Wharf Real Estate Inv Co

Good evening, everyone. A very warm welcome to Wolf Rig Final Results Briefing. You may download the PowerPoint presentation from the QR code on the LED wall, and the webcast of the event will be uploaded to our corporate website afterwards. Our management today include Mr. Steven Ng, Chairman and Managing Director, Mr. Horace Lee, Director, and Angela Ng, Investor Relations Manager. Before the presentation and Q&A section, may I invite Mr. Ng to come to the stage for an opening remarks.

good afternoon ladies and gentlemen thank you very much for joining us tonight this evening i don't have much of an opening remark other than to welcome yourselves we've published our results at noon today over lunch time i think you've probably had a chance to look at it my colleague angela will take you through the powerpoint presentation i'd be happy to assist with answers to questions if you have any following the presentation and feel free to ask whatever you wish and I will feel free to answer whatever I wish. Thank you.

Thank you, Chairman. So the theme for the presentation is core businesses stabilize amidst doubling of interest costs. We are pleased to report resilient performance of our core investment properties and hotels businesses. Full year revenue from core businesses increased by 8% to $12.5 billion and operating profit increased by 12% to $9.5 billion. although business operations strengthened over the year. High interest rate weighed heavily on the group's bottom line and the segmental UMP dropped by 3%. With profit stabilization in second half, the second interim dividend is unchanged from 2022 at 61 Hong Kong cents per share, representing a full year DPS of $1.28 per share. IP valuation was stable at $228 billion, accounting for 93% of the group's assets. Our net debt decreased further by $8.8 billion to $36.3 billion, which is the lowest level since the company was listed in 2017. Gearing ratio improved by 4.6 percentage points year on year to 18.6%. The lifting of border restriction in early 2023 stimulate the recovery of Hong Kong's tourism and retail sectors Hong Kong retail sales increased by 16% year on year while Hong Kong hotel occupancies rose by 16 percentage points Driven by the retail recovery both Harbour City and Times Square experience increasing leasing demand and occupancies with the strategic management of tenant portfolio and effective marketing. Our malls in Hong Kong achieved outperforming year-on-year growth in sales. Also, the strategic realignment of brands on Canton Road high fashion frontage was well received among high spenders. This 530 meter high fashion frontage currently feature 16 top luxury brands which collectively generate over 10 billion in sales in 2023 I will share more on this later and for our Hong Kong IP performance, it regained positive growth and reported a 2% increase in revenue to 10.6 billion, with retail revenue increased by 8% to 7.3 billion. Spot rent has stabilized and turnover rent contribution increased by nearly 60%. In addition, amortization of the COVID rent relief is substantially completed. And now let's take a look at the financial highlights. Group revenue increased by 7% to 13.3 billion and operating profit increased by 13% to 10 billion. IP and hotels revenue increased by 8% and operating profit by 12%. However, the rise in borrowing costs by 1.1 billion to 2.3 billion weighed down the UMP. Core UMP of Hong Kong IP and hotels dropped by 3%. Our dividend policy is consistent at 65% of core UMP representing a full year DPS of $1.28. From this table, you can see that the year on year performance of revenue, OP and UMP in the second half was stronger than the first half. And IP evaluation was virtually unchanged as compared to the end of June. Despite the volatile business environment, the group maintained a premium Moody's A2 rating with stable outlook. net debt and gearing further improved. Average interest cost for the year was 5.4%, majority on floating rate debt. We are closely monitoring the high ball trends and we are prudently converting part of it to fixed rates. Interest cover was healthy at 4.4 times. In the following slides, I will walk through the performance of Harvard City, Times Square and the hotel portfolio. First, Harvard City, which accounts for 75% of our Hong