CapitaLand China Trust (AU8U) Earnings Call Transcript & Summary

Welcome to CapitaLand China Trust 2024 Financial Results Call. I'm Nicole, IR of CLCT. I have with me today, Gerry, CEO; Joanne, CFO; and You Hong, Head of IPM. So thank you all for joining us today for the next hour. We'll start with a brief presentation to provide an overview followed by a Q&A section. Once the presentation concludes, we'll open the floor for questions. [Operator Instructions]. So I'd like to hand over the time to Gerry.

I'm Gerry, CEO for CLCT, very happy to have our analysts and media friends online with us today. Wishing everyone a happy Chinese New Year. Let me start off by recapping what our portfolio consists of currently. CLCT is predominantly retail at 71% gross rental income. These are bread and butter malls, which are resilient in this cycle and new economy assets, business parks and logistics, which are more exposed to business and trade formation. All these asset classes represent different ways to capture the policy and economic transformation that China is going through now. Retail positioned to benefit from government initiatives to boost domestic consumption. Business parks and logistics aligned with China's drive to grow its technology and innovation sectors. Logistics is also influenced by international trade growth. Moving on to our full year financial results. I'll give some key highlights. Overall, our results reflect steady and strong performance from our largest asset class, which is the retail portfolio, and it is driven by our AEI efforts. The market for BP and log assets has been relatively more challenging, offsetting our retail performance. There were also some popular events from 2023 that influenced 2024 overall performance. In 2023, we did a round of AEIs involving supermarket spaces to uplift some of our older malls, Rock Square, Yuhuating and Grand Canyon Mall. Those AEI Malls have shown good results this year. We also ceased operations in underperforming Qibao and divested Shuangliu at an attractive exit yield of 2.8%. These actions strengthened our overall asset quality and balance sheet. Full year, our portfolio revenue dropped 3.9% and NPI dropped 5.8%. Mainly due to business parks and logistics, which had lower occupancy, rents and discontinued property tax incentive for the Hangzhou Business Parks. Our divested and discontinued malls also impacted results. Without that effect, performance would have dropped less. Revenue would have been minus 2.2%. NPI would have been minus 3.9%. Our AEI Malls, Rock Square, Yuhuating and GCM led the performance of our retail portfolio, as they have increased their revenue by 8.7% and NPI by 13.7% year-on-year. ROI for these AEIs are blended at 14%, which is well above for our cost of funds. On the other hand, the market witnessed in some of our BP and log assets has affected their occupancies. We shared in previous quarters that the Xi'an BP that's asset called AIT had a major tenant relocating to their own premises in [ 4Q ] reducing occupancy from 90% to 72%. We are actively sourcing for replacement tenant there. Our Shanghai Fengxian log asset, which has been vacant for 1 year in 2024 had affected income contribution for that year. But we have effectively addressed this going forward by securing a master lease tenant for an 8-year lease in December 2024. So despite just the challenges, what is pleasing is that overall occupancy across the 3 asset classes went up compared to 3Q. Now to mitigate the NPI reduction for 2024, we have also looked at property expense savings. So we are focused on it. If you look at our property expense savings, we actually saved 2.7% year-on-year if we exclude the discontinued property tax incentive for Hangzhou BP. There were other one-off expenses in 2024, which are related to tax consultancies and outsourcing-related to stock compensation. Excluding all these one-offs, our property expense savings would have actually improved to minus 4% year-on-year. We will also make a lot of efforts in terms of reducing our finance costs. Our net finance cost savings is 7.1% year-on-year, and we have benefited from the lower floating rates, lower cost renminbi bonds that were issued and debt reduction from our strong proceeds. DPU wise, our full year DPU is SGD 0.0565 and that is 16.2% lower than 2023 SGD 0.0674 and that's impacted by the NPI drivers we have spoken about, FX as well offset by lower finance costs. This works out to a trading yield of 7.7% at attractive level. Our second half DPU is SGD 0.0264 versus last year of SGD 0.03, which is a 12% drop. This is compared to first half year-on-year drop of 19.5%. So you can see that there's been a lower -- narrowing decline in our second half results. Next, I'll go to our three asset classes and discuss them in more detail. If you look at our retail assets, they held up really well and has been resilient. Retail revenue on same-store basis is up 0.9% year-on-year, having retail sales -- and NPI on same-store basis is up 1.9%. Our retail malls have a high occupancy of 98%, which is about the same level at 2023. Majority of our malls showed an improvement of same -- of occupancy year-on-year, except for Xinnan, which is one of our smallest and weakest mall. Four malls, Xizhimen, Rock Square, Xuefu and Nuohemule are effectively fully leased. Traffic grew 8.7% and tenants sales 2% led by our AEI Malls. Overall, tenant sales are now at par with pre-COVID levels. Our occupancy costs are also at healthy levels below pre-COVID range of above 30%. Having said that, retail operating metrics have moderated in line with weaker consumer confidence, China's overall retail sales growth [ third Q ] positive 2% to 3%, which is the weakest since COVID passed. China's 4Q retail sales rebounded in October, which coincided with initial government stimulus, but has since moderated. If you look at our own portfolio, our 4Q traffic and sales growth, the trend of slowdown can also be seen. In this environment of subdued growth, getting rental increases for our retail assets has been challenging, that affected our retail reversions now slightly negative at minus 1%. The Chinese government has taken off of the weak consumer confidence, now a key focus of the similar program. We expect the government to continue to take policy actions and stimulus to boost domestic consumption and household income over time, and that should benefit the retail sector directly. What CLCT can do in the meantime is to drive performance through AEIs. If you look at our recent successful AEI to 2023, strong ROI, traffic and sales growth, you'll know that they have all been supermarket-related. The success of these AEIs validated our view that we're configuring large format supermarkets are an opportunity to boost yields. We have done smaller reconfiguration in 2024 and we'll look for more opportunities to unlock value from supermarkets and anchor space in 2025. I will speak a little bit more about it later. Next, moving on to business park and logistics park. The business park sector generally faced weaker demand and ample supply. Our business park overall occupancy is at 87.6% for year-end compared to 91% from