CapitaLand China Trust (AU8U) Earnings Call Transcript & Summary

Hi, everyone. I'm Nicole, the IRO for CapitaLand Retail China Trust. Thank you for joining us on the live briefing on the proposed acquisition of our portfolio of 5 business parks and the remaining stake in Rock Square. We're excited about this new development as it opens up an exciting new chapter for us at CRCT. This is consistent with CRCT's expanded mandate, as the acquisition marks our first foray into the highly resilient business park asset class. Together with the acquisition of the balance stake in Rock Square, a core asset with proven track record, this transaction will deliver DPU and [ new ] accretion for CRCT. We've been listening, and we understand that business parks in China is something new and different to you, our investors and our stakeholders. And so we prepared this short video for you to give you more insights and perspectives into this growing and resilient asset class, following which, our CEO, Mr. Tan Tze Wooi, will be addressing you by bringing you through a presentation on the proposed transaction. [Video Presentation]

Thank you, everyone, for taking time to attend today's presentation. Hope you liked the video clip. Pleased to share with you more on CRCT's proposed acquisition of the 5 business park properties and the Balance 49% Interest in Rock Square. I believe that this acquisition, which is CRCT's largest to date, will set the tone for our long-term resilience and diversification. Let me walk you through the transaction summary and the portfolio overview as well as our acquisition rationale in more details. A quick overview. The acquisition with CRCT, acquiring the respective interest in companies holding the following properties, namely: 51% of the Ascendas Xinsu portfolio in Suzhou; 100% of Ascendas Innovation Towers in Xi'an; 80% of Ascendas Innovation Hub in Xi'an; 80% of Singapore-Hangzhou Science & Technology Park, Phase I and Phase II, Hangzhou; and the Balance 49% Interest in Rock Square. Based on the agreed property value of around SGD 1 billion, this represents 1.3% and 1.4% discount for the independent valuations. The total portfolio is acquired on an entry yield of 5.8%. Acquisition cost outlay is approximately 822 million and will be funded via a combination of equity, perpetual securities, debt and internal cash resources. This being an interested party transaction, the proposed acquisition will be subject to unitholders' approval at the EGM to be convened at a later date. This gives you a pictorial understanding of where we are. The 5 quality business park assets in the high-growth cities of Suzhou, Hangzhou and Xi'an and the balance -- Rock Square Guangzhou, which all of you are familiar. The aggregate portfolio GFA approximate 852,000 square meters, with a strong occupancy of 91.6% at September, demonstrating the resiliency of these assets with each above 90% level. Using the 1/2 financial period, the business park portfolio features an attractive entry yield of 6.8%, while Rock Square comes in at an adjusted 4.4% on an effective stake basis. On the Ascendas Xinsu, CRCT will enter into a 51/49 JV structure with CapitaLand to acquire the property as a whole. This signature project, with potential opportunities for redevelopment, is located in the well-established Suzhou Industrial Park. It comprises numerous buildings spread across 6 locations, covering various asset types, including office buildings, built-to-suit factories and ready-built factories, which you have seen in the video. Let me now share more with you on the rationale. This transaction is in line with our recent mandate expansion, set out to strengthen and grow CRCT's portfolio, while bringing the following key benefits to unitholders. Let me run through the selling points. The addition of the resilient Business Park assets is strategic and timely in charting our next phase of growth. Business parks are strongly supported by China's economic growth initiatives. This sector stands to benefit from the preferential policy support, anchored by both national and local government policy incentives. Under China's focused, 5-year economic plan, business parks will experience demand-led growth, especially in strategic and value-added industries. These industries tend to be tenants of China's business parks. In recent years, there is a decentralization trend among various enterprises towards Tier 2 cities that are supported by excellent transport infrastructure and connectivity. All in, these themes provide the impetus for a favorable outlook of business parks. Business parks also supported by strong underlying drivers, with tenants operating in high-growth and innovation-based industries, the likes of electronics, financial services, information and communication technology, e-commerce, et cetera. These industries have shown good annual growth rate over the last 5 years in terms of industry sales as well as employment numbers. There's also a shift in companies looking to consolidate multiple functions, such as the manufacturing R&Ds, into a single location. Such trends support the increased demand for well-run business park space. Across the years, business park occupancy in Tier 2 cities have outperformed. This trend is expected to continue, highlighting their resiliency. Rental growth rates have also grown at a relatively faster pace, backed by demand shift. The proposed acquisition will enable CRCT to establish a foothold in 3 high-growth economic zones of Suzhou, Hangzhou and Xi'an. The ongoing decentralization and also the continued urbanization trends from Tier 1 to Tier 2 provincial cities are what drives the rapid growth of China's regional markets. Our existing footprint from this map, you can see, it's concentrated towards North China. Hence, our new footprint into the 3 new cities in the West -- East and West China will bring along geographical diversification benefits. The 3 cities have each cut out their industry and sector focus and are supported by sound economic fundamentals. Specifically, each has created its own unique business park positioning, with quality sector and tenant representations. Suzhou Industrial Park has been ranked first amongst China's economic development zones for the past 4 years. Xi'an High Tech Industries Development Zone is the largest business park in Northwest China. Hangzhou Economic and Technological Development Area is ranked among the