Wharf Real Estate Inv Co

Good afternoon, everyone. Welcome to the webinar of Warwick Final Results Briefing. I am Angela Ng, Investor Relations Manager. Our management team in the webinar include Mr. Steven Ng, Chairman and Managing Director, and Mr. Kevin Hoi, Director. Before the presentation and Q&A session, we will start with an opening remarks by the Chairman, Mr. Ng, please.

Thank you, Angela. Good afternoon, ladies and gentlemen. 2020 is behind us. I don't think anybody needs 2020 vision to tell that it wasn't a very good year. I remember telling you in August that the first half of last year was already a wash out. Indeed it was. And we did not encounter a miracle in the second half. to make up for the losses in the first half to make up for the downturn I should say in the first half so the year as a whole is obviously disappointing but probably no surprise to anyone I'll let Angela take you through it and then we'll leave some more time for Q&A thank you thank you chairman

Now I believe that you can see our PowerPoint presentation on your computer screen or mobile device. The theme of the presentation is unprecedented pandemic spared no one. COVID-19 has caused great distress to IP and hotel sectors. with cross-border tourism largely at a standstill and social distancing measures made a serious dent in domestic consumption. Hong Kong retail sales declined for the second consecutive year with 24% drop in 2020. All this has led to a drop of the group's IP revaluation. Under the pandemic, Retail tenants have shortened operating hours and stepped up anti-pandemic measures to support social distancing. F&B businesses were a hot hit. In this abnormal period, the group has granted over $2 billion of rent relief to support small tenants, majority in the form of base rent. In line with the market, negative rental reversion was recorded. During the year, retail revenue decreased by 26% to $7.6 billion. After rents dropped, rent relief and tripling in marketing expenses, more net operating cash flow dropped 36%. On the other hand, the office sector was hit by downturn in the global economy. slowdown in economic activities under local work from home arrangement and new supply in the market. As a result, the group's office revenue dropped slightly. Although the pandemic continues to drag on our business performances, we see a narrowing decline in Hong Kong IP revenue in the second half of 2020. During the year, the group has made significant investments to retain our market position and support our retail tenants. With tripling marketing expenses, extensive campaigns have been rolled out to subsidize shoppers' consumption. In particular, the first of its kind citywide spending reward scheme Rewarding Everyone campaign in May and the several runs of voucher program have been proven to be an effective stimulus. Ongoing retenanting exercises also help bring in excitement in the changing market environment. As a result, We saw robust footfall and sales recovery in between COVID-19 waves Sales dropped in our mall slowed down despite the occurrence of COVID wave in the fourth quarter Moving on to our financial highlights Group revenue and underlying net profit decreased by 3% and 24% respectively with underlying net profit of IP decreasing by 23% to $7.3 billion and hotel turning to a loss. Non-cash IP revaluation dropped 5.5%, contributing to a net loss. The group has a stable dividend policy maintaining at 65% of underlying net profit from IP and hotels in Hong Kong which represents a TPS of $1.47 for the full year. In the following slides, we will walk through the performance of our IP and hotel portfolio as well as financial management and outlook. First, Harbor City. The pandemic hurts all business segments at Harbor City with hotel segments hit the most severely by the paralyzed tourism. For the retail side, we are glad to see activity gradually reviving. However, office demand remains subdued amid cautious sentiments. Total revenue at Harbor City was $8.7 billion. As at year end, retail occupancy was 90%, and office occupancy was 85%. Featuring a unique critical mass with over 500 shops, tenant demand continues at the landmark retail destination. We believe the comprehensive mix helps to mitigate the market risk to our tenants. The retail income distribution