CapitaLand China Trust (AU8U) Earnings Call Transcript & Summary

Good morning, everyone. Good to see so many of you managed to take your time to join this results briefing. I know it's a very busy season for all of you. We have released our results this morning. I hope you have some time to digest it. So let me just walk you through, very quickly, our 1 half's business highlights, and I will leave some time for Q&A. I think 1 half 2020, I think, is a very challenging period for the retail sector. As you all know, the mall operations are significantly impacted by periods of mall closure. We have read a lot about the city lockdown, the movement restrictions and also the business essential restrictions, safe distancing measures, so all of these have weighed into a rather weak operating environment. And as landlord, we have stepped up to assist our tenants during this tough period with extended comprehensive relief -- rent relief package and assistance. So all these have impacted in terms of our top line and also our net operating income. In the first half of this year, we also have the absence of the Erqi contribution, which we have stopped the results since the last quarter of '19, and therefore, they do not contribute anymore. Our portfolio, in terms of the impact, has been mitigated to a larger extent by the 3 new acquisitions that we completed towards the second half of last year. Rolling down to the distributable income. We have released the compensation that we retain in relation to Erqi, and that has flowed down on the prudence to manage the uncertainty still. We have decided to retain 5% of the DI. So it's actually for first half, we are still paying out 95%, which is in line with our dividend policy in terms of the DPU that translates to SGD 0.0302. Very high-level portfolio metrics, I think, which I'll cover a little bit more detail in subsequent slides. I think the tenant sales for the second quarter and the shopper traffic still reflects a down relative to a year ago. What's encouraging is the quarter-on-quarter performance. You start to see the 2Q improving substantially over the 1Q. And in terms of the 1 half, I think that's the aggregate of the 2 quarters in terms of the traffic and sales. As a portfolio, we have done about 300 open leases and portfolios to generate 0.7% rental reversion positive. I'll talk a little bit more in the subsequent slides. Occupancy, 93.4%. You'll see the breakdown subsequently. Financial aspect, I think we continued to exercise our disciplined management, where we hedged the debt and also the FX. And we also took opportunity to strengthen our balance sheet and have sufficient liquidity by having the standby credit facilities in place. And during the first half, I think we successfully completed the divestment of Erqi ahead of time, and that has really helped us to bring down gearing to strengthen our balance sheet. This is a rundown of the picture that I have just commented earlier. I think the one thing to take note is the distributable income from the joint venture. This is essentially the Rock Square's performance. You can see that it is slightly, in terms of the drop, it is better than the rest, essentially because of more favorable property tax concession that we managed to obtain in relation to that asset. Balance sheet, I think we continue to be healthy. NAV about $1.60. We have already refinanced all the term borrowings due in 2020, that you can see in subsequent slides. Next slide gives you the key dates to take note on the book closure, and we are also continuing our DRP program. I mentioned the gearing, which improved due to the proceeds that were paid down that has brought us down to 33.6%, being a very comfortable level relative to the limit. Average cost of debt, again, because of the interest rate environment being favorable, we managed to lock in and also enjoy little bit on the floating rate option. Interest cover, healthy, term to maturity has been extended slightly relative to a quarter ago. I mentioned the 2020 tranche that has already been secured and been turned up to 2026. We'll be drawing down that portion come August. At the same time, the 2021 tranche, we have already secured it and at the same time, that will also be drawn down when the existing bond is up for drawdown. So I think all in, we go into 2020 second half and also 2021, free of all these borrowings concerns. This gives the picture I mentioned earlier. I think we continue to ensure that we have a well spread. I think the onshore, offshore and the Medium Term Note program, that's how we have diversified our sources of funding. I commented a little bit on the fixed rate portion earlier. I think with the MAS limit increasing to the 45% to 50%, I