CapitaLand China Trust (AU8U) Earnings Call Transcript & Summary

Hi. Good morning, everyone. Thank you for joining us, CapitaLand China Trust First Q 2025 Business Update Call. I'm Nicole, IR for CLCT. I have with me Gerry, CEO; Joanne, CFO; You Hong, Head of IPM. So for the next hour, we'll start with a brief presentation to provide an overview followed by a Q&A session. Once the presentation concludes, we will open the floor to question. [Operator Instructions] I'd like to pass the time now to Gerry. Gerry, please?

Thanks, Nicole. Welcome, everybody. Thank you for coming, joining us this morning to join us for the CLCT business update for First Q 2025. First, just a quick snapshot again of our portfolio. The biggest portion of our portfolio is retail. This is the largest, most resilient asset class, 71.4% of GRI. Business Park is a smaller subset of it, 25.1% and then Logistics Park, 3.5% GRI. In terms of our First Q results, the key highlights, gross revenue dropped by 6.1% year-on-year versus First Q of 2024. Net property income dropped by 6.6% versus First Q of 2024. One thing to note was in 2024, the first half of the year was a much stronger year, generally speaking, whether it is for CLCT or for most commercial and industrial players in China. The other thing to note is that you will know that we are doing some supermarket upgrading, some of the AEIs that we have announced. We have announced the supermarket upgrading in CapitaMall Wangjing in the previous quarter. In this quarter, we are also happy to share the supermarket upgrading plans for CapitaMall Xizhimen and CapitaMall Xuefu. So those upgrading or AEIs have basically affected some of the gross revenue and NPI numbers that you see today, which is why we excluded some of them for you to see what is the effect if we have excluded them. There was another significant event or another significant thing that happened in the first quarter of this year. In Hangzhou -- one of our business park, Hangzhou Phase 2 had one of the big tenants basically pre-terminating and we had to take over the space and then backfill some of the spaces. We have been moderately successful with it, but there has been some -- of course, some cash flow impact in the short term. So excluding the business park service office tenant and the supermarket upgrading, our gross revenue would have dropped by 4.4% and our NPI would have dropped by 4% instead of the 6% that if you included those 2 effects. In terms of retail segment, if you exclude the supermarket upgrading, that segment itself revenue would have declined by 2.7%, and that's mainly due to the weaker rents at CapitaMall Xizhimen. Business Park segment, the revenue would have declined by 9.6% due to the lower occupancy at Hangzhou Phase 2 and AIT, which we are still trying to backfill the previous -- the space that was left vacant in last year around second and third Q. Logistics Park, that's a positive sign this time around. We have managed to increase the revenue by about 3% due to the increase in occupancy at Kunshan. Overall, there was a decline in NPI due to the drop in gross revenue, offset by savings in operating expenses. We saved about 5% year-on-year for the overall portfolio. Some of the key milestones recently in the first Q and that we have embarked on and successfully completed. We have announced the proposed participation in the C-REIT -- CapitaLand Commercial C-REIT. So I won't go through too much of it, but I think we have made announcements, and we are very excited to be able to present this participation opportunity. We have just done some of the communications earlier on. And the key point about this is it is a strategic opportunity for CLCT to participate as a key stakeholder, right and it broadens our access to China domestic capital market and give us a chance to have control of a vehicle where we can unlock value of merchant assets. And at the same time, the C-REIT units itself have potential upside for our unitholders in CLCT. The other thing that we have executed was to successfully issue a CNY 600 million bond. That was also in April. We launched this and the pricing was at 2.88%, which is better than the last bond that we did at 2.9%. So again, we executed well. So now we are about 41% of our loans are renminbi denominated, and we are working towards 50% by year-end. This is an interim target. If we manage to hit this earlier, we will try to push for more. In terms of sustainable loans, we have increased it to 56% from 36% 1 year ago. Now breaking down the segments, some operational updates. Retail continued to have high occupancy, 97.7%. That's about -- that's the same as 1 year ago. Our key malls like CapitalMall Xizhimen, Xuefu, Nuohemule still enjoy very, very high occupancy, almost fully leased or fully leased. In terms of rental reversions, we benefited for retail. We have a 0.5% positive rental reversion. This is boosted by the upgrading of supermarkets at CapitalMall Xizhimen and Xuefu, where we signed new lease with the new supermarket and concepts that are coming in. So that's positive. If we exclude the 2 supermarket lease that we signed and the reversions and seen under reversions will be about minus 1%, slightly negative, which is similar sort of trajectory to last year, which we reported just slightly negative reversion. In terms of the bright spot for reversion, F&B and IT continue to be bright spots, scoring single digits positive reversions for First Q. For retail portfolio, we just want to emphasize again, low exposure and reliance on U.S. imports for our retailers, for our tenants. In terms of business parks, our occupancy did drop from December 