CapitaLand Integrated Commercial Trust (C38U) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. A very warm welcome to all of you who are joining us via the live webcast of CapitaLand Integrated Commercial Trust, or CICT, results briefing today. I'm Mei Peng, the Head of Investor Relations for CICT, and we are pleased to have the management of CICT to share our first half 2021 results. We will have a results presentation by CICT CEO Tony, followed by a question-and-answer session with the CICT management team. I'm pleased to now invite Mr. Tony Tan, CEO of the CICT Manager, to share with us the details about CICT's performance. Tony, please?

Good morning, everyone. Thank you for joining us this morning for the results briefing. I hope you enjoyed the video scripts that we just now played prior to this presentation to give you a little bit of an idea of thinking behind how the work in the future will look like and how that potentially may transform the workspace and henceforth, potentially how that will look like in the future workspace environment. So I'll just go straight to the briefing, results briefing. I hope you had a little bit of time to read through this morning that was posted. As usual, the disclaimer. Let me go give you some highlights. So first half, we achieved, in fact, more than 3/4 increase in the distributable income. I think this is largely because of the combined effect from the merger between CMT and CCT. Last year, obviously, we have not finished the merger. And this year, the entire portfolio from the office side come over, plus the Raffles City also being treated as a wholly owned subsidiary and henceforth, the subsequent slide you will see, there will be numbers that may look very big but essentially, it's actually a combined effect from the merger of CMT and CCT as well as low the base from last year first half. So for the first half DI -- DPU, sorry. We achieved $0.518, 1.75x higher than last year. Again, it's the same effect I mentioned. Bear in mind, last year first half, there was also retention, some -- of about 49 -- $46.4 million distributable income that was retained in first half last year. And henceforth, there's a little bit of base effect. So we have to take that in consideration. Some operating metrics highlights. Portfolio occupancy remained fairly stable, over last -- it's down slightly from first quarter, 94.9%, compared to first quarter 95.9%. The tenant sales actually has to improve first half at 5.3%. It's better than the first quarter of 2.9%. Again, bear in mind the base effect from last year. But if we were to compare against 2019, this is where there pre-COVID world was like. We are about -- we are still about 14% lower than pre-COVID days. So we use that as a benchmark to guide us going forward, how we see -- what we need to do from a rental perspective. In terms of people returning to their offices. Obviously, we went through a heightened alert phase in May and June. Hence, the return rate has dropped compared to first quarter. I think first quarter, we reported 51.3%. This first half has dropped to 20.6%. On the sustainability plan, which is important -- equally important, in fact, growing even more important, I think we are pleased to announce that now all property are 100% certified green rated. And that brings us to the, in fact, full portfolio, having that green -- 100% green rated. We're also very pleased to -- and in fact, very honored to be conferred the award as the Most Honoured Company by institutional investor during this first half. We're also pleased to report that we are achieving good progress in our development project CapitaSpring, which we own 45%. Now we have achieved a committed occupancy of close to 62%, with another 15% that are under advance negotiation. So we are still working towards our target, hopefully, 80%, 90% by end of the year. This one, needless to say it a lot. I think everyone knows about it, a lot in the news, COVID-19 affected. In fact, we went into Heightened Alert Phase 2. In fact, we are into the Phase 2 again today. And henceforth, I think we will stay nimble. I think we have been proven to be quite pragmatic. We look at how the situation evolves, we will render the necessary support, targeted but disciplined to the relevant tenants. So for the coming month, we would obviously see what the government will announce. They just made a few commentaries. Rest assured that we will stay disciplined and we will render the necessary support to the tenant as required here. Specific for our first half, I think as a result of the heightened alert in May, June, actually, we dished out about $19 million of various form of rental relief or rental rebate. On top of that, I think we're also, on a case-by-case, looking at leases that will be restructured so that our tenant can pull through this difficult time. I think we are all in this together. We stay very -- in fact, we are actually pretty optimistic right until April. I think the -- when you look at the trading momentum, things were looking bright. And of course, the unforeseen spike in infection rate caused a little bit of disruption. But nevertheless, I think what the government has been saying, the increased ramping of vaccination and the various message -- the hint and messages about how the world will look like, the endemic will look like, I think we stay very confident that once we get out of this, we will be in a very good shape. Yes. I'll skip this. So financial performance, I'll go through very quickly. I think it's the same reason. The combined effect of the merger, we've seen a very big jump in terms of revenue and NPI. This one, I think, is just for info. If you look at the 3 components on the left chart, largely remain quite about the same integrated development contribution close to 29%; retail, about 40%; office, about 31%, yes. So among the top 5, I think, contributed about 47% of our NPI. Balance sheet remain very healthy. We -- on a net asset value-wise, today is about $0.025, of course, adjusted for the distribution that's coming up. Then NAV is about $2 per share. In terms of debt maturity, this year, more or less, I think we have the small component, $175 million, we are done. 2022, you look at the big tower, $1-over billion. The orange portion relates to the joint venture at One George Street, which would be dealt with at the joint venture level. I think safe to say that we have sufficient credit to refi, in fact, the entire 2021 and 2022. And while we talk about the tower, we're also cognizant of the fact that 2023/'24 is a huge one. We will be proactive and look at the opportunity for us to bring that tower down. And I think there are opportunity for us to do it, especially the green portion, which is really the bank loan portion. And at the right moment, I think we'll try to bring that at a longer duration maturity. Yes. Other financial indicator. Not much of a movement, I would say. The aggregate leverage came down slightly to a large extent because we have moved from a quarterly distribution to semiannual. So we are holding a bit of cash here. But post-distribution, I think you'll see the aggregate leverage move up a little bit. Interest cover 4x compared to 3.7x. Slightly better. Average term to maturity, I think, is about there, 4.3, 4.4 years, and the average cost of debt remains thereabout as well. Yes. Also, we are pleased to always be proud about this is that we really have a very diversified sources of funding. You look at it here. For the capital market activity, I think represent more than half, and with the rest shared between unsecured bank loan and the secured bank loan. So we stay open to different options, looking at where the