Link Real Estate Investment Trust (823) Earnings Call Transcript

Good afternoon, everyone. Welcome to Link's analyst briefing for the year 2020/'21, which we are hosting today via webcast in consideration of current public health and social distancing measures. Today, we are pleased to have with us our CEO, Mr. George Hongchoy; CFO, Mr. Kok Siong Ng; and CSO, Mr. Eric Yau. [Operator Instructions] I will now turn it over to George, our CEO. George, please.

All right. Thank you, Luna, and thanks, everyone, for joining us. I'm pleased to have K.S. and Eric here with me. COVID-19 has brought prolonged disruptions, and unfortunately, we still cannot meet many of you in person. So we'll start with Eric providing key highlights for 2020-'21 and then K.S. will go through our operational updates, and I'll wrap up with our strategy going forward. Over to you, Eric.

Thank you, George. 2020-'21 was a challenging year to many of us, but we're pleased to present another set of robust results despite unprecedented challenges. During the year, revenue and NPI both stayed flat with a 0.2% growth year-on-year. NAV per unit declined slightly by 1.8% to HKD 76.24. We continued to see DPU growth this year despite the COVID-19 impact, which demonstrates our resilience and ability to deliver sustainable DPU growth ever since IPO. Distribution for the year, including the discretionary distribution of HKD 0.14, amounted to HKD 2.8999 per unit, representing a slight increase of 1% year-on-year. Throughout the year, we strived to maintain normal operation of our shopping centers and sustain our tenants' businesses. Mutual support and partnership with our tenants underscore our portfolio resilience. We managed to hold steady retail occupancy, which was 96.8% in Hong Kong and 96.3% in Mainland China as at year-end. We are pleased to have successfully leased another office floor in The Quayside in Hong Kong. The committed occupancy of the office portion has increased to 82.9% now. Offices in Shanghai, Sydney and London also maintained high occupancy. COVID-19 has unavoidably dampened the leasing sentiment. Hong Kong retail portfolio recorded negative 1.8% in the reversion for the year. But we're glad to see that reversion rate has already turned positive in the fourth quarter of 2021. We saw a relatively quick recovery in Mainland China, which recorded average retail reversion rate of 11.1%. Rental collection rates stayed very healthy across the portfolio at above 90%. As an integral part of the community, we have been monitoring the impact not just ourselves, but also our stakeholders, focusing on collaborating to achieve share value across our value chain. Driven by Vision 2025, we have incorporated the Business as Mutual principle into our value creation process, adopting a holistic mindset to engage our stakeholders, identify areas of mutual needs and sort out the right solutions to address challenges and continue to grow. We believe such an interactive framework help us building up long-term relationship and success for all. For our medium-term goal, Vision 2025, we have achieved remarkable success across the 3 pillars. In terms of portfolio growth, throughout the pandemic, we maintained high occupancy across our portfolio. We've been driving inorganic growth through overseas acquisitions, and we have announced 2 new additions in Mainland China and 2 overseas. Credit ratings from the 3 agencies across all maintained at A levels with stable outlook, evidence of our resilience and financial strength. Regarding culture of excellence, our target to become the employer of choice has been challenging as the pandemic restricted physical interactions and brought additional workload to Linkers. We believe maintaining normalcy is vital to keep up staff morale. So we decided not to apply for the Hong Kong SAR government's employment support scheme yet still assured our staff their job security with no layoffs and no reduction in base salary. Our response to the pandemic with flexible work arrangement and other employee support initiatives earned us a staff satisfaction rate of over 80%. Our efforts were recognized by several global human resources awards, including the 2020 Asia Pacific Stevie TV Awards and Best Companies to Work for in Asia in 2020. Our creativity and innovation have been supporting the ongoing sustainability of our portfolio. This year, we announced our commitment to achieve net zero carbon emission by 2035. To achieve this, we have to improve our operational efficiency. An energy management system will be rolled out in 4 pilot sites, and we expect to achieve an additional 4% reduction of energy -- of annual energy consumption per year. We have also invested in solar PV installation, and over 190,000 square feet of rooftop space at 28 properties have been identified as suitable for installation. And we expect to generate energy equivalent to over 330 Hong Kong households average annual consumption. Also, to create better spaces and places for our NGO tenants, we launched our 15th anniversary flagship project called Project Together to enhance 20 welfare tenants premises on a pro bono basis. All these efforts are in line with our vision of being a world-class real estate investor and manager as we continue to build thriving communities that link people to a brighter future. And K.S. will next talk about operational updates.