2024. There's still a lot of -- there's still oversupply in the market. If we go through each of the portfolio and they have different reasons for it, which I will explain. For Xinsu, it continues actually to be stable and it has a strong positioning. We still have continued new demand for international companies. And the drop from, I think, about 96% to 94%, 96% was December of last year, predominantly was because one of the tenants left to a new location, and we were getting -- we have already got in a commitment of a new tenant, but there was some transitionary gap. So we should see this occupancy go up -- back up by second quarter. And in terms of the Xinsu, in particular, I think last -- we mentioned that the Xinsu portfolio, there are some manufacturing tenants who may have some U.S. exposure, but it's only contained to a small handful, right? So that's number one. Number two, we have also surveyed the majority of large industrial tenants who are expiring in 2025 in the Xinsu portfolio, and they are committed to renew. So with those few data points and our understanding about our tenants in the portfolio, our assessment is that there's limited U.S. exposure -- U.S. tariff exposure for our particular tenants in the Xinsu portfolio. Next for AIT and AIH. AIT, you can see the occupancy is 74%, AIH 91%. AIH, of course, is doing well at 91%, improvement in occupancy with new tenants in ICT and electronic sectors. AIT has been gradually backfilling the space that was vacant from last year. So we'll continue to do that to continue to push the back filling so that we can get back to a better position by this year. Next, Hangzhou. Hangzhou occupancy as a class is the lowest of the 3 clusters. For Phase 1, the occupancy is 71%, Phase 2, 70%. We have reported earlier quarters that there's been a lot of churn in Hangzhou. We are doing a lot of new leases, but there's also been people who have left us, right? Particularly in the first Q, there was -- in Hangzhou Phase 2, there was a pretermination of a service office tenant, which occupied about 19% of the Phase 2 NLA. So what happened is when the preterm -- when we took over, our property managers quickly backfill about 9%, and there's another 3% that's looking to be backfilled in April, right? And we actively did that through our property managers who directly engage with the service office subtenants to sign them up. So we are still doing active leasing efforts in order to secure tenants for the remaining space. The bright spot to this is as we backfill these tenants, as you can understand, when we did this master lease to the service office tenant, as a master lease, the rents tend to be slightly lower. So as we backfill and directly sign the leases with the subtenants, we were able to get a slight positive rental reversions on that space of 19% of NLA for Phase 2 of Hangzhou. In terms in of logistics parks, Logistics Park, high occupancy, predominantly because we have signed the Shanghai Fengxian Logistics Park with our master tenant for 100% of the space. That tenant is still currently doing CapEx works to improve the property. The progress has been very smooth. They have done about 60%, 70% of the work. We expect it to be completed on time, and we expect to get our first rents cash-wise in July of this year. In terms of the Wuhan and Kunshan, they maintained 100% occupancy. The one that slipped was Chengdu, and that's also transitional. There were some tenants who left us and we are backfilling them with some lease of committed tenants. So we are in that transition period. And the next quarter, we should be able to see it bump up to closer back to the 4Q occupancy, which is closer to the high 80s number. Again, Logistics Park, just to report in terms of tariff impact, the 3 of our logistics park, Wuhan, Kunshan and Chengdu they focus on domestic distribution. The master lease tenant in Shanghai Fengxian is in the export trade, but he has little exposure to the U.S. market. Moreover, he's carrying out CapEx, committing his money, and he has signed an 8-year lease with us. So he is very much anchored to the facility. So we see minimal impact or little risk from this tenants. Some highlights of shopper traffic and tenant sales. For the retail segment, shopper traffic grew 2.4% for the first quarter year-on-year. Tenant sales was mixed. It dropped 2.4% on an overall basis, but that's very much predominantly caused by the supermarket upgrading effect as supermarket were basically hold up to do works. So we actually lost a big portion of the sales there. So if you look at -- if we exclude the supermarket upgrading at CapitalMall Wangjing, Xizhimen, and Xuefu, the first Q tenant sales would have grown by about 1% -- 0.7%. Our occupancy costs are still very healthy at about 17.7%. In terms of the key trade categories, again, you can see some of the strength that we have reported in previous quarter in F&B, we are about plus 5%. IT was a stunning uptick of 22%, driven really by consumption vouchers that was given up during that period. Leisure and entertainment also a very big improvement of plus 11%. There was a blockbuster that was showed during this period, Ne Zha 2, maybe some of you would have seen it or heard about it. So that definitely was very popular in China and people flock to our malls to the cinemas to watch it. Jewelry-wise, we've also got an uptick plus about 9%, of course, very much driven by established brands and Chinese New Year is a good time for many people to buy jewelry. So those are some of the key trade sectors that have improved. Next, I'll pass it to Joanne to talk a little bit about capital management.