potential capital market source that will give us the best kind of capital funding structure. Yes. So this is a little detail about the distribution, the date, just take note. Let me move on to some highlights on the portfolio performance. In terms of with the average lease maturity stays relatively flat, 3.1 year. One thing to note is that in 2024, there's an increase in maturity as a result of Commerzbank in Germany, our property in Germany, they have exercised their right have an early termination. So the original termination is 2029. They have shifted to 2024. So we are looking at various options to see how best we can lease out the space here. This is just for your noting. Again, I think no single tenant contributes more than 5%, and that goes to underscore the point that we have been emphasizing, the diversification effect. Yes. Again, this is for your info, very well diversified source of exposures. By far, I think the 3 largest components still remain the same, F&B, banking insurance and the other trade services. So I think it's pretty well diversified. A little bit more insight. I think I touched upon it at the earlier part on the summary. Retail occupancy remained fairly stable, about 97%. Of course, I think earlier, I touched a little bit about the sales. The sales for first half compared on a year-on-year has improved by 5.3% against -- in fact, against the 2019 level, we are still about 14% below. So that's something we are target -- we are working towards, too. Shopper traffic has recovered also to 4.2% improvement compared to last year against a low base effect. But back to my main point, 2019, we are still about 40% below that. Yes. In terms of rental reversion, we actually achieved a -- if you were to measure it on the last-out, first-in basis, actually, we clocked in about 9.1% negative reversion. But I think I've been emphasizing a few times in a very unusual situation we are in and given the circumstances, I think it is more appropriate to look at it more longer-term basis. And hence, we decided to also give a little bit hint on how if we're to compare on an average-to-average basis how that would look like, in fact, the reversion is half. It goes to show that while we bring down the rent on the earlier part of the year, we attempt to catch it up at the later part of the lease. Overall, we retained a very healthy 82% retention rate for our tenants. Again, it's a trade-off. Whether you want to have a good retention rate, bringing the cash flow, or if you are too sticky about the rent, that will be -- that potentially may compromise the occupancy. So our retail occupancy, this one, let me touch on quite quickly. It goes down to I think the main -- quite marginal movement, like I said earlier. The one to take note is of course Clarke Quay. I think it's well known, Clarke Quay is a bit challenged. A lot of the trades are under a more heightened kind of control versus the rest. The other one that we're working very hard on is, obviously, the Raffles City, the space vacated by Robinsons. So far, we are working on a temporary basis for level 1, level 2 with our -- one of our other tenants, BHG, operating a space. But we are looking through our plans for that space in totality and when ready, we will announce more details. Yes. Rental reversion, a little bit more color. So I think if you look at the rental reversion breaking down between suburban and downtown, I think naturally, it's understood that suburban has been a bit more resilient compared to downtown. So the breakdown are there. If you were to compare downtown, I think if you look at that on an average-on-average basis, actually we have just a marginal reversion and, again, underscore the fact that downtown mall has been doing pretty okay, pretty healthy trading. But nevertheless, even within the healthy trading mall, there were some tenants that required a little bit of help. So it's a little bit uneven as well. This point, I think I won't touch a lot on it. No doubt we have 34%, 34.5% expiry next year for retail. I think we are already working on it. You can see close to 7% of it are under the various kind of negotiation. Also bear in mind, there are quite a few mini anchors here. The likes of supermarket. I know the consumer electronics, et cetera. So it may look tall here, but once we deal with it, I think it may come down quite quickly in terms of those that will be committed. For the 2021, in fact, for the remaining expiry, I think we are already at the various stage of negotiation with our tenants. Average WALE is about 1.9 years, not much change. This is, again, just an illustration of the impact on tenant sales and shopper traffic. If you look at the table, again, I think the same point I want to mention. Suburban, downtown has a little bit of mix of performance. But overall, if you look at the first half, both downtown and suburban mall improved compared to 2020, but we still have some gaps to catch up in 2019 -- against 2019. But overall, I was saying, at the beginning of the first quarter up to April, we were tracking nicely. Of course, we get this heightened alert disrupted a little bit on the operation, and hence, you see some decline. But again, we are very hopeful if things recover and reopen, we will see again a nice uplift in -- towards the end of the year. Good healthy recovery in terms of tenant sales across the different category. I think some numbers are no surprise. Supermarket coming down almost 19% on the back of a pretty high base last year. If you recall last year, there was a bit of spike in terms of people doing their grocery. That also compound with an additional 2 new supermarket that we opened in, in fact, during the COVID period. So that entire base effect resulted in overall decline of 19%, yes. But these are bread and butter stuff, I don't think, to be too concerned about. If you look at the rest, then you've seen some pretty healthy recovery. Jewelry and watches, although represent not a big component of our overall trade, has done very well. I think it probably can resonate with some of you who may have seen the same -- similar kind of trend amongst the other peers. Home furnishing, again, has done very well. In fact, home furnishing sales has surpassed 2019. Again, I think maybe many of you can relate as a result of the work-from-home phenomena, I think a lot of people are actually upgrading their homes, buying a whole new furniture, buying a new table top, et cetera. So I think this has, in fact, benefited quite a fair bit. Okay. I won't delve out too much on this. Let me move on to office. Overall, office occupancy came down a notch a little bit compared to first quarter, 94.9% we have recorded. Now we are at 93%. This is largely, I think, the effect of Asia Tower 2 with the space that there's -- basically for Allianz space that's partially unfilled. Our teams are working on backfilling the remaining space. So that contributed mostly the decline in the occupancy. Overall, I think we signed about 26% of new leases. I think it's a good healthy pickup. And in terms of inquiry, because of the heightened alert, we've seen a little bit of slowing down, but nevertheless, still healthy. Some shift in the term of the current demand we are seeing more from relocation and a little bit of consolidation of space. So overall, in the Singapore office front, I think it came down to 92.4%, the same reason I mentioned compared to first quarter, 94.8%. The average rent is pretty flat, I would say, slightly lower than our first quarter $10.25 versus $10.28. I mean nothing to shout about. And the return of office is, of course, half compared -- more than half compared to first quarter. So there's a little bit of