think that gives us sufficient headroom to grow our business and to provide the financial flexibility. On the portfolio side, I think the occupancy, if you look at the quarter-on-quarter, I think there's a decline, which I think I've guided in the last quarter's or first quarter update. This is a result of a softer leasing environment, where I think there's slower turnaround in converting some of the spaces. And we also see a little bit of pretermination happening, especially in the second quarter, despite some of the support that we have extended and also some of the early actions that we have decided to reposition some of the area for us to bring in some tenancies. So a couple of these issues have resulted in slight dip in the occupancy. From a reversion standpoint, I mentioned out of the 389, I would say that, by and large, we are still able to revert a majority, a high percentage on the positive territory. If I were just to give a big picture, about 25% of these will probably reverting about flat. And the remaining 75% -- I think, look at it, I think, 80% of those are in the positive territory and probably 20% are in the negative territory. Obviously, for different assets strategically, tactically, as I always share with you that we have to take decisions, and you see that flowing down to the respective assets rental reversion. Expiry profile has been consistent. I think I've guided that Yuhuating is the main one. Substantially, a larger area will come for renewal come end of the year. This is the anchor space recovery, which we are negotiating to take back space. This is our WALE. I think, has been fairly consistent. I mentioned about the anchor space that we are negotiating, and this will provide the options for us to take back space and add new offerings that will bring up DPU in the subsequent year. This is the traffic and the tenant sales overall picture. As I mentioned, the quarter-on-quarter, in terms of the traffic, the recovery momentum has continued. If you look at the trajectory, I would say that the April to May has been trending up fairly encouragingly. A little bit of slight dip back in June because of the second wave that happened in some of the cities that we have operated, especially in Beijing, and that has sort of like pulled back a little bit of the trajectory. Next slide. For the sales, you can see quite similar picture. I think it's been trending quite nicely in terms of the recovery pattern. June, essentially was -- Beijing has a second wave. And I think you know that CRCT's portfolio, we are quite concentrated in that city, and therefore, you can see the slight dip. Next slide. I think these are pretty familiar to all of you now. I won't take you through point-by-point. I think the key thing to take away is that China is now really the first one to contain COVID because of the very decisive actions. And I think the government has come out to be very focused in wanting to steer the economy back. We have read about the second quarter. I think they've reported positive growth already. I think the production and the capacity, that part of it is driving it. So I think what's -- to watch is probably the only consumption side of things. You'll be familiar with this. I mentioned that during this peril time, we have extended quite a comprehensive support, and this includes being flexible in allowing some of these tenants in terms of the cash flow, installment planning and also tweaking some of the lease terms in the short term to allow them better recovery planning purposes. At the same time, on our management side of things, we have continued to look for opportunities to drive our cost efficiencies and save on OpEx and CapEx. Some of the proactive lease management that we want to do, I think this is what I've guided earlier. I think some of the area you need to keep it around such that you can bring some of the new and more evolving trends that can resonate with the community today. I think these are just snippets and examples of where we see the shift, especially in the F&Bs, we are sizing down on all those big formats, sit-down dining, and continue to drive a little bit more on these smaller format easy takeaways for this peril time. And some of the Chinese market has also been very active in having emerging concepts and emerging trends. So this is something that our ground leasing is working to bring on some of these to complement what we already have. At the same time, I think the last couple of months have really demonstrated that you need to have this omni-channel reach out, especially when the COVID measures are in place. So I think as one of the leading player, we have been in this for a while. So we have actively onboard many of our tenants