Wharf Real Estate Inv Co

Good afternoon, everyone. A very warm welcome to Warwick interim results presentation. You may download the PowerPoint from this QR code on the LED wall and the recording of the event will be uploaded to our corporate website afterwards. We kindly request that attendees refrain from taking photos or videos during the event. Our management today include Mr. Stephen Ng, Chairman and Director, Mr. Horace Lee, Director, and I'm Angela Ng, Investor Relations Manager. Today we will first go through the PowerPoint presentation before the Q&A section with our management. The theme for the presentation is Hong Kong recovery while below pre-COVID. Now, let's take a look at the results highlights. We are pleased to report sequential half on half improvement on retail revenue. But this improvement was overshadowed by the amortization of rental concessions granted during the COVID years. In addition, the office market remains weak. the valuation of IP had not yet bottomed out as the challenging environment persists. By comparison, hotels turnaround is more visible, although it has been losing momentum since the second quarter. in terms of financial management. With Hibor breaching 5% in June, our borrowing cost tripled in the first half. However, the rising cost will be mitigated by the reduction of debt to the lowest level in four years. the recovery pace of the market has been slow. Hong Kong retail sales only recovered to 85% of pre-COVID level in 2019 and tourist arrivals recovered to 37%. the slow recovery pace was led by multiple factors, including the global geopolitical tensions and economic uncertainties, a strong local currency, as well as the very slow resumption in traveling logistics. Meanwhile, the office market vacancy rate is reaching over two decade high, and the situation has no sign of improvement so far. The overall recovery is further complicated by the mounting pressure on hiking interest rates and inflating costs. To navigate this headwinds, the group proactively adjust marketing span to capture both local and tourist spending. Additionally, reducing debt has become a priority and some long-term investment were disposed. net debt reduced by $6.1 billion to $39.1 billion with gearing ratio down to 20.1%. The group's premier Hong Kong IP portfolio had a proven track record in pre-COVID years, which set a high benchmark for recovery. Retail spot rent has stabilized and turnover rent contribution increased, but the growth was overshadowed by the amortization accounting. As a result, our retail revenue increased by 8%, reaching around 70% of the pre-COVID level. Overall, Hong Kong IP revenue report a 2% increase, which was significantly dropped by the decline in office segment. Despite rising manpower and energy costs our efficient spending on marketing helped to offset the impact on profitability Hong Kong IP operating margin improved by three percentage points to 86% under the high interest rate environment. The group's borrowing cost increased by $0.7 billion year on year, resulting in 9% decrease in group UMP. IP valuation declined by 0.5% compared to last December. Cap rate remained stable. Core UMP being the UMP of Hong Kong IP and Hotel decreased by 5%. Dividend policy is maintained at 65% of Core UMP representing an interim dividend of 67 cents per share. A strong financial position is crucial under the current business environment Our current debt level is nearly the lowest level since the company was listed Gearing improved by 3.1 percentage points to 20.1% Average interest cost increased to 4.7% mainly due to the floating rate debt However, there is a possibility that this trend could reverse as some in the market expect the rate hike cycle may be nearing an end. Our interest cover was healthy at 4.8 times and we maintained a premium Moody's A2 rating with stable outlook. In the following slides, we will walk through the performance of our core assets in Hong Kong. First, HyperCity, which accounts for 74% of our core of our Hong Kong IP revenue. HyperCity saw a 9% increase in retail revenue and 60% in retail operating profit. Occupancy improved to 96% with tenant mix refined to cater to both locals and tourists. The office portfolio also received more leasing interest from the investment and insurance companies targeting the mainland customers But the market is still lacking sizable demand Occupancy of Harvard City office maintained at 88% with over 500 diverse retail outlets. Harbour City maintains a balanced mix of trades with fashion, leather goods, jewelry, beauty, and accessories, accounts