Edited Transcript of SPSN.S earnings conference call or presentation 27-Feb-20 9:00am GMT

Thomson Reuters StreetEvents

Full Year 2019 Swiss Prime Site AG Earnings Presentation

Zurich Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Swiss Prime Site AG earnings conference call or presentation Thursday, February 27, 2020 at 9:00:00am GMT

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Corporate Participants

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* Hans Wehrli;Chairman of the Board

* Markus Meier

Swiss Prime Site AG - CFO & Member of Executive Board

* Peter Lehmann

Swiss Prime Site AG - CEO of Swiss Prime Site Immobilien AG & Member of the Executive Board

* René Zahnd

Swiss Prime Site AG - CEO & Member of Executive Board

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Conference Call Participants

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* Marc Schulthess

Bank Vontobel AG, Research Division - Senior Credit Analyst

* Pascal Furger

Bank Vontobel AG, Research Division - Analyst

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Presentation

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Hans Wehrli;Chairman of the Board, [1]

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[Interpreted] Ladies and gentlemen, welcome to our media conference. Today, this is the agenda that we are having. You're familiar with it. So welcome then the highlights and the key figures for the financial year, outlook and expectations. And five, we're going to have question and answers; and six, (foreign language) as people like to say.

The business year is one with a record result. Operating income rose by 3.7% to CHF 1.258 billion. Profit rose as well, clearly, as you can see here. The property portfolio went up as well to CHF 11.8 billion. Revaluations rose. Well, everything rose. Vacancy rate went down though by 0.1 percentage points. And the Annual General Meeting will propose a distribution of CHF 3.80 per share. And a new Chairman of the Board is going to be elected, of course.

And this is a quick overview. We would like to dig further into it. Let me hand over for the first perspective that is going to be highlighted to the CEO, Rene Zahnd.

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

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Thank you, Hans Peter, and good morning. Welcome to this media conference. It's always easy to be able to stand here when figures are not too bad. We were -- are certainly happy with 2019.

Now talking about the details. We had a rise in the property portfolio by 5% to, as it was said before, CHF 11.7 billion and an increase in operating income by 3.7% to CHF 1.2 billion.

On to rental income, which is always highly essential as it reflects top line, CHF 487 million or a plus of 1.6%. And at the level of EBIT, we've got a nice increase in excess of 30%, 31.3% to be precise, up to CHF 628 million.

Now of course, this is the figure that we are particularly pleased with. That's profit of CHF 609 million, which is more or less doubling profit over the previous year. You can see the small asterisks. Of course, this doubling was to do with a one-off tax effect of around CHF 173 million, but is also related to revaluations. And I'll touch upon the details; revaluations, which we had a positive impact on ourselves.

Then the equity ratio rose by 50 basis points to 44.4%. Profit or earnings per share is CHF 4.14. And our Chairman would, of course, say you earned your dividend of CHF 3.80, which we would like to pursue as our objective. And we also have a nice increase on our net asset value up to around 72%, a plus of 6.1%. And I keep repeating it. Bear in mind that this figure includes the Services segment only on the basis of book values.

Moving on to the property portfolio. I'll talk about revaluations later on. So I'm not touching upon it at this point. Net property yield continues to be ratifying at 3.5% versus 3.6% in the previous year, 0.1% less the discount rate. As you can see further compression on the discount rates on -- to currently 3.06%. And the vacancy rate, as the Chairman mentioned before, went down slightly versus the previous year from 4.8% to 4.7%. And compared to the first half year in 2019 -- 2018, it evolved stably.

What's the composition of the portfolio? The largest share is, of course, offices -- office space. And let me mention it. Retail -- the retail share was reduced considerably from 34% to currently 26% in recent years. Now saying this that retail share was reduced, well, retail is not retail, and the locations are not all the same. We went through the different locations, so high street, to A or B locations. And when we reduce then in terms of B and C locations, and in particular in the field of fashion or garments and shoes, so these were smaller sales that we proceeded to last year.

It is also interesting to look at the majority profile of rental income, bulk -- of in excess of 6 years. That's nice and around 25% or to be precise, 22%, with a maturity of over 10 years. This 22% specifically includes Tertianum rental income.

Now this chart, you'll be able to read at home in detail. I'm not going to present everything but just pick up the highlights.

Letting success. This is what we are measured against 128,000 square meters or 8% of the entire portfolio was let or relet last year, nice figure, I think. And for sales, I mentioned it before, we streamlined the portfolio, selling smaller properties including some retail shares, C and B locations of retail. And it's also exciting to look at the condominiums at Plan-les-Ouates. Commercial property there, not residential property. And Peter yesterday said, "Who invented it?" Well, he invented it, by the way. This really is an interesting model. I believe the sales have proven us right. I'll show you a picture of the office. We are convinced we will have letted by the end -- or sold by the end of the year in -- for condominiums.

And finally, project developments, I'll show specific charts about this. We purchased some things there. We live on the property. We have project developments that we're taking over in the portfolio, so it's a matter of adding to this portfolio. You will see the figure of CHF 2 billion on the portfolio. We want to maintain it.

Now what of project or development property as well? We reinforced ourselves in PrailleAcacias-Vernets, PAV. That's this future big development property by the canton of Geneva and the city of Geneva behind Pont-Rouge, behind the new train station, which is the introduction to the new development plot. And we secured some plots there for the long run. It will take some years, but then it will be an exciting environment for the entire canton of Geneva. We also bought some development plots at Uster to round off our portfolio there to be able to develop a larger building there, and at Augst in the canton of Basel-Land. We also purchased to reinforce top line quickly, on the basis rental income, we purchased fully let properties in the field of logistics in the region of Basel and for office space in the region of Bern.

Moving on to portfolio management. What stood out last year were the negotiations and the closure of a new rental agreement with this tenant that you can see here, this location. Remember, we bought it in an asset swap with Credit Suisse against Sihlcity. And we also took over Worblaufen portfolio. And we're given other properties, but the focus is on this property. The current tenant, it's no secret. It says here in the chart, it's Swisscom. And they will move out and move to District #5 in Zurich. So releasing some of the surface here. So the question is, is that a risk to have a vacancy there? Or is it an opportunity? Well, it turned out to be an opportunity. We clearly let these surfaces better than we expected, and this is an important thing when it comes to reevaluations.