top 10 national development zones for the past 3 years as well. The business park assets of high quality, located in well established and accessible zones by various transportation means and support the overall new economy direction. These properties enjoy excellent connectivity with close proximity to city centers and transportation nodes. The properties are also supported by modern facilities and features, comprehensive suite of sports, recreational facilities and lifestyle amenities. They also offer flexible space choices with desired building specs, supporting the tenants' needs. In addition, industry clusters are being built up across the value chain, bringing upstream and downstream tenants together in a collaborative environment. These qualities, coupled with the green communal landscape, provide a campus-style workplace that is very attractive to our tenants. The Business Park properties enjoy an established tenant base, largely coming from the high-growth sectors, with them contributing more than 60% of the monthly rental income. Key tenants include reputable domestic companies and MNCs, the likes of Ping An, Insurance, China Life, NIO, Qualcomm, TDK, et cetera. With a strong combination of hardware and software attributes, the properties enjoy above-market occupancy and are well poised to experience steady rental growth. Moving on to the fourth rationale. Owning 100% ownership in Rock Square will enable CRCT to fully capture the upside from ongoing asset enhancement initiatives. Rock Square is one of the largest shopping malls in the Jiangnanxi cluster in Guangzhou and since our acquisition in 2018, we have actively extracted positive rental reversions, while upgrading its positioning to capture a wider catchment. Rock Square has been a solid addition and growth catalyst, exhibited strong performance record and continues to demonstrate resilience and recovery post-COVID. We look forward to the ongoing AIs to add additional net lettable area to the asset, establish more efficient configuration to attract even higher-yielding tenants that will translate into an expected 15% ROI over the next 2 to 3 years. This acquisition provides an attractive value proposition for our unitholders and is immediately accretive. The properties are acquired at a discount independent valuations. Based on 1/2 2020 period, the incoming portfolio NPI yield of 5.8% is higher than existing portfolio. And this transaction will be delivering 5.1% DPU accretion based on the same 1/2 2020 on a pro forma basis. This transaction marks CRCT's largest acquisition to date. Following the acquisition, our enlarged portfolio will consist of 18 properties, with the business park assets adding diversification and resilience. NPI will see substantial uplift of more than 50%, while CRCT's asset base will move towards the same [ 5B ] land size. The enlarged properties, land tenure, would also be extended favorably. CRCT will continue to benefit from this enlarged portfolio, with 40% of its GFA shifted towards the business parks and industrial assets. In terms of rental income, about 20% of the enlarged portfolio will be contributed by the new income streams. With multi-asset classes in the enlarged portfolio, we will be better equipped to undertake future asset reconstitution across market cycles. The enlarged portfolio's income will be better spread across the trade sectors. Rental income contribution from Retail F&B and fashion reduced from 54% to 40%, while adding 16% to emerging high-growth sectors exposure that's associated with the electronics, engineering, the financial services, the IT sectors, et cetera. From a geographical standpoint, CRCT will now achieve a more balanced exposure to Beijing, with the city accounting for about 36% of income, down from 48%, while gaining new exposure to Suzhou, Hangzhou and Xi'an, collectively contributing about 20%. Following the acquisition, the addition of new leases and the tenancy profile enhanced the tenant-based quality through the diversification benefits. Post the acquisition, CRCT will continue to tap on to CapitaLand's local market knowledge, the wide-ranging real estate capabilities and resources in charting towards the new business. With the sponsor's strong support, CRCT will be positioned as the dedicated S-REIT for the group's China business with growth visibility via pipeline to a full spectrum of the China quality assets. In addition, CRCT stands to benefit from the sponsor's operational and property management platform, along with the community building events that are highly attractive to our corporate tenants. Some of the value-adding services include the real-time monitoring and management system using smart technologies, one-stop call centers and the community engagement programs that are focused on lifestyle and trending themes. In conclusion, CRCT has been actively rejuvenating our portfolio the last few years. In 2016, the CRCT entering Chengdu, a promising retail city. In 2017, we divested our oldest asset from the IPO and recycled the proceeds to enter Guangzhou for the first time in 2018. Over the course of 2019, we carried out a multi-series rejuvenation efforts of exiting Wuhu, entering a bundle deal in inner Mongolia and successfully completed the acquisition of 3 stable assets in Harbin and Changsha. Continuing into 2020. We monetize another old master-leased mall in Zhengzhou, timely, strengthening our balance sheet and financial capacity. Above efforts have strengthened CRCT to now being able to undertake our largest acquisition, which will further strengthen our portfolio through expanding into a new asset class of business parks. As seen, CRCT will substantially benefit from the increased scale and network with our number of assets reaching 18. The GFA and the NLA will experience an uplift. Our pool of leases will improve. The AUM and the market cap boosted significantly. CRCT has remained focused on executing our plans this year, with all our malls and trade sectors currently operational. We see sustained improvement in shopper traffic and tenant sales, and we'll continue to leverage new trends to inject fresh offerings. With the expanded investment strategy, we are now well positioned to capture China's next phase of growth. This transformative acquisition will mark a new chapter for CRCT and solidify our position as the largest China-focused S-REIT. With this, thank you. I hand over the time to Nicole.