for over 80% of retail rental. Harbour City is more than just the largest shopping mall in Hong Kong, but also an all-in-one destination with dining, entertainment, and panoramic view of Victoria Harbour. Additionally, its convenient proximity to the high-speed rail station and various transportation options also make it a popular choice among the local and tourists In addition, the engaging marketing strategies also help the mall to stand out One of the latest examples is the Disney 100 Anniversary event hosting at Harbor City, Times Square, and Plaza Hollywood, which has become a popular summer attraction. By integrating interactive technology, customers can explore the Disney-themed journeys at different corners of our malls while collecting virtual Disney stickers and redeeming prizes on the game website. This combination of engaging digital and physical experiences is very effective in drawing footfall. Moreover, our tourist-centric offers have also been well received. The Canton Road frontage is a must-have location and showcase for the road's best brands. It is home to the flagships of Hermès, Chanel, Dior, LV as well as the high-end jewelers such as VCA, Piaget and De Beers Some of the key tenants are reporting full sales recovery comparing to pre-COVID our world class tenant portfolio is carefully curated by our proprietary selection strategy which helps to promote synergies among the top tier retailers while minimizing tenant turnover and ensures the property is well maintained. Over 40 retail tenants have committed lease at Harbor City in the first half. and then we will talk about Times Square. This vertical mall is continuously refining BrandMax to broaden customer base. It is also enriching diverse experience to customers, including cold baking space, VR experience zone, and Cosway Bay's most popular multi-plat cinema. the mall occupancy was stable at 94%, but office is still facing multiple headwinds and the occupancy was 87%. Then switching to the regional mall, Plaza Hollywood, which is located atop the Diamond Hill Station. The new Chung Ma Line has greatly benefited Plaza Hollywood by providing an easy access to a larger population from both Kowloon and the new territories It helps to effectively expand the catchment area of the mall Occupancy was 96% in the first half Our hotel portfolio is operate under Niccolo Brand and Marco Polo Brand which include the Murray in Central and the Marco Polo Hotels on Canton Road Hotels reported visible growth in gross operating profit but the industry is facing mounting cost pressure Our Forbes five-star luxury hotel, The Murray, has received more corporate demand and event bookings since the borders reopened Similarly, Marco Polo Hotels on Canton Road has seen more tourist demand and Prince Hotel was renovated and reopened by phases from May this year And then moving on to the outlook the post-pandemic readjustment is still ongoing. The recovery pace of retail and hotel sectors are under challenge while the office market supply is expected to persist until a significant change in business climate. And other important factor to consider is the trend of cost inflation and timing for interest rate to peak out. In the last part of the presentation, I will walk through our efforts in sustainability. The group has formulated the 2030 long-term target to reduce environmental footprint and the progress has been on track. we remain a constituent of Hansen Corporate Sustainability Index with AA plus rating and also one of the top ESG leaders in Hong Kong on Hansen ESG 50 Index. We have continuous asset enhancement to optimize operational efficiency across our portfolio and solar panels are installed at HyperCity and Plaza Hollywood to promote the use of renewable energy Meanwhile, the Star Ferry has three low-emission green ferry in the fleet and has participated in the full electric ferry pilot program The group's support in youth development also continues through an array of business in community initiatives including our flagship project We Can We are also making continuous efforts to promote corporate governance talent development and workplace safety That concludes my presentation We will now proceed to the Q&A section A quick housekeeping note before we begin If you have any questions, please raise your hand and our hotel staff will provide you with a microphone And please identify yourself and state the organisation you represent before asking the question you may feel free to ask no more than two questions each time. So now may I invite Mr. Ng and Mr. Lee on stage please.