Good afternoon to all. Thank you, Eric. Our portfolio comprising 136 assets, 80% of them are in Hong Kong now, 17% in Mainland China and 4% in overseas. Including the 2 overseas offices, 50% interest of Qibao Vanke Plaza and the acquisition of Happy Valley Shopping Mall in Guangzhou we just announced, valuation of our asset portfolio has reached HKD 207 billion. Looking into the Hong Kong portfolio. Total retail revenue decreased by 4.5%, mainly due to rental concessions and other support measures provided to tenants. Maintaining occupancy and the optimum tenant mix have been our top priority, and occupancy stayed at a healthy level at 96.8%. There was a small drop in average monthly unit rent by 3.4% to HKD 62.4 per square foot. Hong Kong retail reversion was a result of slight negative. But we are happy to see reversions becoming positive again, starting fourth quarter 2020-2021. Despite the challenging retail market, we successfully introduced over 400 new leases to our Hong Kong portfolio, which is a strong proof that our properties and their catchments remain the preferred choice for many tenants. Quayside in Hong Kong has seen the committed occupancy of the office tower increase to 82.9% in recently. During the year, Hong Kong tenant sales, in particular, F&B, were significantly impacted by stringent social distancing measures and weak consumption sentiments. But our tenants are largely nondiscretionary focused and their sales still outperformed the overall Hong Kong market. Overall tenant sales dropped by 9.4% with F&B and General Retail having suffered the most, recording an 18.7% and 14.5% drop in sales. The Supermarket and Foodstuff segment recorded a strong growth of 5.4% year-on-year, given more people are eating and cooking at home. Rent-to-sales ratio of the overall portfolio grew mildly to 14.1%. As affected by the drop in sales, F&B tenant occupancy cost has gone up to almost 17% yet our properties are still comparatively affordable. Although COVID-19 is gradually subsiding in Hong Kong, consumer sentiment is still relatively weak. We believe tenant's performance and leasing will continue to improve into this financial year. Our total car park revenue recorded a mild decrease of 1.5% during the year. This is mainly due to the drop in hourly parking demand during waves of COVID-19 in the earlier months of the year and the subsequent waivers and car parking discounts offered to specific patrons such as school bus operators. Car park income per space per month fell by 1.8% during the year. Comparing with the last year-end, average valuation per parking space remained flat at around HKD 558,000. Carpark usage has since then picked up gradually as social distancing measures were relaxed. Mainland China's portfolio performance was encouraging. Retail revenue dropped by 7.8% due to the impact from COVID-19 and partial closure of Link CentralWalk, which is undergoing AE. The resulting rent void in CentralWalk has also dragged the overall occupancy to 9.6%. However, we achieved a 11.1% reversion rate and has introduced about 200 new leases into the portfolio during the year. We are pleased to see tenant sales in the 3 non-AE shopping malls recovering to around 90% of pre-COVID levels. For office, our Shanghai office market is competitive due to new supply. Link Square's reversion recorded a negative 8%, and However, its strategic location and building quality continues to attract tenants, and occupancy stayed around 95.8%. Asset enhancement continues to unleash potential in our organic portfolio. During the year, we completed 3 AE projects with ROIs ranging from high single-digit to low double-digit due to the dampened leasing sentiment. There are currently 4 projects underway, including our first enhancement in Mainland China at Link CentralWalk and over 20 other projects under planning. These projects in the pipeline are expected to achieve low double-digit ROI. Our liquidity position remained strong as we have been prudent in managing our capital amidst the uncertainties. Average borrowing cost has declined by 83 bps year-on-year to 2.66%, supporting us to be competitive in acquisition opportunities. Taking into account the 2 recent Mainland China acquisitions, the pro forma gearing ratio after final distribution will increase to 20.2%. Available liquidity amounted to HKD 12.5 billion. 63.5% of the total debt was at fixed rate with maturities well staggered to 2029, 2030 and beyond. And average maturity is at 4.3 years. Riding on the wave of low interest rates, we seized the opportunities and locked in low financing with sustainability-linked targets. To part finance the 2 recent Mainland China acquisitions, we issued 2 CNH notes in May and June, both at an attractive all-in cost of 2.8% per annum. Despite the challenging environment, our A ratings with all 3 credit agencies remain intact. Overall valuation of our investment properties increased by 3% year-on-year, mainly due to the addition of 2 new overseas assets and the exchange gain from RMB appreciation. There was no adjustment to cap rates across the portfolio. For Hong Kong properties, there was a 2.4% drop in value, mainly due to lower market rent assumptions. The increase in value of our Mainland China properties was mainly due to RMB appreciation compared with last year-end. Excluding the translation difference, value of our Mainland China portfolios recorded a small decrease of 0.9%. I will now pass to George to talk about our growth drivers and outlook. Thank you.