a year ago. The drop mainly due to Xi'an AIT and Hangzhou capital assets. However, if you look at our occupancies for our business park assets, they are generally outperforming their submarkets. In Suzhou and Hangzhou, we outperformed the market, particularly in Suzhou by a substantial amount. For Xi'an, the AIT asset, we have a major tenant relocation to [ build ]. Hangzhou Phase 1 and 2, we see higher lease turnover, with new leases signed offset by nonrenewals and preterminations. Compared to third Q though, the combined cluster for Hangzhou has actually improved occupancy to now above 80%, but rent levels remain challenging with the excess supply in the market. Xinsu, our strongest retail asset, continued to be stable and well performing due to its strong market position as one of the primary Singapore-led business parks. Logistics park, which is the smallest part of our portfolio at about 3% of GRI. The market in China for logistics has been paused due to low demand and oversupply issues. Average vacancies of 20% to 30% in many submarkets are common. We prioritized occupancies in this market for 2024. I'm happy to share that we have managed to stabilize the logistics portfolio by this year-end. Kunshan asset, which has some vacancy was re-leased since third Q of 2024. Chengdu assets also improved to over 90% from 68% occupancy a year ago. The bad piece of news, I would say, came over this Christmas period. We found our master tenant to take up 100% of our Shanghai log asset under a long-term lease of 8 years. With this lease, our overall log occupancy at year-end is 97.6%, much higher than 82% a year ago. While we stabilized the log portfolio, logistics will still be a tough market in the next few years, unable to deliver growth. So we will continue to explore reconstitution for log assets where possible. Let me provide further color on leasing and reversions of each asset class. Retail leasing-wise, our retention is 54% higher than 2023, and in line with historical, while reversion for retail is about minus 1%, due to the subdued consumer sentiment. Renewal leases have positive reversions and the new leases have negative revisions because we want to pull in new tenants to refresh our malls. If we exclude the poorest performing malls, reversions would have been positive 0.3% instead negative. In terms of leases, F&B lease executed business, this reflects evolving consumer needs and we continue to secure new F&B tenants with positive reversions. Their reversions come in above 4% for both new and renewed leases. The F&B share of retail GRI has increased to 38.4% from 36.8% a year ago. Among the key asset class, tenant sales are strong for F&B at positive 9%; services, positive [ 14.4% ] and IT about -- also positive 9%. These tenants are geared towards local consumers, local brands such as [indiscernible] and Huawei, Oppo and local EV brands -- EV car brands under -- for the services category. Growth has also been strong for smaller categories, such as gifts and souvenirs and value stores. And those growth are quite strong at positive double digits. This reflects the current consumer preference for collectibles and value purchases. Toys and collectibles collaboration and events have also helped our malls draw large crowds due to the popularity. We have included a slide -- in Slide 28 of the presentation, where you can see some of those collaborations and pop-ups and events that are related to toy and collectibles. For the larger trade [ cap ], large-format supermarket, these are the supermarkets, they are 9,000 to 10,000 square meters has been the biggest like in some cases, over the -- over 2024, they have seen big drops of 40%. We see weakness -- small weaknesses in fashion, beauty and health and jewelry at single-digit drops for sales. If we exclude the poor-performing supermarkets, there are a few of them, tenant sales would have improved further to positive 3.4% for our Retail portfolio, from the plus 2% that is in the slide here. Therefore, we are focusing on those poor-performing supermarkets for our next round of AEI opportunities. Next for business park, we see an increase in electronics, engineering and ICT sectors for leasing, which reflects China's push for technology and innovation. Over the last 1 year, these sectors grew about 1% to 2% as a percentage of the BPL's gross rental income. Business park retention rate is healthy at 65.8% in line with historical. Same-store occupancy is 96.6%, indicative of its strong market position and continues to attract MNCs as well as domestic tenants equivalently. Xi'an BP the cluster occupancy is at 76.7%. As mentioned, tenant relocation to fuel AIT occupancy is at 71.8%. But the other asset AIH performed relatively better at 89.6%, particularly popular with electronics tenants. Hangzhou overall occupancy is 80.1%. It experiences high tenant turnover due to the business condition and new supply. Tenant retention is at 50% and to drive occupancy, more tenant incentives are probably needed for this asset. Although overall BP reversion is at minus 4.5%, our Crown Jewel asset [ Xinsu ] portfolio continued to perform well with 3% reversion. For logistics, our new leases are more than renewals, revealing a high degree of trend. Logistics and supply chain management is the largest category of tenants and their business is affected by the international trade situation. As a result, the general market reversions are more than negative 20% and our reversions mirrors the general market. Given these conditions, being able to fully lease out Shanghai Fengxian on a long lease and also substantially derisking the whole logistics portfolio is a good outcome for the year. Because of the Shanghai Fengxian lease, our WALE for Log assets also improved to 2.6 years from 1.4 a year ago. Moving on to portfolio valuation. For the full year 2024, we are down 1.7%. There has been no significant cap rate movement. We took some loss already in first half 2024 for our Log assets. For year-end, we still took some impairment for the smaller and bigger assets. Business park loss was on Xi'an and Hangzhou which had experienced demand supply issues, which I mentioned. We also cut a little bit more to end the year at minus 9.9% compared to a year ago. In terms of sustainability, CLCT continued to make good progress on our sustainability goals. We achieved 5-Star rating for GRESB for the second year in a row. In terms of green certified assets, we increased our proportion to 60% from 36% last year. We also bought more renewable energy in 2024, currently at 10% of our electricity consumption. Next, I will move on to capital management. I'll touch on it briefly and let Joanne cover it in detail. Our gearing, we have maintained our gearing at 41.9% and lower our cost of debt. We are committed to working towards increasing our natural hedging and aim to take it to 50% in 2025. The renminbi rate easing cycle has started and we want to take advantage of these low rates in China now. One of our success story is in 2024 when issued the CNH 400 million 3-year bond, which was at an attractive rate of 2.9%. Joanne, I'll let you take through the capital management findings.

