CapitaLand China Trust (AU8U) Earnings Call Transcript & Summary

Hi. Good morning, everyone. Welcome to CapitaLand China Trust 2023 results briefing call. I'm Nicole, IR for CLCT. So it's 9:00 now, so I think we should begin. So I have with me today Tze Wooi, CEO; Joanne, CFO; and You Hong, Head of IPM. So our agenda for the next hour would be to begin with a short presentation before proceeding to our Q&A section. So we will take questions after the meeting. Would appreciate if you could raise your hand if you have any questions virtually, and I will direct the time over to you. So I'd like to pass the time on to Tze Wooi, please.

Right. Thank you, Nicole, and thank you, everyone. Good morning, for -- to attend our full year thoughts briefing. This is the first year since China lifted its COVID, and I think you can see our diversified portfolio's attributes are showing up. So let me just walk you through the key highlights and we can discuss a bit more of the specifics. Yes. Broadly, if you look at where our results are for the full year, you can see the retail leading the recovery, while the new economy is having a little bit of the lag effect of the broader economy taking some time to normalize back. As a portfolio, our occupancy continues to be very healthy at over 91%. Key retail operating metrics like traffic and for sales, you see that rebound partly because of last year being a COVID year, so there are disruptions. This year, more normalized operating conditions, coupled with the fact that progressively, our retail AEIs are also reaching its completion. So that drives a little bit of the occupancy, the trading area, that momentum. At the capital management front, I think we have been actively managing our debt, our cash, both onshore and offshore. That helps us to maintain a relatively stable cost of debt. We continue to be having a high fixed-to-float ratio at 82% for the year. And we also improved our [ suste-link ] component. So if you look at both the revenue at the 2 half, you can see that broad recovery of 5.9%. And if you look at the NPI, you see that being 10.5% for the second half, supporting what I mentioned earlier, the momentum that is driving through in the second half improvement. Diving down to the distributions level, the DPU level, I think this is what we are seeing in terms of very strong same exchange rate to renminbi. If you look at CLCT's listing from 2006 to now, I think this period of that P&L conversion of about SGD 1 to about RMB 5.3637 is RMB's weakest point to Sing through our listing history. So if you move that down, I think at the distribution level, you do see a little bit of that erosion to Sing dollars. Key things I want to update you, I think the milestones of what we have been focusing to do in 2023. First of all is the portfolio, we continue to want to strengthen it by optimizing it and also actively rejuvenating the assets. So I talked about the retail AEIs progressively. If you follow us, you will know that from 2022, we started with 1 thing. And in 2023, first quarter, second quarter, Yuhuating starts to be completed. And we move on to Rock Square in the second quarter to third quarter. Finally, Grand Canyon completing the year by having the AEI completed during the third quarter and fourth quarter. So I think that is shaping up for our retail portfolio. Over and above that, we continue to look at opportunity to sort of derisk or unlock value for some of our noncore assets. So we managed to divest Shuangjing, achieving, I would say, quite a good exit yield at this current climate. So that helps to again strengthen our balance sheet and our financial capacity for us to pursue our longer-term growth opportunities. Capital management front, I think we also break through in terms of wanting to ship more weight to RMB-denominated kind of borrowings to level up the kind of natural hedging for asset and liability. So we're happy that we did the FTZ bond, so that gives us immediate interest cost savings in the fourth quarter. I already mentioned active debt and cash management helps us to maintain the cost of debt and also our gearing. sustai-link is something that we are working on. You can see the percentage going up. At the business front, I think sustai, we have also made some initiatives, and I'm happy to say that another 4 of our assets have already gotten the green cert or moving towards our 2030 kind of journey. And also at the operations side, we have also incorporated the green leasing clauses across all sectors. And I think we also piloted a few initiatives, not on a big scale, but we just want to experiment some of the pilot trials of obtaining a little bit of newer sources of energy. And I think some of these sustai improvements have also been recognized by some of these awards. At the valuation front portfolio, you can see that overall, the valuers have taken a little bit of their outlook assumptions moderating on -- and also on rent, market rental and also the rent growth outlook. So I think these are the main parameters that we observe that shift a little bit of valuation downwards across all our asset classes. Specifically, if you look at retail, the smaller and the weaker assets, they are slower to recover, have more difficulty to compete, take a little bit more of that valuation downwards. If you speak to the valuers, I think broadly, they are still maintaining transaction cap rates because they don't see many transactions happening in China. But because of the natural easing off of the interest rate, we do see a little bit of that discount rate also moving in tandem as interest rate distribute in China saw more of a down. So I think this is largely the valuation update. Specifically, if you look at the different asset classes, logistics are having a little bit of more headwind because of the demand, supply and a little