All right. Thank you, K.S. This financial year was a difficult one in operations and also in growing our portfolio, given the travel restrictions for us to go and look at assets in different countries. However, we still managed to successfully complete 2 acquisitions of premium Grade A office buildings: 100 Market Street in Sydney and The Cabot in London, which helped to diversify our portfolio in a prudent manner. The fully occupied assets are highly defensive in nature. And also, they have long weighted average lease expiry. And even during this challenging time, overall rental collection was over 90%. Coupled with 4% annual rental escalation of 100 Market Street and upward-only retail reviews for The Cabot, these assets will deliver stable income contribution to Link. Earlier this month, we announced our seventh investment in Mainland China, the acquisition of Happy Valley Shopping Mall in Guangzhou at a consideration of RMB 3.2 billion. This is our second retail property in Guangzhou and is a testament to our continuous investment in the Greater Bay Area. With short WALE and current occupancy at only 70.3%, we believe it has strong upside potential, both from near-term tenant mix improvement and long-term asset enhancement. In addition, we have completed the acquisition of 50% stake in Qibao Vanke Plaza in Shanghai in April. These additions to the portfolio help accelerate our growth trajectory given that they are immediately income generating. 2020-'21 was shadowed by the COVID-19 pandemic. But with support from our strong management team and all our Linkers, we sail smoothly through the storm and managed to deliver a set of very robust results. We have become more agile and responsive, focusing on building mutual support and partnership with our stakeholders. Our resilient portfolio continued to grow along an upward trajectory, resulting in Link becoming one of the few REITs globally with a consistent track record of DPU growth. With a Business as Mutual mindset, we move closer to realizing Vision 2025. Link CentralWalk's asset enhancement will be completed towards the end of this year with an expected double-digit ROI. We are pleased to have over 400 new leases signed in Hong Kong and around 200 in Mainland China. And we have been working with all the tenants to help them adapt to the new normal. To drive inorganic growth, the newly added investment in Shanghai Qibao and Guangzhou Tianhe are immediately income generating and will complement our existing portfolio. We have also announced a commitment to achieve net zero carbon emission by 2035. This will be achieved through multiple measures, such as improving portfolio efficiency and purchasing renewable energy. All these will help us to achieve Vision 2025 and also sustainability of our business. Maintaining ample liquidity and strong capital base is one of our top priority to meet strategic needs. Our gearing is still at a comfortable level. And we have sufficient debt headroom to support portfolio growth. Our 3 A credit ratings are underpinned by our strong property portfolio, stable cash flow and such financial resilience allowed us to enjoy low funding costs and to be competitive in acquisitions. While we continue to diversify geographically, we are prudently managing our foreign exchange exposure. Forward contracts were arranged to fix distributable income from offshore properties into Hong Kong dollars. And we have committed to 100% payout since IPO. We said that we will pay HKD 0.14 per unit discretionary distribution, and we'll still make good on this commitment this year. As always, we will consider other appropriate and sustainable way to return capital to our unitholders. Over the years, we have diversified our portfolio to enhance growth trajectory and to minimize concentration risk. Our focus has been on building a balanced portfolio that has a mix of investment carrying different degrees of risk and growth potential. A large portion will remain as core and core-plus, which are relatively stable. Having value-add and opportunistic investments such as our recent acquisition of Happy Valley Shopping Mall in Guangzhou will provide better growth opportunities. Geographically, Hong Kong remains a dominant part of our portfolio. And we expect around 20% of our asset will be in Mainland China Tier 1 cities and the surrounding delta area. Overseas investment is expected to be about 10% of our portfolio. And we still target only 4 markets: U.K., Australia, Singapore and Japan. In terms of asset class, we are comfortable with up to 20% of our portfolio in office while other asset classes may be considered, but we will remain more opportunistic. Finally, the important dates for our payment of distribution, again, with a scrip election program available this time are set out here for your information. We now open it up for any questions.

