CapitaLand China Trust (AU8U) Earnings Call Transcript & Summary

Hi, everyone. Good morning. Thank you for joining us for the CapitaLand China Trust First Half 2021 Results Briefing Call. I'm Nicole, IR for CLCT. We hope that you have gone through our results and that it was one of the bright spots of the morning because it sure is ours. So we have on the line here today, Tze Wooi,our CEO; Joanne, our CFO; and You Hong, our Head of IPM. So over the course of the next hour, we'll be having a short presentation before proceeding to our Q&A section. So along the way, feel free to pop in any questions by clicking on the Submit A Question button that you can see at the bottom right of the screen, and we will ambition to answer as many questions as possible. So let's get right down to it, and I'll pass the time on to Tze Wooi. Tze Wooi, please.

Thank you, Nicole. Good morning, everyone. Welcome to our first half financial results presentation. This is the first time we are onboarding the financial effects of our major acquisition last year, acquiring the 5 business parks as well as the balance stake in Rock Square. Let me walk you through the deck highlights. CLCT's portfolio today is much more diversified across the retail and business parks with a footprint that's highly oriented towards the top-tier cities of China. Our AUM and our market cap has grown steadily, having demonstrated the track record of actively reconstituting our portfolio. With a stable dividend yield, backed up by a strong sponsor, China being our largest market, we are setting ourselves apart in the China focused REIT space, establishing ourselves as a proxy for China's growth. So following our acquisition and the active portfolio management, our total revenue and NPI has climbed strongly over 1 half of 2020, led by the maiden contribution of the business parks, 100% ownership of Rock Square, the incremental contribution of the bigger Nuohemule facility outgoing that smaller Saihan as well as general improving operating environment where we see less rental relief being provided also catering of those lease restructuring cases relative to a year ago. So we are pleased to distribute $0.0423 DPU this period, improving 40% year-on-year. Our operating metrics are also showing signs of recovery and strengthening with the retail occupancy pushing above 95% on the back of higher traffic as well as tenant sales growth. At the business park front, the assets that we have acquired have performed well, showing increased occupancy as well as positive rental reversion since the acquisition. Our objective to be more diversified across asset class and geographies have shown results, giving our overall portfolio mix a more resilient tone. The tenant base and the quality has also improved, reducing our income concentration risk while enabling us to capture more high-growth sectors. Our WALE remains stable for our portfolio and well staggered across for our business. Let's move on to the financials. On the back of our favorable renminbi exchange rate, our NPI and DI in Sing dollar terms recorded significant percentage improvement. Our balance sheet remains healthy with no near-term refinancing needs, and we ended the period with an NAV of $1.53 net of the declared distribution. These are the key distribution details and the dates to take note, expected payment date will be the 27th September on the record date of 6th August. We continue to be disciplined on the capital management front with our 1 half gearing at a comfortable 35.9%, holding our cost of debt tight, while extending the overall term to maturity and improving the interest coverage ratios. We continue to diversify our funding sources, tapping the MTN program to complement our very strong banking facilities lines, both at onshore and offshore levels. Our hedging policies are fixing the interest -- fixing the borrowing as well as the distributable income help us to mitigate any strength around the interest rate as well as the FX environment. We have completed our 2021 refinancing and extended the maturity out to 2028 and beyond. And we continue to manage our debt maturity profile to ensure that no more than 25% of our refinancing needs come due each year. Let's take a look at our retail portfolio. This slide overviews our 11 assets across the 7 cities, which are managed out of the CapitaLand Group's 5 core city clusters. In this period, Beijing saw improved recovery in the second quarter in terms of both the traffic and sales. Overall, our portfolio has shown the rebound versus a year ago. Our portfolio's top 5 trade categories continue to register the positive rebound versus a year ago. If we scan through the different trade categories, F&B are still very encouraging and the main draw for crowd gathering, and we see new concepts being introduced. And we also see more spending towards the lifestyle and also some pent-up demand in the jewelry, accessories and watches on the back of very strong brand promotions. So we have seen the consecutive quarter in driving our portfolio occupancy improvement. And this generally support the overall recovery direction that we have guided since the last conversation review on the back of improved traffic and sales. And also, we're being a little bit more flexible as landlord when looking at the first year of lease we signed. So the leasing strategies for each mall are targeted to strengthen its tenant mix and also its own positioning balancing the near term as well as the medium term considerations. The next 2 slides shows a stable expiry profile for the second half of the year as well as our overall WALE. Standing at 1 half, we have completed 60% of the retail expiring works. You can see from the pie chart over here, about 60% of retention and a marginal reversion positive at 1.8%. So overall, our portfolio's rental reversion is narrowed down to negative 2.1%. I think last year, if you recall, we were at about negative 4% to 5% range in this full year as well as second half. So I think things are narrowing and having less of that pressure. With land bank, I think we give a little more consideration to the newly signed brands and concepts so that we continue to drive that freshness in our offerings. The next couple of slides show some examples of how we have partnered some of these local trending brands and concepts as well as events to engage our target catchment. I'll move on to the business part portfolio. This one overviews our 5 assets across the 3 cities that we have entered last year, with each city having