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

Good afternoon, everyone. I'm Sophia from Champion REIT. Today, welcome you all to our Champion REIT 2022 Final Results and Analyst Briefing. Today, we have our CEO, Ms. Christina Hau and our investment -- and Investor Relations Director, Ms. Amy Luk to share earnings results with you all. May I pass this time to Christina, please.

Hi, everyone. This is Christina. Together with Amy, who is sitting next to me. We welcome you all in today's briefing. First of all, Amy will walk you through our 2022 annual results summary, and I'll continue with the property performance review and wrap up with the outlook of Champion REIT. Amy, please?

Okay. Thanks, Christina. Good afternoon, everyone. In 2022, the challenging global economy as well as the fifth wave of the pandemic locally in the first quarter last year actually brought considerable interactions to our business and also impacted our results. For the full year of 2022, total rental income dropped by 5.5% to HKD 2,359 million and the net property income recorded a drop of 7.6% to HKD 2,031 million. The decline was mainly due to negative rental reversion of our properties. Distributable income fell by 13.6% year-on-year to HKD 1,298 million, and our DPU dropped by 14% to HKD 0.1956, although our result was impacted by the continued COVID-19. The local market sentiment actually has improved, thanks to the stabilized pandemic situation and also the border reopening. And tenant sales of Langham Place Mall recorded decent growth especially in the second half of 2022 and overall for the full year, outperformed the market and despite the continuing impact of the operating environment during the pandemic. We are pleased to make achievement in our sustainability with Three Garden Road achieving BEAM Plus Platinum rating with the highest score in Hong Kong. And we will talk more about this later on. And then looking at the rental income breakdown. Out of the 3 properties in Hong Kong, Three Garden Road recorded the largest decline in rental income decreasing by 7.8% year-on-year, mainly due to average lower occupancy and the negative rental reversion. And for Langham Place Office, it's relatively more stable in terms of rental income. For Langham Place Mall, as we have briefly touched on, the tenant sales was very encouraging last year, and that contributed to the increase in turnover rents by over 200% increase to HKD 117 million. And the proportion of turnover rent also increased to 5% in 2022. Looking at the property valuation, there is a mild decline of 2.7% to HKD 63.6 billion and cap rate for valuing the properties, remaining unchanged with Three Garden Road cap rate at 3.7%, Langham Place Office at 4.1%, and Langham Place Mall at 4%. And for the NAV of Champion REIT at the end of last year, it was HKD 7.91. Then looking at the financial position of Champion REIT, it remains stable under the challenging market condition. For the debt maturing in 2023, the MTN deal in January, that is last month has already redeemed. And the existing undrawn committed credit facilities is around HKD 2.8 billion after this MTN redemption. And outstanding debt for refinancing this year is around HKD 700 million. And so it's more than sufficient to cover the refinancing for this year. And after the redemption of MTN, the fixed rate debt portion has turned to 54.4%, which is in a balanced position to mitigate the market volatility in interest rate. And because of interest rate increase last year, our average interest rate was 2.8% in 2022, comparing with 2.4% in 2021. And the gearing ratio maintained at comparable level of 22.5% at December 31 of last year. Now I will pass to Christina to go over the performance of each of our properties.