Kong IP revenue. Driven by retail recovery, Harbor City saw a 10% increase in revenue to 9 billion and 13% increase in operating profit to 7.2 billion. Retail occupancy improved to 97% and retail rent has stabilized, also gradually increasing. Certain luxury brand already achieved high double digit sales growth versus pre-COVID. thanks to the drawing power of the mall. Office leasing demand improved among the insurance sector. Occupancy was maintained at 88% despite the weak leasing market. The three Marco Polo hotels on Canton Road also reported revenue improvement as inbound tourism gradually recovered. Our lineup of major crowd during events were footfall and attract foot traffic exceeding the 2019 level. With over 500 diverse tenants, Harbor City maintains a balanced mix of trades that caters to both local and tourists. Retail rental increased by 10% to 4.9 billion. During the COVID pandemic, we seized the opportunity to strategically realign the brand portfolio on Canton Road. As part of the initiative, we welcome the new flagships of eight top-tier luxury brands, namely Hermès, Dior, Fendi, Ferragamo, Miu Miu, De Beers, VCA, and Piaget. This 530-meter frontage showcases six top-tier luxury fashion and jewelry brands contiguously They collectively generate over $10 billion in sales in 2023 which accounts for around 2.5% of Hong Kong's total retail sales The sales performance is also on par with the 2018 level In addition, some of the key tenants are among the world's highest store sales, which is a testament to Harbor City's outstanding sales productivity. Overall, there were around 100 brands committed leases at Harbor City last year. Celine and Gucci also had vertical expansion within the mall. At the same time, Times Square Mall also made improvement Mall occupancy increased to 95% and retail revenue increased by 3% Office occupancy was 88% Then we will switch to our hotel portfolio which includes the Murray, our Forbes five-star hotel in Central under the Niccolo brand and also the three Marco Polo hotels on Canton Road Hotel segment turned around to operating profit in 2023 Occupancies improved notably during this Lunar New Year as average daily mainland visitors exceeded the 2018 level Prince Hotel completed renovation and fully opened in August And moving on to the outlook While there are positive signs of further recovery in inbound tourism, we recognize the increasing regional competition and the uncertain macro environment. In response to these challenges, the group continues to enhance the competitive edges of our IPs and hotels and actively supporting government campaigns aimed at boosting tourists and local spending. In the last part of the presentation, I will walk through our efforts in sustainability. The group has formulated the 2030 target to reduce environmental footprint and the progress has been on track. Additionally, the group consistently maintains good ratings with leading ESG rating agencies and actively pursues sustainable financing. We are proud to announce that Times Square achieved LEED Platinum certification for existing buildings This accomplishment reflects the group's commitment to ongoing AEI across our portfolio Furthermore, the Star Ferry fleet now includes three low-emission green ferries and has participated in the full electric ferry pilot program Youth Development is also our key focus, and we are dedicated to various business in community initiatives, including our flagship project, We Can. Continuous efforts were also made on promoting 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 question, please raise your hand. Our hotel staff will provide you with a microphone. And please identify yourself and state the organization you present before asking the question. You may feel free to ask no more than two questions each time. Now may I invite Mr. Ng and Mr. Lee to come to the stage please. So now, may we take the first question from the floor? Kyle Choi, Bank of America.

Thanks for taking my question. Just want to ask about the retail sales recovery in the second half of last year. How did it go compared to the first half, or maybe in comparison to where you were in either 2018 or 2019? And also, can you give us a quick update on where the occupancy costs stood in the second half for the two properties as well? Thanks.

