Hysan Development Company Limited (0014.HK) Earnings Call Transcript & Summary

Thank you all for joining us today at Hysan Development's 2019 Annual Results Webcast. Due to the outbreak of COVID-19, we believe this is the best way to conduct our session today, and we really appreciate you for being with us despite the inconvenience. Now let me introduce our panel for this afternoon. Our Chairman, Ms. Irene Lee; our Chief Operating Officer, Mr. Ricky Lui; and our Chief Financial Officer, Mr. Roger Hao. So we'll start today's session with a presentation from Irene, Ricky and Roger and we'll follow that with time to take some questions online from wherever you are. Before that, though, I will invite Irene to speak a little bit about how Hysan is handling the present COVID-19 situation, Irene?

Thank you very much. Welcome, everybody. Hong Kong went through 2019 social unrest and now the COVID-19 virus outbreak. Hysan is facing one of the biggest crisis periods in our recent history in terms of impact on our business, perhaps even bigger than SARS during 2003. However, we need to look beyond today's crisis as a low point over a long period. Hysan has been in Causeway Bay for nearly 100 years. There have been many ups and downs. We will continue to navigate changes brought about by natural evolution, such as changes in consumption habits or unexpected black swan events as we have seen in the last 2 months. We believe we can overcome adversities, adjust and deal with changes. Hysan has a commercial portfolio that exudes quality in terms of physical location, building designs and tenant mix. The company is managed by dedicated, experienced and forward-looking professionals. We have formed strong partnerships with our tenants and our community. I'm confident our partnership with our stakeholders will endure the test of time. While we are certain the COVID-19 virus will end, the situation with timing and intensity is still not clear. We will do our best to provide support to our stakeholders. Importantly, for our tenants, in order to ease the pressure on their business, during this challenging period, Hysan will be offering a meaningful rent concession with reduction in basic rent in February and in March. The rent concessions are in addition to those provided during the social unrest in the latter part of 2019. We believe the situation will improve. We intend to be well prepared when the virus ends and the situation normalizes, so that Hysan, together with our tenants, work to stimulate spending with confidence and with mutual support. For our tenants, shoppers and staff members, we are doing our very best to provide a clean, safe and enjoyable environment. I would like to use this opportunity to thank our frontline staff for their hard work, and we will ensure they receive the best care and protection while carrying out their daily tasks. The coming weeks are likely to remain difficult. With all of Hong Kong pulling together, we will overcome these challenges, and I look forward to better days ahead. Now let's start our presentation for Hysan's 2019 results. Turnover and recurring underlying profit increased by 2.5% and 2%, respectively. A robust first half helped ease impact of a negative second half. Hysan's balanced dual-engine portfolio of office and retail provides a stable platform for our company. Occupancies of office and retail portfolios were 98% and 96%, respectively. We have seen impact from different fronts. Firstly, external factors. Global uncertainties and the U.S.-China tensions affected Hong Kong's general economic well-being. On the domestic front, social conflicts in the second half of the year had immediate adverse effect. Hong Kong retail sales dropped 11% in 2019 when compared with the year before. Office demand and rental growth dampened. Then, we had the onset of COVID-19 in Mainland China and Hong Kong earlier this year, further compounding the difficult economic situation. Throughout these difficult times, Hysan's management team delivered swift, proactive, timely solutions and support to manage the impact on staff, tenants and shoppers. Office and retail tenants were largely in business-as-usual mode. All stakeholders worked together, reflecting our long-term community-building efforts. A dual-engine business provided a stable platform. As you can see from the pie chart, our office and retail portfolios are both at 46% in turnover contribution to our company. Balanced portfolio and synergies ensure Hysan remain more resilient to unexpected disruptions and impacts. Our ability to retain and continue to attract premium brands in Lee Gardens shows our area curation ability and strong partnerships with our tenants. Our portfolio is, of course, also balanced by a broad range of retail and F&B outlets with different price points for different tastes, vibrant neighborhood well served by public -- excellent public transportation. The completion of Lee Garden Three expanded the number of quality local and multinational office tenants. The demand from increasingly discerning office tenants drive broader and more diverse retail offerings. Positive self-sustaining cycle of supply and demand continue to power our business. The convenience and vibrancy make Lee Gardens ideal for Flex or co-work. Flex extended our catchment to entrepreneurs and the shared economy. Co-working industry faces inevitable consolidation in Hong Kong and actually elsewhere. And those with proven business models are expected to survive. We are confident that flex or co-work will remain a part of office ecosystem. Lee Gardens is an extraordinary place infused with old Hong Kong and Hong Kong of today. Residents, shoppers, workers and businesses help build the community in the past 100 years. Hysan carried out asset enhancements, redevelopments, neighborhood curation, tenant mix changes and community events over the years. Long-term thinking comes naturally to Hysan. Stakeholders' demand for sustainability have grown significantly in recent years. Our Board established a Sustainability Committee to provide long-term direction and guidance to be supported by the management Sustainability Executive Committee and task force. We're in a good position to integrate sustainability initiatives with measurable targets into our short-, medium- and long-term goals. Finally, outlook. Hong Kong's economic outlook is clouded by global headwinds and domestic factors. COVID-19 has introduced an unprecedented further challenge after so many months of social unrest. We are committed, as we have been in the last 97 years, to support our community through economic ups and downs. We continue to strive for stable and sustainable performance. A strong, reputable property investment -- investor, developer and manager, we have the foundation to continue our growth. Thank you.