by different types of tenants is shown in the chart. with an established position of must-have address for renowned brands. Harbor City has attracted a variety of forward-looking local and international brands to open doors or expand. New openings included a number of debut brands and a variety of dining options. In addition, a number of top-tier brands unveiled their new flagships after expansion in harvard city including ms alessandra mcqueen christian nabuton and jimmy choo moving on to the three marco polo hotels in harvard city marco polo hong kong and gateway hotel proactively draw in the local market while Prince Hotel was closed since February last year for a major renovation. An operating deficit was inevitable in spite of stringent cost control measures. Then we will walk through the performance of Times Square. The competitive landscape of Causeway Bay has intensified with higher vacancy nearby. market adjustment is in process. We believe the current consolidation would allow more new enticing brands to enter the mall. Under our extensive marketing support, we are glad to see a rise in footfall and year on year sales growth resumed in the fourth quarter. As at year end, Retail Occupancy was 93% and Office Occupancy was 86% Total Revenue at Times Square was $2.3 billion Then switching to Plaza Hollywood The mall enjoyed relatively stable labor market demand and footfall Occupancy was 95% at year end The next one is Central Portfolio, comprising Villa House, Private House and the Murray. With prime locations, occupancy at Villa House and Private House remained high. As for the Murray Hotel, in response to the cross-border travel huts, a range of tempting staycation packages and dining offers are promoted to welcome more local guests. and it has successfully achieved top red part and an outperforming occupancy against its competitive set. However, an operating deficit was still inevitable. Moving on to our Singapore portfolio, which comprises Willow Place and Square Square, both located at the BC Orchard Road intersection. the most recorded mild sequential recovery after the circuit breakup period. Moving on to the financial management. The group maintained a prudent approach on financial management. Net debt was $52 billion and maintained a comfortable gearing of 24.8%. average interest costs lowered to 1.9%. The group continued to maintain the Moody's A2 rating. This year, we are glad to welcome a coming attraction. Niccolo Suzhou is scheduled for opening in early April. Same as the Murray, Niccolo Suzhou is operate under the Niccolo Hotel brand, and it is the fifth hotel in the collection. The hotel will comprise over 230 spacious contemporary-shaped rooms and command stunning view of Jingji Lake. It has already garnered a number of the most anticipated luxury hotel of the year from different organizations. Looking ahead, Mainland China is leading the world with rapid recovery but there are a number of lingering uncertainties that add challenges to the post-pandemic economic outlook. We believe the road to recovery will be uneven to different business segments in different parts of the world. As the pandemic has accelerated the paradigm shift across all sectors, especially to the retail and hotel, The group will adhere to the proactive business strategies to stay ahead in the changing business environment. In the last part of the presentation, I will walk through our efforts in sustainability. WolfRig is a member in Hansen Corporate Sustainability Index. through WAF Emergency Relief Fund. The group provided instant support to the nearly affected by COVID-19. The group is also devoted to making a positive impact in the face of climate change and committed to arts development and nurturing talents. The Star Ferry launched the first low-emission Green Ferry Morning Star to reduce emissions of air pollutants. The group has also introduced the World Hong Kong Secondary School Arts Competition since 2011. In regard to youth development, our business units are partnering with 16 weekend schools to provide support. That concludes my presentation. Now we will come to the Q&A session. If you have any questions, please press the raise hand button on your Zoom control panel. Now we will receive the first question from Carl Choi of Bank of America.