I think for the capital management fund, Gerry has actually touched on a little bit, but I'll just give a brief on the composition as of 31st March. As you can see that our total debt has actually inched up a little bit, most because -- mainly because of the temporal timing difference that we had to actually pay our distribution in March, and we haven't really gotten our cash. But rest assured, we are still to be able to bring the cash, but it's just a timing difference, which is why then you see that gearing has actually gone up a little bit to 42.6% and also because at the back of a weaker renminbi. But we are pleased to say that our average cost of debt is remaining -- remained at steady 3.51%. And we have also extended our average term to maturity to 3.9 years. On the interest coverage ratio, we are also healthy at 3x as based on what MAS guidelines, we have also done the analysis. So with the 100 basis points movement in terms of interest rates and also the 10% increase in EBITDA, we are still well within the 1.8x by MAS. So this is just another pictorial of our maturity profile. We have done all our refinancing in 2025, nothing needs to be refined. Any actions that we are doing for replacement of Sing dollar with renminbi will be very much opportunistic. So like what we have mentioned, we have done the 2.88% at CNY 600 million in April. With that, our renminbi to total debt will be at 21%. I think on the right side, you can see that our funding sources has been expanded. So we have a mixture of renminbi loans and also CCIRS to help us reach our 50% target for this end of the year. Okay. With that, I think I'll let Gerry talk to the rest of the slides.