bit of our location, asset-specific characteristics. Moving on to our financials. I think I've mentioned the revenue, the NPI and also because of the exchange rate and also the rising interest costs. So that's sort of like eaten to our distribution for the second half and also for the year. On the balance sheet side of things, because of the divestment of Shuangjing, we've managed to uplift the last valuation. So that help us to move the gearing improvement. Notwithstanding overall, the investment property has come down due to the valuation and also because of weaker renminbi year-end translation back to Sing on NAV by about SGD 1.20. This is something that I want to highlight. I think I mentioned that we continue to be very prudent and being consistent in our debt capital management front. If you look at where the interest cover, the adjusted cover, the gearing, cost of debt, I think this second half, the last quarter, we have been actively managing to maintain that. We have moved the hedging and also the fixed float and our funding sources. A year ago, I think I would have mentioned that if you look at our renminbi sources of funding, that's probably in the low single digit or about 10%. But 1 year on, we have instead move it upwards, and we are about 20% of our loan base now in renminbi. So I think continuously, we'll try to move to take advantage of where we see the interest rate cycles are moving. On a maturity profile, again, you would see that well-staggered profile. And as we speak, as we start 2024, we have already refinanced what is due in 2024. So nothing to worry come 2024. So eyes are more towards watching what are the best kind of rates to enter such that we can continue to be prudent and conservative in fixing our interest rate exposure. This is some of the details I'll leave with you. Over the portfolio side, very quickly, I think this is the shape. Nothing has shifted too much, except that if you look at the year-end divestment, overall, the pie is still about 75% in terms of retail and the balance of 25% in the new economy. We have also make the whole geography a little bit more balanced now that with the divestment of the older asset in Beijing. So that moves Beijing exposure to about 36%, 37%. Guangzhou coming up as well as the other Tier 2 cities giving that balance. Overall, if you look at our tenant quality in terms of the income, it's very diversified, and we are not exposed to any particular concentration risk. If you look at the top 10, even look at the top tenant contribution, they are not comprising a big weighting. And if you look at the shape of our whole portfolio, 33-odd percent comes from our retail, which are very essential driven, lifestyle-driven and great catchment movement. So I think this is going to be steady demand. On the other hand, I think our vehicle is well positioned to where the China's own economic priorities are. So I think the growth sectors, the tenants that we are taking in, in our new economy sectors continue to be shaped by China's own development push on their own self-sustained technology and innovation. So we will continue to stay the course of doing new business around these fronts. This is the WALE which is pretty consistent over the years. If I move to retail portfolio, we now have right here 10, but essentially, with the divestment of Shuangjing as well as the closure of Qibao, we have trimmed the assets down to 9. And if you look at where the strategy is, it's really to ship the retail, derisk some of these master lease malls that are no longer having a competitive format. And we took the early decision to close off Qibao because of its master lease issue. So I think we have trimmed the portfolio such that we start 2024 on a better footing. And if you can see all the AEIs now completed, we have been driving the occupancy better. So in year-end, we have moved the portfolio occupancy to its highest since pre-COVID. Again, this gives you the sequential feel -- year-on-year feel of how things are shaping out. I think broadly, it's consistent with what I have guided already. In the 2 half, you see the momentum continuing to be better because more of our AEI have started contributing. And as a result, the tenant sales will also start contributing. The one to look out for is obviously Grand Canyon. I think we just opened the full basement towards the end of the year. So that will start to contribute a full year effect as we look into 2024. Largely, if you look at retail after you trim up the weaker assets, we have taken down the valuation of the weaker assets. We are now really shaping the portfolio such that the top 5, top 6 of our key dominant malls essentially are already contributing 80%, 90% of our performance. So I think the idea is to really dilute down some of the weaker ones, look for opportunities to exit, such that overall, the portfolio can continuously be trimmed to be stronger. And if you look at the traffic and sales, I think that is exactly a function of what I mentioned, improved trading conditions, our own efforts to AEI over the course of the last 18 to 24 months, that is shaping up well. And if you look at what are the trade categories doing well, largely, you will see us adding more NLA exposure to the F&B. Beauty and health care, I think this is a lifestyle change. You see people more actively wanting to look at it. If you can bring in good brands that resonate at the right price points, you do see spending. Jewelry and watches, we see a little bit of that shift during the COVID years. This continues to be an area that attracts spending. Leisure, entertainment, IT, this obviously because of a little bit of that rebound from a lower base of 2022 and also the lifestyle changes in wanting to have more electronic gadgets, et cetera. From a leasing momentum, we continue to -- because of our AEI, we are signing