Thank you, Irene. Can I ask Roger to continue with the presentation?

Yes. Thank you, Mark, and thank you, Irene. Let me highlight a few summary of our results from a corporate point of view and then Ricky will share with you in more details in -- for the performance of each individual business unit. We are now on Page 13. So overall, our top line turnover increased by 2.5% to HKD 3.988 billion. And our key performance measurement from a profitability point of view, the recurring underlying profit increased by 2% to about HKD 2.6 billion whereas the shareholders' fund mainly represented the asset value of our investment properties increased by 4.3% to around HKD 77.7 billion. On next page, Page 14, again, this is just a very simple summary of the source of income -- or source of turnover. As Irene also mentioned, in 2019, both office and retail contribute 46% of our top line. And moving on to a summary of our financial positions. On the gearing side, we continued to maintain a very low gearing with net debt-to-equity at 4%. We continued to maintain an investment-grade credit rating with one of the key credit metrics being the net interest coverage maintaining at a very healthy 17x. On the debt profile, fixed rate continued to be the major part of our debt, representing around 84% at the end of 2019. On average, debt maturity with a few run-off bond issuance during 2019, our debt maturity has been lengthened from 4 years to around 6.6 years at end of 2019. Capital market also represent around 80-something percent out of our total funding source. Effective interest rate continued to maintain at 3.4%. And as part of our overall company drive on green and sustainability, after we established a Green Finance Framework back in last year, in 2019, we have issued a total of about HKD 1.6 billion green bond. And in terms of cap rate, as indicated, on Page 16, there's no change in cap rates employed by our valuers, both between end of 2019 and 2018 as well. Okay. Thank you very much.