Good afternoon. I should be on sick leave but I'm not. I had a small operation. Strictly speaking, I am on sick leave but because of the results announcement, I decided it would be a good idea to show up and meet with yourselves face to face rather than trying to do it online.

and uh like to welcome you relatedly um Angela yeah um so may we have the first question from the floor uh maybe um Praveen from Morgan Stanley hi can you hear me

No, not sure.

Thank you. This is Praveen from Hogan Stanley. I have two questions. The first one is retail sales. The dollar amount of retail sales as well as luxury retail sales that government reports has been actually improving every month throughout this year up to June but your comments have been very conservative when if we read our press release just want to understand what are you seeing that we are not seeing from the company and the second related question is about would you be able to share any qualitative statement about your retail sales for first half or second quarter versus market Um, and the third which is linked to this is turnover rent. We saw your turnover rent growing year over year by 60% and the base rent is kind of flattish which makes a lot of sense. But considering you said a lot of your retail tenants have already reached pre-COVID level of sales, we would have expected turnover rent to be even higher, assuming the ratio has not been changed. So is it that we're gonna see that in second half of this year? Thank you.

Okay, thank you for your question or questions. First of all, you look at Hong Kong visitor arrival and Hong Kong retail sales. The numbers indicate that both hit a peak in March or April, and from then on, on a month-on-month basis, it's been declining in absolute numbers, declining. so the peak for Hong Kong as a whole was at the beginning of the second quarter and since then it has not proceeded further and there has been little or no momentum in further growth and that's affected everyone in Hong Kong including our malls almost reported very similar trends as the Hong Kong overall totals. Some of our tenants did very well, but not all of them did. More wide, our year and year growth rates are significantly higher than Hong Kong's overall. That's partly because we started from a lower base than Hong Kong as a whole. Some of our tenants, in fact, are trading better than before COVID. But bear in mind that does not necessarily the tenants, these individual tenants, total sales in Hong Kong are doing better. It may or may not. Because over the last three or four years, they may have reduced the number of stores in Hong Kong. So the fact that their Harbour City store is trading better today than in 2019 or 2018, is one slice of the cake, i.e. the cake that we see, the slice that we see, they will see the total picture for Hong Kong, which we don't see. In fact, some of these tenants are already talking to us about expanding their store. not many, but it does indicate that having consolidated some of the tenants, consolidated their stores and store numbers, some of them are looking at expanding the remaining stores which are performing. So that's favorable to us from our point of view. Now in terms of turnover rent, I think the perspective needs to be taken this way. There's a base rent and there's a turnover rent. When a tenant's sales are not high enough for turnover rent to be paid, we don't get any turnover rent. When the tenant's sales picks up, for the first part of the pickup until the turnover rent catches up with the base rent. There is no turnover rent either. So it is not a simple formula because every lease is different and every tenant performs differently. Although overall sales are significantly better, the distribution of the sales growth is not even. So it is possible that some of the tenants who were underperforming previously have caught up and may be on the verge of paying turnover rent or may have started to pay a small turnover rent. it is also possible that some of the tenants who were already paying turnover rent previously are now doing better and therefore for every additional dollar of sales, we get a slice of it in additional turnover rent. So looking at a global number can be very, very misleading sometimes. From our point of view, the second half is still very unclear. Major factors include obviously economic performance of source markets, Europe and North America. You may have noticed from statistics released by the Hong Kong government that long haul visitors are still much weaker than they were previously. we get a good amount of recovery from short haul visitors with the exception we believe of maybe not curiously Japan and Korea Japan possibly because of currency the yen is simply too weak and currency is a big factor in the whole equation the fact that the Hong Kong dollar has been strong because of the peg has made Hong Kong expensive relative to renminbi relative to the yen and most Asian and European currencies as well so for as long as the US dollar stays strong and for as long as of course the Hong Kong dollar is pegged to the US dollar and the various economies in around in our source major source markets are uncertain we are conservative about the second half. That's a very long 10 minute answer to your questions. I'm sorry.

Maybe we have the next question. Please, Sam from Jefferies.

Thank you, Angela. Thank you, management. Two questions, if I may. First is on the base rent reversion outlook for office and retail. We saw double digit decline in office revenue for Times Square, which seems to imply pretty steep negative reversion at office. So can you please comment on that? And secondly, just want to quickly check on the amortization schedule for rental concessions. So could you please also help quantify the impact for first half 23 and what would be the impact for subsequent period? Thank you.