detail here. You can see from here. So the last impact really coming from Asia Square Tower. In term of office rent, we continue to be able to lock in above-market rents across the board. We registered some negative reversion in the first quarter. The negative reversion for second quarter actually has come down quite a fair bit overall, looking at low single-digit. So it is again a reflection of the stabilizing of the office market, as you probably have reported -- read in many of the other reports. We've been very proactive ensuring that we try to lease out the space we have. Look at 2021, we have about -- we have remaining about 9% of space to be completed. And in fact, we have started to look at 2022 space. And the various leases that are for renewal, I think, we have started to have somehow discussion and negotiation as well. Overall, the WALE has come down from the first quarter. First quarter reported, I think, was 3 years. Now it's come down to 2.7 years, largely contributed by Commerzbank's early termination notice. Something to note also in 2022, we have actually quite a few big space that we are already speaking to 18.5% as reported -- mentioned here. Quite a few big space operator that we are already at a fairly advanced negotiations. So we hope to be able to report something soon. Yes. I think the next 2, 3 slides, I will not touch too much. In terms of situation and integrated development fairly, I would say, stable. I would say, from an occupancy perspective, about 96%. Not much of a movement. Raffles City creeped up a little bit as a result of both the office and retail space that we mentioned leased out. Funan and the Plaza Sing, Atrium space came down a little bit largely because of the retail space that are still vacant. Yes. In terms of lease expiry, I think I touched on it a little bit earlier, but this is more for the integrated development project. It's in the tower here in 2022. For next year, it's actually the main renewal year for Funan. I think we're working on it, as well as some space in Robinsons as well -- sorry, some space that is vacated by Robinsons and as well as Plaza Sing. So there are a few big space occupiers that we'll be engaging them. And then hopefully, we will be able to secure some kind of renewal soon. Yes. I think we're also pleased to note that, I think, despite all the disruption, the AEI project is still quite on track, a little bit disruptions here and there. For the Six Battery Road, looking quite nice. In fact, if you have the chance, you can pop in. The through block link is accessible now. In fact, Standard Chartered has opened up their banking hall, so you can take a look over there. We -- it's still on schedule to complete the 3 projects by end of the year. Six Battery Road, 21 Collyer Quay and CapitaSpring. Lot One actually are done. Our work now is the tenant, they are doing their internal fit-out. And hopefully, they will be able to open in -- hopefully, in the third quarter or if not, maybe early part of fourth quarter, yes. In terms of our leasing progress, as expected, I think it's progressing. Currently, 40% of the AEI space has been leased. I think earlier, we reported the occupancy 78.3%. That's actually including the spaces under AEI work. If we strip that out, the occupancy for Six Battery Road, actually is pretty healthy, it's about 96%. 21 Collyer Quay, I think we have handed over to our master lease tenant, WeWork. They are doing their fit-out work, and we expect the lease to commence in late 2021, yes. So despite all the situation we witnessed in the retail front, we continue to see interest for a retailer to look at a new store opening, both in downtown and suburban, as you can see some of the pictures from here. So again, I think, I underscored the fact that the new retail world, I think, is going to be quite different. We have to just go through the period where pandemic -- when we move into endemic, there may be operational challenges here and there. But by and large, I think a lot of retailers still think brick and mortar is part and parcel of their entire retail chain and strategy. And hence, when the opportunity for them to look at the good quality space in the shopping mall, they are actually looking at that opportunity to come in as well. The next 2 slides are just to emphasize that I think during this difficult time, we'll try all means to help our tenant. I think the fact is that we have a very strong platform. Our loyalty program, CapitaStar, with the 2 digital platform, eCapitaMall and Capita3Eats, are really giving the tenant, the, additional avenue for them to seek up revenue source. We have seen good interest. To date, we have more than 3,000 of our retailer already on board in the various form of our platform. And we have seen quite healthy kind of transaction picking up, especially during the heightened alert period. These are just some numbers. The other thing that's working out quite well is also the -- and it's also in line with our digitization of some of the transaction. The eCapitaVoucher, I think, is gaining a lot of traction now, especially again during this COVID period where some consumer may prefer to do the transaction online to the platform. And that eVoucher, which is a digital -- in the form of digital currency that allow them to do that transaction seamlessly. So we are seeing quite healthy pickup in terms of number. Needless to say, I think this period of time, I think we also need to put our heart, where -- I think, to the people who are out there who need the most help. And we are seeing a quite healthy kind of -- our staff getting involved in the various form of volunteer work, distributing food to the needy as well as extra. So that will be another important thing that we are going forward as well to ensure that while we are a commercial entity, I think it's important to reach out to the community where day-to-day living may be impacted. Yes. I think looking forward, we remain pretty optimistic, notwithstanding all the different noises here, I think once the dust has settled, we're in a good shape. The merger between CMT and CCT really underscore the fact that having a very diversified base gives us that robust balance sheet and robust exposure in different sectors that may be impacted going forward in a different form. And of course, the base effect means that impact to any specific asset would be largely reduced, right? So I think going forward, we continue to be very agile. I think now we have that flexibility to do that. We, obviously, very -- stay very engaged with all our stakeholders, including our investors and our retailer, to make sure that we are in this together, ensure that this ecosystem is well protected and be ready with the new post-COVID world, right? In terms of what we're going to do, given where we are now, obviously, we still put a lot of high priority in terms of managing our day-to-day operation, making sure that things are in good shape. But beyond that, obviously, I think we are looking to see how we can grow. We have started, of course, looking at how we could look at our portfolio construct and whether appropriate time, we may look at some kind of portfolio reconstitution, divesting out some of the assets and redeploying that proceed into higher-yielding assets. So that's certainly something that we're putting a lot of energy into it. So when we are ready, obviously, we'll make the rightful informing to the investor. Yes. I think the rest just market information for you to read through. I will not touch upon it. And I think that, here, I'll stop my presentation. And in fact, I have my 2 colleagues with me here and we're happy to take any questions. Yes. Thank you.

