CapitaLand China Trust (AU8U) Earnings Call Transcript & Summary

Hi, a very good morning to everyone. Thank you for joining us for CapitaLand China Trust's First Half 2023 Results Earning Call. I'm Nicole, IR of CLCT. So we have the best today, Tze Wooi, CEO; Joanne, CFO; and You Hong, Head of IPM. So over the next hour we will be having a short presentation before we proceed to our Q&A session. We'll be taking questions after the meeting. [Operator Instructions] So let me pass the time on now to Tze Wooi.

All right. Thank you, Nicole. Good morning everyone and welcome to our 1 half financial results briefing. And this is going to be a very heavy reporting season for all of you. So let me just dive in quickly into the results pack. I think for the 1 half results, I think our portfolio in terms of our shape and size, I think it remains fairly constant. I think total assets is about SGD 5.2 billion, the share that we have, 12 cities are relatively the same. But what we're happy to update is that in terms of the occupancy, you would see that it has improved relative to the last quarter that we have updated you in terms of the 1 half announced DPU, that translates into a stable and attractive 7.1% distribution yield. If you look at the 1 half financials, I think there are quite a lot of content and [indiscernible] to it. So let us just break it down for you so that we can appreciate it better. I think the macro environment is such that this 1 half results we are translating the renminbi earnings back to Sing there is close to about 9% of renminbi weakness. I think if you look back our last 5 years of reporting season is probably the sharpest reporting period of renminbi business. So in terms of our revenue and NPI as a portfolio, we are trending about 0.8% year-on-year versus last year, largely driven by our retail portfolio who has improved. You'll recall in 1 quarter when we had this discussion our retail was down, this is 1 quarter last year. But as we roll on to 1 half you start to see it picking up in terms of the revenue and NPI of 2.7% year-on-year improvement. A few things that went through. If you look at our retail portfolio of assets, the key and the dominant ones are doing very well. If you look at like Xizhimen and Rock Square in terms of the occupancy, in terms of the sales, in terms of the traffic, this as reporting very healthy year-on-year growth as well as a consecutive quarter growth. So the overall, the retail in terms of footfall and spending are also able to capture because of our AEI efforts that have been done in the past few periods. So you start to see as people return and people spend, we are capturing that kind of spending and footfall. On the other side, 2 of our malls undergoing AEI. So you would expect a little bit of downtime in this 1 half of reporting essentially is the Grand Canyon and the Rock Square. That leaves us with basically 2 assets in our retail. There's a little bit of a drag for this 1 half reporting. Essentially, it's the writing down effect of Qibao as well as the major tenancy adjustments that we are churning quite a lot of tenancies and then giving some kind of rent report to some of our tenants in Xinnan. So that gives you a quick sense of 6 to 7 of our major retail malls are doing well, showing year-on-year growth. 2 are drag and another 2 on the temporal AEI downtick. Moving to the business Park you can see that 1 half NPI reflects about 2.9% drop versus last year, very much driven by where we started at the end of the year. If you look at the first quarter the effective occupancy had been much lower relative to last year. So that is the kind of effect. But let's say that you can see that the leasing activity and the conversion have improved relative to the last quarter. So out of our 5 assets you see that we have been able to convert much better and for reversions they continue to stay in the positive trajectory. I mentioned that if you look at where our operations are trending, 2 are already very much into third quarter right now. I mean you are doing Grand Canyon, you can see the supermarket anchor space. So we lost the car anchor space revenue in 1 half but you can see they are completing. Level 1, they are completing in July. So that should contribute in 3 quarter and the basement will start to contribute towards the fourth quarter. And for the Rock Square, I think most of the work separately have been done. So for both the basement and the Level 3, we are seeing that progressive completion and they should start to contribute income in the third quarter of this year. On the capital management side I think we are able to continue to bring down our onshore cost of debt by early refinancing, both because of the onshore we are enjoying a little bit of the base rate being reduced. Over and above that, we are also able to refinance some of our passing loans at improved margins. So all in, I think onshore we are able to extract that opportunity. Overall, if you look at where our debt [indiscernible] are, I think we have done everything for FY 2023. As we look at 2024, we are essentially already having secured and in advanced discussions. So essentially for the next 1 over year, we have no refinancing kind of worries on our part until 2025. Debt maturity, 3.8 years, I think we took the opportunity to increase the [indiscernible] part of our loan book. ICR continues to be healthy at 3.4x, we are above the regulatory requirement, hedging policy consistent at about 74% fixed at this period. And I think so far we continue to receive, I would say very good support from the debt capital markets as well as the banking community. On the [indiscernible] front, I think also happy to report that we started the year wanting to green some of our portfolio. So as of 1 half we have completed what we set out to do and we are tracking the progress towards our 2030 target. I think I mentioned roughly on this part, if you look at the renminbi weakness essentially translated back that resulted in the DPU of about 3.7%. If we were to apply the same renminbi rate as we were last year's rate I think that worked up to be 4.22%. So about a 2.9% improvement versus last year on constant FX. Balance sheet, I think, continues to be healthy. I think we ended a little bit weaker on the translation impact again. So NAV is $1.33. Gearing wise, I think reflecting the RMB translation weakness [indiscernible] by what management had done during this period is also to actively bring back with our cash from onshore to reduce some of our temporary lines drawn because in the first quarter and we actually get some distributions for last year. At the same time, we also use some of our cash onshore to reduce some of the onshore bank loans. So that helps us maintain our gearing at a healthy level. Our cost of debt remains marginally up, reflecting a bit of the floating rate side of things that are inching up. I think the rest of it, I think we have mentioned. Good thing to note is we are enjoying the onshore easing of the interest rates. So I think we produce a table to guide in terms of seeing every 10, 20 or 50 bps movement, what does it translate to the underlying distribution. This is the debt maturity tower. I mentioned earlier, if you look at it, essentially, we don't have a lot of debt to come to the market to refinance until 2025. We are very much already finishing everything for 2023 and 2024. This is the distribution date, just a quick information. Rolling to the portfolio side, I think let us zoom in. I think in terms of our portfolio, I think, continuously we are fine-tuning the kind of trade categories and the retail mix that we think going forward each of our market can be a bit more competitive and you can see we are pushing a bit more on the F&B, the services, leisure entertainment, the jewelry. These are the traits that we see the consumers of today