Thank you, management, for the presentation. There are quite some questions coming from our analysts. So the first question is actually on Hong Kong retail. So regarding Hong Kong retail, you have said that you had seen positive reversion in Q4. So which segments are actually driving this positive reversion? And do you see that the Hong Kong retail has already bottomed in the worst scenario? And have you been seeing recovery?

Okay. We have been seeing more encouraging leasing results, not just from a recovery of the reversion, but also in terms of difficulty in lease negotiations. We saw tenants were a lot more hesitant in expansion and a lot more hesitant in opening shops previously and -- but as the COVID situation in Hong Kong improves, as mentioned, we have seen over 400 leases -- new leases being signed over the course of the last financial year. And even in the first 2 months of this financial year, we have seen quite a number of new leases signed, both in Hong Kong and in China as well. I think the few particular trade categories, which were very encouraging are F&B. A lot of the smaller restaurants and providing niche cuisines, those have been very active in opening shops in Link. In addition, also, we see, of course, the nondiscretionary segment in the supermarkets and food and beverage -- food-related shops are also opening quite confidently as well. Another category is health related: health products, health goods, healthy goods-related. Those are also doing quite well and eager to open shops. So it's difficult to say whether it's bottomed out or not. I think it really depends on which segment and which trade mix we're talking about. But I mean, all in all, we do see a remarkable improvement in sentiment in the last couple of months.

Thank you, Eric. Then there's a question and let me combine the question from Cusson of JPMorgan also Karl from BAML. They asked about the rental relief or the rental concession. So what's the remaining impact of the rental concession on this year or this period? And do you see the need for incremental relief measures for the coming financial year?

I think we have sufficient amount already provided to our tenants in Hong Kong. With the situation in Hong Kong stabilizing, I don't -- we really don't see further rental concession necessary unless we have another wave. And so fingers crossed that we are fine in Hong Kong. In China, it has rebounded very quickly. But I guess you have all read about the situation in Guangzhou. It will have a short period of close-down, which will impact on businesses of some of the trade, and we are talking to our tenants about how to support them. But I think the amount for that will be quite limited. Accounting-wise, K.S.?

Accounting-wise, I think specific to the rental concessions only, those, like we said before, will be amortized over the remaining lease. But if you look at the whole pot that we announced of HKD 600 million, actually a large part of them were in management fees, service fees, car park discount waivers, which have all been accounted for the last financial year. So going forward, nothing material in terms of the amortized effect of the concessions.

