going to sell this operating, but -- I don't really like talking about complexity, though, but it's simply going to give us more scope for concentrating on our core business, real estate and related areas, both in terms of time and in terms of finances. And so those who've been criticizing us I hope that you will now see us more favorably, and I hope you're not going to disappoint us.

So that was my introduction. I'll now hand it over to Markus Meier.

--------------------------------------------------------------------------------

Markus Meier, Swiss Prime Site AG - CFO & Member of Management Board [3]

--------------------------------------------------------------------------------

Thank you very much, Rene.

Ladies and gentlemen, I will now guide you through the financial aspects of the 2019 half year results. Let me give you some important information. First and foremost, we had growth in various areas. As far as rental income is concerned, we've been stable compared to earlier years, with a clear prospect for further rental income from completed real estate development, beginning in Q4 this year and moving on, as we go forward through completion.

We are planning for strong growth in assisted living with Tertianum. We have growth for real estate services with Wincasa based on construction and property management fees. We have had strong growth for asset management for third parties with Swiss Prime Site Solutions and Jelmoli, in a challenging retail trade setting, was able to increase EBIT.

Let's have a look at the details, beginning with the main source of income, i.e., rental income, which has been stable compared to the period in the previous year. But there have been some swings, obviously. For instance, our rental income was adjusted by CHF 6.4 million due to sales, but on the other hand, we had purchases, and rental income was increased by CHF 8 million as a result of that. So there was a difference of plus 1.6% between the 2. Now for adjusted rental income of CHF 1.4 million, the main reason was the swap of our 24% share in the Sihlcity shopping center versus a 49% share at the office building in Worblaufen where we control by 100% now and 2 well-placed office properties in Zurich, at Giesshubel and Mullerstrasse.

Furthermore, we made medium-sized purchases in the retail field. We reduced our exposure in Bern, Bahnhofplatz 9, at the end of last year and this year in Geneva, Rue de la Croix d'Or, very close to the Rue du Rhone shopping mall in Geneva. And we gained rental income from the 3 properties in the asset swap on the one hand, but also from Beethovenstrasse in Zurich's business district -- central business district -- a well-kept office property that we bought at a challenging return a year ago. But the market has continued to develop and it's very gratifying to see that there has been an increase in value that we posted in the first half year of 2019 on this very property.

CHF 1.8 million of value adjustment on the portfolio of investment properties due to the Messeturm in Basel where the major tenant moved out and, as I mentioned before, we are negotiating with interested parties. Negotiations seem to be promising. Based on this situation in Basel with the Messeturm, we had a like-for-like of minus 0.8% attributable to this very situation.

Then, we had minus CHF 2.8 million of temporary reductions of rental income due to major repositionings, more or less the same ones we had at the end of 2018. First and foremost, the shopping mall on the Stucki Park site in Basel, where we have been moving away from the shopping center towards more lifestyle shopping, enriched with entertainment, medical office, sports, and we're going to convert it along those lines. And we've come a long way in doing so already. Another property in this field that we have temporarily taken out of rental income is the former A1 shopping center at Oftringen, which we're going to re-convert into a DIY market with a long-term rental agreement that was already signed by Bauhaus.

We had 8 sites that vacated at the end of last year by the OVS Group in Switzerland, fast fashion, and at Christmas 2018 we had rented -- let out all the 8 properties at higher income and these properties at Barfusserplatz in Basel will no longer be in fast fashion, but it will be converted into a banking outlet, and we have income from completed properties with more to come on a major scale as we are going to see later on. That's the 2 properties mentioned before in Geneva, around the Geneva airport, the Geneva business terminal and the Riantbosson properties, both of them fully let by now.

And finally, due to additional leased properties in assisted living, we ran a CHF 0.7 million of additional rental income.

On the left-hand side here, you can see the top line situation. Operating income and in middle -- center, EBIT, divided into real estate services, the 2 segments, and you will find the details on the services segment below that.

Beginning on the left, with growth of top line. In both segments, we grew, as you can see in dark, we've got real estate. Here, we grew primarily as far as rental from -- or income from development properties is concerned, we've got 2 complexes in development that we've already sold and we will generate income as a percentage of completion by 2021. This refers to the Plan-les-Ouates and 3 residential properties in Bern at Weltpost Park.

So much for the increase in real estate. Now for services, we rose by CHF 17 million or 4.3%. CHF 12 million in the field of assisted living. That's the growth story we are seeing here, and CHF 5 million in particular for asset management for third parties. Following reorganization in the past year, we are now generating these fees.