Okay. You can see that our retail occupancy remains high. We have continued to design engaging lifestyle experiences for our retail malls. We also incorporated sustainability in our operations, holding events that are associated with it in a few of our malls. Business Park, I've explained the drop from 87.6% to 83.7%, predominantly the effect came from Hangzhou Phase 2 and some effect of Xinsu, which is transitional. Our business park, generally, the cluster occupancy is outpacing or on par with the submarket occupancies. Some of the markets are oversupplied. So we are pleased that we are outperforming some of those markets. We continue to engage our business park community holding events with them. Logistics, I've talked about in terms of the slight drop in Chengdu, which is transitional. And so looking forward, some of the things that we are going to do for second Q all the way to the end of the year, right? One of the strategies that we have talked about is to continue to extract value from our retail malls by doing AEI. So the first one that we have announced was CapitalMall Wangjing. So this gives a little bit more color of what we are doing. We are introducing new retail concept supermarket, which is “7Fresh” operated by JD.com in the 8,800 square meter space, but they won't take the whole space. The big portion of it will be carved out to do other sort of retail and F&B outlets. And have experiential -- more experiential brands that come in to give a broader product selection and then make the -- enhance the customers' shopping experience. Now this is CLCT's second 7Fresh outlet. So it's our second cooperation with 7Fresh. The first outlet was very successful at CapitalMall Grand Canyon. And when we launched it in 2023, in 2024, we can see that the GTO actually went up by 3x. So this give us confidence to introduce this in our AEI for CapitalMall Wangjing. There's been good leasing progress achieved for the first 3 months already. We have signed up -- basically signed up 53% of the tenant. And there's another 24% that are currently under advanced negotiation. The physical works are still ongoing, and we expect to open the new space by fourth quarter this year. ROI is expected to be double digit for this AEI. The next one -- next project that we want to introduce is at CapitalMall Xuefu, which is another supermarket replacement. Here, what we are doing is we are working with hyper local supermarket brand, meaning that they are very local to Northeast China. They are one of the strongest player. The brand is called B.U.T and it's well known because it has a very good supply chain management capabilities, able to source quality products at very attractive prices. They also lay out the supermarket in quite a unique way. And that resonate quite well with the shopper in that region of China, in Northeast China. So besides the supermarket itself, they are also curating and integrating 1,700 square meters animation and comics and games theme street concept into the outlet in order to attract younger generation shoppers. All this, the supermarket as well as the animation, comics and games theme street, the CapEx itself will be borne by the tenant, right? So we actually do not spend any CapEx. So this is a great outcome for us. I mean we get a new concept and we get good returns. At the same time, we actually don't need to spend any CapEx to do up the space. In terms of the operator itself, we have experienced with them, B.U.T actually opened at CapitalMall Aidemengdun. And again, the sales when they open was 3x of the previous supermarket at Aidemengdun. So we believe that we will see similarly exciting numbers once they open. They are expected to open in third Q 2025, and our expected rental increase from this is about 10%. The final one that we'll talk about today is at CapitalMall Xizhimen. This is, again, a supermarket at about 10,000 square meters. We're going to transform with the help of a tenant and operator, this space into DT-X concept store. Now DTX is actually a new retail concept that's created by SKP, which is one of China's most successful departmental stores. They already have something in Beijing called the DT51 flagship store. We saw that it was very popular with the people in Beijing, and we work with them to see whether they can bring it into our Xizhimen location. They were excited about it. And what we have worked with them is to have them target the more mid- to high-end consumer with a younger, more access on the SKP model, which -- the SKP model being a very high-end, maybe slightly more mature positioning. So they are doing that through their DT Select and DT51 branding, and they're going to establish one of these stores in our Xizhimen location. So what does that include? It's going to include a premium grocery. It's going to include boutique retail, multi-brand collection, which is going to be curated by SKP itself, who have, I would say, one of the broadest connection to mid- to high-end fashion brands and lifestyle brands in the Beijing market. There's also going to be social spaces. We're going to have some thoughtfully designed cafes and bookstores and dining venues within that space to make our basement more lively because the bulk of our basement space is actually taken up now by this supermarket space. By converting this traditional supermarket into what we believe will be a more dynamic space, we're going to improve the flow and -- of the whole basement and with the curated offerings support and continue to bring new traffic and new sales to the rest of the mall, whether it's in basement or Level 1 or beyond, right? And we believe that upgrade will elevate our mall positioning and drive benefits for all our tenants. So here, we just recap our strategy and where we hit for the next year. proposed C-REIT is, of course, a big part of it. We're using it as an opportunity to create value by becoming a key stakeholder in CLCR, right? And we are trying -- we're going to use it to unlock value by recycling Yuhuating, unlocking the value of this merchant retail assets, which we have already done our AEIs and improve our financial flexibility. We will extract value. We have basically today introduced 3 big initiatives that we are doing to continue to improve our malls, particularly addressing some of the supermarket -- outdated supermarket formats that may be in some of our malls. So that would once completed drive some organic growth. And of course, we continue to be very active in capital management as evidenced by our April CNY 600 million bond at 2.88%. We continue to push more in that front to achieve greater natural hedging. So with that, I think we can end the presentation, Nicole. We can go ahead and take some questions.

Okay. Thank you. Thank you, Gerry, for the presentation. We have actually a question from Rachel Macquarie that she sent in. As with regards to the increase in the logistics occupancy and demand, are these -- are these led by the trade war? Are businesses taking more space from goods because of the uncertainty.

I think that currently, it's too early to tell. We can't really tell from our logistics portfolio so far, right? We are almost fully leased, right? So that's one thing. I would let You Hong, maybe you want to touch on whether there has been any positive impact of warehouse, I suppose, bad luck because of the situation, yes.

So far, we have not, I think, seen the impact. I mean our -- in our portfolio, in fact, like Gerry was alluding to, it's actually quite true. And then -- in fact, we actually serve the domestic tenants and the distribution locally to begin with, with the exception of Shanghai, and that also probably -- I think what we might observe in a broader, outside of our portfolio is the southern market, which I think people are watching very closely. But again, a bit too early for us to reach any significant conclusion there because South market is really heavily involved in the export and South China is where a lot of the export business were carried out. Yes. So I think we will watch out this space heavily.