Now I promised I would talk about reevaluation gains. If you look at this and analyzed in detail, you will see that one part of the revaluations was to say, "Well, we were lucky. That was driven by the market." Well, it was driven by the market to the extent of CHF 65 million. That's discounting, the reduction of the discount rate. That was due to the market. That was not our achievement. But our own achievements, what we'd generated internally is active portfolio management. A large share of the CHF 110 million of revaluation gain is attributable to Mullerstrasse. And of course, it was one of the objectives in project development. A further CHF 28 million of it is from the development business, and that's how you get up to the total of CHF 203 million revaluation gain.

Moving on to buildings under construction. Let's specifically talk about the project pipeline. Over on the right-hand side, you can see that the pipeline in total is CHF 2 billion, but the composition is different than from the past half year. We're taking you on the journey. There are developments that we have already transferred in the portfolio. And the amounts that you're seeing there for projects under construction or being developed or reserves are always adjusted to the current situation.

So these are the updated figures. CHF 560 million of projects under construction. The CHF 560 million do not include any more projects. The projects at Schonburg, Berne and YOND, they've being taken on to the portfolio, you can deduct them. And the others add up to CHF 560 million. So what is interesting is what we're going to transfer to the portfolio this year. That's West-Log, and you see a picture of it and Stucki Park I, the first part of the finger docks and conversion of the former NZZ printing shop.

Just show you a quick succession of pictures. YOND has been let to the tune of 90%. We're doing very well there. And we told you it was going to take some time and courage to do that at a pre-letting level that wasn't at 50%. I think we can say that, Peter, now. But these hyper-large rooms in the mezzanine floors, I think you need to see that first. You need to sense that first before you accept it and find it good. And as you can see, the market welcomed it very well with -- at slightly above 90% of letting ratio and it's already on the portfolio of Swiss Prime Site. Same goes for Schonburg Berne. It says 95% let here. Of 142 apartments yesterday, 138 have gone. So 4 are still available. The hotel is fully let. Retail space is fully let with coop food. And the gym -- the coop gym has also been fully let. So it's a wonderful story, the transformation of an old office building of the Swiss Post.

And over on the right-hand side at a letting ratio of 85%, with Electro-Materiel as a tenant, we have this logistics office as you come into Zurich.

And over on the left-hand side here, this is the well-known picture of Espace Tourbillon, the 5 commercial buildings from A to E. To remind you, we sold C and D. Buildings C and D, they were sold to Hans Wilsdorf Foundation 2 years ago. And the condominium segment is now being performed in building A., the smaller building. We will have sold that by the end of the year on the basis of our analysis, and we are keeping on our portfolio, have various options for buildings B and E.

The first stage then at center of the former NZZ printing shop. And we have a picture of the old situation here, the first stage over on the right-hand side of Stucki Park, the first 2 buildings here that we're going to take on to the portfolio in the course of this year.

Now we have under construction 2 projects for Tertianum, one based at Monthey, the other one at Richterswil, fully let both of them. And I'll be coming back to these projects or these buildings. We haven't sold them. We sold the business, but they will remain a Swiss Prime Site property or ownership.

Now in terms of planning, we are planning for around CHF 950 million worth of development projects. Beginning from the bottom, Tertianum at Olten and Tertianum at Paradiso, then JED II at Schlieren. That's a new building, new construction set that we're erecting next to the NZZ printing shop. I'll be coming back to this. Then we've got Alto Pont-Rouge. That's the office building, the tower directly at the new railway line. Then Stucki Park II. That's finger docks numbers 3 and 4. Mullerstrasse, well, that's, of course, among the projects because it will be empty one day when Swisscom has departed. It will be empty. And you can see it on the basis of the amount. It's a deep intervention in the structure that we're making there to make the building fit for the new owners. And that's why it's in development. It's not only greenfield developments, but also developments on the portfolio, especially in cities.

And then we also have Rheinstrasse at Augst. It's a plot that we bought at the end of last year. And we are also showing here maaglive, the development project here on this particular site here.

Now where do we stand when it comes to these projects? You're familiar with this slide from the last conference we had. Well, it says whether we have submitted a design plan, whether it's been approved already or where we have an architectural contest, the design plan has been pushed in Olten. Zone plan is underway at Augst, and we have an architectural competition for maaglive here. And we have submitted planning applications for Paradiso and Lugano. And it's being prepared for Mullerstrasse, and we have received building permits for Alto Pont-Rouge, the new building at Schlieren and the former buildings, 3 and 4, the finger docks at Basel.

And at the bottom, I'm not going to read that off. You will find the pre-letting status with regard to the various projects, so much on the real estate property core business.

Now let's talk about the Services segment. Now what shall I mention here? We set an interim objective of EBIT from Wincasa and Tertianum to be more than CHF 50 million by around 2020. We achieved this objective 1 year early. In 2019, EBIT contribution -- aggregate EBIT contribution from Wincasa and Tertianum amounted to CHF 51.7 million. So this interim objective has been achieved.

Now for the various units. Wincasa, we have a nice increase in assets under management to CHF 71 billion and also a very nice gain of new mandates. It was mentioned yesterday, we won over BLS and Swiss clients, Dominice from the French-speaking part of Switzerland. So these are all nice names to add to the client portfolio.

We have an EBIT margin of 12.3%. So certainly, across Switzerland, we're doing well on the basis of a comparison to others. Now this is Wincasa business. What else does Wincasa do? And we also invested a lot of money in digitalization. Of course, management has to be digitalized, especially all the residential businesses to be digitalized end to end. It's no use just digitalizing one part of the onboarding process. The idea is that everything should be digitalized from applications to handover of apartments. Everything should be done in a digital manner if possible.