This leads to EBIT of CHF 286.1 million in the half year, 92% from the core business, real estate, and the rest of it divides into what you see at the bottom.

Strong growth with Tertianum as we saw at the level of the top line.

Then Wincasa. We've got a top line growth as a matter of fact. However, we are very much in the phase of transformation there. We're getting fully digitalized, and we are focusing on moving towards a digital business model. We've got set up an innovative call center for the most essential 20 to 25 questions that people ask. This will take more investment. We have not completed it yet, and of course, this leads to a charge on EBIT this year and last year for Wincasa. But the assets under management, CHF 75 million of assets under management threshold has been passed and that's a result of our expansion in this field.

Jelmoli, in a challenging environment, improved on EBIT, but as Rene Zahnd, we are assuming that based on the investments that we are to make with the [AARO] project at the air site at the airport and the 2 formats, CIRCLE, where we have some construction delays and due to general digitalization and e-commerce -- in particular, e-commerce will be linked up with stationary trade with all the gadgets such as social media will be integrated, and this will certainly be a major charge at EBIT level.

Swiss Prime Site Solution, from CHF 1.6 million to -- rose from CHF 1.6 million to CHF 2.1 million (sic) [CHF 6.4 million] and I think that speaks for itself.

And here, you've got the group income statement with the operating income that we've just talked about. Revaluation of investment property -- there is a strong increase over the previous year -- triggered by the high quality of our properties and the quality of our sites and demand from the market. At the end of the day, we need to mirror market value for the Prime sites. This is divided more or less 50-50 among investment properties and development properties, and what is very gratifying to see is that in all developments under construction, we have a positive revaluation gain.

This applies to all the properties, Zurich (inaudible) and YOND, and the 2 projects in Geneva (inaudible) Pont-Rouge and Schonberg at Bern as well as Stucki Park at Basel, specifically the finger docks on the Stucki Park site. The market weighted average real discount rate reduced to 3.17% by 5 basis points or in nominal terms 3.69%. Then, we've got sales proceeds on investment property in the amount of CHF 5.6 million, that's the sale of Rue de la Croix d'Or retail trade property and you always have to add the gains that we made over time due to POC on the development projects sold. That led to the proceeds in the real estate segment that I mentioned. So we have a total of CHF 12.6 million for the half year of proceeds from properties sold.

Operating expenses also increased due to the developments in -- on percentage of completion, but in particular due to the growth of Tertianum assisted living. This is a business that requires a lot of HR as well as maintenance and depreciation.

Head count at the group as of June 30 rose to 5,200 FTEs, up from 4,900 a year ago. Financial expenses was slightly decreased. We were benefiting once more from a yet lower interest rate setting without changing our financing structure, though. And a very special thing to mention in this first half year is the tax expenses. They're usually expenses, but here we've got a tax income for this half year because the Swiss people on May 19, 2019, voted on [stop] the tax proposal and social security financing, approving this proposal, and various cantons have dramatically lowered their corporate tax rates as a result primarily in the Canton of Geneva, but also in Basel city and St. Gallen.

We have benefited from massive tax reductions, as a result of which we had to reverse some of our deferred tax provisions in the amount of CHF 158 million. They are still at CHF 1.1 billion of total deferred tax provisions that we have on the books. This is noncash of course, and the origin of this contribution is completely outside the control of Swiss Prime Site and does not affect the business at all. This is why profit rose tremendously from CHF 151.3 million last year to around CHF 356.5 million. For reasons of transparency, we're always showing this without revaluation gains and deferred tax, and as announced, we are at a stable level compared to the previous year.

Here, you have the development of the real estate portfolio from a purely financial point of view, with the sales we conducted in Geneva, the retail trade property, and the 2 major value increases on the portfolio, both like-for-like and for project. So this increase in value is composed of investments and the CHF 85 million divided into the 2 components of the revaluation gains as shown before. Then, we bought this small block of lands -- future development block of lands in the PAV site in Geneva and a medium-sized property for assisted living.

This is solid capitalization, based on equity, of course. The strong increase in profit over the half year reinforced our capital base and we can also see the shareholder friendly payout we made in this half year. We are within our target corridor of around 45%. As far as financing or credits are concerned, we continue to have an average volume weighted funding ratio of 1.4% and the residual term to maturity, 4.3 years. One major transaction that we completed in the first half year, a CHF 350 million straight bond at 1.25% coupon for 8 years and we have refinanced a CHF 200 million bond due in December. Early on, this is our strategy to refinance as early as possible. The loan to value ratio is within our corridor of around 45%.