are spending a bit more in the physical space. And progressively, you can also see us reducing exposure to the fashion. So today, if you look at our full portfolio in terms of the revenue diversification, I would say, is much more healthy. At the new economy side, we continue to push up on sectors that we are seeing local demand, especially in the areas of electronics, engineering, the biomedical, et cetera. Real estate, I would say, relatively constant, especially for the kind of asset classes that we are in. And moving to the retail specifics. If you look at where we have shown you earlier, second quarter essentially our traffic and sales have really rebounded very well. Last year, at this time, our Northern portfolio have suffered a bit more. So this time, you can see really the Northern portfolio, the 3 Beijing assets, including the inner Mongolia and have been really helping the year-on-year improvement. Some of our dominant malls are really capturing the kind of sales and footfall. And overall, if you look at how we have been supporting the tenants and how we've been driving sales, I would say that across our malls the retailers' occupancy costs have also been trending towards a more healthy level. So I think this actually sets a stage for us that as more confidence come in, and the retailers' confidence come in, business activities based, I think that we can look at improving some of the rental discussion as we end the year. Occupancy, I think I mentioned, I think if you look at a few major assets, I think the Xinnan, it has gone through that difficult time of churning, heavy churning the tenancy. So in terms of commitment, we have brought in quite a lot of new tenants ending the period. The rest of the key malls, I think they are trending at a quite healthy level other than a period end, some kind of transitional vacancy. One thing there was 1 or 2 tenants that dropped off in June but as we speak today those spaces have been filled up. So in terms of the 1%, we are almost back to the 95% level. The rest of it, I think, are fairly steady in terms of the kind of asset plan that we are pushing. This is fairly constant for the rest of the year. These are some of the updates that we want to highlight to you. Overall, if you look at the few assets where we combine the AEI effect, I think we are, as a portfolio churning about 4% in terms of uplift, led by the F&B. I think F&B continues to be a good space where there are a lot of dynamic concepts that we can introduce to our malls and I think they are capturing. So if you look at the kind of activities that we're looking at this time, I think we are looking at 2Q entering a much better business window. You look at the volume and the kind of activities, 80% up in terms of leasing activities conversion. And these conversions are coming from that broad base of target sectors. This is some of just updates that I would like to give you to inform about what we are doing. Moving to the new economy. Similarly, if you look at where we ended the year it was a very difficult period, I was mentioning the COVID is one of the leasing decisions being delayed. As we roll over to April, May and June, we start to see that pickup in activity, and that's also reflected in the occupancy that you see through in our assets. The 2 Hangzhou are still trending a bit below relative to last year, but at least in terms of leasing activity we do see that healthier pick-up. And if you look at the kind of sectors that we are signing in the kind of volume that we're signing in, I think this again demonstrated that 1 quarter was a very low one and if you calculate the 2 quarter is much better. So we put that as small in terms of their opening, in terms of the business environment improving, that will move us into the healthier level to look at some of the occupancy and the kind of target sectors that we want to attract. Overall rental reversion continued to be healthy at about 3%, 4%, led by duty sectors like the electronics and the engineering that we are targeting. These are some activities that we're looking at our park in terms of moving them together as one. Over at logistics, I think it's a small portfolio that we have moved in. I think relatively to last quarter, I think Chengdu has come down due to some of the tenancies falling off during the period end. 2 tenants potentially just moved away from us to view to look for something else that they can plan better for their next 2 to 3 years in terms of the business. I think as we look forward and plan for ourselves, I think our focus continue around. I think you have seen us really extracting value from our organic side of things, our AEI side of things. You saw that happening last year, starting with [indiscernible] followed by Wangjing and then Rock Square, Yuhuating and Grand Canyon. So this is the kind of staggered AEI of value extraction that we have progressed inside. Principally is to ensure as the economy opens up, as more people come in, as small people want to resonate to new spending patterns. We are able to offer them the current space and the current experience. I think that is actually what we are doing in terms of our retail portfolio. At the same time we are also actively looking to an opportunity to monetize some of this retail, essentially they have matured and in terms of the growth profile, they no longer be there. So I think this is something that we are definitely focusing to unlock value. At the same time, I think once you do that, we are constantly looking at improving the portfolio quality in terms of the income and the diversification. So we are looking into new accretion kind of acquisition that will help to strengthen our overall portfolio duration, account diversification and geography and asset class and revenue stream. So we continue to stay focused to want to do that. I think most of you are very keen to understand how would the CV development help us. We're definitely starting with policy details. It's seeing how we can together with our sponsor participate in this area. And if we can successfully do that, I think that's also another active channel for us to balance our holdings and continue that journey towards our more balanced, that [indiscernible] kind of direction that we want. I mentioned already some of this. So you would see this happening very soon in the third quarter, which I'll update you in the next 3 months, but essentially the Grand Canyon Level 1 has already open. And now we're working on the basement. So once they start open, you can see the income enhancement that will be flowing in at a relevant period. This is Rock Square. Essentially, they are also expected to open in the third quarter. I think overall, if you look at where the China's economy is shaping, I think the 1 half, I think all of you are very well aware. I think more importantly is to look at some of the policy details, I think the government has come up this year. I think they have a GDP and economy target that it will be very important for them. And I think you can also see the combined support, wanting to create back their business competence and consumer spending. So on our side, I think we are really preparing our portfolio to be able to capitalize once this business confidence return. I think retail, we are definitely looking into a better second half for most of our assets, trending where we are in terms of -- if you look at the second half. Business Parks, I think there's some softness because of our effective occupancy will be below last year in the second half. So I think we do have some softness in terms of the numbers. But that said, I think 70% of our business are trending up. I think the 30%, I think a slight down. So on the net, I think we should be looking towards a better second half. I think with that, I think I will just move over to the FAQ. Over to you, Nicole.