Thank you. Retail sales started to recover after reopening. And March and April were seen as the high point in 2023. until December otherwise between April and December there was a gentle drift downward drift but relatively gentle so to try to compare the second half to the first half is not necessarily very relevant first of all there is seasonality secondly reopening didn't actually start from January 1 it started a little later but overall the second half reflected more of a or at least all six months in the second half occurred post Reopening, whereas only four months or maybe five months maximum in the first half. Compared to 2018 for the full year as a whole, bear in mind it wasn't a full recovery year, but for the full year as a whole, it's probably still 20-ish percent below 2018. but as Angela was referring to a little earlier certain parts of our portfolio have already caught up to 2018 performance specifically if you look at the 16 stores on the Canton Road front in Harbour City in 2003 for the full year they generated a total of more than 10 billion dollars in sales notwithstanding the fact that during some months some of the stores were actually not trading because of tenancy transition and therefore closure of business pending tenancy transition in 2018 the same stores generated roughly the same amount of sales but out of the 16 brands eight are same store brands i.e same brand same store the other eight are either new brands all together or same brand different store what has happened is that we've been able to re-engineer that frontage some of the weaker performing brands have been replaced by stronger performing brands and collectively therefore that street front has generated a similar amount of sales as in 2018 that's what we try to do regularly to all parts of our portfolio this is the most conspicuous part and therefore the and arguably the most important part and that's what we focus our attention on first the remainder will have to follow hopefully with similar success Occupancy cost as a whole for the year is a little under 20%.

Thank you. May we have the next question from Sam of Jefferies?

Thank you. Thank you, management, for the presentations and the opportunity to ask the questions. I just want to follow up on the retail recovery point. I wonder if we can get more granularity in terms of the recovery rates by assets, meaning for Harbor City and for Times Square, and also by segments, meaning for luxury and non-luxury. Also want to get your sense. A second question is, you know, want to get your sense on the retail sales outlook for 2024. Thank you.

Recovery in Harvard City has outperformed Times Square Times Square is still a piece of work in progress and we are working on that and we expect to start to deliver some change for you to see hopefully towards the end of this year so it will be some moments We've actually got commitments but the tenants will not come in and start their decoration and fill out work probably until the third quarter So hopefully that will start to uplift Times Square as well There's not much more I can tell you about Times Square at this point in time Harbour City, the Canton Road front I've covered and there is no other equally conspicuous part of Harbour City that I can single out and discuss. but overall sales recovery as I was alluding to it's so far only about 80% of pre-COVID and that needs to be sustained now whether or not that can be sustained or even improved in 2024 is clearly still a question that remains to be answered we believe Improvement will continue, but gradually. In the absence of something that we or very few people foresee, either positively or negatively. So far this year, it seems to be good, but it's only two months into the year. And I don't have very definitive data points to share with you yet.

Thank you. May we have the next question from Kenya City.

Hi, it's Ken from Citi. First question on your treasury management. This is the first time I get to know that you want to fix some of your finance costs. Can I get to know what is the ratio as of end of last year? What is your target in terms of the fix and floating of your debt that you want to going to? I mean secondly is we do see a very sharp cut in terms of their gearing and that part of it is funded by their disposal of securities should we expect more disposal of the securities on that and follow up on that is also the second question the second third question is there's news saying that your Singapore disposal of your IP can we get to know what is the timeline and basically is that use the process will be useful also similarly as lower the key rate

Okay, thank you. I'll answer part of the question and I'll ask Horace to answer the rest. Yes, we've disposed of listed securities in the course of the second half of last year. So much of the impact of debt reduction was not felt last year because of the timing of the debt reduction. This year, of course, we expect to have full impact from that. and assuming interest rate does soften that will be another factor to reduce our interest cost borrowing cost for 2024 We do not have much left in the portfolio of listed securities So I would not expect any sizeable reduction in that portfolio anymore The sale of our Singapore Mall We're in the middle of it The process started in January if everything goes well hopefully we would have a binding agreement signed by May and completion probably around the middle of the year and proceeds of that will be applied against debt initially at least interest rate swap

we adopted floating approach for the last years and this year of course last year 2023 we start to fix some fixed rates before that our floating rate is almost not 100% it's almost 99% but last year is around 94% so we are moving towards the more balanced distribution of fixed and floating. Regarding the liquidations of long-term equity investment for the reducing, last year is around 7.2 billion disposals, which help to reduce the debt level substantially. Of course, as Chairman has mentioned this year, our balance of the long-term investment is about 5.8 billion. So, of course, we cannot expect a similar level of disposal for this year.