to come on to our CapitaStar platform, and we collectively have this ecosystem to help them drive promotions and sales to a very interesting kind of live streaming and marketing techniques. I think this is some of the later marketing programs and flexibilities that we are doing together with our tenants. I think these are some just examples on that. Okay? I think to sum up, I think looking ahead, I think the first half has been a challenging one. I think we definitely will look towards a better second half, although there are certain issues that we are cognizant of. I think the economy is very much weighed down by geopolitical tensions that we see and how sentiments will then flow down. Of course, I think the Chinese government is very proactive and wanting to focus on the domestic consumption and employment. So I believe that this targeted and effectiveness of policy will help in the second half's recovery. In terms of our business from the tenants and the traffic flow, I think we do see the gradual recovery. But that said, I think you would also appreciate that it's rather susceptible to new cases, new case spike and then the government will then come in and implement stricter measures. But what we have seen, I think, in the last couple of months is that there's increasing -- better ability to isolate -- contain. Even if there's cases, they're able to do this very quickly so that it doesn't have a spillover effect. On the business side of things, I think the leasing continue to be on the softer side. I think I've guided that, and there will be a little bit of balance that we have to do in terms of occupancy, in terms of the asking rent and also in terms of the desired trade and brand mix that we want to bring this more forward in a very competitive manner. So I think these are the key 3 areas that we have to look at it from a strategic standpoint and also at certain quarters tactically and decide on what is more favorable for us to bring this business over a longer period of time. I think we'll continue to drive our operating excellence. At the same time, there are a couple of assets that are working through, in terms of AEI, we'll focus on that. And of course, the other prong is also to look at inorganic growth that we will focus to strengthen our portfolio diversity and to build this greater income resilience. What we have done in the last couple of years have brought us to today. I think we are today already in a stronger position to enter this more challenging period. If you look at our NPI, the construct, over 90% are already tilted towards the high Tier 1 and Tier 2 cities. And if you look at the city, these are cities that we feel that over longer term are going to be competitive from a population standpoint, employment standpoint and the family income standpoint. So I think we are well-located in cities to catch that recovery. Our own portfolio ship has already moved towards the multi-tenant mall that leaves us more in terms of our own ability to value-add and less susceptible to those single-tenant must lease credit risk. In terms of our tenant mix, I think, with the 3 assets that have come in, we are much better diversified and we're not overly concentrated towards any trade category or within each of the trade category our top 10 tenants have also come down in terms of concentration. These are the 2 things that we -- I mentioned. We are planting the seeds for CRCT. The Inner Mongolia mall, we are currently on track in terms of the fit up. I think leasing has been, I would say, encouraging. I think we have secured more than 70% of leasing interest already. We are preparing for year-end opening. And I think we have to look at how the leasing momentum, the fit up momentum. But right now, we are on track for that. And if you look at the other area that we are working to recover is the Yuquan -- I'm sorry, the Yuhuating, I mentioned, this is -- oh, I've covered. And if you look at our portfolio, I think there's also a good opportunity for the other mall in Beijing. Two of the big anchor leases will be due in the coming 3 years. And we have already started some early exploration on whether we can redevelop or to repurpose this building such that it can achieve us a better value going forward. So I'll just leave you with this. I think we have experienced ground team during this challenging period to make that assessment and judgment and really sensing the ground on where to shift. At the same time, I think on the REIT side of things, we will continue to look at opportunities and work closely with our sponsor to look at -- looking at how we can drive portfolio inorganic growth as well. Okay. I think I will end this presentation. And I think let's go into the Q&A.