So much as far as finance is concerned. Let me hand it back to Rene Zahnd.

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [4]

--------------------------------------------------------------------------------

Thank you, Markus.

Let me move on with the outlook or confirmation of our goals. Now this is the first half year. So I'm not going to give you a major outlook on the market. Just will make a few short statements. Geopolitical risk, I'm not going to decrease trade war, USA-China what impact is it going to have. At the moment, it looks like having a positive impact for real estate companies. On funds, we continue to expect low interest rates or even negative interest rates. You've heard it several times over. This is not necessarily negative for our business.

Now, for the office market, depending on how geopolitical risks are going to evolve. At the moment, things are running well. We can feel it in the right places. The office market is doing well. Zurich is a good place. Geneva is a good place too, involving different potentials. It's always a matter of micro-location, of course. We can see potential in the field of logistics. There are some logistics centers in the project pipeline, as you can see.

And for the retail business, it is fair to say the wheat in separating from the chaff. On the one hand, as far as product is concerned, and on the other hand, as far as service quality is concerned, in particular, a prime sites doing well -- continue to do well. We show that with the OVS sites that we occupied. Again, it will be interesting to see how inner cities are going to evolve. The 8 OVS sites were occupied with one single thing.

I wasn't really aware of the concept of fast fashion. All I knew was there was fast food. But I really like fast fashion, but there is only one site where we are offering fast fashion. On the other sites, we have banks and dentists and things like that. But this goes to show that good retail sites can be used for different purposes, producing higher rental income at the end of the day as the OVS example shows. These are the points would be borne in mind, product, service quality and the right place, the right site.

Now, the vacancy rate. I've already mentioned Tertianum objectives I've mentioned as well. We are going to achieve the goals set there. We will be able to make appealing payout since 2020 with retroactive effect on 2019.

And on the left-hand side, you can see the growth potential we have for the development pipeline. Most important component there is rental income. There is a total of CHF 83 million that we expect from the pipeline, and saying that, this includes potential -- doesn't include potential from reserves. It only includes specific things that are under construction or in development. So reserves -- land reserves are not included here. This is a total of CHF 83 million, rising in the years to come.

Unfortunately, we only have CHF 1.1 million from the 2 projects of YOND and Schonberg this year. Why so? Because they will go back to the portfolio only by Q4. But then, there's going to be nice increases: CHF 15.8 million, CHF 17 million, CHF 14 million, CHF 15 million, CHF 19 million, so always between CHF 14 million to CHF 19 million of rental income every year.

So much for the outlook and confirmation of all the goals and the outlook for rental income from now to 2024. We will keep you up to date. Even if there is a project that we were to sell, it will be mirrored. So as a consequence, rental income would perhaps go down, but then we would have to post proceeds from sales as a result.

So I'll be available for questions, but hand it over for the Q&A to Hans Peter Wehrli.

--------------------------------------------------------------------------------

Hans Peter Wehrli, Swiss Prime Site AG - Chairman of the Board [5]

--------------------------------------------------------------------------------

Thank you very much for the presentations. We are now ready to take your questions. I'll start over here.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Unidentified Analyst, [1]

--------------------------------------------------------------------------------

I have some detailed questions. The first question concerns Tertianum. Probably not a surprise that I'm asking about this. So what's the duration of rental contracts going to be in the first half of 2020? Are you also considering changing some of the rental contracts?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [2]

--------------------------------------------------------------------------------

No. We're not considering any changes to rental contracts. Most of the contracts that we own are not going to be changed. They're long-term, 20-year contracts, more or less. So the average maturity is now 15 years, yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [3]

--------------------------------------------------------------------------------

And you spoke about additional costs for CIRCLE for Jelmoli in second half of 2019 and beginning of 2020. What's the quantity?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [4]

--------------------------------------------------------------------------------

Well, we spoke about when Jelmoli should reach the zero. But -- so originally the target was 2020, but that would have required us to open in the spring of 2020. And if we had done that we would have invested into interior design in the -- in 2019. But now the plan is to start to achieve the zero in 2021. And we still have some investments to make, which are going to have a negative effect on EBIT. The quantity is going to depend on a few factors. I can't answer that yet. But your question was when the equal would be achieved, and that is now going to be a year later than originally planned.