Yes. Thank you, Gerry. Hi, everybody. I think -- happy new year. I think Gerry has actually touched on in terms of our financial highlights. I think this slide gives you a better picture in terms of the key line items that we have. I think overall, our gross revenue and NPI is down, but largely impacted by business park and also some of the one-offs that were taken in last year but not in this year. So essentially, I think that from this slide, our DPU is SGD 0.0264 for half and full year will be SGD 0.0565. Our balance sheet as at 31 December is at SGD 1.12. The drop in terms of the NAV is largely because of the devaluation that we have taken in for the investment properties as at 31 December, and also -- but actually, in fact, the FX rate has not significantly impacted for this current period of NAV. We touched on -- in terms of the gearing, gearing is still healthy at 41.9%, notwithstanding that the [ IP ] valuation has actually decreased by 1.9%. But this quarter vis-a-vis last quarter, I think we saw softening of Renminbi against Sing dollar hedged that has actually helped mitigate gearing. Overall, cost of debt 3.51%. I think this is generally due -- okay -- because we have actually taken into account the favorable rate that we have for the CNH 400 million that we issued in October at 2.9%. And of course, in 2024, we have also the proceeds from something which we have used that to actually reduce our principal amount. And hence, in terms of cost of debt, we also have some improvement from that. As what Gerry has mentioned, we continue to improve our natural hedging as of 31st December, our Renminbi-denominated debt has actually increased to 35% of our overall debt. And in terms of sustainability, also pleased to inform that this year our percentage of the loans hedged in terms of [ sustainability ] has also increased from 31% to 42%. In terms of our financial metrics, you can see gearing, as I mentioned, 41.9%, still holding well despite the drop in terms of our IP. Average cost at 3.1% sic [ 3.51% ] slightly better than last year. I think we see that in 2025 this should be the kind of level of cost of debt that we're seeing, unless we manage to push through some initiatives to bring in more renminbi loans. And with those initiatives, I'm sure that we'll be able to reduce this cost of debt for 2025. Interest rate -- interest coverage ratio is also healthy at 3x. For this year, this time around I've indicated the ICR, which includes the perpetual. And with that -- even with that, it's actually at 3x. And I think ahead of what MAS has required us to produce, this time now, we have indicated what is the impact in terms of sensitivity analysis for the interest rate rise at every 100 basis point increase on the COD, in fact, our ICR will still -- will be kept within at 1.8x, it will be 2.4x. And in terms of EBITDA, 10% decrease will bring our ICR to 2.7x, which is still well within the 1.8x described by MAS. I think the rest of the sensitivity here that you can see, we also usually show the Sing dollar loans floating rate, if there's any high in terms of the rate. At the 50 basis points, I think the impact to DPU is about 1.1%. But on the flip side, we are seeing that the easing interest rate from Renminbi, will be benefiting to CLCT. And in fact, the proportion of our R&D loans vis-a-vis the Sing dollar floating is actually higher as you can see. If we expect a 50 basis point reduction in terms of LPL, we should see a higher savings vis-a-vis the 50 basis point in dollar booking rate increase. Yes. Overall, we still maintain a high hedging. As of 31 December, we have actually hedged 68.6% of our 2 half non -- undistributed income. In terms of maturity profile, I'm glad to inform that the SGD 200 million due in 2025 in February, we are really -- refinanced this portion and this will be extended to 2030 and 2031. In fact, we have actually refinanced them at a lower margin, I mean despite the increase of the base rate. And in terms of the -- on the right side, you can see the pie chart, I think we are very well diversified in terms of funding sources. Over the years, we have increased our more and more Renminbi-denominated kind of bonds. We've issued FTZ bond in 2022, then in 2023 -- and then 2024 we issued CNH bond. And furthermore, I think we also increased our CCIRS in order to bring more renminbi onto our balance sheet viz-a-viz [indiscernible] loan debt that we usually have. And overall, our fixed floating is at 76% of 24% floating, which I think is quite a good level that we are hitting. Yes. Okay. In terms of distribution details, this is just more for Logistic for you to take note. Our last day of trading cum basis is on 12 February and ex date will be on 13 February, and the distribution date is 27th March. I think with that, I'll pass on back to Gerry to give you more insights in terms of portfolio overview.