more leases, injecting a lot of freshness to most of our malls. Overall, as a portfolio, retail reversion is positive. And I think the other key leading indicator we are looking at is as tenant sales become better and also some of the rents that we are accommodating to be more flexible, you do see retailers moving into a more healthy business across range. I think that sets the motion for a lease cycle to come in the next one. So overall, I think we are happy that the efforts that we have done, the strengthening and also the winning of the weaker assets have helped to move the retail portfolio to a better footing as we start the year. This is the lease expiry profile, quite usual, except for a few assets, I think, because of conscious decision to sign a little bit of shorter tenor leases as we look at the last 1, 2 years. So some of these are expiring. And hopefully, the general sentiment will start to come back, the cost start to be a bit more healthy. This is expiry profile, and I'll leave you to look at some of the new things that were moved in during this half, some of the experiences that we are participating. Moving to the business part very quickly and logistics. I think if you had combined, they are about 25%, that level of AUM. Reversions at Business Park continued to be at a positive side. We have 5 assets. I think each asset are facing quite a different set of leasing kind of strategy and challenges. Hangzhou continues to be a little bit lagging because of a lot of supply, and the smaller enterprises need some time for us to get feel a bit of those. Things are moving slowly, but gradually, you can see we have signed in more. But at the same time, we are also seeing a little bit of that falling away of some of the business models. So I think this is going to be a continuous effort to see where are the new demand coming from. Over at the Xi'an, I think the 2 projects we have been very focused to look at what the local government would like to promote, to attract. So I think we are working very closely with them. And as we shift some of these tenant profile to those that they want to incubate, we also enjoy some of these government incentives. Chengdu is a steady asset, I think Suzhou, we continue to see that they're very strong, deep in terms of the manufacturing base with the higher tech biomedical. So this is an area that will continue to strengthen our leasing. Logistics, I think there's a lot of lease renewals or bunching because of the WALE effect. So we are taking a step approach. We have 4 assets. So we have derisked primarily 2 in Wuhan. And also in Kunshan as a step 1. I think the next step would be to look at the Shanghai and also the Chengdu. This is the Business Park's occupancy. I think we ended the year, I would say, healthy at 91%. If you look at the market reports, I think most of the cities that we are located, the vacancy rates are trending at closer to 20%, 30%. WALE for business parks, I think is quite consistent through the years, and these are some of the activities that we are running. I mentioned for logistics earlier, I think if you look at where the assets are located, 2 leases essentially drives Shanghai. So during the year-end, I think the tenants are shrinking some of their business demand in terms of the space expectations. So that's where we are in terms of looking at new replacement. Chengdu I'm a little bit more optimistic in the sense that we do see as the new year, there are a little bit more leasing activities looking at it. So I think Chengdu generally, we should start to see the occupancy rate driving into the 70s as we approach January, February and into the first quarter. So I think I mentioned Kunshan and Wuhan, these 2 are more exposed, I'd rather say, are more single tenant or 2 to 3 tenants. So we have started to derisk. And I think these are the 2 that we see the renewals. So now the focus is on Shanghai to gather replacement. So I think broadly to wrap it up, I think our focus, the way that we position the sale city is really to look at where the China's own economy, the policies are directed. And I think we are very well aligned in wanting to capture the consumption in terms of catching the technology space. So I think our strategy to create, unlock and extract, you see us demonstrating that. I think we'll continue to do that to maintain a strong balance sheet, such that we can continue to pursue new opportunities. Closer to the China market, I think we continue to stay very active to see how we can monitor and also participate in some of this bit because that we're going to create another capital leasing channel for us to have more options as we look at opportunities to rebalance some of our portfolio. These are something that I've already mentioned in terms of Grand Canyon, fully open, looking at the full 12-month effect in 2024. This is Shuangjing divestment. I think we've completed it this week. So overall, if you look at the economy, I think there are going to be a little bit of that challenge as China address some of these in-house domestic issues. But very clearly, you can see the government taking a more active approach and more willing to come up with policies to stabilize and to stimulate the economy. I think that is going to be good because of how we are aligned. And you can see more and more targeted -- we hope to see 2024 more of these policies being still implemented that will overall lift the business confidence and consumer confidence. On each of our asset class, like our action plan, as I mentioned earlier, is to really focus on our strategy to capture. We have strengthened the retail. We are going to be very asset-specific in the business parks and also at the logistics space to derisk some of these lease renewals and to move the occupancy higher. So I think with that, I will open up to more -- our Q&A.