Okay. Thank you, Tze Wooi. So right now, we have the first question. On the same-store basis, what is the traffic and sales recovery for June and July? So for July...

Yes, we can just turn then to the page where we show the traffic and the sales. If you look at what we have shown over here, the same-store, we have the numbers below. But what is interesting is you look beyond June to July, I think the signs continue to be better. In terms of traffic, in July, we are already at about close to the 74%, 75% level. If you look at the sales, I think they are pretty close, not as high as the traffic, yet are close to the 70% mark.

Okay. Moving on to the next question. Will the portfolio occupancy rate remain flat in the coming quarters. Can you improve that to prepandemic levels?

I think this is something where I have sort of guided that. I think there will be this mix of tenants that despite our best effort to extend the rent relief, but if the business format itself is not viable, I think we have to probably take the hard decision that we have to phase them out or we have to then free up the space for us to rethink what that space can be better put to good use. So there will be a little, I would say, that mix of potential preterms from formats that are no longer competitive. At the same time, we are also accelerating and looking at how we can attract better concepts into the mall. So I think there will be a little bit of this in and out. Just to give you a bit more color. I mean if you look at the second quarter, out of those natural expiries that are coming through in the quarter, I would say that we have converted almost like over 80% of those. That means those that are natural, we have managed to secure renewals for them. So that leaves us about the 10% to 15% over that are not done yet. At the same time, in the second quarter, I think there are also a little bit of that COVID impact that people then reassess their business strategies, whether they want to continue on certain formats and certain footprint. So the preterm has also come out a little bit closer to about 4%. And out of this 4%, I think we have also managed to address successfully during the 2- to 3-month period of close to -- so I think these are some of the moving parts that as we speak, I think, there is something that we will have to find that balance as we look at the second half, yes.

Okay. Moving on to the next question from Jean Dean. Does management have plans to diversify its tenant mix by having a greater proportion of tenants offering essential services to ensure resiliency during crisis like this?

Yes, I think there's a continuous effort that which I have shared earlier. I think based on the multi-tenant mall that we have brought in, I think today, the shift, I would say, is a much more diversified one compared to, let's say, a year ago. Most of our malls are center to the community catchment that we are serving them. And most of them come into essentials like the supermarket services, the F&Bs. So I think by and large, the framework of how we look at tenant mix are there and continuously, that -- it's a continuous effort to look at which are the trades that are no longer so relevant to serve its catchment purpose. And as a result, you got to phase them out and replace new ones that resonate with the catchment's lifestyle needs and spending preferences today. So I think this is going to be a continuous effort as we look into this. Obviously, the impact of COVID, whether that would alter some of the current operators on thinking of how they want to run their business, I think this is an ongoing effort between us and our tenants to collaborate and see what adjustments we need to take together. So I think it's going to be a continuous effort to really strengthen that mix, strengthen the offerings that resonate with the spending catchment. Yes.

Okay. You touched a little bit about this earlier, but if you can elaborate a little bit more. So can we get a sense of how far occupancies are likely to go further and when we should expect some recovery in occupancies? Also some color on occupancies at malls would be appreciated.

I think if you look forward into the second half, I would think that the stronger malls that have -- we have demonstrated over here, I would expect the occupancy to stabilize around the 90%. If you look at Grand Canyon, we're already at 90%. So I don't expect that to materially fall off too much. If you look at the Xizhimen, a substantial drop in June relative to March is because of certain big formats F&B dinings that are up for renewal. And I think this format may no longer be that relevant going forward. So that has now come vacant. And we are now bringing in new subdivisions of smaller ones to inject a little bit more. So I would say that occupancy, the 90s, we are now in the lower range of the 90s. I don't expect that to go down much further. We should be able to operate within this in the second half. And I think as more renewals are being put in place, I think we should be able to see a stronger occupancy by the end of the year.

We have the next question on occupancy from Wai-Fai. And question is, was the occupancy decline driven by preterminations or nonrenewals? What trends are you seeing in preterm and rent deferrals?

If you look at the overall, about that 4 percentage point drop for this quarter as a portfolio, I would say that preterm contributed slightly more. As I mentioned during this period of April, May and June, it's probably a tough period for the retailers as they reassess some of their own business strategies and whether they want to continue with this COVID impact that are impacting their routine business. So some of these have run into higher preterminations that we have observed in this quarter. So about 4% in terms of the NLA have come up for early pretermination, out of which I think we have managed to convert close to 1/3 within the last couple of months to replace them. So part of this so-called occupancy drop, a larger part is due to preterm.

We have a question from David. What are the types of tenants by trade and by business model that you want to attract during the current repositioning?