And of course, the important part of management will be less about apartments -- well, apartments that become vacant or will be full again tomorrow. But the risk is where we have clients who've rented 50,000 or 100,000 square meters of office space, and that's where we certainly need personal management. We've purchased in a platform called streamnow. It's a tenant landowner platform, stands for everything that is residential. This platform, of course, is not only to be there for residential but also for other products in the market.

Then on to Jelmoli. Next Monday -- if anyone's flying off from Zurich, next Monday, we're going to open the Jelmoli shop at Airside, not in Circle yet, but at Airside, we're going to open. Directly after the X rays, I would usually call. You get to -- not to the gate but to Jelmoli first. And we're looking forward to this opening. And the opening -- the surfaces in circle will be open between the 1st and the 10th of September. The 10th of September will be the official opening of the circle at the airport. And you're familiar with the name by now. We are happy to have won over a new CEO for Jelmoli, a female one who can start earlier. Her official start, which we're communicating today, will be April 1, 2020.

Swiss Prime Site Solutions had an excellent year, not only increasing assets under management by CHF 2.3 billion, but also, they extended the contract early on with Swiss Prime Investment Foundation by the end of 2023. And this one year before the expiry of the contract, these are nice indications that we're always happy to hand back to our clients. And as you can see, EBIT increased from CHF 4.2 million in 2018 to CHF 7.8 million in 2019.

And finally, for the Services business. As we communicated before, we are selling Tertianum. And to be precise, we're selling the business -- the operating business, but we are retaining, and you can see this unveiling of partnership. We are retaining the 16 investment properties that we already have on our portfolio, and we will also retain the 2 projects under construction and the 2 under development. So we will have a total of 20 investment properties that are used by Tertianum and that will remain on our portfolio.

Closing. Here, it says expected by the end of February. I can tell you that closing will be tomorrow. From 7:45. So closing, it will be tomorrow, Friday, the 28th of February. And for the implications, I'll leave it over to you, Markus to go into the details there and the results.

Now so much on my part. Let me hand over to Markus, our CFO.

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

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[Interpreted] Ladies and gentlemen, I would now like to talk to you about the financial figures of the excellent year 2019. We had growth in our core business, real estate, in terms of rental income and proceeds from property sales. We also had strong growth in assisted living in Tertianum as planned, and due to opening new operations, but also due to the excellent vacancy rates. And Tertianum is going to leave the group tomorrow. And in any place where this has the simple effect, I will point those out to the extent that we already can do now. But of course, you will get the full results in August when we present the semiannual results 2020.

We also saw growth at Wincasa and real estate service provider, both in construction management and management fees, and we also saw a very strong growth of asset management fees for third-party clients via Swiss Prime Site Solutions.

Now let's start with the main element of yield. Net rental income at group level, which grew by 1.6% to CHF 486.9 million. And EPRA like-for-like, that means that the identical portfolio in 2018, 2019, from then, we had a 0.8% growth. From sales and acquisitions, we were able to generate an additional CHF 3 million in rental income. That means that new acquisitions more than compensated for sales of properties. The rental income from acquisitions were not so much from 2019, but from the previous year when we carried out the asset swap with Credit Suisse, where we were able to swap 24% share in Sihlcity against 49% share in an office building in Worblaufen with Swisscom as a main tenant and 2 other prime location properties such as Mullerstrasse already mentioned. The Sihlcity swap also reduced our retail exposure to 26%. And the -- also the acquisition of Beethovenstrasse in Zurich also helped us to increase our rental income to -- by another CHF 2 million last year.

And we had 10.5 million reductions in rental income, mainly stemming from the Sihlcity asset swap, but it can also be attributed to the sale of the retail properties at Bahnhofplatz in Bern and on Rue de la Croix d'Or near Rue du Rhone in Geneva, a major shopping street, at low yields. And we also lost CHF 2.3 million due to modernization refurbishments. This happens sometimes, but these are necessary parts of active portfolio management. And we showed that we can be successful in that. For example, with the Motel One in Basel and in Zurich. This time, it was about Stucki shopping mall where we can't have rental income for a while due to modernization refurbishment and also the A1 shopping center -- shopping mall, which is now being reconverted into a specialist retail sale -- space. And also, the refurbishment of the former OVS property on Barfusserplatz in Basel. This is Italian fast fashion store. It's no longer fast fashion.

To remind you, in 2018, we were able to find new tenants for all of the properties in the second half of 2018. But now we are going to have financial service providers and other service providers at Barfusserplatz in Basel. And we also generated CHF 2.4 million rental income from Tertianum, which is going to stop as of tomorrow, and also CHF 2.4 million from finished projects -- excuse me, it was CHF 2 million from Tertianum and CHF 2.4 from the finished projects such as YOND in Zurich, [Ides in Sweden] and [TuneBack] in Bern. And we also have some rental contracts from finished developments, Schonburg Berne, YOND and Zurich, which were rented out at the end of 2019. And of course, we have some room for improvement here because we are going to get rental income for this year.

At group level, we are going to get CHF 65 million less like-for-like due to the Tertianum sale. So if you see the rental income guidance on the developments, this 2019 bar is going to show net CHF 65 million less.

This chart shows the distribution of operating income, the top line, in other words. And you can see the distribution of EBIT, a total of CHF 628.3 million. Total operating income grew by 3.7%. In both segments, both properties and services, 2% in properties, mainly due to rental income, which is -- and also POC valuations of the 2 properties, Plan-les-Ouates in Geneva and Weltpostpark in Bern, a residential property. The sales -- the turnover from property development was CHF 80 million last year, CHF 7 million above the previous year, but we also had expense from property development of CHF 63 million in 2019.

The gross operating income in the Services sector shown on the chart was CHF 38 million. CHF 32 million from the Wincasa growth contributes here as well as a strong CHF 5 million from our asset management for third parties. At the center, you can see the distribution according to segments. You can see quite clearly that we are a real estate company, and the CHF 573 million are the core business of Swiss Prime Site, which is our property.