I'll go straight to roundup of our strategy for the year ahead and some outlook. CLCT's strategy is to build a diversified portfolio to capitalize on China's domestic consumption growth and innovation-driven economy will create a lot value through portfolio reconstitution and resilient acquisitions, AEIs and proactive capital management, which Joanne has elaborated. For AEIs, would like to highlight again our track record of successful AEIs. This will be an important avenue for us to grow revenues by waiting for domestic consumption to recover. Our 2023 AEIs on supermarket anchor spaces achieved a blended ROI of 14%, after an initial period of downturn. While identifying -- by identifying opportunities to unlock more value from such AEIs, in 2024, we did some smaller reconfiguration in [indiscernible]. Our next batch of bigger AEIs in 2025 has been identified. They involve unlocking value from lower-performing supermarket space, which I've mentioned earlier. The first one that we are unveiling is Wangjing where we are converting a large old format BHG supermarket space, into a smaller new concept supermarket, complemented by trending retail and F&B outlets to enhance our product offerings and shopper experience. Some downtime is expected but we expect double-digit ROIs once it is open from 4Q 2025. We will have a few more such opportunities, so please look out for them in future quarters. While we focus on unlocking values from our assets and capital management, a big catalyst of course, is the macro environment and policy stimulus. The Chinese government is focused on achieving a GDP growth 5% for 2025. Multiple government announcement and signal their commitment to stimulate this economy, domestic consumer demand has become a top government agenda. Some direct consumer support has started to flow, including trade-in programs, consumption vouchers and salary increases for civil servants. Property and stock market are being propped up with various policy adjustments and measures. The PBOC has also moved into loose monetary policy mode, and we expect further cuts in 2025. All this fortify our belief that we are at the start of the policy stimulus cycle and 2025 should expect and to see more support from the government given to the economy. As for CLCT, we will position ourselves in the best possible manner to capitalize as China recover. For Retail, our outlook is pretty similar to 2024. We see stable to maybe very small negative reversions because of the subdued consumer spending, but with strong occupancies for the retail portfolio. We are well-positioned for Retail portfolio when domestic consumption grows with direct consumer stimulus. Our proven track record in AEI will also help us in the meantime to enhance the resilience of our retail assets. For business park, the business climate remain cautious and some submarkets may continue to face pressure. We expect negative single-digit reversions. We will also see some NPI weakness with the difficult market in Hangzhou and Xi'an and extended that view that we have for the AIT asset. Our portfolio leans towards innovation-driven sectors, including electronics and technology for our business parks, which government policy signals stronger support. We will focus on these policy aligned areas to better position our assets. For logistics, demand and supply issue will make it challenging for many submarkets in the next few years. We are thankful that we have managed to stabilize our own logistics portfolio. This sector is still exposed to geopolitical risks and trade uncertainties. And we see smaller negative reversions for our portfolio compared to previous years. We will continue to review portfolio reconstitution options for Log assets when there are opportunities. But certainly, we are committed to maintain a high occupancy for them. Finally, we will also step up our efforts to reduce risk, diversify both our assets and debt base and improved cost of funding by doing more renminbi denominated financing. With that, I finish my presentation.

Thank you, Gerry, for your presentation. Now let's proceed to the Q&A segment. I can feel the enthusiasm of the participants online already. So we have the first question from Terence. Terence, can I pass over the time to you, please? Terence JPM.

Thanks, Nicole, and Gerry. Yes. So congrats, Gerry, just wanted to ask -- given that in this new role, I wanted to ask on your -- how you see the strategy going forward? I mean, you have mentioned a little bit about portfolio reconstitution, especially for Log. But how else would you look to change the assets? Would you look to also divest some of the underperforming models. Do you see any opportunities for perhaps looking at other sectors or other geographies? Yes? Maybe we'll start there.

Yes. Thank you. I think besides the logistics park, which I mentioned, there are some other weaker assets in our portfolio. Xinnan has been something that's been highlighted before. And certainly, if there are opportunities to recycle them, that's something that we are looking at. So we have indeed put some of those Retail assets and focus on that to see whether we can recycle them. So that's one thing that we are doing. The other thing that we're doing is there may be some -- there will be some assets even in this environment that could be quite sought after. So in those cases, we may think about getting partners to give us a little bit more liquidity and you talk about acquisitions, with the new liquidity, of course, I would like to look at new acquisitions, maybe not immediately but where we have the liquidity, right? And we'll be focusing on more resilient sectors China. Right now, from what we see core retail seems resilient, looking at our experience with our own retail portfolio. For business park, the industrial sector of business park is resilient. So that's 2 examples. We may eventually also look at other -- our other jurisdictions within our mandate, our mandate. Our mandate, as you know, we are -- besides Mainland China, we are also allowed to invest in Hong Kong and Macau. So if there are resilient sectors in those -- resilient assets in those sectors in those countries, we will also look at it.

That's very encouraging. Maybe I can maybe focus a little bit more on, let's say, business parks. You did mention that AIT continues to be a bit challenged. We also have seen some declines or actually occupancies are relatively lower in Hangzhou. So maybe you could focus on these 2 sets of assets, and walk us through the backfilling or potentially if there's any potential weakness coming out from there for this year?