Thank you, Tze Wooi, for your presentation. We will proceed now to the Q&A segment. So there are questions that's being raised on the side. Can I pass the time on to Terence, please.

Congrats. I just wanted to ask on what's -- maybe 2 sets of questions. First is on what's your use of divestment proceeds from Shuangjing? Are you going to use that to repay debt, or are you looking at like redeployment into newer assets? Or would you consider returning some of that capital back to shareholders whether through top-ups or share buybacks? Secondly, on retail reversions, seems to have moderated into the year-end. Could you share a little bit more about how you see retail reversions into 2024? If you can give some sense what that...

Thank you, Terence. I think the use of proceeds, I think, first and foremost, we are still completing the transaction. So the proceeds have to be repatriated back. And I think the first objective will be to deleverage. So I think the first option would be to use it to pay down. We can review whether it makes sense for us to do a little bit of that share buyback, whether the window presents itself. But I think that will be the -- primarily the 2 usage to strengthen our balance sheet. Looking at acquisition, I think it's always very much dependent on the asset opportunity and the timing. So I think if there is an acquisition that we can deploy immediately, I think it makes sense. But if the timing is not, then I think what I mentioned earlier, will be the priorities. On the retail front, I think most of the AEI because we have accelerated some of these AEI activity, so that's sort of like move some of these rental reversion and the calculation method. But as we approach the year, I think there are several assets having that year-end renewals, they are still negative. They are primarily attributed to Xinnan, which we continue to want to reposition the tenancies. And also a little bit due to our smaller assets in Harbin. So I think broadly, I would say the AEIs that we have done for the stronger assets continue to be steady. There are a couple of weaker assets that we continue to see a little bit of negative pressure. And that is in Harbin, that is in Xinnan, quite commensurate with the valuations that I mentioned earlier if we look through. So our feel is that once the traffic comes back, the tenants do better sales, they're trending to a healthier occupancy cost. I think we are moving closer to a leasing cycle that is more appropriate to look at. So I think that that's where we are in terms of retail. By and large, the 2 smaller and weaker assets as we move into 2024, they are going to have lesser and lesser waiting in terms of overall portfolio performance. I think if you just do a quick math, the 2 weaker assets contribute less than 10% of our own retail portfolio. And if you extrapolate it to our bigger portfolio, the weighing is even less. So I think that's how we intend to take a step approach, strengthen the one, the dominant ones and de-weight the weaker ones and look for opportunistic exit.

Can I pass the time on to Geraldine, please?

Maybe just 2 questions. What are the factors that you look at to see that the share buyback window is open, what are the factors that you need to align? And I think, second, post Shuangjing divestment, you have derisked 1 of the tenants in arrears. Are there any other tenants that may -- for under arrears or are currently in arrears within the portfolio now?

Yes. I think in terms of arrears, I think we have already actively derisked predominantly the most of them. I think if you look back at our top tenants, if you look back at our top 10 tenants, the 1 that we derisk used to occupy the single largest. So I think we have effectively derisked what we feel is a weaker operator. So I think that part of the equation is solved. Overall portfolio in terms of arrears collections definitely have moved back to a normal state. For the year-end, I think we are looking at very, very little arrears and whatever risk we have already taken that provision. So I think that part, I think, is essentially much stronger footing as we end the year. Your earlier question on the share buyback, I think we have that mandate from the AGM, from the unitholders. I think the primary objective for the use of proceeds, predominantly would still be to deleverage. On the opportunity window, I think it depends the function of where our share price are traded. And also whether we have alternative use of funds. Just now we mentioned on acquisition, and also because of certain more technical constraints. I mean, just to share with you, I mean, as a REIT, our sponsor, stakes and so on and so forth. So there are certain kind of technical parameters that we also have to watch up for that at a certain window, there's only so much we can do. So I just want to share that it's an option for us to do it because of the mandate, because of the technical constraints, it's not going to be a very big portion of our proceeds will be channeled for that use. More so of opportunistically if our share price don't trade well. And there's no better alternative use of the proceeds. That's something we can consider. That's where we are. I think more importantly is to be there and strengthen the balance sheet.

I'd pass the time on to Joy [indiscernible].

Yes. Thanks. So just to get your thoughts on asset allocation. If you look at portfolio performance, what has actually been dragging is now the new economy. And I think when we did the shift, it was probably the time when new economy are still growing. So do you think from -- looking forward, how would you think about the asset allocation across new economy assets and also the traditional retail and integrated? That's one. Two, on asset valuation. As you start to look at acquisitions, how do you decide what's the right valuation, right? Because market is in a flux. There are people quoting different discounts. So how would you think about pricing?

Yes. I think these are very good questions, Joy. I think when we started to want to build a more sector diversified portfolio, that's really because we want to shift the vehicle to take opportunities and to align long-term to China because of the different asset classes emerging. I think that strategy continues to stay the course. In terms of how fast we can execute, it's always very much dependent on the portfolio or dependent on asset quality and our own balance sheet strength. So you can see us already doing that to move us into a stronger position. The overall approach to rebalance, essentially unlocking value for the mature assets, I think you have seen us progressively doing that in the last few years. We'll continue to do that front. I would say new economy helps to give that diversification. It helps to strengthen our overall income diversification and quality you saw in our portfolio. I think that is a direction thing that we want to do, notwithstanding short-term headwinds. I would say the headwinds are more directed at location-specific, certain asset-specific. By and large, this is the cycle. I think we have to ride through a little bit. We have to be a bit more agile and have to be a bit more flexible in how we list a place and how we then cooperate and collaborate with the government to achieve that aim. As a portfolio, business parks, I would say, is still stable year-on-year. It is still giving us that higher yield as a portfolio. So I think this continues to be sitting well. Logistics happened that lease cycle, bunching of the WALE. I think this is something that we are conscious and actively trying to apply some kind of derisk. That strategy is dependent on asset. I mentioned that we've derisked the Wuhan, and we are derisking a little bit of the Kunshan so that essentially solve 2 assets. I think focus is to drive up Chengdu in the first quarter. And I think among the 4, the Shanghai is probably going to see a little bit of the occupancy downtime a bit longer as we deliberate what are the new tenants that we want to bring in that is more suitable for the catchment. As we look into the new acquisition, I think you are right. I think the valuation for the right assets, the right valuation becomes very, very key. I think we want to be very careful with the due diligence and also the income side of the WALE. I think these are things that we have learned along the way. Market is very challenging and sometimes can be very disruptive. So I think we want to ensure the income side is well safeguarded. So I think these are some of the thoughts that we are looking at as you want to structure new deals. I think that said, in summary, some of the things over and above the usual stuff.