created its niche tech part -- business park positioning. Occupancy has been encouraging and increased steadily and above market levels. We continue to see the tenant and the space occupiers come from the high growth, the innovation-based industries with expansion needs. So our positioning, our management and the relationship with the government put us in a good state to capture the upstream and the downstream sector opportunity. Portfolio reflects a steady profile of WALE about 2 years. And as at 1 half, 57% of our lease expiries have been concluded, again, with that slight 60-40 split among the renew and the new ones. We still see among the new demand coming strong from the electronics sector, the e-commerce and infocom technology, et cetera. Reversion is healthy at our business park portfolio. If you scan across the assets, I think they are trending healthily at a single digit to the double-digit range, especially for assets reaching a typical lease cycle. For example, in Innovation Towers and also in Hangzhou 2, you can see that the market rent has moved up considerably relative to those lease cycle that we entered 3 to 4 years ago. So we see opportunities to take the market. The next couple of slides shows us also injecting those core community-based activities and events to drive that environment of work, lead and play. The next thing to share is, I think, we have shared with you last year on this Nuohemule's opening at Inner Mongolia. If you recall this is part of that shop deal where we edge out the smaller, older building and invested across the road, a newer building spec is connected to the MRT. And so far, the mall has opened very well. And I think we bring to the market something that is more modern and introducing new concepts and offerings to that locality. So we're pleased to see positive feedback, especially from tenants that we ported over from the old Saihan. The majority of them are doing well. So I think this mall has a good potential for us to continue to strengthen the kind of retail offerings that we can bring to the market. The next slide shows you an example of what we have done to our retail assets, our beachhead in Beijing. I think through the efforts in the last 6 to 12 months, I think some other decisions were taken. I shared with you that we took opportunity last year to clear out some of the weaker brands, operators and to rebuild some of the talent mix and leasing strategies around the newer concepts. So you see us moving through the occupancy from a low of about 92%, 93% last year at this point to now back to normal of 98% to 99%. So all this churning, I believe, has strengthened the mall to fight and compete in the new retail environment coming through. We also capitalized Beijing's 2022 Olympics. This mall is very well located at the starting stop where they can take people from Beijing to the Olympics site, and we are collaborating with a few of the sports brands to really anchor and to drive up this awareness. So we continue to see in the second half a good opportunity for us to further rejuvenate another mini anchor space that will be coming due to really freshen up this appeal. We have set focus on executing our strategies in the last few years. I think you are very familiar with this create, unlock and extract initiatives that will underpin our work. So we'll continue to rejuvenate our portfolio composition in the next few years, especially capturing opportunities that avail to us from our expanded mandates in the new economy space to really strengthen that portfolio mix over time towards a more balanced and resilient one that cuts across the asset class and geographies that align our vehicle with China's economic growth trends. So alongside that, we'll continue to stay disciplined to unlock value and recycle capital as we have executed across 2020 into 2021 despite the COVID environment. Organically, we are also putting up our AEI lenses to look at some of our assets, looking at opportunities to further enhance them, increasing the spatial productivity across the assets to extract upside. You are very familiar with Rock Square. We have delivered consecutive double-digit rental reversion over the last 3 years and progressively carrying out our AI program to add new likeable areas to generate revenue upside, improving the circulation and the visibility of some of the shop lines. So that is steadily being progressed. On the other hand, you will also be familiar that when we acquired Yuhuating. We're really looking at the potential of the AI upside because of the anchor space recovery. So this is currently under motion with stages. I think in the fourth quarter, we'll be carrying out this into the next 1 half of 2022. So with that in place, this will provide another catalyst upside for the current Yuhuating asset. We continue to be very active in ramping up our growth. I think this chart shows you what we have done in the last few years in terms of that rejuvenation and the recycling. Since the first divestment that we have made in 2017, we have carried on and monetized a lot value for further [indiscernible]. And you also see us increasingly doing bigger ticket size of investment. So we will continue to build on the momentum to strengthen our portfolio every year. I think we are very well placed to build and add more quality additions to align our building blocks to China's future growth pillars. So to round up, I think the move that we have taken and the strategies that we have executed have really strengthened CLCT today. So our focus is very clear, to build a resilient and quality portfolio, tapping an experienced ground team to operate the business that we have competitively. So our current twin engines of the retail where the outlook is getting more positive relative to a year ago, and we see a more visible path towards recovery as the vaccine rates improve, as the economy opens up back to normalization, we see that business confidence and sentiment flowing back. On the other hand, I think the business parks have been a solid addition, and we'll leverage this good platform to participate in this sector's demand-led growth. So I think this will give us a very firm footing entering the second half of 2021, where we will continue to be active on the lookup for new acquisition opportunities that will further scale us up in that portfolio strength and the strategic direction that we want to guide this vehicle. So I think with that, I'll probably end my short presentation and open up to more Q&A. Yes. Thank you.