And the Services segment accounts for CHF 34 million EBIT from Tatiana. This Tertianum. This is a strong increase over the previous year, which is due to the continued ramp-up, adding new operations, but also an improvement in the vacancy rate. The CHF 34 million will not be shown like-for-like anymore for 2019, but they will be compensated via overtime through additional rental income from developments. And 2020 is also going to show 1/6 of the EBIT on our accounts because deconsolidation is for the end of February.

Wincasa top line growth, as I mentioned, for construction management and management fees are EUR 70 billion. And you can see the effect of the digitalization process via the introduction of the digital business model, namely customer value center platforms and systems. These have a temporary above-average negative effect on the EBIT here. Jelmoli had a difficult year. It was a good year for food and gastronomy, but not such a good year for fashion and non fashion. Business before Christmas was also -- did not meet expectations. So we are very glad that the new CEO is going to help us prepare the way for more success in the future. Then Swiss Prime Site Solutions, in asset management for third parties was truly excellent.

Now here you can see the condensed P&L of Swiss Prime Site. We already mentioned the yield, then also revaluations on properties, more than CHF 203 million. That was a strong year which reflected the portfolio quality and the contribution that the portfolio management and the developments make here. Because 2/3 of revaluations come from our operative business, and are, therefore, not due to the lower discount rate. The 16 basis points to 3.6% was reduced, and this would be 3.58% in nominal terms. And the big revaluation successes were very much centered on Zurich. Zurich-West, a prime tower and neighboring buildings, these -- also Beethovenstrasse and Mullerstrasse, prime locations and the Sky Key Zurich Oerlikon, they all helped us achieve these revaluation results. And also, developments also had positive contribution on revaluation effects. For example, [Zurich-Shedlon and Basel and Murahush]and also the Stücki Park in Basel, the finger docks is -- this is not the mall, but the finger docks that are currently under construction and which have a very positive effect on our revaluation results and sales success at EUR 20.8 million.

In total, these are sales of yield properties, and we also have to add the POC gains, another CHF 17 million almost. And in terms of POCs, we are going to be able to show more gains over time.

Then operating expenses have increased considerably by 4% to CHF 856 million. They're less driven by the planned growth in assisted living. At Tertianum, the personnel expenses in particular come into play here and also the depreciations that are part of growth. And Tertianum assisted living centers around people. This concerns both the guests and the personnel. And that shows that this is a personnel-intensive business. So of the CHF 568 million, EUR 287 million are accountable to personnel expenses of Tertianum. It's also a major operator of properties. So this also is quite a large expense item.

And so now that we are selling Tertianum, the -- this will have our operating expenses, but this is going to have a strong effect on our results and also, of course, on our headcount. We currently have 5,100. We've seen a growth of 5,100 to 5,400 FTEs between 2018 and 2019, but the deconsolidation of Tertianum is now going to reduce this number to 1,400 FTEs, mainly at Wincasa and Jelmoli.

Financial expenses. We have been able to share -- we have optimized financing in a low interest environment and a similar maturity structure to previously. And a very special figure, the tax expense is actually positive, EUR 50 million. This is the staff effect, the effect of the tax reform and old-age dependence pension insurance, which was accepted by a referendum on the 19th of March 2019. And it's going to be introduced here this year. And so this has led to reduced corporate rates in many cantons. And this has had a very important effect for us, particularly Basel-Stadt, Geneva and Zurich. We have been able to release our CHF 173 million of deferred tax reserves, and we still have deferred tax reserves of EUR 1.1 billion in our accounts just to put things into perspective. So this has led to a doubling of profits on a per end of year to CHF 609 million. Before -- in terms of profit before revaluation effects, this is an increase of 10%. Of CHF 315.7 million.

This is the development of the real estate portfolio, financially speaking. The main growth driver is the growth from development, it accounts for EUR 316 million, and it shows that we are able to develop and we are able to sell at much higher yields than with our existing properties. So this is very positive indeed. We are able to be very active in the value-generating part of the business and show some considerable growth here. The main developments have already been mentioned.

We also have value increases on existing profit properties. These account for CHF 291 million and also include revaluation gains of GBP 218 million. We also had some -- saw some acquisitions, were CHF 67 million to properties with development potential for the future, the one in Rue de la Croix d'Or in Geneva and in Augst. And we also saw -- and this also adds to -- bring us to the CHF 67 million. Then we also sold the properties, 9 in total, for CHF 140 million. This is -- one was a very valuable property on Rue de la Croix d'Or in Geneva and other properties in B locations with predominantly banks as tenants and retail tenants. So we have been able to improve the -- to concentrate the high-quality properties in our portfolio.

The divestment of Tertianum is not going to have any considerable effects on our real estate portfolio. We are still -- we still own Assisted Living properties. We feel that this is an area with long-term rental income and allows us to diversify our real estate portfolio. So it's going to continue to be part of our investment policy.

Let's take a look at equity development. Here you can see the payout of CHF 290 million and the annual profit, which is driven by the revaluation gains, the one-time effect, due to the release of deferred tax reserves. This leads to a very solid equity ratio of 44.4%. The Tertianum effect here from -- you probably know that this leads to recycling of goodwill as part of deconsolidation. CHF 300 million are going to be able to be added to the goodwill. And that's going to strengthen our equity basis, but we will be able to show you the profit from the transaction in 6 months' time, which will also help to strengthen our equity position. We're also going to lose some assets, which will lead to a reduction in equity in middle CHF 2-digit million area.

We have continued to optimize our financing structure. We are doing it very calmly to -- we optimize and update our structure all the time. Last year, we issued CHF 350 million in the spring and CHF 170 million in the autumn to extend the duration, but also, the CHF 200 million bond, which was -- which matured at the end of the year was refinanced prematurely. And the maturity structure is still very well balanced. And the average interest rate is 1.2%, and the average maturity is 4.2 years. The loan-to-value ratio of our property is 45.7%, and this is going to be reduced to below 45% due to the Tertianum divestment.

So that's the finances, and now back over to René Zahnd.

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

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[Interpreted] Thank you, Markus.