And the 5.8 includes Harbour Centre's portfolio. because it's because of consolidation.

Thank you. May we have the next question, maybe from Praveen Morgan Stanley?

Hi, thank you. Two questions. One is on office, if you can tell us what's the outlook, both Havasity and Times Square. What, sorry, what? Outlook. Outlook. Just the outlook. It has been very slow and declining, so just wanted to understand if you are seeing some bottoming of that sector. And then the second question I have was interest expense as well. Would you be able to tell us when did this $7.2 billion a disposal happened during the half so to understand net debt number to analyze it to understand if you have sold in December then five months of this and so on so third quarter let me answer the question third quarter third quarter July

Well, July is part of third quarter. You're right.

So then the other question on the interest expense is the reason to sell your equity portfolio, was it because equity portfolio was generating less return than would you get in interest in a fixed deposit, for example?

Yes, negative carry.

Okay, thank you.

so office negative carry because of it because as interest rate went up the cost of that portfolio to us because of funding that portfolio to us was becoming more and more costly office I think the office situation in Harbour City is a little different from that in Times Square in Harbour City because of our location and because of the ability of the Harbour City Mall to draw a good number of mainland visitors we get companies that sell financial services as tenants. Good example, insurance companies. They sell insurance policies. And they know if they set up an office in Harbour City, it would help them to sell more policies. Now we don't have a similar situation in Times Square and so financial services tenants in Times Square would not be as concentrated as they are in Harbour City but we get other kinds technology other general trading and so on and so forth but and then the competitive landscape is also a little different Causeway Bay faces primary competition from Island East where Tsim Sha Tsui faces competition more from Kowloon Bay And competition is probably in that regard competition is probably keener in Kowloon than in Hong Kong Thank you The next question from Kyle Chan JP Morgan

Hi, thank you very much. This is Carl from JP Morgan. I have two questions. The first question is about rental reversion. Just curious if management can share a bit about our outlook on rental reversion, preferably by segment or by assets. And the second question is about potential disposal because we talked about a soft square, right? Just curious, do we have any plans to dispose of any other assets currently? Thank you.

No, Scott Square is the only asset that is on the market or that is planned to be on the market. To give you more colour, Scott Square is a charter titled properties. there is a shopping mall below location is very good it's sandwiched between the Grand Hyatt on the right-hand side and the Marriott Hotel on the left-hand side it's half a block from Orchard Road and Scotts World we built 330 apartment units on top of the shopping mall all the apartment units were sold years ago and we were left with this mall and we think given that there is very little redevelopment potential anyway while the market appears to be hot we've been advised by our local consultants, that this may be a good time to realize that asset and to reinvest in other things if the right opportunity comes along. And because it is a long term investment and because we're following the advice of various consultants and so on and so forth, we believe would be able to avoid capital gains tax and hopefully therefore all proceeds will initially be applied against that. Whether or not we reinvest depends a great deal on finding a suitable investment in due course. Reversion. Office reversion is negative. That's not surprising. Whereas retail reversion is slightly positive. you will have seen too that another piece of information that I wanted to repeat is that the rental relief amortization that we we've had to deal with in the past four years 2020 21 22 23 is substantially over that accounting treatment, somehow or other distorted reporting of actual performance. But hopefully that is behind us substantially for the time being.