Thanks, Amy. On Three Garden Road. Central office market remains subdued in 2022 under local economic downturn and anti-pandemic controls. An abundant office supply in the CBD intensified the competitive landscape, downsizing and relocation of tenants in the financial industry constitute to a fall in occupancy to 82.7%. Banking and asset management sectors continue to be taking up significant portion of the property. Regardless of the loosening travel restriction and lifting of compulsory quarantine requirements. Leasing momentum remained quiet. Market rents continue to be under pressure and the passing rent of the property went down to 99.7 per square foot. And for the lease expiry, the 28% representing tenants under rent reviews where the leases will expire in later years. For Langham Place Office, though certain tenants are required to close operations temporarily during the fifth wave, we saw some bounce back in business operating and expansion activity amount building and medical segment over these days, but a tick up by these tenants was not sufficient to fill up the vacated areas by traditional office tenants, leading to a drop of occupancy 93.3%. This lifestyle hub will still maintain it's traction with lifestyle-related tenants remaining a mainstay, representing 71% of the property area. The rental income of Langham Place Office remained at a stable level and passing rents slightly dropped to HKD 46 per square foot. We are in close discussion with tenants with the leases expiring this year. And for the Langham Place Mall, government consumption voucher scheme improved to be a powerful leverage to boost domestic spending, while the retail market was still impacted by the pandemic and inbound travel requirements in 2022, as seen by a rebound of tenants' business and Mall. Full year tenant sales saw up to 8% over the year, outperforming the city's overall retail sales, which dropped by 0.9%. Since the border reopened, we are seeing encouraging growth in visitors arriving from the Mainland. As in by visitors arrival data from the immigration department on the right-hand side, the Mainland visitors are flocking back to Hong Kong, especially after Chinese New Year, with last Saturday's inflow, reaching close to 70,000 close to 60% of the daily average pre-pandemic. This demonstrates a high thriving potential for Hong Kong's retail market. The encouraging sales growth of the beauty segments not only contributing to the outperforms of the Mall, but also contributing to over 200% growth in the turnover rent portion to HKD 117 billion (sic) [ HKD 117 million ]. However, base rent continues to be under pressure and the average passing rent drop to 157.1 square foot. More tenants are willing to pay base rent as the retail market sentiment improved and hence, the proportion of tenants paying turnover rent from 12% dropped to 9%. During the pandemic, we have been maintaining flexible leasing strategies and entering into short-term leases. The lease expiry in this year offering upside potential and flexibility to further diversified our tenant portfolio. Despite the tight market conditions, the Mall still demonstrate its resilience by welcoming new concept into the premises to maintain its attractiveness. Among 30 new tenants joined our Mall family in 2022, some pioneer operators, for example, CAMPSITE, the first glamping inspired restaurant in Hong Kong. Also a good moment to us into a retailtainment journey, an immersive transformation to transform ordinary retail sales points to a place of entertainment through contemporary Disney movie scenes with AR technology. The Mall remained fully occupied in this year with a similar proportion of lifestyle retail, including entertainment, F&B, fashion and accessories. All rounded marketing campaigns and strategies remain in place to stimulate more sales and footfall. We took an example of our Christmas. We are building a 6-mile to fluffy ball Christmas tree, made up of Disney and Pixar family. Also for the Chinese New Year, we are using the character mofusand replicate the Japanese folklore culture. This marketing events draw large crowds to the Mall and also helped the tenant sales. Last but not least, Langham Beauty fast, along with other sales-driven promotions like lucky draw, sakes rebate and shopping coupons proved to be a success with shoppers with overwhelming responses received. Amy, please continue on the sustainable part, please.

Yes, sure. For last year, actually, throughout recent years, have been working hard and putting our efforts in sustainability. And there are some remarkable performance that we would like to share with you today. And first of all, it's regarding Three Garden Road, years back, we obtained WELL Platinum certification of Three Garden Road, which is the first existing building in Hong Kong to get the certification. And then in 2022, we obtained the BEAM Plus existing building certification for Three Garden Road. And it is the highest score in Hong Kong for the BEAM Plus certification. And 5 out of 7 categories in this certification got full mark like green innovation and optimize energy use measures. So these double platinum actually reinforce Three Garden Road positioning as green and wellness helped. And then we also established our 2045 net zero target and commitment, which we will continue to work on climate resilience. And then on sustainability financing, we continue our effort to increase this proportion. And in 2022, we obtained another HKD 1 billion of sustainability-linked loan where there will be interest savings if the KPIs are met. And then at the commodity level, we have set up urban farm in Langham Place Mall on Level 4, which is called a Love Play Farm project, which provides a farming area and space for multiparty collaboration, including staff, tenants, visitors and the commodity, and that including the planting and also painting. And we got some groundbreaking, mint lemonade that we can actually put waste-to-farm-to-table concept in action. And then for the music fund, our classical music concert series, Musica del Cuore, which is held here at Three Garden Road resumed as the pandemic situation stabilized. And then the new season, in other words, which was launched earlier this month and was receiving overwhelming response with full [ house of guests ]. Now I'll pass back to Christina to share the outlook. And of course, our effort of sustailability receive awards and recognitions, which you can see in the screen here.