Thank you, Tze Wooi. We have received quite a couple of questions. So thank you for sending them through. Thank you for the presentation and congrats on the results. So we're very excited to share more on all these different points that you have brought up. So maybe I will categorize the questions such that you are possible to understand the flow. So we'll probably take this question from the different teams that come through. So firstly, let's talk about the shopper traffic and sales. So can you share with us how shopper traffic and tenant sales trended as compared to normalized level, both on a year-on-year and a quarter-on-quarter basis?

Let me just pull up the slide on the tenant sales and traffic. I think overall, if you look at our portfolio, definitely, last year's 1 half was off a lower base. So you can see that rebound reflected that. But overall, if you look at 1 quarter and 2 quarter, we are happy to show both double-digit tenancy -- tenant sales as well as traffic growth over this period of time. If you look at the numbers of -- relative to the 2019 trade sales as well as traffic, I think as a portfolio for 1 half, we are closer to about 75% level. If you look at the traffic relative to pre-COVID, I mean if you look at our portfolio, if you further want to break it down, I think the Beijing portfolio, as you know, in the first half of 2020, went through a few COVID cases that our catchment were involved. So that sort of slowed down some of this and also the restricted measures being put in place in Beijing are extra stringent. So if you were to just segment out, overall portfolio, about 75; the Beijing is probably about high 60s to 70s; and the non-Beijing is probably trending at about 80s. So this one gives you the rough picture on traffic. Looking at sales, I would say that in terms of sales, we are trending the recovery better than the traffic for quite obvious reasons. I think because of the restrictive measures, people cannot go out. But through very good promotions, through supporting our local catchment, we're still able to drive sales better. So overall, sales about 85% relative to pre-COVID level as a portfolio. Beijing is trending about 80%, and for non-Beijing, it's closer to high 80s to 90s. A couple of specific events happened in the first half. I think the higher trending recovery mall of Rock Square, I think in the 1 half, we suffered a little bit of a pullback because of Guangzhou variant. So we were also losing about close to 2-plus weeks of that active traffic and sales. And if you look at our whole portfolio, the diversity starts to build in. I think in the first quarter, the Beijing is probably lagging behind in that recovery. Coming to the second quarter, actually we see improved quarter-on-quarter recovery from Beijing. Yes, so I think that gives you an overall understanding of the color on traffic and sales.

Thank you. So now we have a question on Nuohemule. Do you see more upside for new Nuohemule, given that it's in the first leasing cycle?

I think Nuohemule has opened well. I think you will know that we have high occupancy, we are 100%. So I think we are entering a stable state. I think sales and traffic are encouraging. If anything then, we are hoping that there will be the extra GTO rent upside that we can attract with the improved sales generated. Yield-wise, I think it's trending well. I think we have guided in some of these forums that we want to open the first year around that 4% to 5% level in terms of the yield. And I think so far, based on the 1 half, if you exclude out all these one-offs of leasing commission that we paid for the preopening, we are already trending at a high 4% closer to 5% level. So I think we are in the right range of where we guided. I think in the next 1 year, there will be some organic step up. And I think with the improved attractiveness and I think the demand in terms of retailers who want to come in, I think generally, we are positive that Nuohemule will trend nicely into our guided 5% to 6% in a couple of years.

Okay. Now let's move on to the NPI performance for Grand Canyon and some of the malls. Could you maybe just give some insight on that? And do you see any downward trend on any specific malls?