Thank you, Tony. Before we start, now I would like to introduce the team on the panel with Tony for the question-and-answer session. So we have Ms. Cindy Sze Yung, our Chief Financial Officer; and Ms. Jacqueline Lee, Head, Investment and Portfolio Management. [Operator Instructions] Okay. So may we have the first question please. Okay. I see David Lum. David Lum has raised his hand.

My question is, what are the trades or retailers that can thrive during a permanent state of endemic? And how are you pivoting your laws to capture these tenants?

Sorry, David, can you repeat? Some part of it is...

What are the trades or retailers that you think can do well going into a permanent state of endemic? And how are you pivoting your laws to attract these tenants?

So I think good question. So naturally, it has to be tenants that are more agile. I think we are living in a world where it's no longer just differentiate between online and offline. I think we -- the tenants who are able to target between the 2 worlds, I think, will be in the best position to ride through in an environment where endemic is the norm, right? And also, it depends on what you define -- at the end of the day, how that endemic situation looks like? Is it a case of constant start-stop, start-stop kind of a situation or it could be a case where its endemic is not a frequent stop, but it's just a case of being able to shift some of the operation flexibly between having a bit more measure in place and less measure in place. So I think those tenants genetically will do well. What kind of trade would do well? I think that will evolve over time because the trade that will do well, whether it's endemic or not endemic, it all depends on the different time and situation. I think, for instance, we look at the current situation, we have seen a very healthy performance of home furnishing retailer. I mean they really received a boost. We've also seen very healthy performance from -- people are very concerned about their health, so they put a lot more emphasis on healthy aspect. It could be as simple as getting a message chair at home so that you're spending a lot of time at home, you want to pamper yourself. So those trades have done very well. In fact, they have done better than 2019. But would that continue to be so? Very hard to say. Similarly, home furnishing. It's also a function of where the property market cycle will be. And then for F&B, think F&B, of course, is quite challenged in this environment, particularly when you have to go to a situation where you can't allow dine-in and then you limit the number of people who can actually be accessible to your space. I think those will be quite challenged. But again, I think food is in everyone's heart and mind here. Even at very difficult time, we see -- we've always seen that an evolution in terms of the food being provided. It's a function of the taste, how that evolves. It's a function of fashion. To a large extent, what's fashionable, what people like to eat. Today, people are looking at healthy food, so healthy food section, you have to have change. So you must be able to be agile enough. So for operator, I think it's perhaps in the long run, for any successful operator to be able to ride through different situation, whether it's endemic or market cycle or change in the consumer taste, you definitely need to have a portfolio of offerings with a different kind of branding to position yourself in the market so that you are able to -- I wouldn't say pivot, maybe you'll re-weight your exposure to different offerings at different points in time. So those will be the kind operator, I think, probably will do well in the new world, yes.

Okay. Thank you, Tony. Now we will have the next question from Xuan from Goldman.

I have 2 questions. Firstly, on retail reversion. When do you expect reversion to normalize for retail?

We -- good question. I can't pinpoint a time. All I can say is that a few things has changed. Of course, now we have that code of conduct that will be in play. In fact, most under the major then will abide by that. And within that, there will be a bit of a, in a way, guided kind of lease structure, but there are also some flexibility allowed if both parties agreed to do that. So I think it's also a function of the cycle, the economic cycle that we are going to ride through when the mall is going to reopened. And a lot of us, I think, ourselves and perhaps even our other peers, would be very flexible in terms of how you want to look at your fixed component. So I think I mentioned in my early part of the presentation, we decided to give you a better picture by looking at the different way of measurement. There's no standard way of measuring reversion? I think historically, we have always been looking at the last outgoing fixed rent, my fixed rent versus an incoming fixed rent. But of course, COVID-19 disrupted the entire operational environment. We adopt a little bit more flexible. So tenants find that they are bearing a lot of risk by having a fixed rent pack, pretty high, and a smaller component of GTO rent. So we shifted the balance a little bit so that allow them that breathing space with the anticipation that, hopefully, were trade well, know we are all in this together, we are able to ride that through. So if you look at the reversal number, although it's negative even on an average-to-average basis, where we're packing the fixed rent with a bit of escalation at the later part of the lease structure, with some modification adjustment on the turnover component. If we able to achieve a very robust tenant sales environment, assuming everything is back to normal, the economy is good and everyone feels very good about it, then potentially, on an effective basis, the rent may not be worse off than what you see in the numbers. Yes. Just to give a rough sense, I mean if we look at a -- we'll do a simple sensitivity analysis. Although we reported minus 9.1% on the fixed in and out, but on average 4.5% negative. If our tenants are able to do so well, improve by 30%, 40%, 50% in the term of sales in a new environment, actually, we're back to square one from an effective rent basis. So I think that's the way to look at it. Reversion number, I wouldn't say it would give you a very true and picture of how the outlook look like from a rent perspective, I would say it's a lagging number. The leading number is really the tenant sales. And we need to see the tenant sales pick up nicely. Yes. So we continue to stay at agile. I mean today, we know that the government has come out to say, okay, they will review the situation in the early part of August, what exactly measures that we'll come out, we will see. I think that will definitely affect the consumer sentiment and also the retailer sentiment. When do they -- do they want to lock in now? Not a lot want to lock in now. And of course, landlord individual situation. Do you want to keep that unit stay vacant while we wait for a better time to come? Or let's lock in together a structure where we co-share a little bit of risk. So it is a trade-off that I mentioned from the beginning. Yes.

Xuan, do you have another question?