Okay. So maybe the AIT asset, which is -- which I think we have already explained about the pretermination of a large tenant that's from 3Q of last year. We have been looking to fill that tenancy. Last year, we had 1 potential tenant coming in, but that has been delayed. Some decisions have been delayed on that part. So we currently are looking for more alternatives so that we don't need to wait for that potential tenant that we were engaging with last year. So there are a few leads and I think we feel good that there are at least a few leads that we can work on to basically ramp up occupancy in AIT in 2025, right? That's for the AIT. For Hangzhou, the whole ecosystem, the old cluster there, basically, the Hangzhong market has quite a bit of supply. So what we experienced is we are signing a lot of research, but a lot of tenants are also exiting the market. So you can see that our occupancy actually don't move that much is about maybe 80%, then some quarters is below 80%, and then we try to push it back above 80%, right? It doesn't mean that we're not doing anything, but we're actually signing a lot of leases, but there have been some dropped out. So we will continue to -- we continue to work on the Hangzhong clusters by trying to reach out to more tenants. We may have to take more reversionary with rent losses -- rent drops in order to attract that. So we are looking at some of those incentives, that we can use to entice tenants to come in.

And maybe a final question for me. You did mention that we are looking at about 50% natural hedge for this year. So -- in terms of financing costs, what's the outlook for financing cost this year?

Joanne?

Yes. I think just I mentioned, if we don't do anything right now where we are seeing in terms of our cost of debt, I suppose 2025, I'm expecting this kind of level of cost of debt. But of course, with any initiatives that we are able to execute this year, [indiscernible] bonds and whatnot, it will definitely -- it will bring down the COD from what I'm seeing right now at this level. So we have a low 3% overall.

So I can share that, actually, we are certainly, looking actively at the renminbi bond market that includes [ tender ] bond, that includes FTZ, the other form of renminbi-denominated, [indiscernible] bond for example. And those rates are actually quite attractive currently, yes. But it will take some time. Ye, tender bonds requires regulatory approval. bonds requires regulatory approval. Income bond, maybe more market driven, but there's also windows where we get -- we can and cannot do it, right? So we'll be working very hard this year to make sure some things gets done.

Sorry, maybe just to clarify, can I get a sense of how much lower the -- let's say, [indiscernible] in some bonds versus signal the fixed rate.

I think if you look at a 3-year fixed rate margin of, I mean, let's say, [indiscernible] plus another swap rate of around 2.5%, that will bring to about 3% -- over to close to 4%. But I mean, if the recent CNH bond that we have done is actually 2.9%. This is the kind of differential that you're expecting to see.

Can I now pass it to Terence from UBS?

It is Terence from UBS. The weakness in the logistics segment has been ongoing for a while and certainly longer than the WALE period already, so has all the rents been re-based to market rates as of now? And also, is it the expectation that market rents will not see another big step down 1 leg further?

I think generally, the market rents have been mark-to-market -- our rents are the mark-to-market over the course of the last 2 years. And you can see that the reported reversion has been quite big changes. Going forward, as I shared, the market is still weak. So I cannot say that there will be no negative reversions because the whole market is weak. We will probably track the market. But because we have already marked down our rents to low levels, right, the level of negative reversions will not be of that managed of previous years.

Got it. And if you can help us understand what was the effective FX rate that was used in 2024? Because if I just look at how the rate has moved from start to end of year, doesn't seem to have moved much. So, I guess -- I'm trying to figure what's the continuing or the lag impact of this FX? And also at current levels, where does the hedge rate stand versus the spot rate currently for us to understand the ongoing impact going into 2025?

Joanne?

Yes. So for the translation mix that we have used for reporting, for 2024 as an average rate is 5.38 vis-a-vis 5.243 last year. So it has been a weakening of the RMB by 2.6%. And obviously, for the balance sheet we have used another rate, which is at 5.391 versus 5.366 last year. So I think if you were to see how we have translated our book, these are the true rates that you will be using. And to your question as to what is the outstanding rate that we have on our hedges, I think it is around 5.39, 5.4-ish account level because that was the level that we have entered previously. And obviously now, we see that the rate has actually softened. So we will continue to look at how we -- when we will lock in the levels. And this kind of level will just continue to move and will just keep on averaging -- we get into the -- we're averaging out in terms of whatever we have on the hedge out there, yes.

Got it. And I know it's probably not a fair question to you, Gerry. But I think a few years ago in 2022, especially during the listing of CREITs, I think the business park portfolio actually saw a 12% valuation increase. And in 2024 so I think there was some logistics CREIT IPO, I believe, had a tight yield. So my question is, did the valuers not take this into account to support the, I guess, valuations for your logistics assets. I get that there are some stuff on the market on sale, but I think the valuers have typically or at least the narrative is that valuers do not tend to pay much regard to distressed assets on sale. So how should we think about this now?

I think if you look at the valuations, I mean the cap rates didn't really shift. So if you take that as an indication that -- certainly valuers did not take into account some of the distressed sales that we have read in the news, that's number one. The CREITs have proven to be quite a good indication or the current market levels of basically transactions because it's been growing. And I think that perhaps would have gone into the valuers' minds when they decide whether to shift the cap rates or not. So they have cap rates pretty much unchanged. What really affected us, as I said, is our -- some of our assets specific issues. The weaker retail malls, for example. And of course, the business parks, some of them occupancies have dropped. The outlook is a little bit poorer because of the supply situation. So it's really on the NPI and outlook that affected our valuation, not so much cap rate issue.

I think the valuers have definitely looked at both the capital market as well as the CREIT for referencing where the cap rates would adopt like what Gerry has mentioned. I think in this cycle, they have not really shifted much. I think that's also consistent generally with what we are seeing, what you have mentioned in the previous round of business park, I think there was because of the timing that the series come in, the business parks could justify cap rate compression from a more illiquid kind of asset class to a more liquid now given the market development. So I think that's what happened back then in 2022. But I think in this round the valuer has taken in, I think, both market development as well as wider market. So I think that's where it is, which I think went in our discussion with valuers, we always ask about all discussions as well.