Moving on to the outlook and expectations for 2020. Well, when you go through the media, even a week ago -- compared to a week ago, things are changing fast. And I would want to touch upon that, but also talk about the positive outlook with regard to our portfolio. Beginning with the capital market here in this chart, well, this is no rocket science. You're all familiar with that. We're continuing to assume a policy of negative interest rates, and the Swiss National Bank has confirmed its expansionary policy.

In terms of politics, it was gratifying to see that the referendum on more affordable homes, what the outcome was, and we only have 1% of apartments in our portfolio. So one might say, "Well, okay, that's not too bad." But it's important for our customers managed by Wincasa, for instance, or the large clients treated by solutions, with 50% of residential share, it was, of course, essential for this referendum not to go through. Another important point would have been important for us. I always warned about the prepurchase right for the federation and the municipalities, which would not have only been hampering project development but would have had a major impact on the transaction market. Now you know that the prepurchase right according to Swiss law means that you will have to find an agreement with a buyer and then have 3 months' time whether to find someone who would enter at the price. And this period of time, the whole thing is now off the table with the decline of this referendum.

As far as population development is concerned, I won't want to make a statement. Now over on the left-hand side, the -- about the economy, I have corrected this part 3 times and revised it downward. Without exaggerating, it's really not fair to say that the current situation with regard to coronavirus will not have an impact, and that -- we were looking at GDP growth in Switzerland, which is closely related, of course, to international competitions, such as the Olympic Games in Tokyo. You're aware that a lot of money would be channeled back to Switzerland. Now whether they're going to take place, we'll see, but expectations, of course, have been revised down when compared to what was communicated at the beginning of the year. And then, and this is to do with the current situation, of course, is the question of the virus -- coronavirus is that we are strongly dependent on China. The question is, how fast is China going to recover to ensure supplies to the world. I think it will probably take more time than we might be imagining. So this is an increased risk. In parallel to this, we have a risk that is always there in years where we have an election in the United States of America. We're going to see what's going to happen from now to November. And is this going to have an impact on our portfolio? No, I don't think so. We are confident that the apartments that we are building will certainly be absorbed by the market. Schönburg Berne is the proof of the pudding. If the site is good, you have no problems, either for residential nor for office or logistics or other fields. So we remain guardedly optimistic also for this year, and we have seen that the rental income that we were able to demand from prime site -- office sites in Zurich have gone -- has gone up. So there is potential there.

So much for an outlook on 2020. I would say we are guardedly optimistic, but certainly, slightly muted due to coronavirus. And it would be good for the press to write about sustainability, for instance. Why am I showing this slide? This chart shows many things. I'll take you through it. You've got this hatch line. That's the current residential population in Switzerland. Let's say it's 8.5 million. And you have the time axis here on the horizontal axis beginning in 1950 and going as far as 2050 to -- that CO2 0, that's the government's objective.

Where do we stand today? Go to this bar. We are at 6.5 equivalent on carbon emissions per capita per year, 6.5 tons. Now if you see the composition of it, then our industry accounts for around 1/3. That's building technology and buildings as such. And if you want to take this down to CO2 0, CO2 3 by 2050, you can see the wall here. The wall means you have to begin to respond today. When you construct today, the buildings will be there for another 60 years. And if you don't build in an energy-efficient manner, this slide is never going to be any better. So this clearly shows you where our efforts have to be. And the question is, how do you respond to this as a business? There are companies that purchase buy-in certificates. I'm not in favor of that. I don't think this is a good avenue to embark on. We need to work on our own possibilities. That is why we developed our reduction pathway -- CO2 reduction pathway. We took the entire portfolio, that's about 1.6 million square meters of space and we looked at it and said, "Well, let's take heat -- thermal energy, for instance. What's the first step we would do in the portfolio regarding thermal energy?" We're going to perhaps take out all the oil heatings from the portfolio. That's step 1. And you end up with natural gas or better. The second step is not to have any fossil energy anymore, but remote heat, for instance, or share of renewable energies of 40%. And the third step would be to double the share of renewable energies inside our own portfolio. That's for thermal energy only. Now for electric energy or power, we are going to use hydropower or solar power to adjust there.

Now so much for energy, and it would be absolutely stupid once you've settled the energy part, you have buildings that cannot store this energy. That would be bad. That's why we're investing in refurbishing the building shells. That's about CHF 150 million for 30 years. That's CHF 20 million of investment in building shells. And if you want to top that off, you cannot only build zero-energy buildings as with the project, JED at Schlieren, but you can use the buildings as power stations. So the buildings would produce a plus of energy.

We're not that far yet. But if we then manage the -- not we, Swiss Prime Site, but we, as technology providers, if we manage to save or store the power we produce and then use it when you need it, we will have taken a major step. That's our CO2 reduction pathway. And if we do all this, we will be by -- we will be on CO2-free -- emission-free by 2040, 10 years early on. But it doesn't cost anymore. The question is just whether you invest in the right thing at the right point in time. And if you tackle it early on, that is to say, now you can make it, and then we will have made a significant contribution -- we have an impact on this gray bar, and we will have made a significant contribution to eliminating this gray bar. So much on the CO2 reduction pathway.

Moving on to guidance, beginning on the right, the guidance for 2020. We've already mentioned that we're going for a vacancy rate despite the new projects that we're going to take on the portfolio of below 5%. Profit expectation, Markus Meier already commented on, we expect a significant increase in profit prior or before revaluation and deferred taxes due to the sale of the business of Tertianum, and we continue to be able to -- we believe that we can continue to be able to have an attractive appealing dividend policy.

And this chart, we keep updating it. That's the current pipeline. We have a total of CHF 84 million of additional rental income by 2025. This is rental income from those products or projects under construction or being developed. What is not included here is potential rental income from reserves, the CHF 500 million of reserves that we have. And why so? Well, we don't even know what we're going to do with these reserves. So we cannot calculate potential rental income. So that will be additional rental income from -- these are from projects under construction and in development.