Yes. Can you clarify on the tenant sales improvement of 30% to 40%? That's based on current level? And does that imply 10% to 20% above pre-COVID level?

Situation -- so I'm talking about only those specific leases that we locked in, not general, right? So those that we locked in. Yes, so on the back of a current depressed number, yes. So we have some, of course, a bit more conservative. If you were to say that back to 2019 level, 20%, I think, is probably a good rough idea, yes.

Okay. Can I talk about, can you talk a bit more about portfolio reconstitution as well? I assume divesting would be fairly easier than redeployment. So how are you thinking of redeployment in terms of asset class and geography?

Yes. So I think very good question. Not necessarily divestment is that easiest. The -- of course, we take a very long-term view. And long-term view means we would have to decide which part of the portfolio we think that in the long term at the right price, we will monetize that, right? Because I think there would be potentially maybe limitation on where, how far it can go, vis-a-vis where the other opportunity may lie. So I think that's going to be a constant at the back of our mind while we look at a short, medium term. We talked about portfolio constitution. Constantly, that will be at the back of our mind going forward in the next 5 years. Timing is another thing. We want to do it at the right timing. Some, I would say, a little bit low-hanging fruit but may not be the right timing. We -- I think we can be a little bit patient. In terms of where we want to redeploy, obviously, Singapore will be the ideal market. I think Singapore is still going to be the core. Whether it's within our sponsor pipeline or outside of our sponsor pipeline, I think Singapore actually is still going to be our home, and it will be for the foreseeable future, substantial part of our portfolio construct. Obviously, we know COVID-19 also affect a large part of the world and extent may be different. And the effect, the after effect of COVID may be also uneven in different part of the world. So we stay very on the ground now. That's -- I'm talking about outside Singapore. And look at where there will be opportunity to do that. Bear in mind that hopefully, we are able to do a decent kind of yield uplift from that whole exercise. Where we are looking at? I think the market that we've been observing closely are the few core market in terms of developed market, whether it's in Australia, in Germany, in U.K. So we stay quite on the ground. And I wouldn't want to pinpoint a specific area at this point in time. But certainly, all these markets we are watching closely, yes. And we have guys on the ground that are scouting for deals, yes.

I think we may give some time for the other analysts to ask their questions themselves. So now we move on to analyst, Rachel from DBS. Rachel, you want to ask a question?

Few questions from me. Just on the regional side, if I look at your chart correctly through my eye scan, it seems like the Phase 2 or the second, the second half of second quarter seems to be dipping down a little bit in terms of tenant sales versus last year's Phase 2. So I'm just wondering how strong do you think a recovery can be compared to what we saw last year versus this year given that we didn't really go down to like a complete closure of the retail? And how should we think about your rental rebate? Is it going to be similar, $19 million? Or could it be higher than that?

You're referring to this?

The tenant sales and shopper traffic chart -- slide.

Is this one you are saying?

Yes. Correct. Yes.

Actually, Rachel, earlier, I mentioned, I think first quarter, we're trending up quite nicely on a year-on-year. In fact, suburban mall is doing quite well versus 2019 in fact. Until all the way into April, the suburban mall were tracking ahead of 2019 as a whole, overall. Of course, it's uneven. I mean some done much better than others, right? Downtown mall, still a little bit of lag. But the May and June certainly has impact on retail number. As you can appreciate -- you can, it's been not easy without having the dining in, the crop literally dwindle. In fact, the trend we are seeing on the very first heightened alert. The moment we entered the heightened alert, traffic down by easily more than 50% from the day before, the week. But on a week-on-week basis, actually, you've seen a nice recovery. As people got used to the situation and environment, actually, the traffic picked up healthily from May compared to -- on a week a week. This, you're looking at, is actually the trending, right? But, actually, on a week on week is picking up from a large deal. We think that the situation today, where we are second -- we are in the second of the Phase 2 heightened alert, we probably will see the current situation. But of course, now we are seeing a fair bit of a very large number of infection case. Still reporting above 100. That may be a little bit dampened versus the Phase 1 where we've actually seen the infection rate coming down. That gave a little bit of confidence, I think, to the, by and large, the public and they start venturing out. So we think it may not be a first week, 2-week effect. Hopefully, with the vaccination, that will give a bit of confidence booster. So to your question of whether that will affect the second half. Given the convergence of the different factor, the number is still pretty high infection rate, but government is quite committed to look at a relaxation and a very differentiated approach for the vaccinated and non-vaccinated. I think that will have a little bit of a basic effect -- impact on the confidence of the retailer and the consumer. So we'll see how things pan out between now and hopefully, by National Day, we hope to see some kind of clarity on where that will go out. But certainly, given that the vaccination rate is improving 1% every day, today, I think we're probably 54%, 55% fully vaccinated, I think we are probably in a very good shape vis-a-vis country around the world, yes. And that, I think, will be a good confidence booster for both foreign investors as well as the local retailer who are thinking about their special footprint. So I think there are a few convergence impact. We hope that will give a little bit of flavor. We are still very confident, I think, towards the -- at least fourth quarter, we are in the traditional high capacity period, we'll see a good, nice ramp-up in terms of trading environment, yes.

How about the rental rebate and rent reversion?

It's ongoing. I think we are reviewing. We have stayed quite targeted. Of course, we also wanted to see what the government will come up with in terms of what is mandatory. But safe to say, I think those that are deserving, we will definitely be dishing out. But we'll also be very disciplined, ensuring that there's equal sharing of pain between the landlord and the retailer, yes.

So would you say you'd be at similar level what you have picked up in the second quarter?

Hard to say. It could be a slight -- maybe it could be on par, maybe $20 million, $20 million, $30 million ballpark number potentially that we have done now. But of course, this is just pure on a rental rebate. I think we have been also reaching out to tenants in different forms, helping them with sales, helping them with a bit of restructuring in the rent. That will affect some part of the reversion number that you see that we reported, yes. So it comes in different from, not just an outright hit-on-hit rent that you see.