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

Thank you management. This is Mark Leung from UBS. I have a follow-up question on management or comment on we finish or completed all the rental concession. So from a like for like basis, if we excluding the rental concession, what will be the rental income, retail rental income growth for this year? I think that's the first questions. and second question is recently we see more medias are talking about the multi-entry endorsements and allowances for the mainland visitors we call it the tax allowances shopping in Hong Kong could be uplifted so when is how what was your view on that one and secondly what's the likely timeline you think that will be announced thank you you're referring to uh

Sorry? Okay, that hasn't been announced yet, I don't think. That's releasing the Sorry. So, easier visiting, generally, I think that's what you're referring to. Well obviously the visa restrictions and the customs are two factors impeding more retail sales in Hong Kong and if they are relaxed and or removed entirely obviously it will be positive for retail sales in Hong Kong and maybe together with that positive for the hospitality industry now but it's difficult to predict at this point in time or to estimate at this time or to quantify it at this time because we don't really know the degree of relaxation and timing of it so we'll just have to wash this space as they say um the other question was uh rental concession what happened was this um because of the amortization accounting standard. In the years when rental concessions are given, parts of the concessions are deferred until subsequent years. And that has a tendency of overstating the rental income during the years when concession is granted. the bulk of our concessions were granted in 2020 and that was followed by smaller quantities in 2021 and 2022 but we stopped granting concessions after 2022 and therefore most of the concessions granted in 2021 and 2022 would have been fully amortized with the expiration of respective leases. The effect of that was because concessions were granted in 2022. The reported rental income in 2022 was slightly deflated because of the amortization. and the impact if we were to just look at the cash ignoring the amortization I believe the year-on-year increase in rental income or total revenue from our IP would have added something like four percentage points four to five percentage points

Thank you.

In other words, the amortization for last year is lower than the year before. So if you take out the amortization, that means the increase will be better than what has been reported.

So the next question from Simon John of Goldman Sachs.

I just wanted to get a sense because all these comments about local Hong Kong going to travel to China and spend in Shenzhen and we have seen some data on the Hong Kong retail sales the low-end necessity spending actually come off I don't know to what extent do you feel there's any impact to your mall and maybe you can comment on what sort of category you have to observe that's the first thing and there's a second thing on Times Square I think we had quite a number of results where you mentioned you're gonna be rewrapping the properties I want to get a sense you know how you are thinking of you know what sort of scale you're talking about in terms of you know capital investment into rewrapping the property and lastly obviously your gearing has come off now that is quite clean without the security now it's sitting around 15% or so 18% how are you thinking going forward given all the disposal is that 10% 15% where you see being more comfortable level thank you that's an interesting question to get to 10% we'll need to reduce it by a further 16 billion