Okay, then I continue to the outlook of 2023. The gradual relaxation of pandemic measures and the resumption of cross-broader trouble has set to provide a boost to the Hong Kong economy and retail market. However, 2023 remains a challenging year for the trust given the general negative outlook for the office market and uncertain economic prospect. We expect a downward trend on rental income and DPU to stay, though we do see the rebounds of retail segment. About liability management, the volatility of interest rate may drive up interest exposure. So under the turbines period, we keep taking a prudent approach on liability and treasury management to identify new enhancing opportunities. For M&A, we continue to stay cautiously optimistic on reviewing the potential acquisition opportunities. So that's the end of our presentation, and we can start the Q&A session. Thank you.

Thank you, management. And this is Mark from UBS. I have about 2 questions. I think the first question is regarding on the retail side. So after the border reopen, I'm not sure if you can share more colors on the tenant sales recovery? And secondly is also on the retail. What is the latest rent-to-sales ratio for the tenants?

Thank you for your question. We do see the encouraging sales after the border reopen, especially after the Chinese New Year because from the figures that presented just now from the immigration department, the tourist has not been back in the January. Until now, you see the daily traffic can come up to around 50,000 daily. So it is close to 40% of the pre-pandemic level. So we do see a -- on week-on-week basis, we do see the traffic growth. This is very encouraging. And from the retail side, we do see that immediately, we can see the sales of our self-operated Langham Beauty. This has been a solid growth since after the Chinese New Year. And we do see the proportion of tourism spending increase and also -- our sales also is catching up and it's in a good upward trend. And regarding to the rental sales ratio, we are keeping -- 2022, you did see there are some rent reversion in terms of our base rent. So the tenant rent-to-sales ratio has become healthier, I would say, in 2022. And it's -- we hope -- it's -- we'll be getting better and better with the increasing number of tourists arriving Hong Kong and the retail sentiment and has been improved quite a lot in terms of local spending as well. Thank you.

This is [ Jin Tao ] from Citigroup. I have 2 questions as well. The first question is regarding the outlook. And can you share with us what's the outlook for the office and retail in 2023? And what's the rental reversion trend here in Hong Kong and its outlook? Then secondly, do you have any potential share buyback plan in this year?

For the outlook on the office portfolio and retail. As we have mentioned in the last slide, over the 3 years pandemic and the uncertainty in global economy, the demand had been shrink over the past years on the office market. So we -- although the boundary has reopened, and we do see a little bit more inquiry, but as you know, we don't have the crystal ball on when the demand is coming back. So this is a market-driven scenario, I would say, on the office portfolio. So on the retail side, since China has been fully reopened and visitors are keen to visit Hong Kong. And the consumption voucher is a powerful tool to boost the local spending as well. So in terms of 2022 retail outlook, we do see it's very positive. If we see the growing numbers of visitors coming to Hong Kong, and if the local spending, the sentiment has continued to be quite optimistic, okay? We do see the outlook for retail is much, much better in 2023 than 2022. So for the next question.