Can we pass the time on to Geraldine, please?

Can I just ask, Gerry, on your thoughts about share buybacks? Do you like it? Or do you believe that there are better avenues to channel funds? And so if you were to consider buying back shares, when will be a good time?

I think at this moment, my immediate focus is stabilizing the portfolio. And if you look at -- if you look our gearing is above 40%, right. So it's probably not the best time to embark on large share buybacks of -- that we will shift the market because that will certainly tap on our gearing capacity, right? So with that in mind, I think in the next few quarters, I probably will not be in a position to do so. But of course, as we look at our portfolio, if we have big portfolio actions, big reconstitutions and that give us excess liquidity, then we can certainly look at it.

Okay. So if you were to do a divestment, then potentially you might consider buying back shares?

Yes, it will be a big one. Yes, that allows us to manage both gearing and some buybacks.

Okay. I understand. A quick question on the cap rates. Were there any change in the cap rates across your 3 asset classes?

You, the details on the cap rate. I do think so...

Yes. No, no. I think we don't see any immediate movement in the cap rate. In fact, I think with the exception of changing valuers, where I think they have sort of adopted slightly different approach. But I think where the valuers have stayed the same, I think the valuer -- the cap rate for the property has stayed the same.

Okay. Okay. Got it. And maybe a quick one on the Retail reversion. There was a note that said that the new leases were signed at negative 4.3% which is below the average reversion for Retail at minus 1.1%. So is it the case that you are -- are these leases concentrated within your weaker assets such as Xinnan. Or are you giving a little bit of discount to stabilize the occupancy rate. Yes, if you're able to share on that?

You?

Yes, sure. From an asset point of view, I think definitely we have more assets with a positive reversion than negative. And then you are right that the weaker assets, mainly Xinnan and some of the other -- I mean 1 or 2 smaller ones that actually we do see some more negative reversions. I think that -- having said that, I think it's not necessarily the new -- I mean in our malls, you can appreciate that every year, we have like 80, even more than 100 leases for the bigger malls. So there is also spread of reversions. So even within the same malls, we actually do have need to bring in new tenants to refresh some of the tenancy brand and then to without some of the nonperforming tenants by sales or by occupancy costs. And that will inevitably lead to certain negative Rental reversions. But I think in the better malls, we are able to balance it out with the renewal -- with the ability to bring some of the newer tenants even also with positive reversions. So I think that's the overall perspective but hard to say whether the -- all the negative reversions are in 1 asset or 2 assets. It's not generally the case. I think it's spread out, but there are certain trends for most. Yes, you are right.

Okay. So it won't be the case that the new leases is seeing some -- any form of softness in rent?

For the weaker assets, obviously, I think, you shared for example, Xinnan, right? We need to bring on new tenants. So obviously, those tenants have contributed quite a bit in terms of negative reversions to do...

Can we pass the time to [indiscernible].

Just two questions from me. Firstly, I'm very glad to hear that Shanghai Fengxian has been leased out. Wondering if you're able to share on the rental reversion from there, and whether we're expecting any sort of CapEx or feed outs for the tenant? And secondly, in a related vein, we are seeing actually quite a sizable number of leases coming due in 2025 for the logistics park. So you did mention that CLCT will look towards portfolio reconstitution given the continued challenging market. So I was just wondering how would you balance between maintaining occupancy and divesting at a reasonable valuation and where may you look to redeploy proceeds in terms of the different sectors?

Okay. So maybe on the lease for Shanghai Fengxian, the reversion there, I mean, in line with what we have talked about the market reversions at even more than minus 20%. So in order to bring someone in to fill the whole asset, we also have to give such reversions against whatever currently we have been leasing up for that space. So that's one. So definitely, we lowered our rent to attract the occupant. When they come in, right, they will have a period where they are doing some renovations.

Yes. So in terms of CapEx, I think we do expect certain CapEx. This will be shared between the landlord and the tenant both. I mean in terms of long lease, it's quite difficult, I would say. And then the fact that the tenants are actually putting CapEx also increased their thickness. I think that's generally the few.

It's not a huge amount -- in the first place, it's not a huge amount. But it's good that they are putting CapEx, yes? So that would allow them to be committed and sticking to the lease. The other question you asked about reconstitution, I believe. And after reconstitution, where CLCT will be looking at?

Yes. And also how you balance that with maintaining occupancy for the logistics parks because there's quite a number of leases that are coming due next year.

Okay. So the logistics please. Yes.

Yes. The fact that we are a listed REIT, and we need to distribute income. I think we definitely will still prioritize occupancy. We would not want to leave it empty just so that we can sell it because in this current market, any sale is not, I would say, easy. We will also need to evaluate that the option of whether the pricing and everything is indeed bring the value or better for the unitholders. Having said that, in negotiating the lease, we will be cognizant that there's a possibility of reconstitution. So we will try to obviously have the flexibility of doing so. So I think that's as always part of puzzle of our asset management and leasing strategy. So I think that's not different.