I think we have shown the 1 half 2021 and 1 half 2020 breakdown revenue and NPI in the investment announcement. So also if you look at it across a couple of factors, I think you mentioned Grand Canyon. I think Grand Canyon, you know that last year, we went through quite some challenges. It's probably the mall in our portfolio that has the most negative rental reversions. And it's also probably the mall that went through a little bit more churn in our tenant adjustments. And so the effective occupancy for Grand Canyon was hovering much lower than normal. So I think if you look at the year-on-year performance, you probably feel that it's still not trending up. So that is one specific mall that we are paying a little bit more attention. We may want to -- from a rent perspective, I think it's harder at this juncture to command that rent premium. So what we are trying to do is to really strengthen the offerings and bring in concepts that can better attract the catchment. The competitive landscape is pretty stiff around that area. There are some new malls that opened, new concept stores. So there will be a little bit of this natural dilution when 1, 2 kilometers away, there are some new offerings. So we are really strengthening the team in terms of bringing onboard a little bit more interesting concepts that can rejuvenate and attract back some of this footfall that we may have lost to some competition. So this is more from the Grand Canyon perspective. But you can see that over the consecutive quarters, the committed occupancy has more or less stabilized. So I think we are really looking forward to a second half where most of this occupancy can turn income generating. So I think that will be helpful for us to drive the second half improvement over 1 half from Grand Canyon. For the rest of the malls, I think you see less rental release. Overall, our portfolio, we are giving about 0.2 months, which is under 20% of what we gave last year. And you look at some of the malls, our negative rental reversion are also narrowing. So I think all this helped us to look forward to a second better half and a couple of mini anchors are also expiring. So those are potential for us to use it, to bring some upside so that we can overall buffer some of these new concepts that we want to bring in. The rental reversion that I mentioned earlier if we were to strip up versus renew and the new, you can see us giving more consideration, letting go of the first year's fixed rent to bring in new concept. That's why that explains that higher single-digit negative. But for those that we renew, we are already seeing a little bit better traction, and we are growing at about slightly under 2% positive.

So before we delve deeper into the rental reversion, there are some questions on the trends on COVID-related restrictions in terms of mall capacity, is there any in China or are your shoppers required to be vaccinated to enter any of the malls?

I think this measures to selective come and go. So the most recent one would be the [indiscernible] where Guangzhou had a spike and some COVID positive cases were traced to the vicinity of our mall. So for safety reasons, the government wanted us to shut down to do that cleaning and make the whole mall, people, the tenants, staff go through all the testing rigorously for 14 days before allowing the mall to operate back again. So I think these measures do come and go a little bit. And after 14 days, they allow us to operate. There will be progressive easing of those restrictions. For example, they start out by allowing F&B to operate, but they may not allow the physical dine in. Typically, children's education, leisure will also take a slower pace of recovery. But as of now, Rock Square in Guangzhou, we are fully back. Fingers crossed, there's nothing. And I think the recent cases happening around in China so far. Fortunately, our portfolio has not been directly impacted. So business are still carrying on as usual.

Okay. Moving on to our topic on rental reversion. Can we have a little bit of color on the difference between the negative rental reversions and the positive rental reversion for the tenant. You touched a little bit earlier on it. Can you just elaborate a bit more?

I think because of the number of leases that we have, right, it's so voluminous. So overall, I would say that as a portfolio, the number of counter leases that we do, I would still say majority are still in the positive territory. If you look at the number of leases that we signed positive and the number of leases we signed negative, it's still outweighing -- positive is still more than negative. But for technical reasons that I mentioned earlier to strengthen the positioning and also to cooperate with newer concepts and newer brands that we want to attract them in, our way of calculating the first year rental reversion is probably a more strict where we measure the first years in and the last years out. And to co-share some of these retailers fees in terms of the upfront CapEx to attract them in, I think we are more flexible in the current climate to probably not stretch the first years fixed rent as much compared to, say, 3 years ago. So that explains a little bit on the math of how we calculate. Among the trade categories, I think I mentioned F&B. I think F&B is still a very positive trade category, and we are really taking opportunities to bring in new concepts because they are the ones that really can attract a lot of spending nowadays and also crowd gathering. And I would say that for F&B, both the new leases that we are attracting in as well as the renewal ones, we are still reverting positive single digit around that 4% to 5% level. Selective leisure experiences, things like lifestyle, the sports, I think we are also able to strengthen some of these lease renewals in the positive territory of single-digit positive. I think where we see a bit more negative for this period of time for a while already is probably the fashion category. So you can see actually during the course of the last 2 to 3 years, we have already consciously taken opportunity to reduce some of this. So while we do some AEI, where we extract upside from those mini-anchor spaces, on the other hand, we may have to shrink down a little bit on the fashion side of things and then bringing more concept. So overall, I think we are still strengthening the retail mall business so that we can capture better sales and better chances of GTO rent upside in the course of the next 1, 2 years as the general climate and the spending confidence come back. Among the other trade categories, I think you have seen the top 5 are rebounding. Services are doing well. Jewelry, watches all this little bit of pent-up demand and also certain brands are actively promoting so that it will capture some of this spending. Electronics, lifestyle, gadgets, IT-related, also good kind of spending that we see more allocation, and we see more and more nationalistic flavor towards supporting local brands. So these are some of the trending patterns that we see, that we want to continue to curate with the local brands.