Can we have [ Paul ], please.

Just a few questions for me. The first 1 is, we had this post-pandemic bump in tenant sales. So I just wonder what do you think is the trend line growth for tenant sales in your malls in the next 1 or 2 years?

A very good question. I think we continue to see strengthening of trade categories that are more appealing to the catchment and to the lifestyle spending. So you see an emphasis more on F&B. You see a deemphasis on fashion, services, beauty and health care. So these are the ones that I think you will see the trade -- the sales year-on-year improvement because of injection of new space. We inject more stores because we take back space from the anchor so that whole churn will help the overall mall to pull in the traffic and pull in the spending. So I think if you look at the essential sectors and then lifestyle categories, I think this will continue to do well, especially for our stronger post AEI assets. This year, obviously, you see this very, very step rebound primarily on 2 factors. Last year was a low base disruption. On top of that, this year, we have that progressive AEI effect. So I think rolling forward, I would say we continue to be positive. I think things are trending well. The brand is doing well, can be growing at about 5% organic. I think that's something that we are seeing as a market as we talk to the retailers, that gradual improvement around the 5% level is something that we see healthy.

Okay. That was around 5%, I mean, roughly kind of organic.

Yes. But just be mindful that because retail, we have so many categories, we have so many leases, we have so many brands. So sometimes, you're going to have people who outperform that 5% because of certain brands. And on the other hand, you will see brands that are declining in that appeal. So it's always that [indiscernible].

Yes, dynamics. Okay. But sorry, so is this like faster or slower than pre-pandemic, group tenant sales?

I think generally, if you are focusing on the slope, then I would say 2024 over 2023, that curve, if you extrapolate forward, I don't think that is the right trajectory given where the general sentiments are. I think you have to look at the mood of the people. I think the economy is on the mind, jobs, income, these are all very important elements that will drive traffic and drive tenant sales, especially spending. When the overall mood of the people feel that they are wealthy, they're positive, they spend more. I think now in China, because of the COVID, the last few years and because of where the economy -- potential challenges, I think people are a little bit more cautious. So I would want to say that we don't expect that very aggressive slope that we are seeing. If you roll back the years between, let's say, 2013 to 2023, if you use that year, I think our portfolio were trending at high single digits. So I mean, if you look forward, if we can grow at about that 5% level, I think it's very, very healthy.

Sorry. Just 1 quick question on your -- on this slide alone, what do you think is -- what's your view on supermarkets in the malls? I mean, is this category like facing many challenges? Just your thoughts.

Depending on the mall catchment that you are servicing, I think supermarket continues to be, I would say, an important ingredient as basic necessities that most household catchment would require. But what we are seeing over the years is that the old supermarket format and the operators need to upgrade themselves to newer business model. And the kind of space requirement has also been reducing. So it works to our benefit that most of these long anchor leases are in the right window for us to take that space. So you already see us doing that for the Walmart. You already see us doing that for the Carrefour and the BHP. So I think this presents an area where our retail malls, we continue to be able to extract upside as these bigger anchor spaces are coming up for renewal. We want to compact the supermarket into key essentials that service the catchment, release space for us, such that we can add other types of retail offerings that as a landlord, we can better manage as a whole more. We don't want to -- these big spaces supermarket, for them to in turn do subleases. So I think the trend is moving towards that way, and we have already done many of such execution. There are a couple more that we can execute as these leases reach the end point. So to conclude, supermarket continues to be important element of essentials, servicing the retail catchment of our mall positioning. But we want to reduce the size. We want to improve the quality of the operator and making sure that their goods and their services match the price point expectation of the catchment.

Yes. Just one last one for me. The logistics tenants are strong. I mean, I just wonder what's the reason? Because I mean, e-commerce in China is still growing. Just some reasons here.

I think the main reason is that the demand end is softening. I think if you look back on logistics, the high exponential growth of, let's say, 2015 to 2022 COVID, a lot of those were driven by very aggressive assumptions. But I think post-COVID, I think some of these assumptions start to be a little bit more realistic, I think you will know. So in terms of overexpansion, overcapacity, people are now consolidating. So we are now into that cycle. A lot of the third-party logistics are also having less orders, less, less demand, on the tail end of the business. So I think all this, coupled with the fact that of more supply and more choices, you will see a little bit of the short-term challenge over the demand/supply kind of balance. So I think that's where we are in terms of logistics, in terms of the tenant usage of space and expansion plans.

Can I pass the time on to Michael, please.

I just wanted to follow on, on this, the logistics tenant. So occupancies dropped from 98 to 60. Was it 1 particular tenant or a couple that left?