We have shown you some snippets of that color. I think from an F&B standpoint, the most vulnerable to -- the most vulnerable F&B during this period are really those formats that position to get people to come in and dine. And I think these are the ones that are really harder because the very fact that the value proposition is to get people to come in and dine. So I think this is the one where we see a little bit more rethinking from the operators. And these are the ones that we also see a little bit more pretermination risk coming through, which is why we have been actively looking at some of this space. One way is for us to continue to support them. But if the business is not viable, we got to take early actions and bring in the newer concepts that are resonating with the younger crowd and the family the kind of social dining experience that people look for. The other thing is obviously certain F&B menu and the formats are easier for delivery -- are easier for takeaway. So this has also proved a little bit more resilient. If you look at the cafés, if you look at the smaller dining formats that can work very closely with the delivery platforms, these are the ones that, despite the challenging environment, they're still able to get some of the sales moving and more resilient. So I think these are the ones that in the shorter term we should be able to conquer more of such.

Okay. Next question is from Wai-Fai. What are -- are there more remixing to be done at Rock Square? And can you sustain double-digit rental reversions?

I think, so far for the first half, I would say, Rock Square continues. I think you would have seen Rock Square. We have been able to do that since the acquisition. Obviously, I was sharing more with you that this environment currently is probably harder for tenants to make very expansionary commitments. So I think this is something that we need to rely a lot on the relationship and the local knowledge to see where are the leasing options that we have from the local market. So I think so far, I would say, Rock Square, in terms of the repositioning that we want to do, we are still able to refit rather strongly. I think Rock Square should be able to do relatively well because some of these passing rent and area that we have designated for renewals, they are not at a high level relative to the market and relative to what we understand these brands that we have booked with before. So I think Rock Square, relatively speaking, I would say, in terms of reversion, we should be in a better shape.

Okay. We have an interesting question from Terence about whether we can get a sense of possible acquisition targets, still retail. Or would CRCT consider other asset classes? Also Tier 1 China cities versus Tier 2 and 3?

I think by and large, we are posturing ourselves towards the Tier 1 and Tier 2. I think we are already high towards that category. I don't think we would want to change too much on that. I think that's our value proposition. And if you look at where our footprint and presence seems today, we are very much within that 5 core city clusters as a group that we are already in. So I think the Tier 1 and high Tier 2s continue to be the main footprint that we'll look at. We have also been guiding that, I think, we have been retail. And if you look at the whole China market, if you want to just anchor ourselves over longer term, I think it's interesting to look at opportunities over and above retail as we think about our next stage of growth. Essentially is to really build that portfolio diversity and the income resilience. And I think this is the philosophy that we have been guiding you. Definitely, we will be looking at opportunities. We would like to cast our net wider as we look at the potential opportunities in China. And I think this is really in line with the longer-term ambition for CRCT to anchor ourselves as the China specialized REIT that we are moving towards.

Okay. And next question is from Joel. What was the reason for Grand Canyon's 23% decline in rental reversions and its lower occupancy? What are the plans to move these higher?

I think -- okay, I'll ask Hong You to give you a little bit more color, especially on Grand Canyon. I think there's a couple of more asset-specific area that we are looking to reposition.

Yes. Thanks, Tze Wooi. This is Hong You. Just to share a little bit of color on the Grand Canyon reversion. Actually, out of the -- I think our 18 tenants that been phased, half of the area, several hundred over square meter was actually due to kids trade that we actually bring in. We were starting talking about this tenant even before the COVID and then the tenant was still committed. This tenant was coming in to replace some of the fashion. So understandably, the kids entertainment rent will be lower than the fashion that we have replaced. So that -- if we exclude this tenant, I think overall, Grand Canyon's rental reversion will be slightly positive still. Yes. Then I think the other factor, I think that there was a question on the Grand Canyon's occupancy, I will address that as well. I think Grand Canyon, if you read some of the reports, there was a second wave in Beijing. And the Fengtai district was affected quite a bit. So I think during that period, we also have some store closures. But I think now business are actually coming back. We have -- the mall has been disinfected. And now our business traffic has been back to probably 50%, 60%, still picking up.