Can I pass the time on to Terence Lee, UBS.

Can you share what is the effective RMB rate in the first quarter, inclusive of the FX hedges as I'm trying to understand how close we are to spot and when do we converge to spot eventually?

Maybe I need to check the numbers. But then off hand, if you look at it right now, what we are having in terms of the bond, the 2.8% if you compare to -- if I were to actually enter a Sing dollar loan right now, I think this couple of weeks, I think, or days, we see that actually SORA has actually come off. So typically, if you look at SORA swap rate of 3-year, I think it can be very competitive at close to 2%. So if you add on a margin of 1-ish percent, it could be about 3% plus. So effectively, if you look at the [indiscernible] that we have done is to -- on the interest front is still better off based on interest rate. And then in terms of FX, right, I think in terms of FX, how you can look at it is if you compare against the Sing dollar rate that I've mentioned and then you swap it to renminbi, for example, then I think it's still quite close to what we have done. Maybe it could be a little bit cheaper based on current environment. But it really depends on the market because it's very volatile in terms of the floating rate and the swap rate. So yes.

Sorry, actually, I was referring to your FX income.

FX income. Can you be...

Can you be more specific what were you...

Meaning I'm not referencing like the interest rates, how you're hedging it. I -- so basically, if I look at renminbi Sing dollar that has weakened in the past month. So I'm trying to figure like when do I see this weakness flowing through into your P&L?

How do you see that flowing through the P&L?

I think part of it would have already flowed through our P&L. But -- because it's first Q business update, the numbers that we presented are renminbi based because the -- so half year financial results will be actually disclosed only in first half of this year. But I mean, the short answer to your question is if the renminbi weakened during that period, of course, when you compute the distribution, there will be an effect.

But maybe if I address your question the other way around, I think we will translate our NPI operation numbers to Sing dollar on a monthly basis. So maybe I think for 1Q, we have used an in-house rate, which I think at that time was close to about -- still below 5.4.

Okay. Got it. And on the part on broader logistics weakness, I know there's -- okay, so the Southern market is something to watch. But in the broader market itself, there's still a fair bit of vacancy. We already saw one relatively sharp round of repricing, I think, for this one lease cycle. And I think we are coming off that lease cycle. As we enter to the next one, should we be thinking of another round of sharp repricing?

I think most of our leases are filled up, right? We had -- maybe this quarter, we have done one lease -- Logistics, right? So I think that's the only big one, I think that's only for expiry. And beyond that, the biggest space that we have, I think we have already filled them, particularly the Shanghai Fengxian, right? And we signed a long lease for it. So beyond that First Q lease, I don't think there's much more that we announced leases.

I just maybe add on a little bit more. The leases that we signed, as you mentioned, we have actually largely mark-to-market. In fact, this quarter, we have actually took an early action to secure another, I would say, year-end expiry by another 1 year that actually do have a little bit of rental.

Similar to last year...

Similar to last year. Going to second half, I think our expectation is there won't be a lot. Maybe 1/3 of the Kunshan, there's one property, which is going to be expiring in the 3 quarters. We are in discussion with the tenant. So that will be something that we will probably see a bigger one in the second half. Other than that, we don't have any.

Okay. And just if you could share how much of the income will turn offline due to the retail AEI that's ongoing?

Income downtime...

As a percentage of maybe portfolio rental income.

Okay. I recall that number is about close to the CNY 10 million to CNY 20 million. If you use the CNY 20 million, maybe that's a gauge something that you can take a look at. Because the downtime that we are expecting is in the range of 6 to 9 months for the 3 months.

I think it will be less than CNY 20 million. I mean First Q, as I remember, our effect for that Q AEI is about CNY 3 million to CNY 4 million.

CNY 4 million.

Yes, about CNY 4 million. So you can guess, even if you multiply by 2, 3, 4 on average -- 3, 4 quarters. Some are opening first Q, some are opening third Q.

Can I pass the time on to Geraldine, please.

Okay. Maybe are you able to give us a sense of the reversion sign for this quarter? For retail, I know it is slightly positive, but without the AEI leases, would it have been a negative number?