Okay. Let me just pull out the -- essentially, if you look at the logistics occupancy, if you are looking at the 2 -- I think Chengdu continues to be around that level. I think you will know that earlier on, there's a little bit of the market noise over that whole zone. I think the government has been a little bit more quiet on whether they are going forward with it. So I think the leasing activities have started. So I think this is the one I feel that in the first quarter of 2024, you should start to see the improvement. This is a multi-tenant logistics. We have more than 30 over leases. So this one should continue to go up, not particularly for any single reason. The one that you see the shrink is the Shanghai. The Shanghai is primarily driven by 2 leases. It used to be occupied by 2 leases, and both leases have shrunk, yes.

And if we look at the -- earlier, you mentioned rent reversions for business park was positive. How does that look for logistics?

Logistics will be harder. I think logistics, given our -- let me just pull -- I think we have a slide on that. Yes, if you look at logistics, in Chengdu, retaining the key tenant for the 2 -- I mentioned the Wuhan and Kunshan, I think we have to lower the rent in where the market now is trending. So this is slightly around negative 15 to 20, what we are seeing.

Okay. Is this across all the 4 logistic parks? Or were there any like bright spots?

I would say the facilities that you are leasing out to more like a single 1 to 2 tenants, I think that's the one you will see the reversions exiting the higher negative because you are trying to balance the retention versus alternative views if we do not lease it out to this current. And also a function of whether the current tenant is, in our view, a strong one for the locality. I would say in terms of the Chengdu one, I don't foresee across the board, we need to revert at that level. It's probably lower. Probably in the lower side of the 10% kind of range, but largely because of the sentiments, because of the demand softening. I think we have to be a bit more circumspect that the market rental have softened. And I think this is not just us. I think if you look at some of these landlords and even some of our civil competitors who have launched their logistics assets, they have also been guiding that the market rental have come down. So I think this is where we are in terms of the leasing renewal cycle.

Okay. That's very clear. If -- I've got 1 or 2 other questions. So if I look at the RMB to Sing, the rolling hedges that you have when you distribute from RMB to Sing, what is the current number?

Just give me a minute. You're referring to the...

I want to get a sense of the RMB impact on your distributions, when that would get flushed out? Because clearly, there's still a drag.

In a way, I would say the RMB...

Yes. I think, Michael, we did our hedges in that. So it emerges around every 3, 6, 9, 12 months. So progressively, the impacts of the hedges gain will actually be factored into the financials every quarter. But it will not be as substantial as you will think, that this is entirely or the underlying distribution income. The policy is for us to hedge 50% of every half yearly distribution. So the half yearly effect -- so in a way, the 50% that we hedge in terms of the settlement of the hedges will be progressively over the quarters.

Okay. Do you have a number, just what the blended number is?

Blended number as to the absolute amount of your hedging?

The Sing to renminbi hedge rate.

Yes, yes.

I mean, if you -- okay, we'll come back to you, like, for example, second half of 2023, what are the weighted average of hedge that we are -- yes.

Yes, that would be helpful. I'll give others the chance to ask questions.

I have the number. You mean the FX rate or the amount?

Hedge rate, the hedge rate.

The hedge rate...

1:5.1.

Yes. The average is about 5.3.

5.3?

Yes. So there are a lot of -- some are actually lower. I mean, more payroll rate, while some are better, 5.1, 5.3...

Because we are consistently rolling it over the cost of the policy, right? So we don't expect it to be very, very outlier type because we do it -- as a matter of every half year, we hedge at least 50%, and the hedge we put in place typically will be 3 to 6 months or up to 12 months. So because of the rolling thing, it's going to be very, very outlier kind of rates that you're potentially expecting. Yes.

Can I pass the time to [indiscernible], please.

Can you share a bit more of our divestment in terms of which asset class do you think is more realistic to actually being transacted in 2024? And also at current book valuation, are you prepared to divest assets at a loss? And if yes, what's the reasonable level?

I mean if you look at this slide, I think it gives you a sense of where our valuations currently are. I think if you follow our valuation in the last 2 to 3 years, you have seen us taking the valuation down for what we perceive to be weaker assets consistently. So I think Xinnan comes to mind, Aidemengdun comes to mind. So these are the smaller ones that we have already sort of like, I would say, value it closer and closer to the market. So these are the ones that are weaker. So it's sort of like a drag to the entire portfolio. So if we can monetize these assets, I think we are very open to it. Whether we can divest, whether at this book value, it really depends on opportunity and how we negotiate. But I think we stand ready that so long as it says noncore, we can recycle the proceeds to better use. And if the passing yield is something that is even lower than the cost of debt, for example, I think it makes sense for us to divest even below our last carry. So I think this is something that from a strategy standpoint, I think we'll look out for what's the best value to monetize, such that we can strengthen the balance sheet to redeploy. Because of how we want to shape the portfolio and most of the retail assets have been more matured because of our legacy, right, the retail assets are there since day 1. So you see us now have already monetized, I would say, 6 out of our initial IPO 7 assets. So that is actually a very consistent and disciplined approach to really reconstitute the portfolios that we have. Younger assets that have longer run rate. So I think that approach is going to drive the divestment thinking, depending on the value as well. The new economy is something that we have moved in, in the last 3 years. Depending on whether by divesting, we have better use of the recycling proceeds. Again, we stand open to look at it. I think key is to continuously strengthen the portfolio of assets, the asset quality and income quality drives our decision.