So I mean to sum up for Grand Canyon, I think the occupancy drop, like what Hong You mentioned, there are some pretermination from certain trade categories, that's over and above what we are already trying to reposition towards. And I think as we approach the June-July period where, for reporting purposes, I think really there's a second wave coming in Beijing, and in particular in the Fengtai district where Grand Canyon resides quite near. So I think all this then sort of like have certain impact to some of the tenants' reassessment of what they want to commit. So I think there's a little bit of such pullback effect that we see. And I think that has reflected in Grand Canyon's lower occupancy.

Okay. Now we have a question From Jerry Dean. It's also related to Grand Canyon's negative reversion, but this is as opposed to other Beijing malls.

I think this one we cover already.

Was the removal of Erqi master lease part the reason for the occupancy decline quarter-on-quarter?

I think what we have shown in the occupancy does not include Erqi.

Is lease restructuring something that you will consider to remain competitive in the face of soft leasing demand?

Yes, I think from a practical standpoint needless to say [Technical Difficulty] fixed rental further from retailers. We have actually, on a short-term basis, restructured some of this to support them. I think some of these involves us discounting a little bit on their fixed rent portion. Some of these involve us converting for a 6 months period just go on sales turnover rent, that sort of. So there are cases of such where we look at the tenant and we look at the business individually. And we do have such cases happening and we'll continue to be flexible as we go about negotiating. And also some of these are tactical by nature. Some of them, we will need to do this as we buy a little of time to look for alternatives. Some of these, we would decide that we may just terminate or we just part ways because we think that the credit risk of them could be increasing if we continue to do rent renewal. So I mean there is a combination. I mean running our volume business, each case has to be looked at on its individual merit and then we decide what is best for the mall, what is best for the business. And I think you had the combination of the range of all this effect that we have to look at, yes.

Can you remind us how much remains within the existing capital reserve? Is this sufficient given that 5% of DI was retained this period?

The 5% that's being retained is more as a prudent measure, as I mentioned, to be reassessed come the end of the year. I mean we remain committed to distribute our DI in terms of that policy. If you're talking about the earlier so-called capital reserves that we have built up because of the Anzhen divestment gain and also the recent Erqi divestment gain, I think we do have substantial reserves that we can look into when required to sort of like look at how to smoothen out a little bit on the DPU profile. But as we guided that most of the focus would be on us looking at the core DPU and the core earnings. I think that will have to be judiciously looked at to see how to augment the core earnings rather than to use that capital purely to substitute for this period where the core business itself has fallen in line with the market, yes.

How will you offset the potential income loss from Yuhuating's DI. Is capital top up in the cuts -- all the cuts this year, from Wai-Fai.

I think it's a good question, but I think we will have to look at it more on a forward-looking basis rather to be prescribing or precommitting to a level of top up, yes. I think I mentioned that the reserves will come in handy and useful as we do a little bit of this portfolio actions. And we would like as much to have some contribution coming in, for example, the Yuquan coming in. And then we look at what would then be the downtime as we carry out some of the AEI for Yuhuating subsequently. So I think we'll be looking at it from a total planning perspective. And where needed, I think we do have that additional so-called capital reserves to look at smoothening.

The next question is from Joel. We are seeing luxury spending picking up domestically. Is management seeing any spillover to the portfolio?

That's right. I think that is something that we have seen in the marketplace, I think a couple of reasons. I think some pent-up demand is one. Second is obviously the people who used to spend on luxury are unable to go overseas. So there's a lot of such spending that has been brought onshore. Obviously, the last couple of years, you have also seen the luxuries pricing sort of like converging. So these are some of the factors that have driven the onshore spending towards luxury. On our part, I think we are not really pitching very much into that category. But definitely, as we want to upgrade our own malls, positioning in line with the families' rising income needs, there will always be a little bit of that sub-brands or accessories brands that people bring into our mall that resonate with the higher quality living that our people want -- our people prefer. So we do see a little bit of this segment doing well. For example, the beauty and the cosmetics. I think some of the well renowned quality brands are doing fairly well, I would say, during this period of time. So I think this is an area, beauty and health care that we will also like to focus on. Jewelry, I think there's also a little bit of pent-up demand that we see in the first half. Could be potentially due to the CNY effect that there's a little bit of pent-up demand. So I think these are segments that we see spending being oriented. IT, electronic gadgets, things that are more digital to our lifestyle today, you also see more spending towards there. So I think it's something that we will also look at. Sports, healthy lifestyle, accessories, apparels, also doing a little bit better. So I think it really sits well with where we think the people are orientating their spending towards. So I think these are really the trade areas that we want to focus to bring in, yes.