something like that, 16 billion. Well, maybe we have to change our dividend policy. No, no, no. Our dividend policy is very consistent and we have no intention of changing it. But to get from 18.6 to 10 will take some time. Disposal of successful disposal of Scott Square would help. But that's only somewhere around two to three billion dollars. Hong Kong. I call it three to We're very comfortable with our gearing level. And our interest cover, having done the changing some of the floating rate to fixed rate debt, our interest cover is also comfortable. So we don't feel pressure on funding. the Times Square improvement. We have not finished working out that program yet. We will spend as much as we need to. I don't think we will spare any investment if necessary. Having said that, I don't think it is necessary to invest that much to turn it into a better asset. So I don't think we need to worry about that yet. We'll have a better picture sometime later. the other topic you raised Hong Kong people going north to spend to consume in a way many people related to the opposite direction the flow in the opposite direction i.e not enough visitors coming from the other side or staying in Hong Kong if they come here and maybe I would take this opportunity to address the second part first I don't know whether you know that Hong Kong Tourism Board recently published a report on what is it called 2023 Hong Kong Tourism Performance 2023 it's not a very long report it's about 10 pages or so and included in there is some analysis of the behaviour of various tourist groups. Mainland visitors, short haul visitors, non-mainland short haul visitors, non-mainland long haul visitors. Now we often hear remarks like more and more mainland business are not staying in Hong Kong overnight visitors are falling as a proportion of total mainland visitors the data doesn't agree with that according to the data a lower percentage of mainland visitors are um let me start again according to the data the reduction in mainland visitors between 2018 and 2023 is more serious among day travelers than those who stay overnight Now, one of the reasons it doesn't go on to clarify why, but I think one of the reasons is because of the parallel importers in the northern part of Hong Kong. They're not coming to buy baby formula and daily necessities and so on. In fact, Hong Kong people are going north to buy their groceries. So with that number gone, the proportion of overnight visitors among mainland business has increased from 39% in 2018 to 46% in 2023. Proportionately, more of them are staying in Hong Kong. We just don't have enough totals. Another data point coming out of that report is that these overnight mainland visitors are staying longer, not shorter. They used to stay three nights. They're staying three and a half nights. They are spending less per capita, but not much less. They used to spend $7,000. They now spend $6,500. But, and that spending consumption behavior has changed too. They're spending more on hotel bills. Previously, they were spending, if you work these numbers out, they were spending a little over $1,000 on hotel bills per capita. Now they're spending 1,400 plus. Dining, they used to spend about $900. on dining, they now spend 1,003. So these same day visitors are spending more on hospitality and per capita and less on shopping. So it's good news for one part of our business and not as good news for another part of our business. But having said that, I think at the end of the day, we just need more of them in numbers. If the total numbers would increase, assuming the same ratio of 46% of them being overnight visitors, we don't need nearly as many total as we used to. I hope that's good news for Hong Kong. Hong Kong consumers going north. On the other hand, I see that as a cyclical behavior. Cyclical driven by at least two main factors. One is currency. If and when the Hong Kong dollar weakens, they will find it less attractive to consume north of the border. another factor is which may be a longer cycle and that is as demand goes north it will also tend to drive up prices up north at some point in time I don't know how long that would take and I don't know at what point in time these factors will start to turn the tide but the whole idea of a GBA is mobility mobility of Hong Kong people going north is now obvious mobility of people coming south is less visible and hopefully with the relaxation in visa requirements and so on we will start to see some of that too at the end of the day it's balance of payments at the moment it may be unbalanced but I think part of that is also because of novelty whether the interest would sustain with the same intensity month in month out for much longer I don't know it depends on what is on offer the other side and what is on offer this side but overall it's the GPA promise and we're seeing the promise delivered we should be We should not be surprised, put it that way.

Thank you. In the interest of time, we will receive the last question from Raymond, HSBC.

Thank you, management, for accepting my questions. Raymond from HSBC. So two questions. The first question is about retail recovery. So management just mentioned about tenant sales is still around 20-ish percentage below the pre-COVID level. Can management share in terms of footfall, like the recovery rate over the past few months? This is the first question. And the second question is actually about the trend. So management, thank you for sharing with us all the trends about the recent tourists coming to Hong Kong in terms of spending behaviors. Can management also share with us the key trends within your shopping malls, Harbour City? What are the major changes for the tourists or the spenders within your mall? So what are you going to seize these opportunities? And the follow up question here is, what is the latest split in terms of tenant sales between the local citizens and the tourist fundings? Thank you.

I don't think we have data to answer that last question. We can't differentiate between locals and non-locals. But luxury is doing well, clearly, in Harbour City, which is why the Canton Road, 16 stores in Canton Road, are already delivering similar sales as in 2018. Dining is a bit weak, particularly dinner, suppertime. Part of the reason is because of change in behaviour, and I think that's a common Hong Kong problem. Another, I think, common Hong Kong problem is increase in supply of dining options. over the last few years as when retail was under pressure more landlords including ourselves converted retail space into dining space so there's more competition and therefore the consumption dollars are spreading thinner than before Those two are obvious sectors. Others, jewellery and watches seems to be doing well. That's arguably part of luxury. Electrical appliances, electronics, that's very dependent on product. Sportswear seems to be doing well. So those are the obvious categories that I can think of. Food traffic. I sometimes feel it's more than before. I've got to work in the same building all the time. But it is comparable to before on key dates. over the Chinese New Year period, for instance. Generally, I think it's well recovered.

Thank you. So we will consider this briefing to be concluded. Thank you all of you for joining today and we wish you a nice evening. Thank you.

Thank you.