Just to give a little bit color. For example, the Shanghai Fengxian lease is 8-year lease, right? But we have also negotiated some termination options, right? So that enables us to move if there are some better options come available. For example, the rental market move up or there is a buyer that we'll be able to buy these assets. So that's one point. The second point is when we engage with this current master lease tenant, one of the attractive parts about this tenant is that they actually are buying it for their -- sorry, actually leasing it because they like the asset. It's a stand-alone asset where we can control the whole site right? And it's in a good location near the port. And they are also one of the top 3 logistics -- top logistics player in Shanghai. And they are indeed looking for more assets actually to buy for their own end use. So in a way, we are, in fact, setting up a position where it could potentially be a lease to buy situation, for this tenant.

Can I pass the time on to Jesse from [indiscernible].

Congrats on the results. I kind of want to also ask about the logistics park performance because I understand that in the past financial year, reversions were kind of 24.5% negative, right? With the current Trump administration and the announcement of tariffs, what is your take on how this might affect like CapitaLand China Trust and its portfolios. Because I can imagine, I mean, the logistics sector if it was already affected by global price issues and low demand, I'm not sure how that will pan out for the coming year?

Maybe I can chip in to add a bit of color on our logistics portfolio and the tenant profile that we are attracting. With the exception of Shanghai, which actually is indeed nearer to the port as well as some of the Tesla manufacturing facilities, which is a bit of specialized. The other 3 maybe in Kunshan, Wuhan as well as Chengdu, they are actually servicing more of the domestic -- the domestic consumption as well. So in a way, I mean, for example, there will be the 3PLs or the suppliers for the -- I would say, like 7-Eleven kind of a chain supermarket stores, right? And we also have [ Jingdong -- JD ] in our -- 2 of our properties. So I think these are the quite predominantly domestic. Obviously, they are also in a cycle of sort of trying to rationalize their cost, as well as given the overall market need to be more cautious and -- but also have more options given the supply situation. That's why I think you see the reversion generally is not favorable to the landlord. But I have -- so what I try to explain is actually in terms of the geopolitics, I think we are slightly less shielded as for that issue that -- from it because of the fact that we are also quite -- our tenant profiles are quite domestic.

Okay. I think just to add on to you, Hong, I think you pointed out Kunshan, Wuhan, which are more -- which will be more domestic focused. I mean that's a good part, which is -- which -- that's always some protection. But of course, on the other hand, Shanghai Fengxian, which is near the port will be more trade driven. But we are thankful because -- which is why we are very thankful that we secured this 8-year lease. And I would say that, that part has also been derisked to some extent, right? Of course, we need to continue to monitor the situation, because the situation is volatile.

One more question from me. So I think you did mention that CapitaLand China Trust might explore portfolio reconstitution efforts for the logistics portfolio. So like in the case that this happens, what kind of assets would you think of recycling? What kind of assets do you think of acquiring?

I think I mentioned for the logistics portfolio, we will obviously see which -- I mean like what, You Hong, said is not so easy to make a sale for the logistics asset at this moment. I've mentioned that 1 opportunity is our [indiscernible] where we are positioning this tenant now as a potential lease to buy option. So that's something that we have made initial steps right? If things go well, we potentially sell. So that's 1 option. The others, we have to look at what kind of basically, the level of liquidity varies in the market at this moment. And of course, if we manage to find some liquidity and sell those assets, as I mentioned, we will be focusing on the more resilient parts in the China economy. That will be the core retail, the core industrial. And perhaps when you look at geography outside Mainland China, but within our mandate in Hong Kong and Macau and look at more resilient part of those areas -- those economies to invest in terms of asset class.

Hi, Derek, Can I pass the time onto you please?

I just wanted to ask a few follow-up questions. Sorry, if this has been asked just now already. I just came from another call, but my focus is on your thoughts for 2025, right? You talk about asset constitution. But I'm just wondering whether from a very realistic standpoint, I mean a lot of people are wanting to sell and buyers vouchers. So I'm just wondering whether while this is part of the plan, how realistic do you think we will be able to see you selling something? Or the reality is that we should be just hunkering down and just squeeze as much as we can in our portfolio? Yes, I just wanted your thoughts on this?

Actually, I'm doing both. I'm squeezing as much, number one, which you can see I'm positioning -- unlocking value from some underperforming supermarkets, which are good opportunities. And I'm also driving the team to reach out to more local partners because the liquidity now is all in the local hands, right, which is -- you rightly point out, it's not as easy as in the past where there are foreign -- a lot of foreign capital in the market, right? But I'm cautiously optimistic because CapitaLand has been in China for a long time. We are, in a way, the massive leading company which the China-owned businesses, like SOEs and insurers feel comfortable with working with, right? So when we go there, we can speak to them, and we can maintain a good relationship. And hopefully, there are some things in our portfolio, which we want to sell and they want to buy and can strike off a good deal.

Yes. I think just to add that we are not the kind of desperate sellers, which also means that it's not as easy to -- like -- it's not like any price I would take. And then so I think a very important principle. We will always look out. And where the opportunity lies, the way I see it is actually we needed to dig deeper because I think cases like Chongqing, we really, really needed to find that really who is actually -- can see the value in the piece of real estate and can actually pay for its best use? And then this is where the opportunity can be struck. I mean we are not going to sell the asset in terms of the super high yield which -- to begin with, we're actually [indiscernible]. So I think that's...

We are not selling below the market yields basically [indiscernible].

Just one last one for me. Look at the business park and the logistics, I think we are negative, I'm just wondering whether is this segment, giving you a positive spread on a post-tax basis?

Okay. His noise is a little bit affected. But I think I can hear you. [indiscernible] for the business park, the answer is yes. We are still early on a portfolio basis, a positive spread over.

How about logistics?