Thank you, Tze Wooi. So now, I would like to open the floor to questions and Khi on the line, Khi can I pass over the [indiscernible]?

Yes. Just a couple of questions from me. Maybe I'll start on the first one. Could you share a bit on the tenant sales recovery? It's actually very surprising that you made sure to achieve tenant sales at above pre-COVID levels. What's driving it and how should we look at it into the second half?

I think if you look at the first half tenant sales, the big drivers essentially were our dominant malls and also driven by the Northern portfolio. Essentially Yuhuating is the main contributor. If you look back at where Yuhuating in this half, all the AEI have already been done. So they're already starting contribution, whereas last year, part of that area are undergoing their AEI effort. So you have more area and more tenancies in the new space that are contributing towards the improved tenant sales. In terms of sales, I think it continues to be led by the F&Bs, continue to be led by the services, jewelry spending and some of the built-in health care and IT spend. So I think Yuhuating a big contributor in that area. Similarly, in share we have Nuohemule. So these are true assets that if you look back last year, they were having a little bit more of a restrictive trading period. So if you look at this half's environment, they are much able to capture the footfall and the spending. Xizhimen, you partly I think is because of the AEI in 1 half, so you don't see a lot of contribution from there. Net, I think if you look at where our malls were 1 half because of restrictions and this half or are put back and with the AEI in place, I think this is the main driver and that move our 1 half sales to be there. Second quarter was especially strong year-on-year. And if you look at second quarter, we have also moved slightly ahead of 2019, predominantly driven by services.

And I mean there's always these concerns on a very weak China retail recovery. Are you seeing that in your malls? I mean, your tenant sales, I mean actually, not just on a year-on-year because last year we had COVID but on a -- versus a pre-COVID level, why are the malls being able to deliver higher than pre-COVID sales?

Primarily driven by some of the tenancy changes that we have injected. I think once you have that new concepts and offerings and new brands that you bring in, coupled with the overall footfall coming back, if you can have certain concepts and certain brands that are able to capture people who want to come back and have their physical social interaction, I think that's where the spending is being captured. But that said, I also want to let you know that increasingly, there's this application where we see -- I think those malls that we have AEI, those malls that we are continuing to have the [indiscernible] characteristics in its sub-catchment are able to do that. But there are certain malls that are weaker, we can see that they are not able to turn as much of that sales despite footfall coming back. But on the net, I would say, 6, 7 of our dominant assets are doing well. 2 of them are under AEI and the other 2 are -- no, 1 is widening down, so there's a drag and the other one, Xinnan, is really going through a lot of major tenancy adjustments. So that's also a drag.