I've been using your capital stats.

Yes, yes. I think we need to. We're using that.

Maybe just moving on to the office portfolio. Could you give us a sense on the filling of your Allianz, JPMorgan space and also you're expecting a big tenant.

I think the key thing we need to deal now with is, of course, the rightfully mentioned the JPM, the Capital Tower, the Allianz space, those departing ones, in fact, all departed ones, the backfilling of space, those are the key areas that we are working on. I mean there are interest there, but it doesn't really help with the -- this heightened alert situation now. So actually, it's one big component. We have seen a little bit of a slowing back as a result of this tightening, the latest tightening measures, but I hope things will resume back normal. But there are RFP we're working on, whether it's Capital Tower replacement for JPM or Allianz space, remaining space in Allianz. In fact, even space -- partially vacated space for Mizuho, I think there are interest. At the same time, CapitaSpring that we are ramping up in the development side, I think we've also seen the uptick in committed occupancy. We hope the situation around the world also improve further because a lot of -- sometimes decision has been delayed because the head office had been impacted by the COVID and some decision has been delayed, and we get request to extend at least for 1, 2 years kind situation while getting through their overall space requirement. So it's a little bit of kind of effect as well. But hopefully, we -- I think it will turn more positive by the third quarter, yes. But overall, I would say the leasing momentum is keeping pace, slowed down a little bit, but overall, I think it's still healthy. You probably can see some various report from the consultant, market rent has stabilized a little bit. Naturally, I think that's a good reflection of where the market is, yes.

Would you be able to say, like, backfilling is still very small? Or is it like 20%, 30%, 50%?

Which one again, backfilling of Allianz space?

Allianz and JPM, yes.

In the different form. I think that comes in different form. Discussion can be a major mini-anchor, it can be different split floor, that's under discussion. So I think we are not prepared to reveal anything yet. Yes.

Okay. Okay. Sounds great. Just maybe one more last question on your portfolio reconstruction. I think your peers have been quite active in the transaction market. So your thoughts there. Would you follow suit with your competitors? And what do you think of your -- the remaining Japan asset that's sitting in your sponsor pipeline?

I think we want also -- we want to be active when we find the right moment. So obviously, I think we are -- I think we are ready, in a way. It's just finding the right moment, yes. [Foreign Language]

So next, we will have Goola from The Edge.

I've got a couple of -- I've got 3 questions. Can I ask the portfolio reconstitution question in a different way. What portion of your portfolio would have a redevelopment potential in terms of -- you just can give us a rough sort of idea in terms of the number of properties, GFA, dollar, what you're comfortable with? And then for divestments, what sort of exit yield would you be looking at? And then specifically for the Commerzbank property. So I just wondered why they exercised early termination. And how does that affect the valuation of that building? Will it drop because -- was it earlier value that at a longer lease, yes. So those are the question, yes. And just one on the retail side. What portion would you say is your GTO now with your new leasing structure? That's it.

What's the second question again? I know that one was Commerzbank. Second one was...

What kind of exit yield?

Exit yield.

Second one on was exit yield on divestments, yes.

Okay. So I think redevelopment is a question of timing. Some projects are not the best time now to look at the redevelopment. Given the uncertain situation on the construction industry, I think there's a little bit of challenge over there. You probably know about it. So there are a few projects, I don't think I want to name, that we have done some study, but the cost structure may not be right at the moment. And hopefully, over time, the urban channel, the authority, would also have to relook at the -- in terms of land usage around Singapore and what kind of policy and strategy they have going forward. That we affect the pricing, the kind of GFA we are able to secure. So those are also important element that make that kind of a decision to redevelop, don't redevelop, very important. So at the end, the financial analysis on all those factors, I think, will be quite critical. But safe to say, there will be the potential downtown one as well as urban ones. Exit yield depends on what -- I think it's very misleading to look at exit yield if we were to exit our property today based on -- I think, naturally, the yield below, right, and also depends on what kind of property you are looking at. So I don't want to pinpoint a number. The -- there are transactions out there in the market, whether it's retail or office. I think you can make a little bit of reference there, but I think each property are unique, the potentials are different. So I will give you an example. It depends on that specific asset and whether the asset and the buyer -- so that we have the congruence of factors, right, the stars align, you have a buyer who look at situation. They do their own analysis. They think they could value add in a different way or -- and then they may price it quite differently. So we have seen transactions in a market that some of them trade at sub-3%, right? But a lot of that actually come with a value-add anchor, right? So on -- so it's not -- it's misleading if you look at just purely on an exit yield perspective. But they also will be a viable thing that, okay, capital preservation is key, right? They don't care about anything else, capital preservation is key. They could also be transacting at a pretty low exit yield. Even on a stabilized operational environmental, the yield may still look pretty low. So there could be situations like that. There could be a situation where the asset is mature, very stabilized, maybe the upside is limited unless there's a change in the policy by the authority, then the yield for the asset may be, on a forward-looking basis, pretty straight line. But -- it could -- certain kind of investors who think that this is the kind of portfolio, one, stability, right, no volatility. There could be a case like that. The exit yield may be quite different as well. So very difficult to pinpoint. And of course, retail and office, and in fact, mixed-use product will be quite different. Commerzbank, we are looking at different options. The -- I think we have some time, 2024 expiry. We have started to, in fact, getting a consultant to look at it; whether it is a single-let, multiple-let, what kind of capital investment may be required, I mean these are still in the feasibility study stage. So those situations or potentially could be a possibility. So at this moment, we don't have anything more to share, yes. Retail GTO, I don't think it will be a very big component. Overall, I think we guided it's still going to be about 5% to 7% overall of total rental income. I don't think it will be a huge component. While we are guided by the code of conduct in terms of how we can structure the leases and specifically on the rent structure where the old component on a standard template is not allowed. But on a mutual agreed basis between the landlord and retail, you can still put in the old component. So you can have a typical structure with a plus, GTO and old component GTO, whichever is higher, to be part of the overall lease structure, provided both party agree to it. And we have negotiated leases, notwithstanding the COCs in play that are still having the 3 components together. So how that will pan out? Hard to say. It's all about us. I'll give you a very simple example. If you were to take a very extreme, which we have done so for some of the leases, fixed rate more or less it's just recovering on our service charge rate, and we charge turnover components for a period of time. So relative overall, the turnover component may look very high for some leases. So if you look at just a snapshot of one particular tenant, then, his or her share of the GTO component of his total rent, it looks high because we have done some restructuring. But we're looking at the base effect. Overall, as a portfolio, this is not something we are steering towards to, and turnover rent eventually would translate to fixed rent. If a tenant does well and we pull through this cycle, when it comes to renewal, the fixed rent, we'll adjust, yes. So it is a moving target. But safe to say, I don't deviate too far from 5% to -- even, I think even hitting 8%, 9% will be quite remote, yes.