Logistics. Yes, logistics we are probably came down a bit. So I think this is the part that will have to, like I said, prioritize the occupancy first, and then -- and see what's the opportunity like if there are opportunities to replace it and then go into some higher yields, we will do it.

Yes. So in short, it is below...

Cost of debt?

Yes.

I noted that we are past the hour, but I do want to make sure that we get all the questions in to extend this a little bit more. Joel, can we pass the time on to you? And then Karen, UBS. I'll circle back to you again.

I just had two questions. The first is regarding the Shanghai Fengxian Logistics Park. Could you share if there's any rental escalation or indexation over the next 8 years? My second is, could you share the numbers or...

It's typical 2% to 5%.

3% to 5% over which period? Yearly or...

Yes, yearly.

Yearly. Okay. My next question is regarding the Ascendas Xinsu Business Park. I noticed that it's actually outperforming the market quite significantly. You've been able to hold your occupancy above market and quite stable, so at 96.6%, even with positive rental reversion. So just wondering what's the secret here? And could this potentially be under track?

I will say that this business park is actually -- a portion of it is industrial, which helped us like what you have mentioned is more resilient. This is the -- even the R&D a bit specialized sector is also in a better shape, generally speaking. However, I think is in the part that we are entering the earlier. I think our location is indeed in the center of the [indiscernible] National Park which becomes quite core. And I think even our local teams have [indiscernible] the market also likes our product. So generally, I think we are able to hold the occupancy as well as the rental revision better. So I think going forward, it's hard to say. But I think, at least for now, we are seeing that it's more resilient than the other two.

If I look at the MNC in our [ Xinsu ] asset, we continue to be there in high proportions, which is obviously quite different from other business parks. And I think that really boils down to the reputation. This being a Singaporean-run, Singaporean maintained asset. And that's a tremendous advantage to have.

Terence, can we go back to you before we hand the time to [indiscernible] please.

So we've seen like a fair amount of revenue declines in 2024. And it seems like the portfolio is also suffering from the effects of operating leverage. So margins suffer as a result. My question is, is there a lag we should consider in terms of the ability to reduce costs? And I guess, in essence, should we expect margins to stabilize or improve from here?

I feel that margins should be stabilizing. I mean, Terence because our focus in 2024 has been to cut costs. 2025, we are still focusing on areas where we can cost optimize our debt initiative will also kick in. So that's my broad view that margins should not shift much henceforth.

Yes, margin, I think we have observed that other than those one-off items, generally, the margin is focused around 61% for the Retail portfolio and 70% of BP.

And I see -- I mean DPU has certainly fallen and that gap has widened against 2023 strong. I know you can't guide for 2025, but for your narrative, it sounds like borrowing costs, FX, this risk seems to be -- the bulk of it seems to have coming on, hopefully, and it seems like on the portfolio side, you're standing some of the occupancy issues, maybe a bit of negative reversions to come, but it sounds like it's not so deep. So is it fair to say then that DPU outlook for 2025, if any decline, it should not be in the order of magnitude we've seen in the past 2 years?

Certainly not in the order of magnitude, you're talking about double-digits magnitude. I don't think that's where we are at this stage, right? But of course, we are positioning the portfolio for better retail revenues. So we're going to do a few AEIs, then some downtime that will fit into 2025. But you're right in the sense that I wouldn't be expecting that kind of big double-digit decline.

Thank you Terence. Hi, [indiscernible].

Yes, I've got 2 main question. And the first one is, what are the logistics transactions that are taking place like in dollars in renminbi terms versus the valuations you have on your book? I mean, are they about the same? Or are they a lot lower if you could? And also the business park, but business parks are a bit more diversified. So it depends on what they -- it depends on Hangzhou or Xi'an.

So you're talking about transactions in the market or in BP versus our -- what we are currently holding in our books?

I think for the logistics assets, people -- I mean if the some of the insurance players also reference to [indiscernible]. They are looking at sort of yield of around 5% or even slightly shy of that. So I think that that's where they are looking at. I think in the past, people look a bit more on the capital value per square meter, but this latest batch of investors are more yield driven. I think the same could have been said for the business park. Generally speaking, I think we are seeing -- they are looking at a healthy 5-ish kind of this yield for the asset.

So what is that the NPI yield of your business parks and log assets then?

I think our BP are in the 5% to 6% -- close to 6%. Our logistics a bit lower given the [indiscernible] yes.

The other question of course is a CREIT market. I mean, is there any likelihood you could do like there is a secondary listing in Shanghai or anything like that, have you looked at that? Because I remember many, many years ago, that CapitaLand was looking at the CREIT market.

Yes, you're right. You're right that the CapitaLand has looked at CREIT market. I think it's continued the market of interest for CapitaLand, right? CLCT, of course, will be guided by the sponsor in terms of where they're going on that front. And indeed, the go ahead with it, we may or may not participate. So we have to see through.

Yes, I think we are watching this space...

Yes. [indiscernible] your kind of assets because I believe the retail assets also allowed...

Yes. I think -- If I remember the latest in the market, I think it has performed quite well in the sense that the stock market had a good run for the past couple of months. So they are trading initially. Last year, it was about 5%, now it's about 4-ish.

For the bigger retail consumption, what they call consumption CREITs.

Do we have any last questions that might be coming through? Okay. I don't think we have further questions or hands raised. So we hope this discussion has offered you valuable insights into our operations and future outlook. So please feel free to reach out to me if you have any questions. So again -- once again, happy new year to everybody, may the Year of the Snake bring you lots of happiness and good health. Thank you.

Thank you.