And maybe you can touch on the logistics part. We noted that Chengdu are seeing occupancies come off over the last 2 quarters, is there any time line that you would look to backfill some of these vacancies? And are you expecting negative reversions coming from logistics?

On a portfolio basis, I think most of our leases would only come into renewal status in end December. So we are working definitely hard to look at -- looking at prospects and also talking with the current tenants. But I think the overall environment this year especially for the typical logistics, especially the big space users, I think we do feel that their outlook in terms of the business it's being moderated down. So I think a lot of the tenants are also relooking at the space footprint. So we do feel a little bit of the demand supply challenge. So I think we are in the stage where we are actively looking and looking for alternatives so it's very hard for us to give a precise number. But I think given where the supply and demand imbalance and looking at where some of these big space users are consolidating, I do feel that you want to fill our occupancy, I think rent is something that we have to -- been willing to go lower than passing. I think that's where the market trend is right now.

And final question from me. In terms of, let's say, divestments and maybe even asset recycling, would you still be looking at new economy assets? I know that you are probably looking at divesting some of your older malls. But given the current weakness in let's say, even logistics and the slower backfilling for Hangzhou, are new economy assets still a stable and resilient as they should be?

Yes. So in terms of the monetization, I think for the mature assets I think it's quite obvious that there are some of these assets that we have been holding since IPO days. So they've been with us for almost close to 20-year journey. So I think that's something, I would say, quite prime for us to look at, avenues to monetize if we can. So if we can successfully monetize some of this, I think the first way to look at where we want to deploy, I think it's still being the new economy space and between the new economy space I will prefer the more mature business parks that's already having that track record and knowing that they are able to command in that city, that kind of stability, and this will also play into the entry cost and the entry view that we are looking. So all in, I think we continue to stay on that track in order to want to reconstitute our retail, bringing new economy that will enable us to have the NPI, new pickup. I think all said, I think that space will continue to help strengthen our overall revenue diversification and streams. So I think that's something that we are definitely focusing to pursue. Logistics, I would say, because of where we are as a group and also looking at where third-party opportunities are, I think we will keep that look up, but I think it will be a bit more circumspect in some of these underwriting assumptions because I think logistics is going through a little bit of the demand supply imbalance for a period of time. I think we need some things to settle down that.

Thank you, [indiscernible]. I'll pass the time now to Geraldine, Geraldine please?

My first question will be regarding the retail reversions is that our 4%, would you say that this number is boosted by Yuhuating AEI completion? And if so, what would it be if we look at the malls that was on a same-store basis?

Yes. So 4% is with the AEI, that you are correct. So if you were to remove it I think individually each mall would behave differently. But on a portfolio basis, you got to just look at the organic side of things, we are probably negative, single digit as well.

Okay. So given that you have another 4 AEI to take completion in the second half, will this 4% be sustainable or even stronger if you look at it in a second half basis?

I would say our first half because of the volume of leases that we have already secured, that played into a large part at plus 4%. So the number of leftover balance that we can record in the second half, I think in terms of the volume is slightly lesser than 1 half. But on the net full year, we should -- the positive territory we still have a bit of leases to be secured for some of the AEI spaces like in Grand Canyon. So that will come in in the second half but I think on a total basis, I think plus 4% have factored in more of the AEI effect rather than the second half. The second half, we have less of that volume.

Okay, understood. With regards to tenant sales second half, do you see this sustaining or even exceeding pre-COVID levels, because taking into account of our travel-related items and with legal ticket items as we go into winter for China?

I think the retail sales is really going to be a function of how things shape up in the second half in terms of overall business and consumer confidence. I think you already see 1 quarter was a very slow one, second quarter improved a lot. I think it depends a lot on how people view the outlook as they approach the second half. On our part, I would say that more of our malls are rolling into position to be able to open up and do business. I hope that by the extension, more of our spaces are able to attract footfall and [indiscernible] help us in that number. Yes. I think from a retailer standpoint, we are definitely moving into an environment where today the rent structure to sales, the kind of level of occupancy costs have moved into a much healthier territory relative to the last 3 years of very uncertain COVID period. So we just ended 1 half of so-called no COVID disruptions. So I think as we move to a second half [indiscernible] I think as retailers confidence come back, as consumer's confidence come back, that will really help to move their business and I think by the end of the year, we are in a much better position to discuss rental growth. I think this year is going to be a little bit of that, us repositioning ourselves, retailers resetting some of their outlook expectation. I think as we let this environment improve and recover, I think everyone will then move back to what's the more pre-COVID kind of mentality because the metrics are now moving more towards that level.

Okay. If I can just ask some more on the business park. I see that the e-commerce and infocom leases looks a bit slower this quarter. I'm just wondering if it's a function of shifts in business dynamics in the Hangzhou submarket, are you able to give us some understanding of what is happening there?

