Wharf Real Estate Inv Co

Good afternoon, everyone. Welcome to WolfRig final results presentation. I am Angela Ng from IR team. You can download the presentation from the QR code displayed on the LED wall. Our management today, including Mr. Steven Ng, Chairman and Managing Director, and Mr. Horace Lee, Director, We will start with a PowerPoint presentation and then open the floor to the analysts for a Q&A section with the management. The theme for the presentation is Topline Challenges Remain Hard. Now let's take a look at the results highlights. Global economic and geopolitical uncertainties continue to pose challenges for the economy of Hong Kong and Mainland China. In such operating environment, group revenue decreased by 3% to 12.9 billion. Revenue from Hong Kong IP representing 81% of total declined slightly by 1% to 10.5 billion. in response to unfavorable interest rates. Our financial priority in the past few years has been the management of debt and borrowing costs. During the year, net debt decreased further by 2.1 billion to 34.2 billion. Gering ratio further improved to 17.8%. net borrowing cost has peaked, decreasing by 10% year on year. While Hong Kong's economy shows moderate growth, demand for commercial properties remain weak, leading to a 3% decline in the total value of our investment properties. In 2024, the strong local currency and gradual pace of interest rate cuts continue to dampen both business and consumer confidence. Notably, Hong Kong dollar against the RMB and Japanese yen hit decade high, together with the continued strength against other currency has weakened Hong Kong's competitiveness for both tourists and locals. As you can see from the chart, overall recovery of Hong Kong visitor arrivals remain incomplete and uneven comparing to the pre-COVID. Hong Kong retail sales also saw a slow recovery with 7% decline year on year, mainly dropped by consumption downgrade from key markets and local spending leakage abroad. under the weak market conditions. Our Hong Kong IP revenue declined by 1%, but OP margin maintained relatively stable under our effective cost controls. Retail rent was strapped by weaker retail sales. Meanwhile, office rent remained weak, but it was partially offset by the improving occupancies among our office portfolio. to support sustainable value creation of our IP and hotel portfolio. The group has been taking an incremental approach and invested $4.6 billion in total since our listing in 2017. This investment includes the addition of ocean terminal extension, the office conversion from Hampton Court surface apartments, and the recent strategic realignments of global brands on Canton Road frontage with the additions of multi-story maisons, which have together solidified the leading position of our iconic properties. At the same time, we consistently enhance our brand value through proactive brand portfolio management. Thanks to our proven track record and strong relationship with best-in-class brands, Harbor City welcomed the duplex expansion of Celine, while Louis Vuitton is set to expand to four stories in the second quarter this year. Meanwhile, Louis Vuitton at Times Square opened earlier this year, and Loewy has committed to increasing its base. a series of promotional activities have also been launched to capture food traffic and stimulate consumer spending. on the office front. In light of the high market vacancies, we maintain competitiveness by offering flexible lease terms and accelerating premises improvement. As a result, our office portfolio occupancy increased to 90% by year end. Now, let's take a look at the financial highlights. Group Revenue and Operating Profit declined by 3%. However, thanks to improvement in non-core DP business and a 10% reduction in borrowing costs, Group UMP increased by 2%. Non-cash and unrealized net IP revaluation deficit widened, but cap rate remained unchanged and conservative. Since listing in 2017, we have been completely upfront and consistent about our distribution ratio of 65% of core UMP as a policy Full-year DPS was $1.24 The group maintained some financial health with Moody's A2 rating Net debt is at a record low of $34.2 billion, down by $17.8 billion since the end of 2020. Average interest cost was 5.6%. With this rate, $17.8 net debt reduction would have saved $1 billion of interest every year. In view of the high rate environment, our floating rate debt further reduced to 80% Interest cover stands strong at 4.7 times In the following slides, we will walk through the performance of Harbor City, Times Square, and the hotel portfolio. First, Harbor City, which accounts for 70% of group revenue. Publicity continued to receive stable demand backed by critical mass and location advantage Overall revenue increased by 2% to $9.1 billion Retail occupancy was healthy at 94% Office occupancy rose to 90% mainly driven by the expansion and commitments from finance and insurance companies as the largest and most diverse shopping mall in Hong Kong. Harbour City maintain a steady and balanced mix of trades that caters to both local and tourists. Retail rental increased by 2% to $5 billion. Canton Road Frontage now features 16 best-in-class luxury brands, including the addition of Fendi And inside HyperCity, we also welcome the expansion of day build of various global brands and F&B outlets Moving on to Times Square We continue to refine its tenant mix to enhance competitiveness The mall has been enriched by the most popular luxury brands while the upper floor will feature more experiential retailing and trendier dining options On the other hand, office occupancy improved by three percentage points from the end of June to 90%, driven by tech, media, and financial companies. Then we will switch to our hotel portfolio, which includes the three Marco Polo hotels on Canton Road and the Murray under Niccolo brand. The Murray, which is where we are today, has been awarded Forbes Travel Guide Five Star for three consecutive years in 2024. Through consistent service excellence, our hotels maintain steady occupancy rates. But the overall industry is experiencing a decline in room rates largely due to intense regional competition and price-sensitive travelers To encourage repeat visits we have launched a cross-hotel rewards program along with attractive package deals Moving on to general outlook a full market recovery remains uncertain as concerns about looming trading wars and unfavorable interest rates and currency persist. However, the central government's substantial stimulus packages, along with the Hong Kong government's ongoing efforts to attract quality visitors, may help revitalize the market once cyclical factors improve. in the last part of the presentation. I will walk through our efforts in ESG. We have formulated the 2030 targets which are on track. Additionally, we are developing new carbon reduction targets in accordance with SBTI criteria. Our efforts have earned us strong ESG ratings, including A rating from MSCI ESG Assessment In recent years, Times Square has earned both LEED Platinum and World Health Safety Certifications Up to the end of 2024, an accumulated total of $11.1 billion Sustainability Link Loan has been arranged Energy saving initiatives are actively adopted and pursued across our IP portfolio and Star Ferry. 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 for the analysts before we begin. If you have any questions, please raise your hand. Our hotel staff will provide you with a microphone. And please identify yourself and state the organization you represent before asking the question, if I did not do so. You may feel free to ask no more than two questions each time. Now, may I invite Mr. Ng and Mr. Li to come to the stage, please? So now may we take the first question from the floor, Cindy from Citi.