Thank you, Tze Wooi. So now I'd like to proceed to the Q&A segment. So you may post your questions via the asset question tab at the bottom right-hand of the webcast page. So I'll also go through these questions as and when I receive it and direct it to the panel, who will address these questions. Our panel today consists of Ms. Joanne Tan, CFO; Tze Wooi, as well as You Hong, our head of IPM. So let's kick off the session with the first question.So the first question, we have a question on, CapitaLand has a pool of quality assets across the asset classes in China. Why specifically these 5, in particular?

Well, I mentioned that we are really looking into a multi-stage phased growth. And I think we like the resiliency of the business park space. At the right cycle of the Chinese economy, I mentioned that if you look at the economic plan, the business park space is going to be receiving good economic support. If you look at the tertiary industries, if you look at China's trying to promote onshoring some of these higher value technological industries. These are typical sector uses of business park. And if you look at, especially this year, across the real estate classes, some asset class will be more subject to the COVID measures. Some are more resilient. So as we think about building a multi-asset class, as we think about the diversification, I think we want to add that resilient attributes to CRCT's portfolio. So that's the tone on how we look at which asset class. As to the 5 BP, I also shared with you, if I look at our CRCT's portfolio shape currently, we are a little bit concentrated towards the north of China. So we've always been looking at opportunities to how to pivot a little bit more to the east, the Shanghai -- with the Shanghai, the Suzhou and the Hangzhou. With this connectivity, this whole old Yangtze River Delta exposure, is something that we want to build. And also towards the west of China. So in summary, this is how we look at it and how we assemble the 5 BPs in terms of how we do the selection. Of course, we also look at the maturity of the BP. And these are mature assets, and Suzhou Industrial Park is the signature BP. And I think as a first move, we also want to give ourselves that meaningful scale, that meaningful exposure, and that's why we are moving towards 5 and in 3 cities in 1 go.

Thank you, Tze Wooi. We have a question now from DBS. And the question goes, "You are acquiring various interests in the BP portfolio. Will you be acquiring the remaining balance date? And is it available for acquisition in the medium term?"