Okay. So last question on the reversion. What are your thoughts on the rental reversion trend in second half of 2021, both for retail and business parks that have done quite well?

I think we have guided that for retail in the current climate, the asking rent is very competitive. But what I can say is that as we look towards the second half, I think things are opening up more positively. We went through quite a lot of lease restructuring cases last year, meaning that some of them we convert to GTO or we drop down a fixed portion. Those cases are tapering off. If you look at the number of renewals that we do now versus a year ago, more and more percentage are coming back to get more normal state. Although the first year fixed rent, we still have to give some favorable consideration. Among our malls, Rock Square, we are confident that will continue to be -- that double-digit growth in terms of rental reversion. Yuhuating is also positive in the sense that we have that AEI plan that's coming up. So that will help us to extract more rental upside. If you look at our other malls, Beijing ones, I think Xizhimen has probably stabilized over the last 6 to 12 months. We are entering a more positive window. So you do see the negative reversion narrowing. So we used to be closer to negative 5%, now we are almost like negative like 2% to 3%. So you can see that pressure easing. I think for one thing, we are going through what we did to Xizhimen almost a year ago, taking some hard decisions to really look at some of the older brands that have been with us and whether tactically we want to let them go and bring in some new ones, especially those fashion that are paying higher rent. So I think Wangjing may need a little bit of time to reposition. So I think in terms of the rent outlook, I think it will probably still hover in the negative territory. Same for Grand Canyon. Shi Fu, I think, is also recovering well. Shi Fu is also recovering well. I think we see less negative pressure on it. So I think overall, just look at the climate in terms of leasing environment, competition and with the cautiousness of retailers, I think we will strike that balance. On the business parks, I think things are a little bit more steady and positive because of real demand. And some of our assets are coming off that cycle. So we do see second half again. We still can continue to extract positive. So on a net basis, I think the addition of business parks definitely have augmented the mall volatility that we are seeing in the retail portfolio in the next 1, 2 years. So I think that's probably the color that I can share with you.

Okay. We'll just take another 2, 3 more questions on operations before we shift the conversation more to the trend portion and then the exciting part, which is the future growth. So the next question would be on the rental rebate. What was the rental rebate for the first half? And in terms of like the number of months and going into 3Q, 4Q, what set of rental rebates are we looking at?

So I mean, in terms of actual numbers, I think for the 1 half, we booked in about RMB 24 million. So if you translate that back using the same reference point, so that would come to be about 0.2 months of our portfolio retail revenue. That's -- last year, we were providing closer to about [ CNY 125 million ], which equates back to about maybe 1.2 months. So on a net basis, you can see the pressure definitely less. So where have this rental rebate gone through? I think, a significant portion actually went to Rock Square for those reasons that I mentioned earlier. We have provided, but on the ground, we are still negotiating. So this is to buffer some of the 1 half earnings risk. We also selectively provided rebate to the mall tougher trades that are under restricted measures. So that extends to some of our cinemas. And also, we also apply a little bit of rental rebate for some of the sticky debts in some of the malls for us to renegotiate some of these lease restructuring I think that centers around in item [indiscernible]. So I think that overall gives you some color that we are not having that broad based need to provide rental release. I think that move is lessening. We are now more targeted, more tactical to see how to use this to renegotiate some of lease structures that we want to do ahead of time.

For insurance claim, are we looking to distribute the insurance claims from Grand Canyon? And are there any insurance claims outstanding in other malls that we are looking at?

