Champion Real Estate Investment Trust (2778) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Champion REIT's Analyst Briefing for 2020 Interim Results Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today. I would now like to hand the conference over to your speakers today, Ms. Ada Wong, Chief Executive Officer; and Ms. Amy Luk, the Investment and Investor Relations Director. Thank you, and please go ahead.

Hi, everyone. This is Ada and Amy is also on the line. I'll let Amy to just go through the very high-level highlights of the results and then I'll go into all the properties and performance itself. I'll pass to you, Amy.

Hi, everyone. This is Amy here. Thanks for joining our interim results briefing. So for the 2021 interim result is over still under a very challenging environment during the COVID pandemic. And our total rental income, as a result, dropped 6.2% to HKD 1.26 billion, and the rental income actually for both office and retail portfolio dropped. And negative rent reversion is also recorded across the -- for all properties in our portfolio. And net property income dropped 4.8%. We did see that the retail sales bottomed from a low base last year. But overall, it's still below the pre-pandemic level. And our DPU dropped 2% to HKD 0.12. And if we go to the next page, you can see that all the properties' rental income dropped. And with Langham Place Mall, the retail portion dropped more. For the turnover rent portion of the mall actually increased from a very low base, but the increase is not sufficient to cover the drop in the base rent. So net-net, the rental income for the retail dropped. And also for offices we touch on, it's also dropped. So I will now pass the time to Ada to go through the details of each of our properties.

Okay. So let's talk about Three Garden Road first. Central office is still under pressure given that in the first half of the year, everyone is still working from home. But tourists, like, the middle of the year, everyone is like gradually coming back to work in the office. And there are also selected, like, multinational banks are saying that they encourage their employees to go back to work. So we see that the leasing momentum, although it's low, but at least the banks are willing to make some real estate decisions. And also recently, we see that like the viewing and also inquiry level also picked up from the very low base. Our portfolio still is very consistent, like banking, asset management, like, all financial-related trades. Occupancy is now at 85%. And -- but I think the first half, it was still very challenging. Even if we discussed the lease with any tenant right now, we will be talking about like towards the second half of this year or something about next year. So hopefully, according to the agency reports that there could be some potential pickup in 2022 in terms of the occupancy on the rent in Central may be stabilized. Our passing rent is still at HKD 111. This is just mainly because of the leases that we have signed has not commenced yet in June 30, 2021. So if you look at 2022 and '23, for those expiries, these are the people who signed it at the peak. So the peak level of our rent, it was around HKD 120 versus our latest is around HKD 90 for small size or even like there are several bigger tenant around that level. So there is still some gap between the current rent versus the passing rent of the future expiries. So you could expect that the passing rent is going to continue to trend down. Hard to tell like what the market is going to be in 2022. But I think even if there is like a stabilization in rent or there could be pickup in rent, it's hard to get back up to close to the 2022 and '23 level. So for Langham Place Office Tower. Slide #8 for the Langham Place Office tower. The occupancy slightly goes up to 91%. It's because we see a very good demand from beauty centers. It's mainly because for Hong Kong people, they cannot travel, they're stuck here, they cannot get their facial or cosmetic surgeries in Korea. So they spend all the money locally in Hong Kong. We see there's additional demand from beauty centers mainly. And our lifestyle-related tenant has expanded from 62% to 65%. So that drives the vacancy down a little bit. In terms of the passing rent, very similar case as Three Garden Row. Now the passing rent stayed at around HKD 47. But actually, currently, the leases that we signed are in mid- to low HKD 40s level. But given the very swift responses that we have from the lifestyle tenants, we are slowly narrowing the gap between the spot rent and the passing rent. But still, like, I have to say that the current spot rent is still slightly below the passing rent at month end. But I see that for Langham Place Office, we have been very consciously changing the timing mix to quota retail. And we see that this is a very successful case. And we'll continue this strategy for Langham Place Office. For Langham Place Mall, the mall remains 100% occupied throughout the year. And we did sign up like quite a few of turnover rent only leases, and that was around 14%. But recently, since the relaxation of the social distancing measure, we see that, especially from F&B tenants, they are quite active in terms of looking for space. And for those tenants, we can -- we were able to sign up, like, normal leases with them, like a 3-year term base or turnover already. So we expect that with the shopping culture, the general retail momentum is also very strong. Hopefully, that can put back the entire retail shopping industry back to like a normal track. And then in terms of the passing rent, we do have negative reversion. Also for those tenants who is being turnover only, the turnover rent that they paid is insufficient to offset the drop in the base rent. So our total rent dropped from HKD 356 million to HKD 321 million. And actually, some of you may have noticed that one of our anchor tenants, who is also a listed group, that they announced that they have leased another shop near the high -- around the area. We do have plan in -- that is in the making already. But then in second half of this year, there will be some downtime before the new tenant comes in. So -- but then I think we'll have more announcements when the new tenant is open. The mall, since the relaxation of the social distancing measure, we have host a lot of events and there are also new shops that attract a lot of footfall. Say, for example, in the top left corner, at our Level 12, there is a collectible toy store. When they open, like, you can see that there's lines of people lining up. We also have some smaller, more unique shops like a new tenant or the Level 11, a Grandmama Store. And there is also like some new F&B concepts that is like a Cocolo Factory on B2. And I think a lot of you who are in Hong Kong, you probably know Mirror, the boy band. In Hong Kong it's like super popular right now. So whenever we show the Mirror MV on our big screen TV, then we can attract foot traffic. And some Mirror fan, they will try to give out souvenir at the mall, and that will also attract a lot of footfall. So there are actually a lot of ways to attract footfall, and we are not selecting our footfall. But it's a matter of how to improve the sales. Next slide. So go to Page 14. We have actually improved our mobile app, and we have launched a new website, make it much easier to put in points. And also, we can capture a lot of, like, customer data for follow-up cross-selling to generate more repeated purchase. So with this new app, we were able to improve our spending per ticket. And also, we have this lucky draw that we are -- just ongoing right now is to incentivize the spending of the Government Consumption Voucher in the mall. Next, for the M&A side, we have completed our first overseas acquisition, which is 66 Shoe Lane. This is not a very big investment, only like 27% of GBP 250 million of total purchase consideration. So this has positive carry, but that has actually a minimal impact on our bottom line. But still like it helped to enlarge our portfolio and also helped us to diversify our portfolio geographically. Next is on the financial position. So the total valuation right now is HKD 65.5 billion. Actually, the per square feet number to look at it is actually very, very conservative, like the Central office of HKD 24,000, and then for the Kowloon office, it's only around HKD 12,700, and we held only HKD 27,000. So that comes to an -- gives us an NAV of like HKD 8.32. And that in terms of our debt portfolio, we have fully refinanced our 2021 loan [ fee ] with our first sustainability-linked loan. And then on top of all these, like around HKD 16 billion of loan, we also have an additional of HKD 3.1 billion undrawn committed facilities. So currently, 100% of our debt are unsecured. Average interest rate is 2.5%. We have fixed 62.1% of the debt with interest rate swap or MTN. The current gearing ratio is very healthy at 23.2% as of June 30, 2021. And then in terms of sustainability, as I just said, that we have completed this 5-year, HKD 3 billion of unsecured sustainability-linked loan. And our 2030 ESG target is also on track. We've gotten a lot of international awards and accolades from various vendors. So in terms of the guidance. Office, given that our passing rent is still quite a bit higher compared to the spot rent, you should expect to have negative rental reversion. I think this passing rent will also start coming down and the leases that we signed earlier this year started to commence. And then in terms of the retail, I think for the retail side, I hope that this has bottomed, unless the Delta virus sort of force Hong Kong into another lockdown. But I think that the retail side is actually not that bad. But it's more a matter of when the tours will come back and that would really make them move in terms of our retail turnover rent revenue. So just to summarize this two, that sort of set -- should start a lower DPU trajectory in the very near future. And then in terms of the liability management, we don't have any major imminent needs in 2022. So we are very, very safe and prudent. And then we'll continue to monitor the market movements to see whether there's any opportunity to further improve our credit profile. In terms of M&A, we'll continue to look into expansion given that our core portfolio is quite challenging at the moment. So we'll look for any opportunities to try to add additional new enhancing acquisition targets to our portfolio. So with that, that's it for my presentation, I'll open the line for Q&A.