Well, there are cases. If you look at the ones where we are not acquiring on a 100% basis, I think essentially it's the Ascendas Innovation Hub in Xi'an. We have a 20% local JV partner. So that is actually belonging to the SOE arm that runs the whole business park. So they've been there. They've been value-adding partners. And I think it's good for us to work together with them to continue the business -- in strengthening the business. And the other one would be in Hangzhou, where we acquired also 80%. Similarly, there is a 20% local JV partner. As for Xinsu, we are growing at 51%, with the Balance 49%, to be held jointly with CapitaLand. The thinking behind is that this is going to be a signature project with redevelopment potential, and having CapitaLand as a development partner definitely gives us that ability to extract higher value from these combined. As demonstrated, the state held by the sponsors, I think in the future, they can provide a pipeline for us in terms of growth. And through this acquisition, that's exactly how we demonstrated the sponsor and [us] went in into Rock Square acquisition 3 years ago. And now we are taking the 49%. So I think that's how I will look at it.

Thank you. So hopping on to the question on our pipeline, we have a question from Cohen & Steers on what is the remaining Business Park CRCT has as pipeline from its sponsor?

I think if you look at the sponsor's balance sheet and as well as some of the projects that are held under their private funds, I think if I recall correctly, they have about 10 assets that are classified under the business parks, logistics and industrial. So currently, we have acquired 5. So there are some balance, and I think that is definitely the spectrum of opportunities that I mentioned that we'll be continuing to evaluate. I think arising from our expanded investment mandate, I think that's really opening up a lot of opportunities for us in the marketplace, both from our internal sponsors' holdings as well as third-party. I mean, recently, just because of our mandate expansion, we have received a lot of interest in asking us to evaluate certain opportunities that in the past because of our more specific retail mandate, we are not able to. So I think we're very excited by the whole range of opportunities that will open up.

This is slightly more into the details of the deal and the transaction. So what's the difference between the consideration and acquisition value?

The acquisition value, or rather the property value, we are using it in terms of how the property is being valued by the independent valuers, and that's how we determine the price of the property. The consideration is because of the structure of our acquisition, we are essentially acquiring the interest in the companies that hold the properties. And arising from the company's own funding structure, there are certain onshore borrowings. So that's how you look at the difference between the aggregate property value and then the consideration. I think the specifics we can probably take you through if you need us on more detailed numbers on each of these projects. But essentially, that's the concept. The agreed property value is how we define, and that number will run into the NAV of the company. And we are acquiring shares in the company. And we are acquiring certain companies at a 100% stake and certainly at the effective stake of 80% or 51%.

So I'd like to move the conversation to -- on a more macro level. We have a question from CNA. What are the plans to mitigate risk amidst COVID and slow economic condition?

Well, I think this is a very good question that I think everyone is trying to navigate. I think on one hand, you can see our focus in our own tenant operations and focusing on what we can value-add as a landlord. And that has brought us some, I would say, mitigating or good recovery. If you look at what we have just disclosed in our 3Q financial or other business updates, we are continuing to see footfall coming back arising from -- people are more confident. And I think in China market, there are definitely some funds ahead of the other economies. People are going back to normalcy. People are going back to the office buildings to work. Our malls are very well connected and are supported by all these captive catchment. So you do see people coming back. On the tenant front, obviously, you can see us doing a lot of rebalancing of tenant mix, understanding better what are the consumers' spending habits of today, the preferences. One way to help mitigate is, obviously, also to onboard many of our retailers into our online CapitaStar platform, the ecosystem, and help them increase the reach and outreach to consumption to help them stretch their outreach and drive the spending. And on the other hand, we are also embracing a lot of new digital means of management and how we outreach to our shoppers through live streaming, through digital connection through smartphones. So I think these are all evolving things. And I think as a responsible and proactive landlord, we are working very hard and close with our tenant community and also our shopper engagement community so that our mall continues to be a relevant place for them. We still feel that the physical environment is something that people want to spend time. And that's why our malls are anchored as the social meeting place, as a family-oriented destination and especially during weekends. So these are some of the, I would say, active efforts to bring our business back to normalcy.

We have a question that is quite popular here. So does [Xi'an] City have the management expertise to manage business park assets in China?

Well, I think this is one of the key benefit in the last year, after the merger of the CapitaLand and the Ascendas business, so I think along with that merger, we have assimilated the management team and the operating platform that used to be there. We are now assimilating both debt management team into together with our own CapitaLand's property management platform. They are also -- resided in that 5-core city clusters. So we do have the expertise. And I think the -- through the merger, we have strengthened the management bench strength. And definitely, this is an area that we can cross-learn. And we're confident that if this is an area that we want to focus on energy more, we'll continue to be able to harness and cultivate and continue to find good people who would like to join us to expand this business.