Thank you, George and K.S. There's a question from Andy of Haitong and he is asking about the occupancy cost. So now that the occupancy cost is probably at a 5-year high of 14.1% and -- combining a few questions again. So do you have any guidance on the coming retail rental reversion for the next year?

I mean we have -- we don't think there is a cap per se on occupancy cost. We've always been saying we think mid-teens would be a comfortable figure for most of the tenants. But of course, it will vary trade by trade. Obviously, last year was an extraordinary year, which can't be used as a benchmark. We do hope with the ease of lockdown restrictions and easing of social distancing measures, tenants' turnover and revenue will recover better. And so we should see occupancy cost easing to even more comfortable level, let's put it that way. But we don't think, at this point, it is too stressful for the average tenant. But -- when we saw it becoming stressful for particular tenants, that's when we offered the tenant support scheme and the rental concessions and property management fee waivers. So this was dealt with on a case-by-case basis over the last financial year.

I mean to supplement, we didn't help every tenant. There are some tenants who we believe can take advantage of this opportunity to change. And therefore, we have that many new leases and new shops and restaurants opened and improve the variety that we provide to our shoppers. So we I think that the occupancy cost ratio while it has risen is temporary once sales pick up.

Thank you. Then there's a question on the balance sheet from Cusson. So his question is about, while currently the gearing ratio now getting closer to 20%, what's the gearing level that the credit rating agencies may -- or the credit ratings may start to be affected? Or what's our comfortable gearing ratio?

Like we have mentioned in the results, I think post distribution, post acquisition, it will tip over to 20%. What's our comfort level? I think, like always, leverage is about triangulating your maturity, your coverage and getting the right LTV. Looking at where we are in terms of this 3 criteria, my sense is mid to high 20s we can stomach. Still very comfortable, nothing to worry the investors on the market. As far as the credit agencies, I think we don't see a big issue around how much more buffer we have. If you look at the equivalent ratings in the other economies that have been awarded the same, that's actually quite a lot more buffer if you look at where U.S. or even Europe or Singapore. So I think we have been pretty stringent on ourselves with the agencies on what the A in S&P should look like. So I think over time, we hope that we can then align internationally on how the ratings look like. But on a practical basis, I said up to 25% to 30%, I don't think it's an issue so long as we have the opportunity to push things out, manage the liquidity and the coverage. So rest assured, this is not something that we worry about as of this stage.

Okay. Thank you, K.S. One more question on capital management from Philip of BOCOM. Will you set a buyback budget for the next year? Or do you have any numbers in mind for the buyback?

We have no numbers in mind simply because there's a lot of capacity on balance sheet in order to reflect the right value of what our unique prices should be. And that means the second question is what is the right value? If there's an event where a market, if you ask me, showed us unnecessarily a long-lasting cost disruption that price that does not reflect the value, then we have a responsibility to go back in to protect the unit price for the sake of the market, for the sake of the unitholders. So we have agreement with the Board that we would do that if that comes.

Thank you. Then the next question, it's on disposal. So there is a question coming from Jevon of JPMorgan. Do you see reviving investment sentiment for disposals? So do you -- while we say that we don't have an immediate plan so -- but what about any plan further down the road?

Our investments are, on general, long term. So we don't have any particular plan for a disposal per se, but we do review our assets on a regular basis. Our team of asset manager do review whether they believe that in the long term, these are asset that we should hold or not. Those review are done on a regular basis. So in terms of our particular plan, we don't have any in the near term, but opportunistically, we may. So not really answering your questions directly. Having said that, we've seen in markets where we have looked at acquisitions, capital value has gone up. Value -- cap rate has either been stable or have come down. And as the situation in Hong Kong retail stabilize, we'll expect the same as well. And so there may be interest for potential buyers, but there is no particular sort of plan right at this stage.