Actually, we have shown our slide. Without this, it will be slight negative, actually quite close to 2020 for whole year.

You're talking about the supermarket...

Yes.

How about the new economy. I mean we are not at negative, but have...

Repeat users, I think last year, we reported about mid negative, right, single-digit negative. It is within that space. It is within that space.

Okay. Maybe just one more, I think, on the interest cost. The CNY 2.9 million loan looks smallish. But what will move the needle for your full year interest cost guidance? And any chance that you can borrow more under this facility?

Yes. I think it's small, but then coupled with the one that we have done in October, I think it will kind of like move about 5 basis points on a per annum basis. But I think per annum basis, yes. So -- and I guess whether we have any more opportunity, I think we are always constantly working with the banks to see if there's any opportunity. So just...

That's what we are trying to...

So I take it that your 3.5% guidance will be flat for the rest of the year.

Slightly lower if everything remain constant.

Okay. Okay. Maybe just one last quick one. Are you able to share the break cost terms within your portfolio now by the 3 segments?

Break cost?

Yes. So you say like the pre, the early pre-term, are you given any rents or any other form of...

Typically, we do not for -- especially the typical 2-, 3-year leases, we actually don't really provide specifically early termination from a tenant's part. So in the sense that if tenant breaks, then it's -- they will actually have to fulfill the deposit and actually be liable for all the losses that the landlord is suffering. Obviously, all the losses is something that's a bit more debatable that sometimes the court will support all the way to the end of the lease. But nowadays, I think the court will not go that far. So I think that's usually -- I mean if we have to go down to the individual cases.

Okay. So the deposit will be like 3 to 6 months?

Typically, like those were 3. But for longer leases, yes, you can look at about 5 to 6 if it's really the kind of anchor.

Thank you, Gerald. Can I pass to Cindy.

This is Cindy. The first question, I want to touch a little bit on C-REIT. So apart from the retail mall, will consider doing C-REIT for your business park or logistics park. And also on the, say, commerciality behind your C-REIT. How is your C-REIT effectively, I think you need to provide somewhere around 3.8% or above yield versus I think you mentioned your Mainland China loan can be below 3%. So how should we understand the, say, financial, say, reason behind doing a C-REIT versus, say, doing just RMB loans or operating loans, et cetera? So that's the first question on C-REIT.

Okay. Thank you for the question. Okay. So first of all, the C-REIT is not a debt instrument. So it's actually a REIT. So it's an equity instrument that is basically launched in the Asian market in China, in this case, Shanghai Stock Exchange. And we are doing it in conjunction with our sponsor. So our sponsor, CLI and of course, our other CLD, us, we are collaborating together. We are in -- we are injecting -- CLCT is injecting Yuhuating and our other CapitaLand affiliates are injecting this SKY+, right, into this new C-REIT, which will be launched as a new IPO on the Asian market. So that's one. I will answer the second question first. So actually, it's not a debt instrument, right? It's not a debt instrument. And I would reiterate why we are doing that is because we are trying to tap the domestic liquidity, which is pretty strong for this product, right? And that we are using to sort of see this -- trial this -- start this C-REIT so that we start an additional avenue to recycle our assets, right? If you're asking what is the kind of rates of the C-REIT right now, typically, the trading yield for the C-REIT -- cash yield for the C-REIT is between 4% to 5%. It is equity, not debt, okay? And the other question regarding whether we are doing Business Park or Logistics Park C-REIT, I've answered in previous call that I don't think CLCT is the right party to answer it because it's really CapitaLand and CLI level initiative. we were invited to sort of join in and participate to team up because we also have an interest in it. But the decision to start more C-REIT will be something or not will be something that CLI or CapitaLand Group will decide on their strategic intent.

My second question is on the portfolio reconstruction or say, your strategy to potentially stabilizing the portfolio operations. Effectively, I think the C-REIT and the supermarket upgrades are great movement. What are some of the upcoming strategy or plans you have to further enhance the portfolio? How do you see the underperforming segments? Any divestment plan? I think you mentioned earlier a few months ago about the potential sale of Shanghai Fengxian if a property opportunity emerge itself, but is it still something we are thinking?

Maybe in terms of stabilizing the portfolio, I'll let You Hong talk about the things outside the AEIs, and I can take the portfolio reconstitution question.