Hi, management. Thanks for this opportunity. Two questions from me. One is on retail. So we see from results that second half 2015 seeing some more challenges in retail comparing with first half. So would you mind like sharing with us the reversion and retail sales performance in the second half last year? We remember first half we see still positive reversion at Harper City. So how did second half performance been doing? and what's your initial outlook for 2025? Say, do we see sentiment improve in the first two months? Is it still quite challenging? This is the first question. And the second question is actually on the retail occupancy. So obviously occupancy is still very healthy, but we see some fluctuation at both Harbor City and Times Square retail. Is it more a function of some proactive tenant remixing? or what's the reasons behind and how's your plan in say retaining the brands or say attracting more brands this year? Thank you.

The retail market in Hong Kong, as you know, is going through a downward trend. It's experiencing a downward trend. And that started actually from March or April 2023. And ever since then, the year and year, growth quote-unquote growth has been negative with the exception of course January and February of last year because they compared to pre-opening January and February so this is general knowledge and I don't I don't need to dwell on it and at Harbour City and Times Square we're not performing too differently from the market. Generally, it's been down. And we don't, looking ahead, first of all, we don't yet see improvement in the first half of this year. The first quarter is almost behind us, and we know there is no quote unquote good news. in the second quarter may surprise us, but given that We haven't started to see momentum yet. Even if the second quarter does improve, it will take a little while for the full impact of it to be realized. So that is the way we look at the retail situation in Hong Kong in the first half of this year. Second half is difficult to predict. The US president is toing and froing, and it makes the forecasting extremely difficult, if not impossible. the two sessions in Beijing produced favorable comments from certain quarters from a number of quarters but we have to see how quickly and how significantly that would translate into real dollars and cents at the Hong Kong level so I can't predict with any measure of certainty what the occupancy going forward would be, or the rental would be, other than to say that I am not optimistic about the first half of this year. Second half, hopefully, I don't know, not yet. Okay, thank you.