And the area hatched in red includes rental income that we won't have any more from Tertianum, but we will present this to ensure you can have a like-for-like basis for comparison with and without Tertianum. And if you add all this up, rental income of 2020, the additional ones, by 2020 -- 2022, you will come up to CHF 30 million and CHF 75 million, CHF 320 million -- CHF 75 million like-for-like without having to readjust any other screws and thus compensating for the loss of Tertianum.

Now let's move on to the question-and-answer session, and let me hand over to Hans Peter Wehrli at this point.

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Questions and Answers

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Hans Wehrli;Chairman of the Board, [1]

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[Interpreted] Thank you for your presentations, and I'm now happy to take your questions.

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Unidentified Analyst, [2]

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[Interpreted] From Zurich, Habib Bank. I have 3 questions, if I may. The first one about the maturity profile of rental contract. So what I would expect between 2020 and 2022? Are you expecting any increases or decreases in rents? And what's the vacancy rate that you're expecting?

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Unidentified Company Representative, [3]

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[Interpreted] Peter?

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Peter Lehmann, Swiss Prime Site AG - CEO of Swiss Prime Site Immobilien AG & Member of the Executive Board [4]

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[Interpreted] Well, there's nothing unusual. Just like every year, 65% of rental contracts are going to be up for renewal and already have been negotiating. And it's quite clear, our top locations are showing upward trends. So we're going to generate more rental income, particularly due to the scarcity of good office properties. But we're also seeing a similar trend in Geneva and partially also in Basel. So renewing rental contracts always are an opportunity to help us generate more rent between 1- and 2-digit percentage points, but there's definitely an upwards trend. You have another question?

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Unidentified Analyst, [5]

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[Interpreted] Yes. On the vacancy rates, PSP is always -- the competition had 5.7% compared with 3.5%, and your guidance is 3.5%. So why is there such a change in positioning compared with the competition?

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Peter Lehmann, Swiss Prime Site AG - CEO of Swiss Prime Site Immobilien AG & Member of the Executive Board [6]

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[Interpreted] Well, I can't say anything about PSP's figures. I can't comment on those. But you can see that we have a continuous decline of vacancy figures. And whether it's 3.0% or 4.0%, it's not really that relevant. We have to just generate what's optimal from our properties.

And if you have rental contracts that are too low in terms of rent, then you can also lose money. So -- but we are generally comfortable with the drop in rental -- in vacancy, sorry.

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Unidentified Company Representative, [7]

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[Interpreted] May I add another couple of points? Of course, it's true what Peter said. You shouldn't forget that our project development pipeline brings out a lot of projects. And usually, we don't have 100% rental, but this is covered by the below 5% vacancy. But we always see vacancy as an opportunity. A vacancy in a good location can be solved well, or you can just keep it in your portfolio and wait for it to -- for a good opportunity to come up. And that's our philosophy, and I think it's been successful. So we're not going to comment on our competitors, but we could achieve 1.82 easily if we had a different policy here.

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Unidentified Analyst, [8]

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[Interpreted] Okay. My third question and last question concerning Jelmoli. So we do have a certain track record of losses from operations. Following the sale of Globus, the situation may become even more difficult. You're trying to attract top brands, but the new owners of Globus are well positioned to attract those top brands, maybe even better than Jelmoli. So what's your strategic response to these developments? Or maybe you should just sell the activities as a whole?

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Unidentified Company Representative, [9]

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[Interpreted] Okay. I'll say the stupid -- make the stupid comment, and you can make the clever one. No. Anyway, this is a competitive situation. You know that it will take some time to consolidate our market contracts or medium-term contracts, and so there is potential, and there is pressure. But we'll have to wait and see and not rush things because retail always talks and complains until it really does get bad. So this is a negative spiral. And so if you believe what -- but I think there is still a great deal of potential in off-line retail. We believe in it. And of course, it is our task to check all of our options and to reassess them again and again. That's our job.

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Unidentified Company Representative, [10]

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[Interpreted] Well, let me add. Well, we have -- the annual rental income is CHF 27.5 million from Jelmoli. And so Jelmoli is interesting for us because we do earn well off the Jelmoli. It's still the most important property in our portfolio. And in operative terms, I believe that the City of Zurich has room for 2 good shopping malls and Globus only had 9,000 square meters, so -- and we have 23,000 square meters. So I think having the right brands in the right place does give us an opportunity to be successful in the market.

We also are part of the luxury brand. So that means -- what does that mean for home living? What does that mean for fashion and for sports? And I think that we -- there is room for everyone. And I'm glad that we and Globus also have that solution because it keeps our inner city attractive. At the back.

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

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[Interpreted] Pascal Furger of Vontobel Bank. So a question about the outlook. You were optimistic at the semiannual releases, and now you just talked about CHF million for 2020. So what's changed? So who's euphoric?

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Unidentified Company Representative, [12]

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[Interpreted] Well, everyone is euphoric. But -- well, you're talking about shifts, but I think you always have to see the entire period. The outlook 2020 says CHF 32 million. And at the half-year [comp] it was almost CHF 16 million. That's Slide 32. Well, this -- we just update it all the time. So it depends on when you get construction permits, when the building is finished. And so this always shifts a little. These are always our best guesses, our best estimates. But more than CHF 80 million additional rental income are going to be added to our portfolio over the next few years. But the exact time may change. And this is an important point. The time factor is never fully under control. Just one complaint can lead to 4 months delay in construction, for example.

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

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[Interpreted] And another question on valuations. We saw CHF 40 million negative valuation adjustments. Maybe you can comment on those.

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Unidentified Company Representative, [14]

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[Interpreted] Well, these are projects from retail, which -- where we need to be active. And so we made some adjustments, downward adjustments. And Stücki was a large part of that. And currently, we are able to say from -- for all we know, we should now have found some solid ground here. But the other shopping centers have also -- for the other shopping centers, we also made these adjustments, and this is based on current situation.

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Pascal Furger, Bank Vontobel AG, Research Division - Analyst [15]

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[Interpreted] Yes. And one last question on the EBIT of the asset management. And of course, also some new acquisitions are very profitable. So what are you expecting for the next 3 years in terms of the EBIT contribution of the foundation?