Yes. I think we have secured the insurance claims from Grand Canyon. So I think the idea is we should be able to get the claims back in the third quarter. So that will flow into our property income line. And so we intend to just let it pass through. Some of the other malls that have gone through a little bit of that shut -- that effect, I think it's going to be an ongoing process. I think the insurance companies are also tightening some of these clauses inside the insurance contract in terms of business interruption arising from COVID as you can likely imagine why so. So I think -- I believe it's going to be a tougher ask on this recurring basis. But I think what we have done some good lessons that we have accumulated on Grand Canyon. Hopefully, we can use that to negotiate and put up claims similarly at Xizhimen and also at Rock Square. But that's also a function of, at the end of the day, how much rent rebate we have to dish out to the tenants in deal terms arising from the COVID shutdown. So I mean insurance is there as an instruction -- as a backup. I don't think that we -- if we don't have that loss, we are probably unable to claim from insurance as well. So I think these are some of the things that we continue to work through at an operational level. If we have any flow-in from the insurance that is indeed a good safeguard and backup for some of the downside that we have really passed through in the 1 half.

Last question on operations would be the lease structure. Have your structure changed for the new leases? For example, lower base rent and higher GTO that get down. Can you provide some color?

I think that breakdown remains relatively constant. Our pure GTO -- the basket of GTO continue to only be less than 5% of our number of leases. And I think in terms of our revenue contribution, it's probably less than around that 3%, 4%. So our exposure to this basket has always been around that level. So that's being monitored quite closely. And over 60%, I think, 62% -- 60-ish-percent continue to have that higher of the 2 structure that is built in. So that remains relatively stable relative to our last sharing.

So let's talk about the latest hot topic, which is the education. The reason developments from the Chinese policies released on the education sector. So how is your exposure, I mean, to these tenants? And are there any possible or potential implications for CLCT?

Yes. So I think this is definitely a very trending topic. I think this one really caught everyone quite by surprised by the strong arm that is being digital. So we are definitely going to watch this space, how things develop. But now, our exposure to education sector, from a retail portfolio, it's probably about 3% to 4% in terms of exposure. If you combine our total portfolio bringing in the business part, I think that percentage will be shaped down by a further 1%. So that itself is not a very big exposure to start with. And then if you look at our education tenants that are in our malls, most of them are actually not the direct hit ones. Our education tenants are more of those enrichment classes, where we let the children promote their other hobbies. It can be dancing movements, music, drawing, photography, singing. Our tenants are more of such. I think the policy directive is more on those who are really giving the -- like the primary school student or the secondary students, the core curriculum's tuition. So we have less of those direct exposure. But I think generally, the market is adjusting to what it means. So I think we are also watching this space carefully. There's probably going to be some consolidation of some operators, some brands and the outlook. I think this is something that is trending. We'll continue to watch over it. But just to address your concern, I think right now, our profile types are not directly those being targeted we continue to monitor this space.

Okay. So let's move on to something very exciting, that keeps us up, trying to grow the REIT, which is the future growth. So can you highlight more about the unique focus on new economy assets? Are you looking at business parks, data center? And how will it impact our future acquisitions? So what are the targets? And does it change the long-term message of the portfolio?

Yes. I think we have a slide that gives you that longer-term road map that we are moving towards. I think if you look at the whole essence of our mandate expansion, it's to really capture the opportunities that the asset classes are providing. If you look at both China itself, we have big markets in development, the states and also the own economic direction and emphasis, we see a lot of good opportunities for us in this near term to be in the space of the new economy asset classes, which comprises the business part that we mentioned. So this -- given last year, we have built this portfolio. Definitely, we would like to continue this momentum to look at more of such. And I think logistics is also an asset class that is structurally and you can see that going to see a lot of demand because of how the supply chain distribution and e-commerce and how our lifestyle is going orientated. So these are the few so-called new economy trending things that we want to be able to capture so that we can participate in this sector's growth. Obviously, digital is also another asset classes that is seeing a lot of attention because of the lifestyle and the increasing demand for digital needs. So I think data centers also present exciting opportunities for us to look at. So the focus is really to use our expanded mandates, looking at the market. Since last year, I think we have seen more deal flows along those asset classes being shown to us. And we do see good opportunities for us to really diversify and to strengthen this new economy so that over time, our portfolio becomes a more balanced one that comprises our original retail, which will continue to rejuvenate and strengthen, trim out some of the lower performing or the shorter land tenure or in certain cities where we don't have a lot of economies of scale and the advantage. So this is going to be an ongoing process. On the other hand, we're going to really focus in bringing on the business parks, the logistics and the data center opportunities in the near term. And once we embark on and scale up, we hope that we are able to take on a little bit more chunky assets as well into our portfolio. So that in the next 3 to 5 years, we start to shape up the kind of [indiscernible] composition that we are guiding as we approach the next 5 years.

So what sort of cap rates would be attractive to CLCT?