Okay. I will address the share buyback question. So as you know, for REIT, we are paying out 90% of our distributable income and like every year, like for this year, we are saving about 10%. And we have also mentioned that we do got CapEx plan in mind, like some enhancement work for Three Garden Road for the lift modernization and also in planning. So upgrading in the washroom and that require CapEx. And also for -- like a very large scale of buyback because the amount of cash that we can reserve each year is not a big amount. So for a big buyback plan, we may need to borrow and that in interest rate like high interest rate environment, it may not be desirable for unitholders.

This is Raymond from HSBC. I've got 2 questions. Both of them are related to the retail segment. So the first question is, can management remind us like the split of the lighter domestic spending and the tourist spending in Langham Mall pre-COVID level? And what do you expect in terms of breakdown in 2023? This is the first question. And the second question is the outlook for the retail is improving like more shoppers coming back especially for tourists. So do you -- does -- do the management expect rental reversion to turn positive in 2023?

Since we are not using a central POS, okay? We are unable to track the local and tourist spending in terms of our general tenants. But we do operate the Langham Beauty ourselves. And we do see the increasing amount of these UnionPay, WeChat, AliPay transaction very recently. So there is a certain portion, we see that there is increase from that, the mainlanders keep spending in the -- and now more. And in terms of the rental projection on the retail side. As you have seen in the slide that in 2023, we have a certain portion of tenants, leases are going to expire so with that we will capture these opportunities to review their performance and reflect in the renewal -- rental subsequently. So -- but still, there are some leases that were signed back in 2022. And those leases may not be able to catch up with the sales trend right now. But still, we foresee, we are able to collect more turnover rent even though some of those are base rents were not up to a very optimal level, I would say.

[ Jason Lee ] from Fontana Cap. So my first question is, can you share your view on your borrowing costs and also the -- are you comfortable with the current gearing level? Will we consider any equity raising? Like, what -- like one of your peers has recently done? My second question is, you mentioned about a downward trend on our DPU outlook this year. So I'm just wondering in terms of a driver, do you think it's mainly driven by the top line drag by your office portfolio or extracted by a surging borrowing cost under the current high interest rate environment?

Okay. For the borrowing cost, actually, as you -- maybe turn back to the debt maturity profile slide. So overall, we -- average interest cost for last year was 2.8%. And say, for the credit spread for the new loan that we obtained last year is actually more or less of the previous debt that we obtained. So what's the moving part is the HIBOR, we are not 100% fixed rate debt. So the volatility here is for the remaining 46% of the floating rate debt portion, which is subject to the interest rate movement where right now, if we are comparing the floating -- swapping to the fixed rate cost is maybe still around 100 bps of difference if we are swapping from floating to fixed. And regarding like source of funding, we always evaluate different sources of funding from time to time. And just 1 just kind of like our forecast, we may not be preferred to issue equity at the discount. And so far, for the expiry profile, we have already arranged the credit facilities for the refinancing debt still this year.

This is Mark from UBS again. I think I got 2 more questions. I think is, first of all, is on the office expiry for this year. I'm not sure how much we have already done for the lease negotiations. I think for both Langham Place and Three Garden Road, I think that's the first question. And second question is, already recorded in the past few years, we lowered the payout ratio to [ 90% ] and going forward, because you mentioned maybe the retail is recovering, so under what condition we will consider to increase the payout ratio again?

Thanks for your questions. Regarding the renewal on the leases is going to expire in 2023. In fact, we have secured quite a lot renewal for Three Garden Road as we have kickstart the renewal process in 2022. So over half of the tenants are going to expire in 2023, it's going to stay. And in regarding the Langham Place Office, we are in close discussion, and it's going to be -- the deal will be closing very soon on the renewal tenants. So although they may impose some of the uncertainty, but majority of the spaces will be renewed on the lifestyle and Beauty segment.

And regarding the payout policy, we have been following the [ record ] rules. And then we can see the light market conditions as well as our funds and some other factors when we decide. And then so it will be, like, up to the next review to decide whether we will maintain this or have a different payout ratio.

Any other questions? If there's no further questions, that concludes our analyst briefing today. Thank you very much.