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Unidentified Company Representative, [16]

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[Interpreted] Well, you should rephrase the question. It's the EBIT of solutions, you're talking about Swiss Prime Site Solutions, which does the assets management. And we expect that the EBIT will grow again from 2021 onwards and will be relatively level in 2020. And as you said, there are a lot of acquisitions, which had an effect here. One was closed on the 3rd or 4th of January, which maybe should have been accounting for 2018, so it's always about a date. So this is a level, but the foundation is continuing to grow. We have 1.35 in terms of transactions. And this is, of course, in steps, so CHF 50 million, CHF 100 million. So it's approximately CHF 110 million. So we can certainly see -- expect a further positive development. And maybe we can open another vessel in the near future. And we are certainly looking into this with -- so we are open for new opportunities here, and that's, of course, would be additional new EBIT. And -- but what's important is that's not -- our solutions is us, and the foundation is not us. And we are working with vessels that we manage ourselves, and that's important for these future of solutions.

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Unidentified Company Representative, [17]

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[Interpreted] Mr. [Fry], wait for a microphone, please?

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Unidentified Analyst, [18]

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[Interpreted] As far as vacancy is concerned, you mentioned the development properties. Can you give us a figure how much did they account for? So how much is actually missing due to this development. You said it was positive, but this also gives you an idea of what -- how much is missing.

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Unidentified Company Representative, [19]

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[Interpreted] Would you like to take that?

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Unidentified Company Representative, [20]

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[Interpreted] Well, we presented in relatively simple terms. If a property is fully refurbished and cannot be used at all, then we take it out from the income calculations. And once it's completed, then the rest that is not let yet will be part of the vacancy rate. YOND, for instance, is the vacancy of 10% because 90% was let in 2019. YOND was under construction as a project. So it didn't account for vacancy.

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Unidentified Analyst, [21]

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[Interpreted] Well -- but the thing is, you have 85% at the end of the year, but you didn't have the rental income throughout the year. So the question is, if I multiplied everything by 12, how much have I got in there? And of course, you could show how you restated it or how you accounted for that. I do understand your system. Actually, you would be presenting a better situation.

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Unidentified Company Representative, [22]

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[Interpreted] Well, the rental income increases slowly and gradually, and you can only make one cut. Either it's too late or too early or at the right point in time, and we make it when the property is ready to -- for tenants to move in. Any further questions? Over there, please? No. Over here?

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Unidentified Analyst, [23]

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[Interpreted] How important is cultural engagement for you like on the Maag side?

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Unidentified Company Representative, [24]

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[Interpreted] Well, a talent developer once told me we have a cultural mission, but let's be serious. I think it is essential for us to always have -- be in the position to develop space, not only buildings. And number two, we are carrying out an architectural contest at the moment. You will have read about this. A daily newspaper in Zurich described it in detail, and the time axis that was described there applies. So we're not going to comment on that today.

And thirdly, just as a sideline, a personal note I would like to make is if the city and the Mayor keeps addressing me like she did recently, and that's one thing, but the city itself ought to take a decision and make a commitment to this subject matter. So it cannot be up to us to come up with a blueprint of operating some sort of building or old form of factory, but the city would have to take the lead rather. They commissioned a study, we're all familiar with this. But my personal opinion is that the city could perhaps take the lead in this regard, for a change. Because, otherwise, it's -- we're a real estate company, and it's not our mission to develop a blueprint for a cultural program. I think you share my opinion.

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Unidentified Company Representative, [25]

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[Interpreted] Yes. Absolutely. We're not focused on what the Tornhalle is going to do, but what we're going to do with the Maag side. And we're going to make the best possible use of what's available by maximizing the value of the site. And whether this includes more or less culture, that's a different question, and that's really only a means to achieve an end. But we focus on the quality of the entire site. Culture, of course, contributes to increasing the value or the quality of a site, but a third-party needs to come up with a blueprint for it. You cannot always keep asking the same questions for 2 years and carry out studies. Now this may be a mean comment.

Yes, please, to someone at the back.

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Unidentified Analyst, [26]

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[Interpreted] On Jelmoli, it was said here in the past that you were incurring a loss due to the launch at the airport. Now if you assume that Jelmoli would have to come up with breakeven or positive EBIT within 2 years, does this still apply?

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Unidentified Company Representative, [27]

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I can still confirm this breakeven by 2022. We said it was going to be one year earlier once, but then things shifted backward. The opening of the Circle was delayed by half a year. And we have made investments, especially in Circle, that we incurred some of it in 2019 and certainly in 2020 in view of the opening in September. That's one thing.

And the other thing is the relaunch of the online shop that we are financing at the same time. And the relaunch of the online shop will occur in Q4 2020, requiring investment. Now until all this has a positive impact on the books, we will be in 2022, but I can confirm this.

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Unidentified Analyst, [28]

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[Interpreted] Last year, you said that certain retail properties were sold. Do you think you have streamlined the portfolio by now? Or can we expect more sales of such properties?

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Unidentified Company Representative, [29]

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No. Well, a portfolio is never finished being streamlined. Otherwise, we wouldn't be doing our job. So we decide, on a case-by-case basis, on what the market opportunities are for properties that may be problem ridden, and when we see opportunities, we will grasp them and sell the properties. But we will do that from a very calm point of view and grasp the opportunities.

We will certainly continue along the pathway of continuously reducing the retail share. Within 5 years, we have reduced it by around 10%. And will not be the same steep curve in the years to come, but we will rather decrease it than increase it.

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Unidentified Analyst, [30]

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[Interpreted] Next question, I have a technical one. You yourselves said, "Next year, you can expect relatively high one-off gain from the sale of Tertianum." The incentive plan of the management is based on EPS -- is driven by EPS. Now revaluation and deferred taxes are not news for calculating the incentive plan. Now what about the one-off gain from Tertianum? Will that have an impact on the long-term incentive plan or not?