Okay. And so I just want to ask you used to do a half year -- you used to do a half year valuation but you didn't do that for the first half. Did you? What's that reason?

So overall, we -- of course, we, this is all together with the entire suite of CapitaLand. I think it's a decision taken collectively. We think that half year is sufficient. We don't think there's a significant movement. Bear in mind, the -- today's market, I think you can see for yourself, no doubt, there are potential impact coming from the rent decline, but there's also compensate effect coming from a low interest rate environment, loss of liquidity, transaction in the market has been mostly above where the valuation is. So I think we take a lot of comfort that I don't think the movement is huge, yes. So we'll continue with our annual valuation exercise. Of course, there are internal procedures that we need to do to our own internal assessment. And with that, we need to give comfort to our Board that the valuation number has not deviated too far, yes. It's not material. Yes.

Okay. Thanks, Goola. Okay. Before we jump to Mervin, there are also a couple of questions on the webcast that's related to Commerzbank, so I think we will just address them together here. So Jonathan Koh from UOB Kay Hian is asking that for the early termination by Commerzbank, are we able to share the reason for them vacating? And then whether there's any one-off penalty? If there is, when will it be recognized? So that's Jonathan's question. And then there's Lisa who also asked about Commerzbank, whether they are the single tenant? And when we explore the plans, are we gearing more towards having it multi-tenanted or it continues to be more anchor tenant heavy? And I think Mervin was asking the last question about Commerzbank is that -- or Galileo. What is the passing rent of Galileo compared to market -- what is the -- how does Galileo's passing rent compare to market rents? And any expected loss in NLA if we need to carve out the space, or I think carve out the space previously occupied by the Commerzbank?

So many questions. Okay. Commerzbank, they are going through some consolidation. So I think it's not just in Galileo where they're looking at consolidating. I mean, essentially, they are looking at their overall footprint in Frankfurt and in many other cities as well. So this is, of course, under one of those property where they lease, they don't own. I mean Commerzbank do have their own real estate. And of course, they have done their own internal assessment. So that's mainly the reason, they're trying to consolidate the space and the footprint. No penalty. I think this is all within the contractual terms. They have the right to have early termination. They need to serve a notice, 2-year notice, and they have done so, yes. As to whether it's going to be single tenant, multiple tenant, I think this is something that we are looking into that I mentioned earlier. We're getting the -- we're doing the feasibility study, whether it's single tenant or multiple tenant. We do also have inquiry. Once the news is known that Commerzbank decided to leave Galileo, we do get inquiries whether we are interested to lease up. So I think we are still going through the exercise. And I think we definitely will share once we have something more affirmative. I think the question about passing rent expected loss is it really also relates to eventually -- okay, Mervin's question was passing rent versus market rent. I would say it is quite on par with market rent, passing rent. And of course, the situation on headline rent and passing rent is evolving depending on the demand-supply dynamics over there. But I think at the current moment, with the German economy re-picking up, and they have just opened up again, right, the situation has stabilized a little bit. During the intense lockdown, there was softening -- there was softening demand. But now with things seems picking up again, it seems that -- it seems they have recovered a little bit. So I wouldn't give you how the forward market will look like, which is why we need to get a study done to get a consultant, whether should we look at multiple let basis or single let. Multiple let, what does it mean from an NLA perspective? And whether effectively, overall, the effective rent is more favorable under what situation, yes. So I think, Mervin, unfortunately, we can't answer that question. But it's actually linked to eventually how we decide whether we want to do a single or multi let, yes.

Now we'll let Mervin from JPM to ask his other questions face to face.

Thanks, Tony, on the Commerzbank questions. Maybe turn to the Singapore office market. Obviously, there's a bit of big space coming up in the chart, ourselves at Capital Tower and Allianz. But are you seeing many -- a large request for large spaces? Or is it smaller tenants at this point in time?

Large space like JPM, that kind of size, no. So mostly smaller. Yes, mostly smaller. So we, of course, JPM occupying multiple floors in Capital Tower. So even if you have to decide how you want to split out the space, it could be a situation of on -- done on a floor-by-floor basis or it could be a situation within the floor that we may have to split. So I think that one, still assessing the various RFP that we're looking at, yes.

And with this uncertainty over Chinese regulation, do you anticipate any slowdown in Chinese tech demand in Singapore going forward?

I think too early to say. I'm not sure whether they would -- I mean the strategy, of course, is quite different, right? Coming to Singapore is -- I think it's a base for them to look at expansion beyond just China in Southeast Asia market. So I think it's too early to say. It potentially could be a mixed bag. I can't comment. I think it's something that needs to be played out. And of course, we know the news about the recent policy change in China, whether there will be a little bit of moderation subsequent to that, not sure. Already, you are seeing comment that they are trying to work back some of the things that they are doing. So too early to say, yes. Any of this tech company, those who decided to move here, you probably also hear that they are actually packing themselves in some of the co-working space while waiting for the situation to perhaps stabilize, yes. So our co-working space seems to have a bit of a healthy inquiry. I mean we do have co-working space operator that we work with very closely, yes.