Well, I think the cap rate is always a function of the assets, the portfolio, the location and sort of the growth prospects that we see in the asset class. But I mean, by and large, you have seen us make acquisitions within the range of 4% to 6% over the last few years. So I think we'll continue to look at good opportunities, good value in properly discount entry yield range. If you just want to break down, I think logistics currently is probably growing at about 5 to -- 5-ish, depending on the quality, size and the growth. Business parks, I think we have a good chance to between 5.5% to the 6%, early 6%. I mean these are some of the opportunities that we are looking at and evaluating.

Okay. In terms of acquisition, what your thoughts on acquiring fixed in funds that CL managers versus buying the assets directly?

We are open. I think we are open. I think whether or not we buy the single asset mall, we buy -- stick into holding vehicle that owns portfolio assets. I think we are open to such cooperation in core investing so long as the underlying assets are good ones that suit our strategy, and we can ensure the holding structure is one that is efficient, that we don't have too much of leakages. I think it's something that we can explore and look on it.

So this next question is more on the structure. So in the trust structure, they are Singapore, Hong Kong and Barbados companies. So do the unitholders own the properties in China directly or are any of the properties in variable interest entities that have caused some controversy on the New York Stock Exchange?

I think we are definitely along the right structure, I have to say. I mean since our listing, we have always incorporated with the SPVs, China entities holding the property asset itself. And all our SPVs are subject to all the local taxes necessary. And whenever we have to repatriate any of our earnings, it's always subject to the local rules as well, where to set aside the earnings reserve, we have to satisfy the relevant withholding taxes depending on whether it is Singapore holding China or Hong Kong holding China or is it Barbados holding China, we go through the same process of getting clearance before we renewed our earnings up. So our structure is one that is well tested and mature one. We are not in those [ VIE ] structures.

Okay. With regards to China's expected tightening of credit and policy measures on the property market, do you have to see any impact to the portfolio? Are there any distress opportunities in third-party assets?

I think the market is definitely one that we are watching for. I think with credit tightening, I think the -- we do survey of how some of the existing developers or owners fund their holding, would need a little bit of rethink and reshape. So I think as people are going through that -- with the 3 [indiscernible], the easy gearing or sometimes off-balance financing is no longer as easy to access. So we are definitely in the market close enough to look at potential opportunities where they fail, we'll look at it. I mean so far I would say they have not seen very distressed price being transacted in the marketplace yet. So we continue to stay active and keep watch in this space. But so far, I've not seen a lot of distress pricing in those quality assets that we are looking at.

I think this basically rounds up our questions for the future growth. We do still have a couple of questions on the business parks portion. So can you elaborate on your comment that your business parks have a good relation with the government and local support?

Well, I mean, if you look at our business parks in Hangzhou, take for example, the 20% stakeholder is actually the SOE arm, the 400 -- so called the district government. And business parks right now, from a policy-driven standpoint, I think each government is very active in wanting to curate the kind of sector enterprises that they want to base their presence in their district or in their province or in the park specific. So by having a good partner on the ground, I think these are some of the early discussions, understanding the directional positioning and the kind of sector enterprises that the local governments are actively promoting. This will help us to help plan some of our lease expiries, help us look at those upstream and downstream sector users. So these are what I meant by having a good relationship with the government, allows us to better plan and better capture some of these opportunities. And the government, they are also operating within their own KPI. So they sometimes can be pretty competitive in the sense that when they want to target certain sectors to be based in the park, we will not want to lose it to someone else. So I think these are some of the things that potentially the government would incentivize, some of the sector users, by giving them a little bit of upfront incentives, tax considerations. So I think these are some of the, I would say, market intel on directional things that by having good relationship, good partners on the ground, enable us to shift earlier. So I think this is what I -- we meant. And if you look at the -- each of our business parks over the last few years, we have built up a fairly good relationships, not just with the government, but also with the tenant specific. So when the tenants want to expand, we would also like to be able to support expansion by planning ahead some of lease expiries. Sometimes you can be moving them within our portfolio, for example. In the Hangzhou's case, Phase 1 and Phase 2, there can be a little bit of this technical shifts that we want to promote. Even in the case of Xi'an, same thing. We also have a local partner. And obviously, for Suzhou Industrial Park, I think that the signature part that's going through a lot of potential by virtue of where the economy is now, vis-à-vis 10, 20 years ago, the park also needs to keep refreshing and the government has some ideas on what are the new sector users that they want to promote. And that's what I meant by having strong relationships will enable us to plan and capture some of this upside together.

So most employees working in the business parks, are they working from home?