[Operator Instructions] Your first question comes from the line of Mark Leung of UBS.

Yes. So I have a few questions. I think #1 is more technical. So because I saw on the financial statements, we have a joint venture income contribution it's about HKD 25.8 million. But I think for the statements we mentioned, we only got about HKD 6 million net passing -- net property income from the U.K. offices. May I know what is the differences between these 2? I think that's the first question. And also, the second question is about for -- I'm not sure if you can give out the guidance on the retail sales group. So not sure if we are outperforming the Hong Kong retail sales or we are underperforming?

Yes. Your first question is -- actually, the HKD 25 million, that includes the fair value changes of the building. So that's -- the difference is actually the fair valuation plus the sort of the profit from the JV, okay? Then for the second one, I think it's very hard for me to give any guidance in terms of the retail sales because Langham Place Mall, traditionally, we are more reliant on big tourists. So unless the tourist comes back, it's hard for us to outperform Hong Kong.

Your next question comes from the line of [ Will Fu ] of CGS-CIMB Securities.

So my question is regarding the performance at Langham Place Mall. And as we know that we -- in Hong Kong, we just have the electronic coupon distribution. So can you please share with us some color on the latest footfall after the distribution of the electronic coupons? And also, we would like to know the degree of the rent reversion in Langham Place Mall. So can you give us some guidance on how the magnitude or the approximate magnitude of the rent reversion for the mall?

Well, actually, the footfall definitely increased subsequently through the distribution of the government shopping coupon. We have gotten selected tenant feedback. Some tenants have actually doubled their sales in August. But in majority of the general retail, the sales is up with a very, very decent growth. F&B the impact is a little bit less because there's only that much that we can eat, and the F&B has already had a very decent recovery since April. So on the F&B side, it's still growing, but it should feel also a lot less. But I have to say that this is like onetime boost in August. I don't know whether there's any -- they will spend the money that they originally planned to spend in August -- sorry, in October or during Christmas. And there's challenge right now, right? So it's hard to tell like what is the general impact on the entire sales in second half. Because normally, for second half, majority of the sales will happen in November and December. So that is actually quite key for us. That if Hong Kong can stay this way, there's no further tightening in terms of the social distancing measure, if we have a good November and December, then our sales should have a decent growth in second half. So it's just really, really declined. I think there are so many unknowns in the second half right now. And then it's very hard to give out any guidance in terms of sales because it just really depends on when do you think the tourists can come back. And then in terms of the negative reversion, it's also something that is hard to guide, because right now, like for those that -- the trade that got impacted a lot, especially this [ journey we have ], we -- like in case they ask for a very steep cut in the base rent, then we would probably move down to a short-term lease. So then we will have a chance to renegotiate the lease to a decent amount of base rent when the entire retail market sort of recovered. So I think we are very flexible, and we are moving very agile with the retail market right now.