Yes. Because our Hangzhou business parks have always been more exposed to the e-commerce community, big space users and also multiple small enterprises who are supporting the online e-commerce, the kind of rate interactive, the kind of consumer and business. So I think that part of it, a lot has gone through the last COVID period. I mentioned to you in the 1 quarter, a lot of the business models are being reviewed, some of the smaller players are not able to continue. So you do see a bit of that leases being churned and as we look at the next phase of where we want to target, I think we are moving slightly away from the exposure. So I think that's a reflection of that passing, which is very heavy towards this space and as they drop down, where are the others that we are capturing. So you do have a bit of that lease in lease out, we expect as a [indiscernible].

Thank you, Geraldine. Can I pass the time now to [indiscernible]?

My first question is regarding the properties under AEI. I understand the -- I think 2 AEI malls, could you share the pre-commitment levels for these 2 malls and perhaps what sectors are these tenants from?

Yes. So we have a slide over here, if you look at Rock Square, essentially from Level 3, we are actually reconfiguring the F&B. So basically, the commitment is 100% and as we speak they are already preparing for opening into this quarter. [indiscernible] at the basement, this is where we took back some space. Originally it was leased after the anchor so we actually recovered some of this and then we then we configure it into about 20 other units. And I think we are injecting a little bit more of those variety of offerings, focusing on specialty F&Bs, a little bit on games and toys. So that -- these is going to be the basement where they will come in through the MRT. So I think this is something that we have really done in terms of expected commitment rate is about 98%. I think over at Grand Canyon, again, if you look at where things are, again, we are taking opportunity to reset the whole basement. It used to be filled out by one big anchor supermarket. So that supermarket is no longer competitive so now we are re-cutting the space. We are only re-offering more modern smaller format supermart to service the catchment. The net balance of the area, again, we are injecting a little bit more variety, looking at some of these retail offerings as well as F&B. 72% has already been secured, I think we are close to 80% in terms of some of the advanced negotiations still within the process of being approved. I think we expect to complete everything by the fourth quarter of the year.

And my second question is regarding the -- I understand there's lower interest rate environment in China as seen from your 85 basis point savings. I'm just wondering also, is there like positive carry on, say, acquisitions in the market or is there something you're looking at before you make a move?

Sorry, I missed the second part of your question as in the positive carry or something?

The positive carry on acquisitions in the market.

Yes, definitely. I mean if you look at where the cost of debt is trending in China side of things, right? I mean we have always been taking loans that's packed to the LPI and you would have seen that the LPI has progressively come down. I think the LPI today is about 4.2. So looking at where our assets and credit are, we are able at times to do better than 4.2. That means -- how the bank's quote is a function of the -- maybe they can give us how many percent below the LPI. So we are on this side of the equation where we can negotiate. I think that banks are comfortable with our name, with the kind of business, with the kind of credit so we are looking at 4% and sometimes we can even look at slightly below 4. So definitely, it will help us as we plan for new acquisitions. In terms of the kind of funding mix and the kind of that mix onshore and offshore. In the past, we take offshore debt because it's cheaper. Today, I think we are structuring more towards the onshore debt if we look at acquisitions that we can structure around that.

My last question is regarding shopper traffic. I understand you showed that shoppers sales are actually above pre-COVID in second quarter, how does shopper traffic look like?

Shopper traffic, if you were to compare year-on-year, again, it's a big increase in the second quarter. I think you see over 50% improvement in the second quarter, and if you look at the full 1 half, I think we reported that number is like over 32% improvement over last year. But relative to pre-COVID we are probably depending on where your portfolio and assets sit. On a net basis, we are inching towards the [indiscernible] to 90% level. Some of the better ones are closing in at over 90%. I think that's where we are in terms of traffic. It's quite consistent with our data point elsewhere. I think in terms of footfall, we may not be back to pre-COVID level. But in terms of sales, I think we are closer. Sales is always being able to pick up slightly better than traffic compared to pre-COVID times.

I see. So actually, the shoppers at your malls are spending more similar to Singapore?

I would say in a way that people who come out to the mall are now more purpose oriented and I think so long as your malls are oriented towards the kind of concepts that are able to attract them in and you do have fresh offerings, brands, concepts that interact with them well, I think you do see that spending coming back. But that's it, not all 3 categories are enjoying it which is why there's a lot of work to be done for individual assets as you reposition yourself where do you want to like them, when you want to increase the kind of new brands that are marshalling in the market. I think these are really details on on-site that you need to be able to catch and bring them in. And hopefully, you bring them in, in the first wave, and therefore, it has an overt effect. I think that's exactly what we are trying to do to AEI and reposition ourselves as we look towards capturing the second half recovery.