So moving on to CapitaLand's differentiation. Why and how are you able to command a higher rent and higher level of occupancy as compared to surrounding competition?

I think if you look at business parks, I think the -- really the concept and the idea, I think, we are one of the first movers. If you just look at the Suzhou Industrial Park, I think we do bring that element of finesse, of not just the hardware and also the software. I think just now during the presentation, I do share with you a lot of the value-added, landlord services and the initiatives that we have built in. So these are some of the management know-how that I would say, set us apart from the other business parks. And from the tenant engagement point of view, especially the international enterprises, the global MNCs, I think being a foreign brand do give us that ability to connect with them in better at times, so I think the ability of us creating that differentiation by working very closely with the local JV partner and through the joint efforts, being able to attract the MNCs into the project positioning. So I think these are the few factors I would think that set us apart from the other business park space operator.

Thank you, Tze Wooi. Shall we now move the conversation to a portfolio level? So there's a question from DBS. Can you share about the [wheel]? And whether it is materially different from retail?

As a portfolio, the current 5 that we are acquiring, I would say that they sit around the 2 to 3 in terms of wheel years. So that's where we are. Some of the wheel are also attributed because there are some expiries of -- the anchors they are coming up in the coming 1 to 2 years. So that's how the portfolio is shaped. That's where we sit. Some of the longer [ wheel ] BP, probably 3 years and beyond. If you look at the BPs that we are acquiring, and just to segregate them, the more of this, like, typically, the lease structure is also about the 3 years. Some could be 3 to 5. The industrial side of things probably will be slightly longer, typically around 5. Some build-to-suite factories could be around 8 to 10. So I think that's generally the order of how we look at the lease and the [wheel] effect.

Okay. Let's talk about the occupancy. So in general, the vacancy that we see in the BP portfolio, is there like a structural market vacancy? Or did it drop prior to COVID or during COVID period? What was the trend on occupancy?

Well, I mean, if we look at the market report or the valuation report, I would say that as a whole, as the industry as a whole, we do see close to, what, 15% to 20% of vacancy in the marketplace. And that's why relative to the market, the properties that we're acquiring are all above 90%. So I think that sets the tone of how these projects that we have assembled demonstrate that position in the marketplace and the ability to command the demand. Well, I think we are now about, what, 90%, 91%, 92%? So I think this year, definitely being a COVID year, I would say that the leasing activities may have slowed, especially in the first half. But I think we do see China's economy coming back more focused a 5-year plan, and more push with the economic stimulus. So I think all this will roll ourselves into a better operating environment, hopefully, as we enter 2021. And definitely, as a management team, we'll continue to look at opportunities to drive occupancy up.

Just to add, I think this business park asset class is, in a way, the lease structure is a bit similar to the office, although the tenant base could be different. So in terms of structural vacancy, there would always be some. And I think also, it went on to Tze Wooi's answer, I think, for the COVID impact. This early half of the year, we did not really see a drop in occupancy. And in particular, I think, in AIT, which was ramping up its occupancy, we see actually a nice pickup from the AP over Ascendas in the beginning of the year to now a 90%. So I think it's quite a resilient sector, I would say.

How about rental reversions? We have a question from JPM on what were the rental reversions for the incoming business parks' portfolio?

Well, I mean, there are a range among the 5 that we are acquiring, the Hangzhou being the youngest. They are into their first lease cycle coming up. We do see strong rental reversions of double digits even. That's because of -- they are just -- they're entering that cycle where they revert themselves and 3 years ago, the signing rents vis-à-vis where the market runs now, they are able to revert at double digit. For Suzhou, in fact, even for mature projects like Suzhou because of the correct positioning, because of we know what the whole project demand is in terms of the sector tenants, we continue to be able to extract high single-digit rental versions year-to-date for Suzhou as well. As for the other projects, I would say, the range, it's also around the single digit, yes.

How about rental escalations? There's a question from DBS on what is the typical rental escalation?

Maybe I can take that one. I think the typical, just like I mentioned, a typical business park set 2 to 3 years are leased lands. And then within the leased lands, if it's 2 years, usually, there will not be a rental escalation. But if the lease is longer, say, 3 to 5, then there is potentially escalation built in, consistent with CPI growth to that effect.