Yes. I mean our priority in terms of portfolio operation and the asset management, I think apart from the AEI, the other assets are still trading well. I mean, Gerry has gone through each of the sectors. For retail, we are generally okay. For other 2, where we actually prioritize occupancy and actually, we are better than the market. And we are actually also in terms of rents, generally also above the market, I would say, right? The stabilization work in terms of our portfolio, I think, generally cycles with the occupancy, I would say. We are just stepping up the leasing effort.

So for example, Business Parks, right? So okay, logistics, we are almost full. So really nothing to talk about. So for Business Parks, we are -- the team and us, we are thinking of, of course, continue to think of more ways to make it easier for tenants to plug and play into our space, right? So some of the initiatives to promote the takeup of space is we may do some very basic outfitting of some of the spaces, not very expensive, just basic outfitting so that whoever requires a space can immediately pick up the office space. And this works actually quite well for the smaller tenants, especially in Hangzhou, we have, for example, a lot of small tenants who actually don't really have high requirements for their business park office space. They just want to start work and because they are entrepreneurs, right? We've been to a few in March when we visited. So we have been working out packages to make sure we can have plug and play sort of office package for people to come in and lease up quickly.

On the portfolio reconstitution side, apart from this, obviously, we are actually trying multiple fronts. At the moment, I don't think we have anything other than the CV that we talk about. Other than that are still work in progress. We're not ready to share. But indeed, what you have mentioned is still on our agenda. The Shanghai Fengxian in particular, I think the -- we are actually trying to look for possible monetization. But bear in mind that today's market is pretty tough. And actually, we are also just secure tenant. And so actually, we will also want to time it a little bit more carefully. And so we will continue our effort on those fronts.

And the last question is on -- so basically, some of your peers have kind of given our plans on divestment and saying that they will use a certain percentage of divestment proceeds as buyback, et cetera. I know you have mentioned that the current priority is operations and maybe gearing level before you consider any buyback. But would it be something on your, say, agenda in, say, a certain horizon when you gearing returns to which level or when you say, at what comfortable situation of your portfolio operations before you consider buyback?

I think I talked previously, unit buybacks is certainly an option. That's number one. Two, as to when we do unit buybacks, that should be aligned with our own financial situation, right? And as Joanne has shared, our gearing is slightly elevated, right? So we need to work on that first. And once we get that sort of reduce -- to sort of reduce the gearing, then I think we have more financial flexibility to do unit buybacks. So one of the -- of course, one of the things that with this proposed unit is that we move forward with Yuhuating divestment, during the release of circular, we'll probably share some illustrations and plans of what we'll do with the proceeds. So that is something that maybe we can take a leap off once we release.

Can I pass the time on to [indiscernible].

I just wanted to know what are those consumption vouchers you are referring to and you are expecting...

Consumption vouchers, I think these are quite closely related to the trading programs. I think the China government have launched end of last year and also expanded the scope beginning of this year. So these are more related to the home appliances, phones and to a certain extent, some furniture, right? So I think they have -- different cities do it slightly differently, but generally, they actually do buy vouchers and then people can actually be entitled to the voucher and then they can with the voucher, buy the IT products, home appliances on -- in our malls.

The one that we -- I showed earlier was the IT segment was the beneficiary of consumption vouchers. That's right.

And which retail categories is not performing well?

Okay. I think the supermarket, in fact, that is a category that has suffered, right? And which is why this quarter, we announced this AI is basically to address that to put in better concepts. And in some cases where the supermarkets are oversized to take back those space and introduce other users for those spaces besides supermarket. And that's one of the key legs, I would say, in terms of sales.

Last question from me. Like percentage-wise, how much is your tenant is exposed to the U.S. And yes, if that's okay, are you able to share the name.

We don't even have a percentage because I think I shared it's very minimal, right? Retail malls, basically, I cannot think of any real tenant who buy anything from the -- I mean, import anything from the U.S. and try to sell to the China market, even the international brands, they produce in China or Southeast Asia, and that's particularly in our retail malls, which is basically a mid-market retail mall, right? There are no luxury items to speak of, right? Then for BP, again, very, very minimal. For example, [indiscernible] and Hangzhou are very domestic operations serving local enterprises and therefore, I can't talk of any U.S. exposure. Xinsu, I mentioned there's a handful of them, right, which are doing manufacturing and have some exports to U.S., right, but they are a handful, right? And in this Xinsu portfolio that we're talking about, we have also surveyed those the tenants who are expiring in 2025 and they say they are committed to continuing to stay in our portfolio.