Hi, good afternoon. Can you hear me? Yes. Thanks. I have three questions. One is, you're glad to hear that retail sales were up in the fourth quarter for Times Square. Can you give us a little bit of sense of the rebound that you saw sort of for the in-between the COVID sort of episodes? Or, you know, obviously we don't know when the borders will open, but if we are in sort of the current kind of situation, Just based on local spending, what kind of retail sales rebound do you think we can see in 2021? Second is on occupancy. Based on your advanced negotiations, can you give us a bit of a sense about your occupancy outlook for both office and retail? It was stable relatively half and half, but I think there were some news stories recently about some store closures at Times Square. And then lastly, the third question is on the central commercial site that is being tendered. Can you give us an update on your latest thinking about your interest level and also the sort of likelihood that you go for either on a standalone basis or more in a consortium basis? Thank you.

Okay, thank you very much. First of all, the market has been unstable. These different waves which you refer to have made analysis and planning a bit of a challenge. We get retail sales reported to us on a monthly basis and unfortunately waves do not follow months. So we can't tell exactly from in between wave X and wave X plus one how the tenants' sales perform, and precisely within Wave Y, how the tenants' sales perform either. But generally, we see, I suppose after Chinese New Year this year, when the social distancing measures began to be eased, we see happier faces among our tenants. I think it's a combination of several factors. First of all, business begins to come back. And secondly, after a year of reversion, more tenants are now on a lower rate compared to 15 months ago or 12 months ago. so the affordability or the ability for tenants to trade and to make ends meet has improved however all of that is a matter for today what is more important for tenants is what would happen tomorrow and there nobody has a crystal ball if you ask me about the outlook for the current year I would use today's weather to describe it overcast with patches of shower we don't expect clear skies completely very soon and even when vaccination works and when the border starts to reopen it will take some time for markets to get back to better days so generally we are cautious about the rest of this year in terms of tenant movements I think maybe that's a better way to answer your question day in day out we get a lot of tenants who come in and tenants who move out in this particular case we have a couple of high profile tenants that get reported in other cases they don't get reported that's all but this is a time for the some of the tenants whether they are weaker tenants or whether they have changed their strategy or whatever to scale down and this is also a time for some of the stronger tenants or some of the more aggressive tenants to scale up that is precisely what we're seeing with our malls we see major international tenants making long-term commitments with us new long-term commitments with us to move into for instance harbour city they when when the market was a lot hotter they were not able to get the locations that they wanted Now that the market has softened, some of them have come back to ask for these locations, and we negotiate reasonable rents for both, and they're prepared to sign up and make very substantial capital expenditure commitments at a time of uncertainty. So that just points to a phenomenon which is a little bit of a cave that sometimes people refer to except in this case in our case it's not a K of the rich versus the poor it's a K of those who are more ambitious versus those who are more conservative so tenant movements will continue but it will take some time for the current market to stabilize and And so we do expect vacancies to remain noticeable in the most part of this year. And as to your third question about the site in Central. Yes, we have a task force working on it. As you know, the design is as much a component for this bid as money. and so the first thing we're working on right now is to try and come up with a winning design that would give us a maximum score on that count if we can't come up with a good design that we are ourselves happy with we may not bid and whether we did by ourselves or with partners that's also part of the Consideration will be making in the course of the next few months Thank you.

Thank you. So now we will receive the next question from canyon of city Hi

Hi, Stephen. Thanks, Angela, for getting me in. I have three quick questions. First, you mentioned about the rent relief of $2 billion plus, which in the first half is $1 billion plus. So I think it's somewhat similar for first half and second half. But I do see that your foot traffic is excellent. I mean, in the last couple of months. My wife also using that kind of coupon and keep relooping and cannot escape it because when they spend $10,000, they get another $7,000 and then need to spend more. So very successful program I said on this. But can I say on that, on that of this, are we seeing an increase in sale, which we are seeing a trending down on this rent relief? Can you give us a special on some of the guidance that let's say in the January, February, December, that kind of things. Are we seeing the rent relief overall going down? And if possible, give us a sense that how much is going down. So this is the first question. And secondly, I also follow up on this is on the foot traffic. It's very crowded, so flooded with people. So how can we compare with this? I know that you may not be one to tell on the retail sales. How do we see on the foot traffic versus the pre-COVID level versus the pre-social unrest level for what you are seeing in the recent couple of months? and and lastly I think I want to drill down on the sales as well so any things that you can give us on the guidance on January and February Harbor City and Times Square tenant sales thank you okay thank you rental reversion certainly we are we continue to experience negative reversion and that's been the trend in the past 12 months and