--------------------------------------------------------------------------------

Unidentified Analyst, [5]

--------------------------------------------------------------------------------

And just to get an idea of the market better, in terms of rental of buildings under construction, have you made any concessions to future tenants? Have you had to? Or--

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [6]

--------------------------------------------------------------------------------

Well, I'm going to talk about Schonberg. Well, I live very close, 500 meters [today]. And well, the question should really be, whether we should have gone up with our rents because now 132 apartments have already been rented out and there is just 10 lacking -- so the 10 that maybe don't have the ideal layout. But as a basic principle, we certainly achieved the level that we were aiming for, for the hotel anyway, and retail is food retail. So yes, but now I'm going to pass over to our specialist in Zurich.

--------------------------------------------------------------------------------

Hans Peter Wehrli, Swiss Prime Site AG - Chairman of the Board [7]

--------------------------------------------------------------------------------

Well, in YOND, we did not make any concessions. It was interesting to see that YOND had to be understood by the market. It was a new product and were giving our tenants a lot of freedom. And we saw that they had to be able to cope with that freedom because they had a lot of scope on what to do with the surfaces, with the areas. And that's why we waited a little; didn't try to speed things up by reducing the price. But we asked for the CHF 260 and we were able to get that. It may have taken a little longer than expected, but we now have 80% just before completion. So I'm very happy with that.

--------------------------------------------------------------------------------

Unidentified Analyst, [8]

--------------------------------------------------------------------------------

And were there any contributions for interior design, etc.?

--------------------------------------------------------------------------------

Hans Peter Wehrli, Swiss Prime Site AG - Chairman of the Board [9]

--------------------------------------------------------------------------------

Well, sometimes 3 months, mostly.

--------------------------------------------------------------------------------

Unidentified Analyst, [10]

--------------------------------------------------------------------------------

And just 2 brief questions. Well, like-for-like growth ex Fair Grounds Tower in Basel were relatively flat. And on Slide 28, you gave an outlook to the future rental income. And it says here in the small print in full rental, so should we expect full rental rates? Or are you going to have the usual vacancy rates?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [11]

--------------------------------------------------------------------------------

Well, yes, we are expecting full rental, but of course the question is how long it's going to take. Maybe take a year before full rental is achieved, but that's a...

--------------------------------------------------------------------------------

Hans Peter Wehrli, Swiss Prime Site AG - Chairman of the Board [12]

--------------------------------------------------------------------------------

So it's always a relative question of what full means.

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [13]

--------------------------------------------------------------------------------

Peter said this correctly. The question was how to valuate the intermediate floors, how to divide the rent between the mezzanine floors and the others and what makes sense in the market.

--------------------------------------------------------------------------------

Unidentified Analyst, [14]

--------------------------------------------------------------------------------

I have a question on the yields which are, in the business report they're 5.8% for the 2 projects.

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [15]

--------------------------------------------------------------------------------

These are net yields and those include a 4% vacancy rates. So this is the net yield.

--------------------------------------------------------------------------------

Hans Peter Wehrli, Swiss Prime Site AG - Chairman of the Board [16]

--------------------------------------------------------------------------------

Next question?

--------------------------------------------------------------------------------

Unidentified Analyst, [17]

--------------------------------------------------------------------------------

Some follow-up questions. Tertianum first. Maybe you can give a few more details on who the potential buyers are.

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [18]

--------------------------------------------------------------------------------

We're not going to comment on that.

--------------------------------------------------------------------------------

Unidentified Analyst, [19]

--------------------------------------------------------------------------------

And maybe a question about the financial figures.

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [20]

--------------------------------------------------------------------------------

No, we're not going to comment on that. Neither on potential buyers on the finances.

--------------------------------------------------------------------------------

Unidentified Analyst, [21]

--------------------------------------------------------------------------------

Okay. On the margin?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [22]

--------------------------------------------------------------------------------

When I say that we're not going to comment, we're not going to comment.

--------------------------------------------------------------------------------

Unidentified Analyst, [23]

--------------------------------------------------------------------------------

So the margin increased by 130 basis points. Was that driven by operative improvements or investments that have now been discontinued so that you achieved the 5.7% of the EBIT margin?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [24]

--------------------------------------------------------------------------------

You talked about Tertianum early. Well, this is due to operative results, and this does not yet include the start-up costs. It always takes a while for new operations to get into full swing. So this is operative results due to process improvements, SAP, careCoach, also getting the yield up on costs. So of course it's part of the operations. And so the care beds -- and the apartments have to be filled, and the team managed to do that. Well, it's good management and it's very simple. More beds rented out increases the profitability, but that has nothing to do with the idea of selling. That's just good process management.