Thank you. How about the average portfolio retention rate? Can you share a bit of color on that?

I would say, around 70% retention rate, especially, we do see very, very good retention, especially for those build-to-suit, Samsung lease tenants, if you look at the Suzhou has been with us for like 10 years, 15 years. So I would say, generally, around the high 60s percent or 70s percent as a retention rate, while we also will always want to also turn over some of these spaces to bringing the newer economy and the tenants that are expanding themselves. And we want to be able to provide that one-stop communal space for people who may not want to assemble some of their various functions together in our project park. So I mean, these are some of the leasing considerations that we have. Yes. So around 70% retention.

Thank you so now let's move the conversation to the Xinsu redevelopment. Can you give us some additional color on that as well as the CapEx?

I think it's a bit premature to really be focusing on exact redevelopment and CapEx. I think this project being a very signature project and has been there for a long time, I think we do see plot ratio availability, the capacity of plot ratio that we have not really utilized. We have some track record in the past of re-purposing certain areas of the project from the old industrial, the warehouse-affected buildings. And be able to utilize the additional plot ratio and convert it into more the R&Ds and the office buildings that support the new economy demands and the users of this old project. So this is where we are preparing ourselves. I think it's probably a bit too early to be talking about specifics, but more of the potential that we see in this project to move in tandem with the own project's positioning and the Suzhou Industrial Park's positioning and the economic emphasis of Suzhou. So I think this is where we are preparing ourselves, and that's where having a joint venture partner, CapitaLand, having that brand name as a developer, engaging the various governments. This will help us to extract value for this project over the medium to long term.

Yes. Just to add a bit of a history. I think Xinsu, there's -- if you look at our announcement, there's actually 6 plots. So the Xinsu Square was earlier an industrial building, and then it was redeveloped in 2013 to 2016, actually into an industrial [kind of] R&D like what Tze Wooi mentioned. So unlocking the [certain] plot ratio. And so -- but I think for the next stage, we could be looking at one of the plot at the North area. So I think there's potential. But I think like what Tze Wooi mentioned, I think this conversation has to go on with the government, and then we have to look at the plan carefully.

Thank you. So let's move the conversation now to valuation and cap rates. So the first question that we have is, where do you see the valuation moving forward a year from now?

Always put me on the spot with predicting. Very difficult to predict. But I would say that based on what we have, just share with you the economic emphasis, the policy support-driven incentives, the demand-led business park users, the growth from the tenant users in those sectors. I think generally, these are what I will feel that it will support. And as more and more people are interested in this asset class, I think that we will definitely have a good opportunity for the rates to compress into the future. It's also interesting. If you look at the -- China's own C-REIT that they are trying to pilot very strategic industrial business park within that first batch of potential. So I think this would then create more investment interest. And I think we are now entering this asset class in the right cycle. And yes, I think the valuation I would think should be fine, yes.

What is the cap rate of the targeted BPs? And the cap rates of the BPs in Tier 2 cities?

Well, I mean, we can run you through it more details of each of these BP. But by and large, if you look at the valuation report or the market reports, Tier 2 BPs' cap rates is probably around the mid-6% level, thereabout. And if you look at the ones that we are acquiring sits quite closely in that range. Obviously, cap rate's always dependent on the particular projects on its own. So for the ones that we have acquired, it sits around the same range as well.

Okay. So I think Rock Square is getting a bit lonely. So let's move to the conversation to Rock Square. So is Rock Square's rental reversion sustainable?

Well, I think we are still having ongoing AIs that will help us continuously extract the rental upside. I think we are working on our plan to extract that. You have seen us doing the rental reversions since the acquisition in 2018 early. And obviously, we have shared with you during the acquisition time that we see for ourselves a 3-year execution plan for us to able to extract value. And that's exactly what we have been saying on cost over the last 2 or more years. So I think -- but definitely, we are now bringing the rent level to a higher level now relative to where they were when we acquired. So I think then, in terms of the numeric of the rental reversions, especially and also in consideration of the retailers' more cautious outlook, definitely, you have to moderate. It will be difficult for us to continue to revert at that strong, what, 20%, 30% level, right? So I think we continue to see opportunities for us to extract upside from this solid mall that is sitting on top of 2 MRT lines. And we're confident that this mall will continue to be able to service a wide catchment and be able to inject better brands and improve the shoppers' traffic and the tenant sales as we continue to manage it.