For the 2 assets that you mentioned, can you share the passing yield?

If you look at the NPI that we have disclosed, I think they are probably around that 3 handle. So I think that's probably where we are for 2023.

Can I pass the time to [ Joel ], please.

I just had 2 questions. So the first is with reference to Page 24. I'd like to ask about your retail portfolio lease. I understand it looks quite concentrated in 2024. So just wondering, what are the current length of contracts you are hoping to sign? Is it a typical 3 years? Are you looking at like maybe more opportunistic short-term tenure? And the second question I'd like to ask is on Page 6. I noted that Shuangjing and logistic properties are not managed by -- or not operated by CLI. So is this operated by a third-party operator? Is there some advantage or some reason for that?

I think maybe the first point on the lease expiry is I think during the COVID era and then both landlords and tenants are having more difficulty in arriving at a common convergence, right, like where things are. So I think we tend to sign shorter leases with a little bit of more flexible upfront terms. But as we go into 2024, I mean if you are entering an environment cycle where things normalize, our typical lease structure for smaller tenants depending is the 2- to 3-year type. And I think this is very market-driven. And if you are leasing to some of the bigger anchors or mini anchors like F&B, who then spend a lot to CapEx, the typical lease contract will run about 5 years. So I think this is probably where the market practice are. We were a little bit shorter in the last 1 to 2 years. That's why you see a little bit more leases are up for renewal, precisely because we want to space out and we want to have that step up. So I think this is where we are today. I don't think it's going to be very different in terms of land -- the lease contract tenure. What we can potentially be a bit more flexible is to maybe structure something within the first 6 months, being the first year, et cetera, such that it's easier for us to do business when a little bit more uncertainty involves CapEx, et cetera. So I think that's where we are in terms of being more flexible in structuring our leases. Your earlier question is on the operator. I think it's because Shuangjing essentially our master lease is out, and 1 of the anchor master lease is like running the mall essentially. So that is why we said that it's not operated by us as if like those other multi-tenant malls. What's the other asset that we mentioned?

Logistics.

Logistics, essentially, again, because we have single tenant, so we outsource the day-to-day. It's like a single building on site. So we don't do a lot of real property management, so to speak. These are leases that are outsourced to the tenant and also some of the facilities management.

I see. So as you move towards derisking it, you would be more hands on, I guess?

I think it's a function of what the building and the tenants meant to use for the building. I would say in the market space, it is predominantly handled by all these operators, I think that is something that we want to see whether it's more efficient for them to carry on or it's better for us to come in, provided we can value add a lot of things. But I think generally, the logistics space, a little bit different like retail, where we have our own platform of people to do the value-adding activities.

We do still have another 10 minutes. So if you have any questions, feel free to pop it in. Can I pass the time on to [ Emma ], please.

It's regarding the SPV one on Slide 6. You mentioned there's a 100 basis points savings. Can I check what is the advantage of the SPV? Is there a lower cost for lenders?

What's the last question?

Is that lower cost?

Yes, is it lower cost for lenders?

So for us, we were able to get the FTZ bond, it's a 3-year tenor at 3.8% on. It's denominated in renminbi, the use of proceeds can be flexible to be used to pay down. So in essence, we have the proceeds to pay down some of our Sing-dollar debt power that is going at about 4.8%. That's how we have managed to save some of the interest savings. I'm not sure, did I answer your question rightly?

Yes, yes, got it. Very clear.

Do we have any other questions? Michael, I'd like to pass the time to you, please.

Michael, you have something to round-off, Michael?

Yes, sorry. Just going back on the retail rent reversion, going into 2024, can you give us a sense of what the trend is likely to run it?

I think I would largely segment our retail portfolio, I mean, if you look at our retail portfolio, I would say the top half like Xizhimen, like Xuefu, like Nuohemule, I would say these are steady assets that have really gone through a lot of repositioning and because of the improved trading environment, I think these are the ones that potentially, you will see that slight positive range of things to happen. There will always be a little bit of tactical things that you want to bring in for certain brands such that they'll spill over. But by and large, I think these are strong assets that I would say, in the flat to slight positive range. The one that I foresee having a little bit more downside continues to be around Xinnan because of the churn of the lease cycle. I think I mentioned to you earlier, Xinnan used to be very fashion-oriented more, very heavily oriented towards that. And I think it took us that 2-, 3-year cycle to slowly churn all this to derate fashion and bring in others. So I think we are still into that cycle. I think this is probably like the 1.5 years. So I foresee 2024, we may still have a little bit of those. Aidemengdun, being very small, I think in terms of rent, negotiation, I think the rent asking power is probably not going to be there. So I think I would largely say that. And I think for Rock Square, quite stable. Wangjing, I think would be generally quite stable, except for a few tactical trade mix changes that we want to see. I think I would maybe guide you that maybe minus 3 to plus 3 spread around all our retail assets. I think that's probably where we are looking at things.