May we take the second question from couch and JP Morgan?

Thank you very much, management. So on Hong Kong retail, just a follow-up question. Just curious if you can share a bit more colours on the performances by category in the past, let's say, past six months. Say, is luxury doing better or is it like, you know, F&B or is it other retail? Yeah, can you share a bit more colours on that? And then with that, do you think we would need to do even more trade mix upgrades or trade mix changes in the coming year? So that's my first question on Hong Kong retail. And then the second question is more on AEI. Just curious, in the coming year, do we plan any AEI? I guess from our side, we have always been anticipating some sort of AEI in Times Square, because as we see, the rental income in Times Square has been still declining. So just curious, do we have any plan for Times Square for the next one to two years? Thank you.

Good. Thank you. There is no marked difference. between categories, so to speak. The difference is actually within each category. Some retailers within each category perform better than others, uneven performance. It depends on the brand. Some of the brands are doing very well. Others are lagging quite far behind. On an average, there is no marked difference between, for instance, luxury. and non-luxury. A good example is along the Canton Road front, we talk about 16 shops. And those 16 collectively perform similarly as the rest of them all. So that's probably the best way to answer that question. For AEI, we do have some schemes which we're still trying to finalize for Times Square. Yes, we will be investing. The question is, what is the best scheme to make the investment worth every dollar of it? And hopefully sometime within the next, well, the rest of the year, we'll be able to finalize it and implement it. In the meantime, we're taking smaller steps. We're bringing back some tenants that would help us to reboot retail sales. But those are relatively small steps at this stage. The bigger plan is still in the making.

Thank you. May we take the next question from Raymond Liu, HSBC.

Thank you management for taking my questions. I have three questions I want to ask. The first question actually want to reconcile current situation in the high-end retail market in Hong Kong. Because if you look at the overall market, we actually saw some of the top luxury brands. to re-expand in a couple of shopping malls, including the Times Square. What you just mentioned in the Harbour City also saw some expansion here. But the overall retail market has been quite challenging. Can you share with us and connect the dots with us and as well as investors? That's the first question. And the second question is actually about fixed rent, as well as turnover rent. of your shopping malls here because like do we see like the fixed rent continue to receive a positive rental reversion or like there are some challenges going forward that's what the second questions and that and the third question is actually um would be related to the um the second half the management chairman just mentioned hopefully to be a bit better what can you share a bit more color that what are the key things that you are looking for other than the policy from the mainland China or anything that you particular you want to focus more that you will read that we see some improvement in the retail and tourism market down the road thank you okay

Thank you. To be fair, Angela suggested two questions. You asked three. I'll give you a choice. Which two would you like me to address? First two. And we can come back to the third later on if there are no other questions. For luxury retail, what we see is overall consolidation. i.e. most brands are looking for a smaller exposure in Hong Kong generally, but they're becoming selective. So some of them are expanding those locations which they consider priority while downsizing, if not closing, other locations. and hopefully we'll be one of the landlords benefiting from this process of consolidation. So far we're doing reasonably well, but there is competition clearly. And on the question of turnover rent versus fixed rent, turnover rent certainly dropped in the year 2024. Part of it is because of the when new leases were written, the base rent increased. So part of it was because of conversion of turnover rent into base rent. whether or not we can continue to see that same trend of conversion from turnover to base I can't be very confident I think in some cases we will see that, but in other cases we may see the reverse. So overall, I would think that the base rent portion would probably be stable and the upside or downside will come in the turnover rent in 2025.