Okay. On the topic of occupancy for Rock Square. Why was there a drop in Rock Square occupancy from 93.8% to 91.9%? Can you shed some light on the current situation?

I think the 1%, 2% transitional vacancy during this 3-quarter reporting period is in relation to a certain space that we are also working through for AEI purposes. There are certain tenants during this period of time who may not want to continue running the business. And we can take opportunity to then arrive at a decision to take back the space and rezone the space, and that 1%, 2% is in relation to some of these AEI zoning work that we are planning.

Yes. That's right. I think there was a few space, 1 of them at Level 3, 1 the F&B. I think we saw the opportunity. So concurrent with the AEI program, actually, we are taking that space back and reconfiguring into a multiple areas for a few tenants. So I think that's one. And then I think the B1, we also have a few spaces that actually we'll see opportunities coming up. So we are using this AEI time to actually relook and then hopefully be able to reconfigure it into a more optimal mix.

Yes. So let's shine the spotlight back to the BPs, the one that's getting people very excited. So how does the land tenure balance of the BPs compare against the current portfolio?

Well, by nature, BP land usage is 50 years. So that is already 10 years longer than retail, which you are familiar, retail on a 40-year basis. If you look at some of our projects in the 5 BPs that we are acquiring, if I recall correctly, some land tenure would stretch all the way to the 2060s. I think with the last one, ending about 2064, 2065. So that would definitely help to lengthen our overall portfolio's [balance] lease duration.

From Daiwa, we have a question. Roughly, what is the typical NPI margin range of BPs versus your malls?

A very good question. I think for BP because of the different sizes as well, typically, the bigger ones will have higher margins. The smaller ones may not. So I would just put it around the 70% mark for BP, for the ones that we are proposing to acquire.

Okay. Moving on to the method of financing. So we have a question from [BH]. What sort of funding costs have you assumed in your estimation of pro forma DPU?

I think we have shared a little bit in our announcement in the deck as well as the announcement. We are looking to put together a funding mix of equity. We have also, just a couple of weeks ago, raised through Perpetual Securities. So that came in at, I would think, quite an attractive cost of 3.375%. If you look at where the current SORs, the lending rates are, I think we're confident to be able to do a debt raise, definitely much below our average cost now. And equity, I think we have also assumed a certain illustrative price. So I think I've given you enough information to be able to assemble some of these weighted costs?

Yes. Just to add on because earlier on, Siew Bee has also mentioned that we're actually buying over the companies onshore. So we actually assumed some of the onshore debt. So some of these onshore debts are actually packed to PBOC or LPR, and now we were just looking at the proportion of that debt. About 30% of debt is issued to onshore, and then the remaining will be through offshore loan at a lower rate of about close to lower 2%. So that will give you a sense of how you sort of like get the blended all-in rate for the onshore [indiscernible] onshore [indiscernible] debts. Yes.

What would the expected gearing post-acquisition be?

Based on our base case funding plan, we are targeting to post-acquisition land around the 38% gearing level. Yes.

Okay. So if we eliminate the impact of COVID in the estimate, the pro forma impact versus 2019, what would the accretion be?

If we were to look at this deal itself, I think if we just benchmark against the FY 2019's DPU accretion, that is what?

2.8%.

2.8%. Yes. So I mean, if you are thinking that either 1/2 2020 has some elements of COVID, although we have already adjusted back some of these rental rebates' one-offs that came through in 1/2, and that's how we arrived at the 5. But you will just look at it on a 2019 basis, the number will be 2.8%.

Yes. Okay. What is the CRCT's NAV after this revaluation?

I think it's also in the announcement. I think that's a specific statutory section, if I recall correctly, it's probably $1.44. You may just want to double check on that. It's a disclosure item in our announcement.

Okay. Thank you, Tze Wooi, You Hong and Joanne. So now let's move the conversation to outlook. So with -- this is a question from SPH. With the acquisition of business parks, would be seeing more integrated development that you will be acquiring in the next round?