Thank you, Michael. Hi, Geraldine.

I just wanted to understand how should we look at DPU for this year, given that logistics are probably going to lock in more negative reversions. The other 2 segments, to remain stable, most of the upside come from interest rate as well as ForEx.

Yes. I think to understand the DPU profile, I would say that we will start 2024 retail, I mean, you look at a shift, generally, because of the progressive AEI completion, you will start to enjoy the full 12 months upside relative to 2023. But that's also countered by a little bit of a loss in contribution from Shuangjing. Generally, I would say 2024 should look brighter as a retail portfolio because we have already derisked and stopped the operations of the weaker assets, and we have moved down the weighting of these weaker assets. And post the AEI, the stronger assets are starting to perform for a full 12 months. So I think the outlook for retail, it's going to be a better one. Much depends on I would think the business parks' performance because some of the business parks entering into 2024, I think it very much depends on the government, whether we can continue to be able to collaborate very closely with them and also to enjoy some of these government tax incentives. We know that the local government may not sometimes have a lot of kitty in their wallet. So I think it all depends on things. Hopefully, the government is stabilizing the economy, stimulus improve, we can catch a bit of that. Logistics, as you mentioned, I think we are guiding for a lower year-on-year because of the occupancy downtime, because of the negative rental reversion. But I would say as a portfolio, that's where the shift comes in. I think the logistics is going to take less than, I would say, 4%, 5% of our entire portfolio. The upside that we actively manage the retail is going to outweigh the downside of the logistics. I think BP is the 1 that we are watching very closely. If we can neutralize it year-on-year and continue enjoy some of these tax incentives, that will be good. FX, I think we are -- I mentioned we are at the lowest RMB point against Sing. Hopefully, that is going to plateau off in terms of the FX front. Although I feel that if you look at where the spot are, I think in 2024 first half against 2023 first half, you are still going to see a bit of that net effect of the weakening of RMB. So much depends on the second half, hopefully, a lot of calls on the rate cuts. So I think we stand to benefit as most of our fixed hedges are rolling off towards the second half of 2024. So hopefully, with more volume coming in the second half of 2024 and interest rates start to trend down, we hope to be able to catch that positive cycle. Over and above that, I think you'll see us shifting the RMB borrowings weighting. Again, if you look at where the RMB interest rate cycle are easing, I think we stand to be able to enjoy some of the LPR rate reduction. So I think all in, we're going to be, again, being very active to balance the onshore, offshore debt, active cash management, looking at new financial instruments, potentially to convert some of the Sing into RMB borrowings through the hedging instruments. So I think all in these are the few things that we are focusing on the portfolio side and also on the capital management side. So hopefully, at the DPU give you a sense of where we are seeing the business.

Okay. Hopefully, the ForEx hit will turn into a tailwind next -- this year. Yes. If I can just ask 1 more question on the regional sales. Last year, most -- the border has not opened much and most of the traveling is still done domestically. So have you actually seen some form of increase in domestic then?

I think for our malls, the positioning, I would say we are less impacted by the so-called external borders opening up. Ours has been very driven by our catchment. So overall, I think our tenant sales behavior is very much driven by our own active refresh and being relevant to the catchment that we service. So during the course of the last 1, 2 years, you do see so long as we inject certain new brands that matches up with their lifestyle preferences, you do see. I think I shared with you a little bit on the F&B in terms of the jewelry, in terms of the IT gadgets, electronic lifestyle. So these are the ones that you will see the domestic spending being oriented towards. And I think it's a function of us having the means to keep refreshing and inject new offerings and connect with the catchment. So long as you do that, I think for the stronger malls, you do see the spending coming back, which is reflected in some of these year-on-year sales.

Okay. Sounds good.

Okay. So any last questions? We could take 1 last question before we conclude the session.

I think 1 last question for me is that in terms of the retail portfolio occupancy cost, you mentioned that it's ranging between the high teens to low 20%. So I just wanted to understand how does this compare with the pre-COVID performance.

Yes. I think the rent cost is also always a function of the kind of trade mix within the mall. I would say that where we are now, we are moving closer. In fact, some malls are exhibiting slightly lower cost range relative to pre-2019. So I think the readthrough is that over the years, I think we have moderated some of these rent terms. Over the years, you see sales picking up better. And I think the efforts that we have put in have moved it to a healthier range. And I think this will then allow the retailers to build up their confidence so that we will enter the next lease cycle in a better position to look at some of these rental renewals. So I think the leading indicator are good. Traffic and sales are building up. The rent has moderated. So I think this is the cycle that we are moving towards more positive. If the overall market sentiments becomes a better one, I think the outlook becomes stronger. And I think that's what we are trying to say, strengthen your mall, strengthening your offerings, as the market becomes more positive, it moves us into a better leasing cycle to talk about rent.

Okay. Thank you, everyone, for your questions. We hope that the discussion has been very fruitful for you. Just feel free to reach out to me if you have further questions. And we hope that you have a good day. Thank you, Tze Wooi, for insights. Thank you.

Thank you, everybody.