Okay, office sector and retail sector are at the moment performing in different directions. We see the retail market recovering. In fact, in spite of the amortization of rent relief, retail rent in the first half improved over the first half of last year. There is year-on-year growth. Whereas for office, because of the general oversupply in Hong Kong, there is pressure on both occupancy and rent. and we see the office oversupply situation continuing in the next one to two years at least until major economies recover and until tenants start to regain appetite in committing to bigger spaces, and the other factor about office, the office market is that a lot of tenants are reluctant to incur capital expenditure. So retention of tenant in a way is less difficult than before because with every move there is capital expenditure. Now, we understand, of course, some of the more aggressive landlords are prepared to subsidize capital expenditure. But we also have noticed that some of the tenants who moved to the less prime office locations due to capex subsidy are finding it difficult to retain staff or to recruit staff. at a time when talent is becoming a more scarce asset. So tenants will need to think twice about taking supposedly sweeter office leases if as a result of that they stand to lose good stuff. But we see that the office market still remaining soft Within that soft office market, our role is to maintain, if not gain market share, if possible. And one of the first things we will be doing, and we have already started doing, is to renovate, to bring our offices, the physical state of our offices, back to a more competitive state. We start with the common areas. And that would involve capital expenditure. And at the same time, of course, we need to make sure that our leases are flexible enough to deal with customer needs. Whatever the situation is today in the office market, it is a buyer's market. And as a seller, we need to cope with buyer's demands. So that is how we intend to deal with it. In the retail sector, different tenants are trading differently. And over the past few years, we have invested a good deal of energy in improving the tenant mix to make our malls more attractive to tenants and shoppers. And there are early signs of that strategy paying off in Harbor City. Times Square is still a piece of work in progress. And we don't have as good results to show yet. but that is going to be our next target, but it will take time. But we see if the retail environment continues, no worse than in the current state, we do see retail rent improving. The question you asked about amortization of rent relief, Rent relief was mainly granted in 2020, 2021, and 2022, those three years. And according to the accounting standard, rent relief is to be amortized over the duration of the lease. to the extent that most leases are not longer than three years. There are some special leases, but to the extent that most leases are no longer than three years, we would expect the majority of the amortization to have been completed by the year 2025, being three years from 2022. And the... amounts of amortization will be evened out as well so first half of 2023 the half that we are reporting on probably saw one of the higher the larger distortions if I may use that term but if you look at the underlying retail rent, total retail rent, the growth was satisfactory. Thank you.

Thank you. May we have the next question from Raymond of HSBC.

Thank you, management, for giving me a chance to ask two questions. The first question is about tenant sales in Hong Kong.

Sorry, what?

Tenant sales in Hong Kong. Tenant sales. So can management quantify the tenant sales performance of your harbor city? Because as you mentioned, you commented some of the tenants have already fully recovered in terms of sales versus pre-COVID leveled. So can measuring provide us the guidance like quantifying the tenant sales leveled for the first half or even in the second quarter this year compared to pre-COVID level in 2019. So an investor has a better gauge how strong your recovery is in this year. And the second question actually is also about retail market. Management mentioned that the office market is still a buyer market. So when we look at the retail market, would it be fair to say it's now a landlord's market or still a tenant's market at the moment? Thank you.

Okay. Total tenant sales. Total tenant sales. At Harbor City in the first half of 2023, is probably still about a quarter below pre-COVID. So, the good news is there is still room for upside. The not so clear news is how quickly will we catch up, or will we ever catch up? Now, Hong Kong is part of the bigger problem. Will Hong Kong ever catch up? If Hong Kong does, next question is will Harbour City catch up? We don't have the answer, but it will take time. The recovery clearly is taking longer than some people expected. I described the office market as a buyer's market. If I have to characterize the retail market, I wouldn't call it a seller's market. No, not yet, definitely. It's probably a neutral market. where leasing interest has certainly increased, but on the other hand, some of the tenants are still hesitant about making long commitments. On the one hand, it varies from tenant to tenant. Some tenants are doing better than others, obviously. If they do better, they would have more confidence. At the same time, I think the Hong Kong recovery is also a factor that they need to take into account as well. So it's a bit of a neutral market right now. Thank you.

Thank you. May we have the next question from the floor? Mark from UBS.