So maybe I can add onto that, recently we went to our malls, within our malls and Grand Canyon, we did the AEI and when we visited, a lot of the stores are actually a very good direct with that. There is even horse-riding and there's also a lot of this area where you can interact with animals. So there were guinea pigs, fishes, [indiscernible] and there were so many parents that were just crowding there and putting their kids there. I even saw a parent falling asleep beside their child as they play the [indiscernible]. So I mean, all these different concepts are actually good in the sense that it's actually a case where you can leave your kids there and then they just sit around and they just talk to one another and there's a future here as well. So I think a lot of our concepts that we have done in [indiscernible] feels they must actually pulling that in. We have been very active in terms of our pulling of the tenant and trying to bring in all these different things that will attract their children into the mall. And therefore, the parents have to be there, take care of them, buy a drink and the whole entire ecosystem [indiscernible] is sort of set up in place.

So this one if you look at our track category shifts over time. I think we acknowledge that people go to the mall nowadays is to have that kind of experience and Nicole has just gone to elaborate that unless -- just moving from shop to shop and buy physical goods, clothes, et cetera. So I think we've got to really think harder on how to use the space well and alongside that, we will try really the productivity of space and being able to connect with the shoppers. I think this is exactly what we are trying to do. The core dominant ones, we will hold and do all this AEI and obviously re-positioning. For those that are weaker it is very hard for them to compete because of certain constraints. I think it's within our planning to look for opportunity to exit. So that overall, the core retail portfolio become a stronger one to capture the consumer spending.

Thank you, [indiscernible]. Hi Derek, would you like to share your question please? I think there's something wrong with the microphone because we can't hear you. Well, I can see that you've unmuted yourself.

Hello good morning. Can you hear me?

Yes, now we can. Thank you.

Wrong headset. I just had 2 questions from me. I want to hear your thoughts again on the interest cost, right? So on Slide 13, I think you did mention before, you wanted to pivot towards more IMB, there's some interest savings but here based on what I see, it assumes that you're doing just a like-for-like Sing dollar kind of replacement. Is that the case? And where you -- where should we expect your interest costs to land by end of this year?

Let me just -- sorry, you're looking at our [ penetrate ] tower slide.

Correct, correct. Yes.

Yes. So this one, if you look at, its 150, is offshore Sing loan that we have refinanced, so you are right. The balance 120, we kept it there. We are exploring some opportunities to see whether we can refinance it using alternative that is not a Sing or direct Sing. So that is something that we are exploring. On how we intend to shift our loan books, right, if you look at where things are, today, our onshore loans are about 13%. If we can refinance something using alternatives to replace the Sing, I think that will push us towards the close of 20%. And if we were to be able to do some portfolio reconstitution when we do acquisition we look a little bit more on the onshore side of things. I think potentially that will move us closer to the 25%. So that's our planning for the year. If you look at June, we are at 3.54 in terms of average cost of debt. I think all things constant as we go into the second half I don't think that number will materially change because most of our 2023 refinancing have already been completed. So it's going to be very marginal if there's any movement. I think the new refinancing that we have done early, that benefit of cost savings will start to contribute in the second half of 2023. So that one is not factored into this cost of debt yet.

I see. Okay, so just to follow up on this, does it make sense for you to tap the CNH market, the offshore RMB, is it effective or no?

I think we are exploring with various banks to see this is -- whether it is cost effective for us. From our point of view, I think we would like to have a little bit of that natural hedging where we can. I think onshore is the more natural way, so whenever we are able to reconsider our portfolio through acquisition, we'll take on a little bit more onshore so that it moves us towards what I mentioned that 20% to 25% loan book ratio. Offshore, whether we can do a bit of all this in that take, whether we can raise CNY or we can raise Sing but convert to renminbi kind of interest, I think these are all potential hedging kind of instruments that we are all working on.

Okay. So just one more follow-up question for me is your retail performance. I send some optimism for you and we're quite excited about the second half outlook. But just wondering also your tenants also and your -- for a number of quarters of either very low or no profitability. So do you think that we should be expecting, say, a few more quarters of very strong say, tenant sales and then before you start to push the rents, just wondering -- trying to get a sense around how would the lag between your reversions versus tenant sales would be if we adjust to the project next 6 to 9 months. Any guidance on that?

Yes. Very good question. And I think I mentioned earlier, I think a lot depends on the second half that feel good confidence factor coming back. What is good today is I think the rent structure to the sales are at a more healthy level. As the average during COVID period, we are trending like 30%, which is on average, I mean, it's not that healthy. But today, we are trending more towards at 20%, which is at a more healthy level. So I think if you let this run its cost for the next 2 quarters thereabout and if the sales can continue at this level because rent side, I think we have already restructured and supported them for the year. So I think if the sales are there when the next cycle comes in I think we are able to talk a bit more on the rent. So 2024, I think potentially, it's where the stronger malls can see better outcome on 2 fronts. Most of our so-called existing leases that you may have signed with tenants during the COVID period. Let's say, give them the 3-year cycle, they will be coming out from a lower base as you approach [indiscernible].

Okay. So I can say 2024 much brighter prospects, okay.

Thank you, Derek. I'd like to pass the time to Tara [indiscernible].