Okay. Thank you, Mervin. Next, we will have Derek Tan from DBS.

Tony, I just want to -- I have 2 questions on retail, if I can? First one is your thoughts on the fact that with this Phase 2 Heightened Alert happening again, do you reckon that there are tenants in our portfolio that may just throw in the towel? And do you reckon that your rebates will go beyond 3Q and going to 4Q? Just my first question.

Second?

Oh, the second question. The second question, if we look at Funan, right? So it's fairly unfortunate that we had COVID in your first renewal cycle. So I was just wondering what are your thoughts on the tenant demand there? And do you reckon that there will be a fairly big reset in terms of rentals there? And are we looking at a big tenant remix there? So that's all I have.

Okay. Whether tenant will throw in is a function of what kind of measures will be announced in terms of support. But nevertheless, I think even with support, I think there definitely will be casualty here. I think that's for sure because not everybody would be able in a position to dip into their reserve. So all depends on situation. I think government came out their own measures. We are looking at more details in terms of what will be mandated. I think on our own, we have been helping our tenants in the different forms that I mentioned earlier, where there's already rebate, rent restructure, a little bit of repayment scheme for them to write on. So a combination of many things that we're reaching out. I think that, potentially, there may be some in terms of tenant metering, but I don't think it's going to be big ones, yes. Funan renewal, you're right, we're entering our first renewal cycle. Whether there'll be a reset -- first cycle, there will be a few big space that we need to deal with. I think we are under discussion with them. We think there could be a bit of a reversion number coming off. But to begin with, Funan, we went out, in the first lease, it was on a relatively low rent base. So we don't anticipate that to be too significant. Even if we are to make a rent adjustment, yes. A function of a lower base over there.

Okay. Thank you, Derek. We have a couple of questions on the -- from the webcast. It's relating to the retail operations. So I think a couple of straightforward ones. Someone is asking, what does the rental waiver of $19 million translate to in terms of number of months of retail rent? That's the first question. Second question is what proportion of our retail leases have an annual step up? And what is the percentage of increase per year? And then from Nicolas Teh of Crédit Suisse and also Donald Chua, I think they're asking about the trends because I think the -- Donald commented that I think Q-on-Q, some of the malls have seen quite impacted. So they would like to understand a bit on the reasons and trends.

Okay. $19 million translate about 0.3 something. If you can't look at this in isolation, this is our right. Of course, we have been also giving restructured rent as part of the overall consideration that you won't see in the headline. But if you will just look at the $19 million, it's outright, is about 0.3 months, thereabout. Annual step-up, there will be variation. Depends on whether where you lock in your first year. The first year, we have a 30%, 40% decline. Naturally, the step-up may go higher, yes. But if you have a more moderated step-down, then the step-up will also be moderated. So I think that's the general principle. Trend on Q-on-Q. Second Q -- later part of the second Q will probably be similar to the early part of the Q, which is where we are now. Hopefully, the early part of the Q will be a bit short-lived, which we -- I mean we are all looking forward to what kind of relaxation measure that the government may announce in terms of how they want to treat the vaccinated and unvaccinated. I think that will affect the way the operating metrics, the returning of people, the tenant sales, et cetera, yes. So my sense is from a trajectory, second Q, early -- it will be moderate, probably very flat line. Hopefully, by second half August and into September, we'll see a nice uplift there. Hopefully, when we enter into fourth Q will be -- hopefully, we're in the celebration mode, hopefully, yes.

Okay. I think then this is also a question from Joy of HSBC, asking whether that the recent P2HA impacted the starting date for lease for some of the major leases. I think they're mentioning about JPM at CapitaSpring and WeWork at 21 Collyer Quay. So the question is, do you see a longer void period for office than usual? That's the first question. Second question is construction cost is reason. Do we see any change in the required return for AEI. And when do we think we'll start to revisit major, AEIs?

Longer tenor for AEI.

No. When do we think we will start to revisit major AEI.

Oh, okay. Longer void period as a result of heightened alert. I think the work is ongoing. So it depends on -- at least for our own project, the -- those are already known. There is the delay is already known because the construction work, labor supply issue, most of the projects are already on late stage now. So I would say what we mentioned by end of the year, completion, I think so far, we are still on track, yes. For those projects that's yet to be started, of course, then there will be a big question mark. It depends on how big a scale. It depends on how complex, what kind of level of labor forces you will require, at what stage in point in time. That may affect the duration of the projects. So it will be very project-specific in terms of duration and as a result, void period. And relating to the question, we talked about the AEI, right? We actually started to look at a few. Safe to say, some assets are a little bit on higher urgency than others. I think we are looking at it. You probably -- and we're looking at Clarke Quay, we're looking at space vacated by Robinsons. These are the 2 more prominent ones that require a little bit action. We are already at quite late stage in terms of the holding assessment, and we will definitely share when we are ready. So those are ongoing AEI work that were planned. Beyond that, our common space that we talk about, those potentially may lead to an AEI, depends on different form of AEI or different scale of AEI. So that's something that we are working on. Other smaller ones are ongoing, reconfiguring space where tenant depart, to know whether we should combine the space, those are ongoing. I think those small-scale jobs shouldn't be too affected, yes.

Okay. Thank you, Tony. Maybe just one last question is regarding green loan -- sorry, yes, what Steve Chen is asking, what's the proportion of green loan in our retail asset loan portfolio?

Percentage.

Yes, the ratio. I don't really have the exact number. Maybe this is something that I can -- we can get back to you on this.

Yes. On a portfolio basis. Portfolio basis is about...

I really didn't have that.

Yes. Okay. I think we have cleared most of the questions on the webcast. And I see that on MS Team, I think, Goola, you have asked your question. So I think there's no more question. So thank you very much, everyone, for your presence today online. Thank you. Tony, Cindy and Jack.

Thanks a lot. Stay safe. See you soon.

Thank you.