Hello, management. Thank you for taking my question. This is Mark Leung from UBS. I have a follow-up question regarding on your sales comments on the Harbour City. We are still a sales, attendance sales for Harbour City.

Attendance sales, right?

Yeah, yeah. We are still maybe a quarter below the pre-COVID level, but we look at either maybe luxury malls in Hong Kong, Some of them are reporting even at par or even higher than pre-COVID sales Could you comment on what kind of tenant mix we are dragging the tenant sales? Obviously our luxury sales are doing really well, right? But how about for the other segments? I think that's the first question And I think the second question is regarding on the office because I think the office rent was down by like 8% to 14% YY but if I look at the occupancy actually is only largely flat or maybe slightly decline a few percentage point Could you imply that is it mainly due to a really severe negative rent reversion or do we have any one-off expenses being booked in the office segment? Thank you

Answering the second question first, obviously rent has been soft, so there is negative reversion in the office sector, no question about that. Whereas in terms of vacancy, we're maintaining and hoping to gain occupancy in the coming periods. In terms of recovery compared to pre-COVID, A lot depends on the starting point pre-COVID. If your starting point was higher, it is possible it may take longer. If the starting point was mediocre, it is possible that recovery would be sooner or even over-recovery. In fact, the same applies not only to any mall, but to any tenant, any store. Some of the stores that I... described as having recovered to pre-COVID levels may imply they were not doing that well pre-COVID. But in the intervening three years, for instance, their products may have improved, their brands may have become stronger. So the mere fact that they are trading better than before does not necessarily mean they are doing better than competitors because reference is only pre-COVID rather than to other malls. I can only say that much. We're reporting how we did compared to pre-COVID and so are our peers.

Question from Ken Yuen from City.

Hi, I think we haven't touched base on Times Square. I guess you mentioned about Harbor City already 75, something like recovery pre-COVID. How should we be comparing versus Times Square? And do you think that, I'm sure that Harbor City, the recovery, the performance is much stronger than Times Square. Do you think that this is more specific or basically it's just is closer to high speed where we're definitely better than Causeway Bay is a district specific. So this is the first question. The second question is I think is for Horace is we do see that the investment portfolio have been down by something like four billion. So do we have the plan to further sell down some of the securities in order to repaid your debt?

Okay um Harbour City compared to pre-COVID is about quarter down Times Square is probably about a third down and there's a um the main reason is because Harbour City is a stronger more with a more dominant market position in Tsim Sha Tsui, whereas there is less dominance for any one mall in Causeway Bay. It's a more balanced competitive landscape in Causeway Bay. We clearly recognize that Times Square has fallen behind in the past few years, and as I was implying, We are working on trying to regain some of the lost ground, but we're not ready to talk about those plans yet. To your second question about investment, what we sold in the second quarter of this year, is mainly investments which were giving us a negative carry, i.e. where the dividend yield was lower than the cost of money. What we have left are mainly investments which would give us a positive carry, even in today's market, or at least a neutral carry. which means there is much less urgency for us to divest additional investment because that neutral or even slightly positive carry that's assuming interest rate stays where they are today If interest rate goes up further, then obviously it would change the balance and we would review it at that time.

Thank you. So please feel free to raise your hand on Simon from Goldman Sachs.

Hey, thanks for the presentation. I got a quick question. Just given the fact that I think Harvard City historically been able to capture a lot of mainland Chinese and for whatever reasons that we've been discussing, macro currency, it seems like that, you know, the Chinese are returning quite slowly. one thing to understand how you're thinking about your tenant mix because you know obviously historically seems like you're very skilled towards you know these group of mainland Chinese how are you thinking about your positioning assuming that you know they may not come back so quickly that's the first one and then second one sounds like you are maintaining your equity portfolio as long as the interest rates is upholding at this current level so in that if the interest rate further rise does that means that you're going to be disposing more that's one and then secondly how are you thinking of your borrowing costs because I remember last time you took the view that you know it's very difficult to hatch whether you have any change in your mentality now you're thinking about that thank you