Thank you. May we have the next question from Kyle Choi, Bank of America.

Hi, a couple of questions. First, could you share with us the occupancy cost that you saw in 2024, and is that sustainable, or in view of some vacancy, is there a chance that you actually need to lower some rents in order to boost the occupancy in terms of the outlook? Occupancy cost

is a little bit higher than what it was a year ago. And how the city's occupancy cost is we're doing just about 20% overall. And Times Square is not too different either. That's because of rental adjustment. But again, there are great variances from tenant to tenant. Some of our major tenants are reporting occupancy calls of single digit. But there are others that are reporting triple digits. But overall, it is about 20%. Now, clearly, you would ask, and I have asked the same question, why are they still there if they're paying in rent as much as they get in sales? I'm asking the same question. Clearly, these tenants will either have to improve their sales or they have to have a good reason for continuing to be there. Maybe there's an advertising value in it. Maybe there are reasons, we don't know. Or hopefully they're not under-reporting their sales. Debt. We don't have a fixed target as such to reduce our debt. It's a natural process of debt reduction. It goes back, I suppose, in a way to when we listed, we structured the listing vehicle to be not a REIT, but a week because we never like to read code, which was rigid about distribution at 90% or higher. We didn't think that would allow the company to manage his debt down when interest rate goes up. And so at the IPO stage, we made it very clear that our dividend policy is 65% of our core earnings, i.e. underlying net profit, the basic earnings from Hong Kong IP and hotels. And that allowed us to claw back the remaining 35% into A, CapEx, B, debt management, which was a good reason why we were able to reduce debt by $18 billion in the last four years at an interest cost equivalent to about a billion dollars last year. So how much we can reduce our debt in 2025 can be quite easily calculated. Again, take our underlying net profit from Hong Kong IP and hotels, assuming it's not too different from last year. 35% of it will be cash that we can plough back into repaying debt minus of course capital expenditure. We do not expect very large capital expenditures in 2025 because even if we go ahead with the Times Square expenditure the bulk of it will probably not happen this year or payment of it in any case. So more or less it's a natural progression which you can estimate.

Thank you. Any more questions from the floor? Simon John from Goldman Sachs.

Thanks for the presentation. I just broadly wanted to get a sense what you are seeing in your shopping mall because I think your competitor mentioned that 85% of the tenant sales is coming from locals. For example, I think that was in the briefing that Hong Kong Land mentioned about the landmark properties. And for your property, I'm not sure whether you have any number that you can share and also on your membership program, like BIC program. We don't have a scientific number about what proportion of our retail sales come from locals versus non-locals

but we have a reasonable guesstimate that at Harbour City up to 50% of it is generated by visitors and a lower proportion at Times Square probably less than a third. VICs, we call VICs, I don't know what other people call them, do not contribute a great part of our Sales, because particularly for the visitors, unless they are frequent visitors, they wouldn't care to join loyalty programs. And that is why I think overall our VIC proportion is probably lower than what some of our competitors claim. coupons, we have no intention at this stage to restart coupons. It was a costly program, as you pointed out. And it was a program we used in exceptional times. And I don't think we're in exceptional times again yet.

Thank you. and then we will have the question from Raymond Chan of CGS.

Hi management, can I have some comment about your shopping mall food traffic especially after the Shenzhen government they released the multi-visit visa so how's the food traffic especially in January and February and also any changes for those your shop talent sales whether it's high-end or F&B better so this is my first question and the second question You know, Hong Kong new stadium just opened recently. Any expectation, whether you guys expect, say, given, you know, those are concert, right? Those are, you know, big event could potentially bring some high spending customer. Do you think your shop, your mall could be benefited? Thank you.