--------------------------------------------------------------------------------

Unidentified Analyst, [25]

--------------------------------------------------------------------------------

And maybe another question on Jelmoli. So these development costs for interior design, are you going to take that over completely? Or is part of it paid for by Zurich Airport?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [26]

--------------------------------------------------------------------------------

Yes, part is going to be paid for by Zurich Airport. We have concluded the contracts and so the question is on how much we will invest on top into the interior design.

--------------------------------------------------------------------------------

Unidentified Analyst, [27]

--------------------------------------------------------------------------------

Question on like-for-like. Is not something that you -- well, in terms of the contracts that are going to be renegotiated in the second half of 2020, are you going to try and achieve flat like-for-like?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [28]

--------------------------------------------------------------------------------

Yes. But due to the situation in our markets, we expect a flat development. Well, the tax effect was very good, and are now also in discussions in the canton of Zurich in terms of some changes here.

--------------------------------------------------------------------------------

Unidentified Analyst, [29]

--------------------------------------------------------------------------------

And what do you expect the effect to be for you?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [30]

--------------------------------------------------------------------------------

Well, in Geneva, in the Canton of Geneva, there was a reduction from 24% to 14%, and that's certainly not the kind of reduction that we can expect in the Canton of Zurich. But -- well, there are various different opinions, and we think that the scope or the expectation of tax cuts is relatively low, which is a shame, of course, because this would give us quite a lot of leverage here. But well, we're not expecting really anything in terms of tax cuts in the Canton of Zurich because even if the vote is accepted, the Canton of Zurich still has one of the highest tax rates. I spoke to Mr. (inaudible) and the expectations should not be raised here.

--------------------------------------------------------------------------------

Unidentified Analyst, [31]

--------------------------------------------------------------------------------

Is there any news on Oftringen? There was a discussion about selling the property. And in Geneva, you also sold a retail property. So are there any plans to reduce the retail share in the next 12 to 18 months?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [32]

--------------------------------------------------------------------------------

Well, we've already reduced the retail share a little, and we are currently reassessing our retail definition because some of our tenants are not even retailers anymore. The question about A1, well, we're testing the market here. It could be an option to sell it. But it's not necessarily the best solution. It's fully rented, particularly Bauhaus DIY market. And so the building -- we can keep the building too. But it's a good moment to test the market and if we got the right price, of course, we could consider selling it. But we can't really say. Well, the retail share is going to generally drop. We were at 33% a few years ago, and now we are at 28%, and maybe in a few years, we will be at 25%. And, of course, it's a question of quality. Retail is not the same as retail. So 25% would also be okay, if it's the right retail.

--------------------------------------------------------------------------------

Unidentified Analyst, [33]

--------------------------------------------------------------------------------

So I have a question concerning (inaudible) investment costs have been reduced to CHF 180 million. Before, it was CHF 232 million. Is that just due to the one building, the residential floor?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [34]

--------------------------------------------------------------------------------

Yes. That's correct.

--------------------------------------------------------------------------------

Unidentified Analyst, [35]

--------------------------------------------------------------------------------

Well, that's not necessarily what you'd expect. Maybe you can give us an explanation why is it suddenly attractive to have a residential floor in an almost purely commercial sector.

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [36]

--------------------------------------------------------------------------------

So condominiums are only the form of property. And we've noticed that a lot of commercial operations have to relocate. And when looking for substitutes, they find it difficult, particularly when they want to reinvest in order to save on capital gains tax. And so that was a market -- this gap in the market that we discovered. And we saw that there was a demand and therefore decided to go for it and split the property into various condominiums and separate floors. So this is simply adapting to the needs of SMEs. Well, in the large development areas that we mentioned earlier, some of the businesses have to move out and they 're now half the building property by Geneva.

--------------------------------------------------------------------------------

Unidentified Analyst, [37]

--------------------------------------------------------------------------------

So these commercial operations (inaudible) usage is going to be commercial anyway?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [38]

--------------------------------------------------------------------------------

Yes. Of course, it's going to remain commercial. So it's not a change.