Okay. Harbour City, as large as it is, is not a mall that caters to mainland visitors. That happens to be the one piece which catches most attention but in fact there's a there's a lot of business from locals and we certainly consider locals as an important source of business for our tenants to start with there are a lot of offices within Harbour City and the office tenants or people working in the office tenants are a major source of consumption within Harbour City. We also draw consumption from neighbouring office buildings and so forth. What is most conspicuous at Harbour City is of course Canton Road. And Canton Road is where the big luxury brands are. And they draw the most mainland tourists. And that's why the perception is it is a tourist mall. It is not. We rely very much on local consumption. And in the course of, particularly in the course of the COVID period, You will remember we did very well in gaining additional market share in the local market. Post COVID, we have changed the marketing strategy. We are investing less in price promotion. We are investing a lot more on events and publicity opportunities. And that is drawing both locals and tourists. On the equity portfolio, I thought I already answered that question, but in case interest rate rises further and if as a result of that, some of our remaining investments would turn from neutral carry or positive carry to negative carry, we would reassess the situation. But if as long as they continue to give us neutral or better carry, we don't see urgency in liquidating the portfolio. and interest rate. We took advantage of a low interest rate environment for a long time, at least since this company was separately listed at the end of 2017. And regularly, we considered the cost of hedging, i.e. going fixed from floating. And invariably, we always came up with the answer that over the medium term, it would be favorable to stay in floating. and we continue to hold that view while currently the fixed rate is high. Sorry, the floating rate is high. And we don't expect the floating rate to go back to what it was pre-2022, not for a very, very long period. but on the other hand, we don't expect interest rate to stay at five plus percent for a very long term either. So our current assessment is we would stay in floating.

Thank you. Please feel free to raise your hand if you have any questions. Carl from Bank of America.

Hi, a couple of questions. Just want to ask about occupancy costs. I can go back and do the math, but it looks like you said retail rental income was back to around 70% of pre-COVID level and sales were back to maybe 25 to one third down. So looks like occupancy costs, I guess comment on occupancy costs, where do you think it is? Is it still higher than where historically it was or lower? Occupancy cost today is obviously a lot lower than immediately pre-COVID

on a more wide level, we consider it reasonably affordable. It's under 20%. So that's a reasonable level, but there is great discrepancy from tenant to tenant. Some of the tenants are doing very, very well and are enjoying occupancy costs of in the low teens, but others are not. Some of them are still struggling to the extent that they may not be staying with us either voluntarily or involuntarily. So this is a I think it's fair to say the recovery has been very, very uneven. Some people are doing much better than others. But on a more wide basis, obviously the occupancy cost is a lot more affordable than before. And we're comfortable with it. Capital expenditure for Times Square, we don't know yet. We haven't finalized our plans yet. and for Harbor City, the capital expenditure will be incurred over a period of several years. So we don't expect that to put much burden on the cash flow. The reason why it cannot be done all at once is because we have a lot of remaining tenants and we need to program it so as to cause the minimum disruption to existing tenants. So I don't expect the capital expenditure in the second half of this year, for instance, to raise any eyebrows.

Thank you. So in the interest of time, we will receive the last question from Jeff on DBS.

I have a question. Hi, I have a question regarding the interest of making new acquisitions. Given the top priority is on debt reduction as a result of high interest rate or poor line interest rate up cycle. Does this mean that it is less likely for Wolf REIC to make any new investment, new acquisitions in the foreseeable future?

No, I don't think they are mutually exclusive. If we find the right opportunity, we would certainly be able to finance it either by liquidation of the remaining investment portfolio or by debt. At the moment, our debt level of gearing is 20%, reasonably low, and we've been able to repay our debt quite well. I think one of the slides shows you a couple of years ago, our net debt was $52 billion. and it's now down to 39. So we've been able to generate something like $14 billion of cash within a few years. And then on top of that, we've got a portfolio of investment. So if the right opportunity comes along, we'll be able to fund it. Thank you.

So thank you for answering the last question. So we will consider this presentation to be concluded. Thank you for joining us today.

Thank you very much. I can go back to my sick leave.