My first question is on potential divestment, right? I assume you're referring to retail malls, can you comment a bit about how this transaction value and cap rate compare versus book?

I think if you look at some of our existing retail assets, I think there are some, I would say, easier fruits to harvest and I mentioned earlier there are certain assets that will help through since IPO days, those are actually still help relatively low to our books. So that is potentially one that we are working -- focusing. If we can monetize that one, I think, will be good in terms of the value to recycle.

And just to clarify, this is on your current book value, right? Not the IPO price?

That's right. Because we have been revaluing it.

Okay. Got you. And the second question, if you were to take RMB loan I assume you will use it to repay the offshore loan, right? But is there any issue repatriating money out of China?

Yes. The borrowing that I mentioned earlier is more the offshore kind of borrowing structure. I think you potentially may know about all these [indiscernible] bonds, so these are some of the areas that we are exploring. So the thing that we want to is such that the proceeds can be used to pay down our more expensive Sing dollar debt tower. I think that's the -- that's why we want to do it. The onshore one is more for searching onshore itself. I cannot raise onshore renminbi and repatriate now. So that contributes to that.

I'd like to pass the time to [indiscernible].

So the retail malls sounds that they're doing a lot more better than the last time we spoke. But I'm just wondering which ones you plan to sell, I mean, to divest? And which ones are sort of well non-negotiable, which ones you would not divest at all on any terms, if you could on those? And are all your retail malls -- all the retail malls you plan to divest, are they financed by the offshore loans? And how does it -- how does the mechanics of it work? Because when you divest the mall and the loan is offshore, you won't be repatriating the money offshore, will you? Because you want to buy another asset and finance it with onshore debt?

Okay. I got your questions. I think first and foremost, I think we want to keep the strong dominant malls that continue to be competitive in the catchment that we operate our business. I think that fundamentals continue to shape how we look at things. So if today our biggest contributors are Xizhimen, Rock Square, Wangjing, Xuefu. Nuohemule, we just opened, we're parting them just AEI, this potentially would be assets that I want to hold onto. It doesn't mean that this identification would mean that if there is a good offer for us to monetize I may not consider, I'm not saying that. But today, I don't think people have given us any attractive enough offer to make that move, right? Then another category of retail assets are the more, I would say, performing at a level that's below the line from our own expectation. This would include, let's say, Xinnan, the small ones like Aidemengdun. In terms of new, Grand Canyon is also on its way up but still below the line. So I mean from a reconstitution perspective, if you want to strengthen the overall quality of the portfolio, if there are good exit opportunities I think this would be some of the priorities. One that we have been holding since IPO days, like Shuangjing, it has given us the very constant one like kind of view from IPO to today but it has also reached a point where we have to really think through that if we want to continue we potentially may need to re-CapEx and redevelop. So between whether we want to take it down to redevelop vis a vis if there is an offer for us but it makes sense to us to just exit. So I think these are some of the deliberations that we will look at it. I hope that gives you a bit of a sensing on how we look at our projects at our core and what to sell and in what prices that make sense. On your second question on the borrowing side, I think like all of our divestment, subsequently, if we were to divest because of our offshore structure the proceeds will slow up after you settle on your relevant taxes. How we then intend to flow back in, again, depends on the acquisition structure. I think we can explore setting up a new onshore vehicle to do onshore transactions. So I think that is one way to look at it. And when you have an onshore transaction -- onshore entity that you set up you can then bring the money in through both equity channel and also being able to take onshore loan. So I think these are ways that we can look at. Some of the cash flow, if we have an existing onshore shareholder loan, I think that loan potentially we can see how long we can keep it onshore to fund some of our other AEI needs. So I think this has been the 2 ways we have been looking at how we want to rebalance our capital structure. But because of our offshore nature, the proceeds would need to come back before going back in again.

Okay. So then the next question, can I just ask one more question? You said that -- actually now they are 2 questions. Because of what you said about Shuangjing because you mentioned that it could be redeveloped but could -- would you partner with your sponsor if you decided -- I mean, you haven't decided -- if you decided to, could you partner with your sponsor on that? That's question one. And the second one is, you said that you and your sponsor are studying -- I'm not quite sure studying what in terms of the C REITs, are you studying to do some sort of a second dream listing or what would you be studying?