As the market adjusts to a new retail environment we need to adjust as well and there are situations where the negative reversion can be quite substantial depending on location, trade and specific tenant but generally it has been a major factor in the decline in our rental income. We don't see that stabilizing yet. Rather, I should say, we don't see that ending yet. The negative reversion is less serious today than it was six, 12 months ago, but we don't see that ending in the very near term. and that is why we continue to be cautious about the retail side for the rest of this year. Food traffic is good. I don't have specific numbers with me about how it compares precisely with 15 months ago, 18 months ago, 24 months ago. but another measure is that we've been getting a much heavier utilization of parking facilities for those of you who drive to our malls you would have noticed that weekend parking is very crowded very congested and a lot of times long queues form usually around lunchtime, beginning from Harbour City all the way to West Kowloon Cultural District or beyond. It is a bit of a problem sometimes. All that points to what we think is that we've been able to gain market share among local shoppers, at least in terms of bodies. and hopefully we've been able to gain market share from among local shoppers in terms of their wallets as well. But clearly what is still badly missing are the tourist dollars. And as you may know, tourist dollars have been a significant part of the sales at both Harbour City and Times also at Harbour City then Times Square and when that's down to a very very low level overall the tenants are still not able to report better sales than before although there are obviously exceptions locals are spending however and you may have noticed queues forming in front of some of even some of the luxury brands and I think everybody has to adjust the retailers have to adjust we have to adjust sales we obviously don't have sales from February yet we have some from January but they're not good indicators because last year Chinese New Year fell in at the end of January whereas this year to try to compare January 2021 to January 2020. Suffice it to say, again, I go back to what I said earlier, we have happier tenants now and renewal conversations with tenants seem to be less sticky than they were only a few months ago.

Thank you. Now we will receive the coming question from Mark Leung of UBS.

Hello, management. Can you hear me?

Yes, please go ahead.

Yeah, sure. Actually, basically, this is Mark from UBS. I got about several questions. Number one is regarding on the marketing expenses. Not sure, could you give us the amount how much marketing expenses we have been booked in 2020 as well as in second half of last year and what is our upcoming budget for that? That's the first question. The second question is, I realized we got about 13 billion long-term investments. Not sure under what condition we will monetize the investment. That's my second question. And my last question is regarding on the luxury brand CapEx Outlook. What is your view for the luxury brand CapEx Outlook in Hong Kong versus mainland China going forward? Thank you very much.

Good, thank you. Marketing expenses, I can't give you a precise number for commercial reasons, but it's in the hundreds of millions of dollars. That's for sure. In terms of the listed investments that we hold, they're generating good yield for us and it forms part of the reserves that we would be able to resort to if you like if we succeed in making a new investment for instance the central site right we haven't decided we would bid but we need to put ourselves in a position to be able to support a bit otherwise it would be highly risky It is in blue chips and stocks generating yield and in today's low interest environment we see that as a plus to the shareholders Your last question about luxury brands CapEx is a very good one as I was indicating some brands are prepared in today's weak market to make large commitments in Harbour City for instance we had Ermey that moved from a one from one Canton Road location to another and effectively doubled its store size and as you know with these major luxury brands they spend a lot on opening a new store that's precisely what they have done it indicates clearly that their commitment to Harbour City they've been a tenant of Harbour City so they know how much they can sell here it's not as though they were guessing in the blue they know how much they can sell and they made their calculations and were prepared to commit to this major commitment and the new store opened in December and since then I believe they very happy with the performance in the new store and all of that points to a justification of the original decision another example and I can't disclose the name of this tenant yet for commercial reasons is that May having moved and the next shop Ferragamo having moved at the same time uh that was part of our mall planning to vacate two adjoining stores and what we're doing right now is to combine the two stores into a bigger store for which we already have a binding commitment with full deposit paid from another major luxury tenant to move in but first of all we need to take away some structures and comply with fire requirements and so on and so forth to get the store ready for hand over to the tenant this is another large store and the tenant is again a very demanding tenant when it comes to CapEx to fit out a new store again that's clear evidence of confidence in Harbour City.

Thank you. So the next question from Justin Kwok of Goldman Sachs.

Hi. Thanks for taking my question. So I think on the office front, I just want to get a sense on what are you seeing in the market? across the Harbour now in both Harbour City and Times Square, the occupancy is now falling to around mid 80%. So do you think it's more or less already bottom out in a way or you think that there are still further headwinds into 2021 and 22? I guess given what we're seeing from the agents, it seems across the district, things are not yet improving. So what's your expectation on that? And actually on a similar question is on also on the retail side, Will you be able to share a little bit on your expiry profile now into the year? Do you expect some legacy impact from the short-term leases kind of overflowing in 2021 where you're going to see a relatively bigger size of renewal? Thank you.