Right. Yes, footfall has certainly increased. The number of visitors into Hong Kong has recovered, although overall there's still something like 30% below 2018. The recovery is not yet as healthy as most of us would like to see. but compared to even 2023, numbers are higher and we see that in our malls as well. Unfortunately, they're not translating into commensurate improvement in retail sales, implying the per capita consumption has dropped and we're no different from our competitors generally. The opening of the sports park in Kai Tech is obviously a stimulus for the hospitality industry in Hong Kong. First of all, we do hope that the hotels will benefit. Our hotels are beginning to see a little bit of that. but it's still a little early to be too definitive about it. It will hopefully also benefit the retail trade. A slight upside too, an additional slight upside too, I hope is when the multi-visit visas rather than one visit a week from GBA. Right now it's limited to Shenzhen. Now when that's extended beyond Shenzhen to some of the other GBA cities, if that happens, hopefully we'll bring more visitors from those cities as well. And hopefully too, because those cities are a little farther away, they would tend to stay in Hong Kong rather than go back the same day. But all of that is at this stage hypothesis. Whether or not other cities will be added and when, we don't know. Which is why I can't be too optimistic about the first half of this year. Second half is anybody's guess.

Thank you. And then we will have the next question from Percy DBS.

Hi, management. Thank you for taking my question. This is Percy from DBS. Just one question regarding your equity portfolio holding. I recall previously we have actually settled on a portion of our equity portfolio and to reduce our debt. I'm just wondering what is your view on the current positioning? Is there any chance that we could replicate as well as to reduce our debt as well? Thank you very much.

Right. It was in 2023 when we sold a significant portion of our investments and the purpose was to deleverage and that's exactly helped us to reduce our not only our debt but also our interest cost What we sold at that time was primarily lower yield equities and what we have kept are the higher yield equities, high enough to result in a slight positive carry. Now, if they were also negative carry, we would have considered liquidating some more. But to the extent that they are slightly positive carry, we can afford to hang onto them. And hopefully when interest rate falls further, the positive carry will become bigger.

Thank you. And then the next question from Mark Leung, UBS.

Thank you management for taking my questions I have three questions I think the first one is regarding on the Hong Kong visitor mix So I think everyone knows that the mainland maybe visitation has not gone back to pre-COVID level and the per capita spending is quite weak as well But on the positive side we have seen the non-Chinese visitors actually has growing pretty is strong and according to the Hong Kong government, their per capita spending is even higher than in mainland. Just want to check if management see any tenant mix reshuffle needed for both of our tourist district mall in Harbor City and Times Square. I think that's the first question regarding on the tenant mix. And second question is regarding on the competitions regarding to our neighbour Shenzhen I recorded in early December last year Shenzhen has allowed it to allowing Hong Kong residents to have a tax refund after they shopping in mainland China How do management view that the possibility for rollouts on the other land ports in Hong Kong? I think that's the second question. And what is our impact for the Hong Kong retail market in general? And thirdly is maybe I should wait on this first day, but I would like to check with management is for 2025. for the Hong Kong retail and China retail outlook because we have both operations in both regions, right? Which regions you think will outperform in this year? Thank you.

Thank you. Well, first of all, again, the rule is two questions. And it's convenient for me to defer the second question, given that it would be price sensitive. Could be price sensitive. We haven't announced for the other company yet. So I'll deal with the first two questions. Visitor mix. There are a few destinations, or rather a few source markets, where visitors' recovery has exceeded 100% or very close to 100%. The Philippines is one of them, certainly Macau, Thailand. Taiwan as well Taiwan and we see ourselves benefiting from them as well in particular our hotels in Harbour City for historical and other reasons they've done well in some of these markets the Philippines and Thailand so we're doing not too badly in that regard The tax rebate in Shenzhen, as far as we know, it's not been a significant factor. The volume is relatively insignificant as far as we know. So I don't think it's had much impact on Hong Kong retail sales.

Thank you. Due to concern of time, we will receive the last question from the floor if there is any.

Thank you.

So I think we can conclude my briefing here today. We wish you a nice evening. Thank you for joining.

Thank you.