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Unidentified Company Representative, [31]

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[Interpreted] Well, Luca Stäger will benefit from all of this. No. Seriously, René or Markus. Who would like to take that?

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Unidentified Company Representative, [32]

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[Interpreted] Well, at the end of the day, it's a decision by the Board of Directors, its management compensation, and this has not been decided yet. We haven't taken a decision yet. So it's still open. It could go either way. Well, open means it's open. Yes, please?

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Unidentified Analyst, [33]

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[Interpreted] Just a quick question on solutions. You said that growth is driven by new vehicles. How about the pace? And what pace can we expect? And so what's the strategic thrust for these new vehicles? Are you planning for organic or for buying in?

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Unidentified Company Representative, [34]

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[Interpreted] Well, we don't buy a vehicle. The vehicle is owned by the foundation. We don't buy the vehicle. Well, just to be precise again. We're looking into further growth through other vehicles. There are various options, but there is no specific plan. And if there was a plan, I would certainly not reveal it at this point. So we are in this phase of looking into the matter. We're pleased to manage this investment foundation. But what else can you do with solutions? Of course, you may extend the area of activity of it.

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Unidentified Analyst, [35]

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[Interpreted] Quick question on Wincasa. How about the CS asset management contract? Where do you stand in this regard?

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Unidentified Company Representative, [36]

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[Interpreted] Well, would you like to take this?

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Unidentified Company Representative, [37]

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[Interpreted] No. I can answer this. We've got this agreement. It expired at the end of 2020. It will expire at the end of 2020. It's been prolonged to -- by the end of 2021, and we have also taken up negotiations for the new contract. At the moment, it will be continued, on a like-for-like basis, until by the end of 2021. Maybe you can give more precise information.

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Unidentified Analyst, [38]

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[Interpreted] Well, no. I have a final question. Peter Lehmann announced that he would step down. Will he be replaced in his capacity?

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Unidentified Company Representative, [39]

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[Interpreted] Well, we'll communicate about this in the course of the year. More questions? Yes, please? Wait for the microphone.

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Unidentified Analyst, [40]

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[Interpreted] If I understood properly, Swiss Prime Site Solutions and -- for the investment foundation, purchased a Migros portfolio, including properties, including retail. Now why do you think this is appealing and not in other places?

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Unidentified Company Representative, [41]

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[Interpreted] Well, that's Migros food. Well, that's a small detail that you need to take into account. It's food. More than 85% that we bought off was food. Several buildings in excellent locations that also provide room for development.

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Unidentified Company Representative, [42]

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[Interpreted] Well, let me talk about retail again. Well, it's a matter of site location. If you have high street location, even A or good B locations are not a problem. And if you're then eat food or near food, it's not a problem either. So retail is not retail. You shouldn't put them all in the same basket. And if we have reduced, it was C locations and you called it fast fashion like OVS, for instance, that's the business that we will continue to probably rather decrease than increase than other retail spaces, particularly in food, and keep growing. So we don't think this is a problem.

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Unidentified Analyst, [43]

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[Interpreted] So what then is your decision-making process? Why do you buy something for this portfolio, but you are not so much interested in that in other places?

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Unidentified Company Representative, [44]

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[Interpreted] Well, we have our own acquisition and sales unit. That's where all the portfolios come in with Swiss Prime Site Solutions. And the Managing Director looks at the files and decides which ones are going to be pursued. And if it goes one step further, then the Board of Trustees decides about investment. The investment foundation has a managing director. We're not the managing director of the investment foundation. That's important to know.

In terms of size, that's not the buildings we buy. And then -- and there's a residential share. So that's not our objective. Well, what is important is that in terms of corporate governance, we are entirely separated units. And this portfolio is not part of Peter Lehmann's business. It came in with solutions. That's why we didn't submit quotation. And if we were interested, ourselves, then there's only one good way. Both of us would submit a quotation, and the client would then pick their choice. Certainly, what we never do, to make an agreement between the 2 units, and we didn't even receive this file. It went to solutions, and that's why they took it on. Yes, please?

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Marc Schulthess, Bank Vontobel AG, Research Division - Senior Credit Analyst [45]

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[Interpreted] Marc Schulthess, Vontobel. I have a specific question on Stücki and the cause of the down valuation and lease incentives. Six months was required, I heard, with ATMOS to be successful in rental income. What do you think about this? What's your sentiment?

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Unidentified Company Representative, [46]

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[Interpreted] Well, for Stücki, in the process of construction work or deconstruction, certain technical defaults have been detected, which had to be remedied. And they couldn't be detected 1.5 years ago, and that's why this additional demand was caused. Second question, what was that again?

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Marc Schulthess, Bank Vontobel AG, Research Division - Senior Credit Analyst [47]

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[Interpreted] Rent holidays that you have to grant. Rent-free periods.

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Unidentified Company Representative, [48]

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[Interpreted] Well, we have become very guarded doing that because, a, it's really a malpractice in the market. You just grant fringe benefits, although it perhaps wouldn't be necessary. I'm convinced that if a building has its quality, tenants will accept it no matter whether they have 2, 3 or 4 months of rent-free period. In Stücki, we still have 7,500 square meters of shopping that is not let, and we are consciously doing that because we wait until the cinema is opened. And only when the axis works, we will then be able to rent -- to let the surfaces. And for good prices, not for dumping prices at cheap interest rate, but we prefer to keep waiting for another half year or a full year to get the best possible price.

Any more questions? No more questions?

So okay. I would like to thank you for your attention. Well, I was really wondering that one subject matter didn't give rise to any questions, and I believe it ought to be taken really seriously. And that's seeing the total cost of ownership as a building. I think this is the biggest challenge that we're going to have as a property company. We need to adopt a long-term view to secure profitability. Everyone can do it in the short term, but securing it in the long term and complying with increasing legal demand, perhaps even being proactive in this regard, that would be the biggest challenge.

So I would like to thank you very much for your attention and invite you to the (foreign language) upstairs, and have a good time.

[Portions of the transcript marked Interpreted were translated by a speaker present on the live call.]

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