For our business parks, I think based on the last survey, I think we are quite clear that they are almost full capacity back to work in the business parks. Culturally, I think those -- and those sector users, I think they function on a very collaborative kind of work environment. So I think what we are seeing is definitely have moved back to that 95% to 100% work in the parks.

For the business tax rental reversion, can we continue to see double-digit rental reversions for AIT and Hangzhou Phase 2?

I think the double digit, as we guided, it's coincided with this year because they are entering their typical lease cycle. So quite a majority of them are reaching that 3-year cycle, 4-year cycle. And by renewing them, we are reverting the last cycle's rent to what the current market rent is all about. So I think this is something that we will continue to look at, but I don't think it is fair to then relate that every lease we are able to revert at double digit. I think we just want to manage this business properly. I mean the tenants also need to manage their own costs. So I think we have always guided there. I think business parks because of the strong demand that we see from those high-growth industries users, a single-digit per annum kind of rental reversion, it's where we are guiding.

Okay. We have the last 2 questions, it's around trends. So this is on the pro domestic brands that we see right now. There's a trend towards going domestic by young people in China. So do you plan for any tenant mix to suit this trend for -- to trend for automatic brands?

I think it's a definite yes. I think when we look at trending things, you're right, we see more and more local bond brands that are very innovative and able to assimilate some of the brand equity, the stories of what they see are the best practice in the industry and create a storyline around it and using a lot of social influences to promote that. We see quite a lot of such cases coming through. And definitely, this is a trend that we are looking closely with our property managers on the ground to curate and to collaborate with them. But this is not to say that the international brands are not good. I think each mall, we have to look at what the catchment demographics is all about for our target shoppers, and we have to build around that kind of leasing strategies around that. But you're right to say that we see more and more local brands, and this is definitely the direction and trends that we are working closely on the ground with them.

Do you see more competition from delivery companies for the F&B tenants? And how to upgrade the F&B tenant mix against that?

I think we don't see ourselves as a direct competitor with the delivery platform. I think we have mentioned that we want to be a landlord that provides a lot of good services and a lot of channels for our retailers in our network to be able to access a lot of customers and help drive the sales. So I think this is the guiding principle of how we approach this partnership with our retailers. We don't necessarily see the REIT platform as a competition but more like a service. And we have also, over time, enabled them to be on our own platform. So I think we can't dictate which platform is best for them. I think they will be coming an equilibrium. But what we want to make sure is that we connect all our CapitaStar members, we connect the physical catchment of shoppers, we connect them to our retailers. So that within that whole ecosystem, we are able to continuously extract spending in that. And we have the reward system, we have that point system that works itself back. So that's the ambition that we have. I mentioned that F&B is going through very healthy, and I think there is a lot of innovation going through. We see smaller formats that are not trending. We are also able to see a little bit more fusion of that menu, of what they are providing to shoppers. I think we said over the last 1 or 2 years, they are starting to capture both the sit down customer spending as well as the take off menu and also the delivery. So I think people are all trying to improve their range of offerings such that they can drive sales. So I think we want to work with all this very forward-looking F&B operators to introduce new concepts, new food ideas. And these are the ones that you see really continuing to partner. And as a result, those older data formats, they are not moving less competitive, you see us taking opportunity to get them out. I think this is going to be a continuous cycle in our area of business. I don't think there's a point where I say we have done enough. We have completed -- the work is going to be continuous.

Okay. So Tze Wooi, thank you very much for your time. We touched on a wide range of topics in this briefing, and we definitely hope that it has been insightful for the audience. So before we close out this session, can you maybe share some concluding statement that you would like our audience to take away?

I think, to sum up, I think I've mentioned that the strategies that we are working, the moves that we have taken have really strengthened CLCT today. With the expanded mandate, we see more opportunities for us to scale ourselves up and also to move the portfolio quality and strength to be more resilient. So we stay focused on this part. This 1 half, you see the financial effects of that acquisition that we made last year. Maybe one thing to take note is that it's still not a full 1 half's contribution from all these acquisition. So purely, if we just look at where things will go, our second half should see further improvement over the 1 half in terms of the new acquisition's contribution. On the other hand, we have some specifics, AEIs organically that we are working on. So that again will plants some seeds for us as we take costs into the second half and into the first half of next year. So a combination of what we have already done, what we will continue to do as well as the AEI portion, I think if we put this 3 parts together as well as our business environment moving towards more positive tone, I think we should be able to do much better as we approach the second half.

Well, it looks like the second half and our future plans sounds really exciting. So thank you all for joining us for this call, and have a great day ahead.

All right. Thank you, everyone. See you.