Well, I think we constantly evaluate what available opportunities that will add strength to our total portfolio. And I mentioned with the widening of the mandate, we are now to able to avail ourselves to more opportunities. We can look at different assets at different time points, having the flexibility to be able to combine different assets or assets across different asset classes and bring them on board. So I wouldn't want to be too prescriptive that the first acquisition is BP. If [indiscernible] [Martin] implied the second acquisition must be of something that must be prescribed, I think I don't approach it from that angle. We look at what makes sense for CRCT to continuously strengthen and grow our portfolio. The philosophy is to build up a multi-asset class, diversified portfolio over time. And I think it's important for CRCT to use this transaction to skill ourselves to the right level. Then it's easier for us to look at the more chunky integrated developments.

We're going to take the last few questions that will be coming in. So now this is a question on divestments. Are you looking to divest any assets in the portfolio?

Well, we have been actively looking to reconstitute our portfolio. And I shared with you earlier in the presentation, in fact, today, we have already monetized or divested 4 out of our initial 7 IPO assets. Some of these assets have contributed. Some of these, if you look hard, they may no longer be very competitive. They may not be core to our holdings anymore. These are some of the assets that we'll seriously look at to monetize. And you already see us doing that. So I think this is really part of that continuation of that active reconstitution efforts that we have done in the last 3 or 4 years. So that will continue.

I mean, I think we have shared in the past, we will constantly review. And then I think looking at our retail portfolio, internal and could be one of the potential candidates, but we will explore that market. And then if there's a good opportunity, we'll do that.

Yes. I mean, since You Hong mentioned internally, I think all of you who have followed us know that this asset has been going through a little bit of operating challenges because of the environment. And in terms of contribution to CRCT as a portfolio, I think the value is like less than 2%. With the enlarged portfolio, will be even lower. In terms of contribution to income, it's almost like point-something percent or below 1%. So it's really not a core holding for the portfolio. We'll definitely be disciplined in looking at how to achieve value and monetize it at the right opportunity.

Okay. So I'd like to leave a popular question to one of the last few questions. What will be the target asset allocation for CRCT's portfolio moving forward?

Well, I mean moving forward, you can really stretch it in the horizon, how far you want to stretch it. But I think we want to position ourselves as the long-term China play. Having said that, if you look at China's, opportunities that's available in front of us, we are currently 100% retail-centric. With these proposed acquisition we are moving towards probably closer to 80% retail and 20% business park and industrial space. This newer economy sector, it's something that we are interested to further look at in terms of opportunity, both in-house and external. So I think over the longer stretch of time, well diversified China REIT replay, we're probably looking at a 40%, 30%, 30%-kind-of-balance mix. Over the longer time, when the chunky integrated developments can come in, that will probably take up that 40% and then 30% retail and then 30%, the newer economy asset class that we are looking at.

Yes, I think by new economy, we are not limited to the business parks. There could be logistics, even [indiscernible]. I mean, are open with expanded mandate.

So now come to the last question that we have. And I'd like to close this off with another very popular question. So will CRCT be looking to remain the REIT post acquisition?

Well, you can take the answer as a definite yes. Let me just [think of the best] thing to bring to you.

Thank you. So I'd like to thank Tze Wooi, Joanne and You Hong for joining us on this panel, answering key questions that you, our investors, have in mind. So now that we've concluded our last question, I would now like to pass the time to Tze Wooi to give his closing remarks. Tze Wooi, please?

Thanks, Nicole. I think this morning, we have touched on quite a bevy of things. And I think we've tried to give you a lot of information on the business parks, because a lot of you have given me some feedback that you may not have a lot of information. So please read through the content that we have put out, is for you. If I may just leave you with a few key takeaways. I think CRCT is really into a transformative journey. With the expanded investment mandate, we are really excited by really the opportunities that present itself in front of us, the full spectrum of asset opportunities in front us, both in-house and third-party. I think through this deal, it will give us a significant muscle growth, if you like, in the [indiscernible] space, both in terms of our AUM and our market cap and trading liquidity. So I think this will really push us up to a bigger league. I think if you look at CRCT, it's really a unique value proposition out there. We are positioned as a long-term REIT for China market, supported by a strong sponsor, where China market is the core market. And if you look at where the market is moving, and our track record in China having a strong investment and operating platform, and now with a strengthening and growing REIT to complement, it's really a unique proposition. So as we write a new chapter for CRCT, I really look forward to your support in joining with us. All right. With that, thank you very much in attending today's presentation. Take care.