--------------------------------------------------------------------------------

Unidentified Analyst, [39]

--------------------------------------------------------------------------------

I know that you don't want to comment on Tertianum much, but I have 2 questions anyway. So first of all, how are the contracts going to be handled? Now, if a new owner comes in, there are existing rental contracts, and you're still building new buildings for the new owner then. So what's the contractual arrangement going to be about who is going to have which shares and how well Swiss Prime Site shareholders know what they will be the owners of? And second question, you already mentioned complexity as an argument for selling it. But now, if I understand you correctly, that means that the remaining 3 business areas are considered core business areas and that we're now to expect you to sell off any other business -- more units.

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [40]

--------------------------------------------------------------------------------

Now, let's begin at the VAC. We're not talking about selling other units at the moment. And for shareholders, with regard to real estate, there won't be any changes. We continue to be the owner of the real estate and with the new owner of Tertianum, we are going to have a rental agreement. That's my pragmatical view of things. So the shareholders will take part as they are taking today in the real estate.

--------------------------------------------------------------------------------

Hans Peter Wehrli, Swiss Prime Site AG - Chairman of the Board [41]

--------------------------------------------------------------------------------

Well, of course, the rental agreements of Tertianum, the 16 properties that are owned by Swiss Prime Site, these are rental agreements agreed at arm's length. So for the other 62 rental agreements, we know what third parties who would conclude it's entirely at arm's length and a potential buyer would have no reason to doubt these rental agreements. They are in agreement with the market conditions. No problem. And we clearly defined what was contributed by the owners and by the tenants. So for a third-party buyer, it would be no problem to identify their position as the buyer. Thank you very much. Further questions?

--------------------------------------------------------------------------------

Andreas Brun, Crédit Suisse AG, Research Division - Swiss Equities Analyst [42]

--------------------------------------------------------------------------------

Andreas [Brun] from Credit Suisse on Chart 28. There was a small update on the increase of expected rental income from the pipeline. Is that due to the Tertianum construction permit for 2010-2021? Or what is the reason that these figures are slightly higher?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [43]

--------------------------------------------------------------------------------

Well, 2021. The CHF 83 million we've shown that in the annual result. The CHF 83 million will remain CHF 83 million fundamentally, but there may be a shift over the years. So the question is when is a permit coming in, when will we be able to complete a building and when to market it. So there may be a shift in time. This is our best guess that we are indicating here, but it's subject to ongoing review or adjustment.

--------------------------------------------------------------------------------

Andreas Brun, Crédit Suisse AG, Research Division - Swiss Equities Analyst [44]

--------------------------------------------------------------------------------

A question on your future tax rate going forward. Looking into 2020, 2021 and future years, can you give us any guidance, now having seen the first half year?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [45]

--------------------------------------------------------------------------------

Well, even following realization or implementation of the tax proposal and holding privilege, we will assume that we will keep operating at the same level. Maybe our tax rate will slightly increase or improve, but there is also negative effects since we have to adjust our financing structure due to the holding privilege situation.

--------------------------------------------------------------------------------

Andreas Brun, Crédit Suisse AG, Research Division - Swiss Equities Analyst [46]

--------------------------------------------------------------------------------

Final question on SPS Solutions. The level that we saw now in the first half year, that is probably -- is that sustainable with a view to the future?

--------------------------------------------------------------------------------

René Zahnd, Swiss Prime Site AG - CEO & Member of Management Board [47]

--------------------------------------------------------------------------------

Well, we expect it to be sustainable. While you cannot simply double the half-year EBIT -- I think that was probably the core of your question -- there are running fees on the one hand. Running fees are going to increase when assets under management rise. But then the profitable business, of course, will be sales and purchasing commissions, and that depends on the point of time you have acquired a portfolio. Now we are fortunate enough to have acquired 2 major portfolios in the first half year.

By the way, I would have preferred to have one of them in the past year. But one of them was in December, but closing was on January 1 -- or January 3. So it was booked this year, which means that EBIT increases as a result. But it's absolutely sustainable. The investment foundation intends to grow up to CHF 3.5 billion or CHF 4 billion, so you can do your own math, but when the other commissions will occur in what half year, I cannot possibly tell you. More questions at this point? Well, so everything has remained unclear, I would assume, and we will be excited to see what you will make of it.

Thank you for coming. And as always, you are invited for an aperitif one floor up. Maybe there is an elevator going up or lift going up. Maybe we will have to walk up. Have a nice day and rest of the summer.