A question from David. What are the penalties if any tenants ask about pretermination and that is initiated by the tenant.

Under the standard agreement, obviously, if they did not honor, that we have the right to offset the security deposit. And we also have a right to ask for further. But I think during this COVID period, I think it's a little bit more sensitive on how we have to handle this. I mean you've seen it from the Singapore market. You need to have this mediation, someone to come in. But I think in China, we don't have that so-called mediation. But I think in principle, the law is always trying to favor the weaker one. So I think as we handle such cases, I think we have to be cognizant of that as well. And second, some of these brands have relationships between us for many years. I think some of the thinking behind why they would like to close the shops, it's not to say that this relationship will end forever. I think these are some of the business decisions that both parties would need to come down and resolve. It doesn't mean that today you close a shop and next year we cannot do business again. I don't think we approach from that angle. But purely, if you look at agreement, the basic things would be that the security deposit will be forfeited, yes.

Okay. Next question is from Xu Bin. Could you share some color on the performances of malls in Beijing?

Perhaps I can take this one. I think that Tze had shared just now that Beijing in June was facing a second wave. And then I think due to the swift responses of the government, I think it was contained pretty much by the end -- mid of July. So in terms of portfolio statistics, I think sales is still -- I mean, probably not real time, but when we look at the traffic data, I think we have shared in July our portfolio is at around 75% same mall basis. If we break them down, I think Beijing, I would say, is for the 2 malls that are less -- slightly less affected, I think we are probably 10% below, around 65%. The Grand Canyon, just reopened after the disinfection, I think we are at more than 50% level already. I think for the remaining non-Beijing ones, I think we are seeing actually traffic more consistently above the 80% level. That brings to the whole portfolio of 35 that we have mentioned. So this is the rough breakdown.

Moving on to the next question from Joel. As you explore more diversified asset classes, what do you think about return versus current cost of capital?

We will be -- definitely, I mean, this part of the investment discipline that we will continue to have. Obviously, we would like to do deals that are immediately accretive, but I think there is room for us to structure something. And I think this is something that we will bear in mind. I mentioned that our balance sheet has been strengthened. We have successfully divested Erqi. That gives us a bit more financial capacity. The different asset classes that we look at, we are also trying to assemble probably a good mix such that the yield that come in is in line with the market and then it also bring us the stability and also that potential to grow the income over time. So I think these are some of the parameters that we will have to think through. I think if you want to move up the quality of the asset, I think there is also some tactical aspects of things that we need to think about. How do we have a very optimal mix of funding plan? There is a mix of divestment proceeds, a mix of debt, a mix of equity raising that will make that deal able to be accretive. I think these are definitely the few parameters that we have to think through very carefully as we get any potential acquisition, yes.

So next question is from Terence. Following the rent waiver of 1.2 months in the first half, how much further more rent waiver should we expect in the second half?

I think this is a good question. I think the first half, I would say, most of these -- I would say most of these so-called relief, I would say, more or less settle. There are still, I would say, some balance, I would say. As you know, there continue to be certain trades that are restricted by the government to operate. As we speak, I think things are easing off. Good news is that, I think, the cinemas, the entertainment are progressively being able to reopen. But that said, there are still a lot of measures imposed on them in terms of how they run their seats, how they maintain the kind of social distancing things. So they are unable to operate at full capacity. So I think there is a little bit of such, I would say, trade categories that may require a little bit of longer support. And -- but by and large, if I were to give a number, I would probably think that we have more or less given out the necessary support, probably 80% in the first half, yes.