Yes. So essentially, the first point, whether we will consider jointly redevelop with our sponsor there I think it's always part of a possibility. I think it has seen some of these REITs and sponsor, how they will stop certain assets, et cetera. So I think these conversations will continue on all those fronts with the feasibility and the economics work for both sides. So ourselves, I think we must be convinced that with redeveloping have to take the asset down for construction, redevelopment, planning for the next, let's say, 3 years and whether this move at the end of the day, whether it's economic beneficial to us or not or do we then monetize it and then we discuss later whether after someone else finished the development then we buy them. So I think these are potential business structures that we can think of vis-a-vis let's say, [indiscernible] it to someone else, if it makes sense to us quite fast. So I think the options are there but I'm not saying that we won't consider but I think we will land on something that's best for ourselves. Your second point on the C REITS, most people who are active in China and who have exposure and platform, I think the good news is that it started off with very infrastructure-related assets. Toll roads, water and then business parks and in logistics and now they have opened up to include retail for the core consumer infrastructure, essentially is the mass retail servicing, the middle income, the common people. So I think because of CapitaLand's platform, I think we stand in a good position to be able to work out with the regulators to study how do we become part of civic participation. When I say participation, like what you see, it includes how we can send it up, how we can partner with the existing structure, we can think about originating some assets. Also these are being studied because the C REIT regime and the policy details are not like the current S REIT regime that all of us are very aware. There are very policy fine print that we need to discuss with the regulators. So I think that's where we are in terms of studying the policy to see how we can participate in that area. For CLCT perspective, I think if that thing can certainly take off, I think it just creates another engine catalyst for us potentially to recycle.

I'll now pass the line to [indiscernible].

Okay. So 2 simple questions. First one is on FX income hedging. Can you remind us on the policy? And as of this point, is it fair to say that RMB weakness has -- the magnitude of the RMB weakness has probably been fully captured as of first half?

For the first half, you have seen that the RMB weakness of close to over 9%. Our hedging policy has always been to hatch at least 50% of our distributable income. And I think we have consistently been rolling that policy alone. So for this round of distribution because of some of our hedging contracts there, it has also helped us to cushion a level of that close to 9% weakness but we are not 100% kind of hedging policy. We are hedging 50% of our semi and normal distribution. So we will review along the way to see whether it makes sense for us to consider other hedging instruments or we can potentially increase some of this hedging ratio, taking into account the cost of entering. So I think this is something that we have always been applying consistently. How things would shape up in the second half of RMB, I think -- I mean, the P&L will always have a bit of lag effect relative to the spot, right? So I think that this is where things are. Today's spot is probably around 5.3% plus, 5.4%. If you look at the average rate of where we have translated back P&L is about 5.2%. So I think directionally, we may be still seeing a little bit of that softening of the RMB entry in the 2 half. I think that's where I see things currently.

Okay. And then for logistics, should we be expecting negative reversions based on your earlier comments? I think in the very first few questions if you can quote to us like what is the magnitude we should think about? Because some of your peers are expecting China logistics reversions could be the tune of negative 10%. So I was just wondering whether it's something [indiscernible].

Yes. So just now, I think I mentioned that if you were to talk to any of the logistics tenants today, the landlord asking and the tenants requests that I think that indeed is a double-digit kind of rent gap. I think that's fair to say that -- especially if you talk to the more dominant end users, I think that's potentially the double-digit rent gap is [indiscernible]. That's very difficult for us to prescribe a number to you because our negotiations are still ongoing and we are looking at opportunities. But I think it's fair to say that the existing passing into this market, it's harder to get takers. So I think if you want occupancy, I think you have to let go of the rent. I think for guidance, I think double digits is potentially something that we should be aware of.

I'm mindful of the time, may I mention that we have reached an hour, but I'll be happy to take in any further questions that you might have. Perhaps we can wait another 10 seconds, 20 seconds to see if there's any other [indiscernible]. Okay. I'd like to pass the time on to Tze Wooi to share some concluding remarks with regards to our results.

Yes. Okay. I think to wrap up, I think I mentioned for 1 half, I think the picture is that we started the year on a slow first quarter. You would have seen that most of our assets are reflecting on lower occupancy. So as you roll over to 1 half, I think things are shaping up better, especially in the retail portfolio. We can see the leasing activities, the conversions are there, the occupancies are better. As we look forward to the second half I think the AEI spaces would also start to contribute. So on a net portfolio basis, I think we are looking into a better retail performance in the second half versus the first. So that takes care of almost 70% of our portfolio of business. On the new economy side, I think given where again, we started off the year slower in terms of occupancy. Some of our assets, especially the Hangzhou ones in terms of occupancy back drilling, we are not back to where we started the year. So I do just expect that vacancy gap that we continue -- must book. And as a result, I think the rental reversions are also getting softer arising from the kind of space needs that we are pursuing. So new economy and also looking at logistics. So I think on the new economy side, I think we are expecting a softer second half relative to last year's second half. I think that's where things are from a business standpoint. On the capital management side, I think I mentioned there are a couple of things that we are doing that will help us rebalance some of our debt profile and capture more of the onshore cost savings. And from a reconstitution point of view, I think we are looking to unlock value for some of the mature assets and alongside that we'll concentrate and focus on bringing in some of this in organic new accretive acquisitions that can help us strengthen our overall portfolio when the window is there, when the market is more conducive. I think these are something that we're preparing as we enter the second half.

Thank you, Tze Wooi for the concluding remarks. So it has been in a very fruitful discussion and we hope that you manage to get have a better color on our operations as well as outlook. So thank you all for joining us for our call. Thank you. Have a good afternoon.