Yes. By the number of tenants, we are talking about handful out of 3,000 tenants that we had...

Percentage will be I think below 1, I don't know, year-end.

Generally, I also don't -- I mean we also don't really name the tenant for the obvious reasons.

[indiscernible]

Just 3 questions from me. So on the first is with the C-REIT, that means CLCT will be looking to reduce exposure to retail. Is this something that you're still going to do more? So for now, you have 71% retail, close to 30% in business parks and logistics parks, even though retail is outperforming, I think, the other 2. So that's my first question. So the second question I have is what do you think about the perpetual that's callable this year? When the reset comes, I think most likely the distribution rates of that perpetual will move up significantly. Of course, it depends on where the interest rate environment will go towards that time. So by -- at this juncture, do you think it makes sense to redeem, given the current kind of rate environment? And my third question is regards to gearing. What's an optimal level for gearing actually?

Maybe Joanne answer the second question first. I can answer the second.

I think the pet that is now due for -- due to recall is actually in October. I think we are watching this space very closely. I think just to give you a sense, I think last year, when we look at it, it was really at a high level of close to -- it's probably at 5 handle. I think this year, we are looking at more like a 4 handle kind of levels. I think we will not do early because I think we can't call early also and it will also have a lot of negative carry for us. But rest assured that we are watching this space, of course, when it's closer to it and it's very opportunistic and the rates are right, we will do something about it.

Okay. Let me take the earlier questions. So for the C-REIT, it's a good initiative. It's a strategic thing for us. And it actually is aligned with actually what we have been doing over the years, which is really to position ourselves to be a diversified multi-asset class China-focused REIT, right? And when we started investing in other sectors outside retail, we actually have already sort of started that process that eventually, we may have different asset class in the portfolio beside retail. Now to the question of whether it means that we will have no more retail investment, I think that's not correct, right? Because the reason why we are also divesting Yuhuating is because it's already a mature mall, we held it for many years. We have done AEIs on it. We believe that we extracted the full value from it, especially with our -- again, our supermarket revamp and AEI that was done in 2023, which had good results. So once -- I mean, typically, when you have -- after you do AEI, the NPI would have been -- NPI would have shined through in the next few years. If you feel that there's not much more you can do on the assets in the midterm and the asset has been reviewed for a few years, actually a good active REIT manager should consider what to do with the asset. And one way is to unlock the value, right? With that, if you do more of unlocking the value, you have more financial flexibility to reinvest in other assets, right? And when we reinvest, we could always go for some good retail assets again. Of course, we want to look for stuff that we can continue to be able to add value, right, so that we can continue that value creation trajectory. Third question is with regards to the...

Gearing level...

I think that the popular wisdom in the space and also within the CL-REITs family is we try to keep our gearing at about 40%. So that is still something that we will seek to achieve over the midterm.

We have a question from Joy HSBC that sent in a question. Two questions. She would like to ask about the CapEx for the AEIs this year. And number two, the chances of gearing going above 45%, given current foreign exchange FX rate.

Maybe You Hong can take the first one, I can take second. CapEx that's for the 3 AEIs, how much is the CapEx, only one?

In fact, we only have one, having the CapEx. The other 2 are actually carried out by the tenant themselves. And it's a replacement. And actually, we reap the benefit of those works and some will be in the form of sharing of the upside, right? The CapEx for Wangjing is -- in the region of CNY 20 million. It's not big one.

So we answered that CapEx part, AEI and then also ForEx, year-end.

So I think that everyone will agree that the ForEx situation is quite volatile. So quite difficult for us to forecast. We are now about 42% gearing. There's still some space before we hit 45%, right? But rest assured, I mean, this is not a level that we want to go towards. So we will control that gearing level.

Okay. Great. Do we have any last questions? Okay. If we don't, thank you so much for joining us today. If you have further questions, please feel free to reach out to me. Thank you, everybody, and have a good day.

Thank you.

Thank you, bye.