Okay. I post our last question. If you have any questions, we can address it over the next 9 minutes till 11:30. So feel free to just put the questions in. So the last question that we have right now is from Wai-Fai. For Xizhimen, you mentioned you would be replacing big format F&B by smaller format. So what rent reversions do you expect from this move?

I mean these are some of the actions that we are still in progress. Probably it's harder for us to give a very definitive rental reversion number. But if you just purely look at that subdivision of big formats, and then we are able to release it out, I would think that our usual expectation would be in the single digit of rental reversion. And I think that one we should be able to still pull through, yes.

A question from Vince. Just a follow-up on the potential diversification away from retail. What other asset classes is CRCT looking at? Would it be office and industrial?

I would say we will look at asset classes that I think within the group we already have the strong management presence and the domain knowledge. In terms of if you look at where we are already, that's probably a easier way to think about where you want to pivot yourself, where to and what asset class. I think that's how we think about things. I mean we probably would not move into a total foreign asset class where that's a group we have no knowledge about. I think that's probably too far a step to go. So I think it's natural to think alongside. We already have retail, primary retail, we have integrated, and we also have other parts of the group's business perhaps within the China area that we can potentially look at. So I think this is where we are, really looking at across that spectrum of opportunities to augment some of the retail income streams that we already have.

Okay. If there are no further questions, we'll end the call here. So thank you, everybody, for joining us for this call.

Just a few concluding note. I think I would say that in the first half of this year or rather the second quarter of this year, from a business environment point of view, definitely, you see consumer sentiments and confidence being in the higher level compared to the first quarter. You see the footfall, you see the tenant sales picking up. I think that's a good thing. The second thing to take note is that I think during the second quarter, what we've been doing is really to stabilize the operations on the ground, given that there's a lot of challenges going through in the retailers' minds. Some because of the COVID-related changes that make them unable to carry out their business on a normal tone. So I think we have to come in and help support and probably give them that -- a little bit of support in the next 3, 6 months for them to better have a sense of how they want to realign their business along. So this is where we are coming in to assist and being flexible in some of our lease terms restructuring, being a little bit flexible in our first year of fixed rental as we sign new ones with them. So that will then -- from a purely measuring a rental reversion because we use the more strict way of measuring, we use the first year of the incoming rent versus the last year of outgoing rent. But some of this leasing, restructuring things that we talk about could be to consciously lower the fixed rent for the first half year to the first year. And we have a more higher pickup in the second year and third year we revert back to where it should be. But because of the way we calculate rental reversions, the subsequent part would not be picked up. And as we talk a little bit more on the GTO rent, this is also not being directly impacted by the pure rental reversion. So I think rental reversion is one dimension that we look at things. But I think during this peril time, we probably need to look at the total business of how we run things on the ground to help recover and help to position our mall better and to also attract the desired mix of brands that we want such that we can compete and become more appealing and relevant when the recovery confidence picked up. So I think this is what we've been focusing to do, and we'll continue to do that. Strengthening the balance sheet is something that's also the key focus of management for the first half. I think we have done that, bring the gearing down, lowering the cost of borrowing, locked in the refinancing. So that basically clears up a lot of these issues for us. I mentioned that now we look at some of the seeds that we have already planted for the coming year, which is the AEI for the Yuhuating and also to ramp up the leasing momentum such that we can open Yuquan well in the marketplace. So all these are part of the existing work that we are doing. Now over and above that, we're looking at how we can catch the inorganic part of the growth elements. And that's where I said we have to cast our net a little wider to access asset opportunities available in the marketplace that give us that portfolio diversity and basically strengthen the income resilience. So I think in a nutshell, I think this is what we are focusing -- what we're focused on for the first half, I think what we will be focusing on in the second half, yes.

Thank you, Tze Wooi, for concluding the call. So just feel free to reach out to us if you -- to reach out to us, reach out to me if you have any further questions. So we hope that you all have a good day, and a good remainder of the week. Thank you.

Thank you, everyone. See you again. Cheers.