Thank you. Office vacancy, I would answer that question this way. We think the current vacancy in our office portfolio is higher than we would like to see. And we would be trying to improve from that in the course of this year. Now, that's our wish. Whether or not the market will move against us, we don't know. but it's an indication at least of our intention for retail you're right as you rightly pointed out we have in the past 12-18 months been more flexible with new lease terms and that includes for instance shorter Leases, which therefore increases the concentration of lease expiries in 2021. So that's a double edged sword. On the one hand, we would be more subject to this year's market, certainly. and if the market stays low or goes lower our exposure will be bigger but we're banking obviously on the assumption that sometime in the course of 2021 the market would get better if the market doesn't get better what we may do is to roll over these short-term leases again Um, and that's sometimes preferred by tenants as well. So, um, 2021 would be an interesting year. You're right.

Thank you. The next question from Andy. So of high tone. Oh, Andy.

Hi, management. Hey, hi, can you hear me? Yes, we can. Please go ahead. Hi. On the rental relief, for the 2 billion rental relief that we have given out in 2020, may we know if such cost has been fully booked in 2020 and a little more cost will be booked in 2021? So this is the first one. Secondly, the second thing that I want to ask is on the selling and marketing expenses. In our financial statement, what I can see is that our marketing expenses in 2-2 increased very substantially by around 73% year-on-year to around $6 billion. And that number was just around $1.3 billion in 2-1-9.

So that is a very substantial increase in marketing expense in 2-2.

So shall we expect our marketing expense will stay high and won't be coming down, you know, in coming like one to two years? Thanks.

Okay, thank you. First question, the $2 billion plus of rental support, rental relief. The bulk of it has already been charged to the 2020 accounts. I'd say less than a third of it has been deferred on amortization by application of the prevailing accounting standard. and most of it will be amortized in the course of 2021. To your second question, this is selling and marketing expenses does not refer only to what we would use as marketing expenses. This includes a lot of things, including staff costs, including commissions we pay to agents, for the sale of properties or for the rental of properties and so on and so forth. And in particular, 2020 probably included the Suzhou IFS and so on.

Yes. In last year, we look at sales.

Right. So the bulk of it actually does not relate to the mall.

Thank you. If you have any questions, please press the raise hand button. We will receive your verbal questions. Any more questions?

If there is no more question, I think this is the end of the...

I just say a couple of words in closing. As the heading of our presentation and our announcement says, the unprecedented pandemic spared no one. Of course, retailers were hit and landlords were hit as well. and as we reported our net cash flow from our mall operation declined by about 36% from a year earlier but of course malls were not and are not our only business and our other businesses were with the exception of the hotels were less affected and that's why we came up with the group underlying net profit decline of 24%, which was a little bit better than the malls. Not good, but a little bit better than the malls. We're hoping to see a better market for retail in 2021. And early signs are Real Estate Inv Co is widely accepted and even if the new strains of virus do not hit Hong Kong as badly as it can otherwise so we're keeping our fingers crossed but in the meantime obviously we're doing everything we can to help our retailers uh rent relief is necessary but not the most effective way of helping them it's necessary as a short-term painkiller if you like but at the end of the day the cure is to remove the pain and that is we need to help them to generate more sales not we alone obviously the borders need to reopen and the local consumers need to come out and spend. And that is a problem not unique to us. It's a problem for all shopping malls in Hong Kong. For all retail property owners and all retailers in Hong Kong. It's a Hong Kong problem. It's not a company specific problem. But of course we have a large exposure to this particular sector. and I can understand why you would be concerned if you are concerned however it's a macro problem that we will need to deal with and our other businesses hopefully will be able to help soften the impact of the retail softness and I look forward to being able to conduct our next briefing in person rather than over the internet as we have for three sessions now right okay in the meantime i wish all of you a good evening and a successful week ahead of you thank you thank you