Thank you, Roger. I will give some highlights of our operations, starting with office. For office, our turnover increased by 8.6% to HKD 1.833 billion. Occupancy is 98% at the end of 2019. The increase of turnover reflects the positive reversion for rent renewal and new lettings. It also cover the contribution from the whole year effect of Lee Garden Three. About the distribution of the portfolio. Our portfolio is still a fair-balanced portfolio by tenant's profile. The 3 major industry, banking and finance, professional and consulting, co-working and flex, they have taken about 50% of the area. The rest were covered by another 7 different categories. For retail, with the impact of the second half of in 2019, there's a drop of 4.5% in turnover to HKD 1.836 billion. The contribution from turnover is HKD 66 million with an occupancy at the end of 2019, 96%. Still, the -- there's positive rental reversion in renewal, rent review and new lettings. About the retail sales. Our retail sales aligned with the Hong Kong retail sales with overall drop about 10%. The category of jewelry and watches are the -- had a serious drop of over 22% while the F&B has amounted over 3%. In this -- to end 2019, we still made a lot of advancement in our trade mix enhancement. In this -- in 2019, we have 35 new brands added to our portfolio and also 27 shops have been majorly renovated. All these reflect the competence of Lee Garden areas. For residential, there's an increase of 14.3% of the turnover to HKD 319 million. The possible rental reversion is contributed by the renovated units and also the enhanced environments of the public areas, including the lift lobby and the lift modernizations. The occupancy is 87%. About Tai Po development. All the design work has been done and now we are refining the landscape and clubhouse design. Foundation and basement work has been completed and superstructure has started earlier this year. We expect the construction work to be completed by 2021. In Hysan business model, we emphasize on our community. As mentioned by Chairman, the dual-engine model is bringing a lot of benefit to our business. On top of that, we also add a lot of accents and characters to our communities. One of the new initiatives is a project called Bizhouse, which is especially designed property for the entrepreneur who will need a good living space, but at the same time, they want to use their living space to operate their business in the daytime. This is a very new product in the market. And then we also have the Urban Sky, which is a new venues created for arts and culture at the ninth floor of Hysan Place, which is gaining a lot of traction from the market. To further content of our art and culture, we also have our Arts Programme curated by our management trainees, mentored by our project and design team. We have a lot of collaboration with the local artists. There's a one modern piece of art that is being hanged in the -- at the atrium of Lee Garden One. We hope you can spend some time to come and have a look. Lee Garden Association has spent years to curate a neighborhood to engage the neighbor. They're still making a lot of effort this year getting the neighbor to be more aligned in our interest and also in our road map about how to form the Lee Garden areas. About loyalty program, which is one of the key pillars of Hysan business. We have -- last year, we have the Lee Garden apps, and now we have the Lee Garden Club apps newly launched later of the last year. And we are going to put in the Club Avenue into the same platform, so the Club Avenue members will also enjoy the benefit from this new technology. But at the same time, the classic pampering of our members is still very important. We just finished our newly club VIP lounge at the first floor of the Lee Garden One. We are going to open and serve our members soon. Talking about the loyal members. We believe family is also a very good member's unit. So we have been enhancing our children and family program to include a lot of art, culture and sports and other kind of training that will benefit the kids while they have the fun in this area. We also make use of the modern technology about the electronic gift coupon last year. This is a trial year for us. The electronic gift coupon, e-coupon, can be used in our area. There's over 20,000 of transactions that have given a good multiplier effect of the tenant sales, which will be another channel to help our tenants. In 2019, we have 160 marketing event, which include a lot of Hong Kong leg of global events or even first time in Hong Kong shows or products. Finally, we talk about some business technology. On top of the apps weed talk about right now -- just now, we also have invested in the area WiFi as well as the IoT, which help us to give a clearer picture of the demographics of our visitors and their traffic pattern. It help us to gain better foresight of our operational planning. In 2020, we are going to adopt the data analytics and AI. We hope this will strengthen our understanding of our customer as well moving towards -- to predictable approach. We also talk about the social media. Our WeChat and Instagram has doubled to triple-digit (sic) [ double- and triple-digit ] growth in 2019, and with the new marketing program, we expect this growth will continue. Finally, we would like to say we use business technology to help us to improve our operational efficiency, making data-driven decision and create value and taking strong consider -- but at the same time, we will take strong consideration in data privacy. Thank you.

Thank you, Ricky. Now it's time for questions from you guys out there online. I will try to read out as many questions as possible, which are coming in. But as we only have about 20, 25 minutes for this session, I can only promise you I'll do my best. So now the first questions are from Justin Kwok, Goldman Sachs. It's a 3-parter. The first one is how has the tenant relief program affected your retail rental in the second half of 2019? And how much would that financially impact into 2020?

Roger?

First one first?

Yes. Regarding the rental support we provided to our tenants with respect to the year of 2019, had been fully reflected in the 2019 results that you are seeing from the announcement. So I believe that...

So there's no spillover into Q1 of 2020. But as we talked about earlier, Q1 2020 is now -- we are now rolling out a program to help our tenants to get over the COVID-19 crisis.

Sure. Second part is what's the guidance for office and retail rental reversion outlook into 2020? And what's the situation of the renewals?

Okay. Well, let me do a quick recap on the 2019 and then I will touch on 2020 that we have seen so far. As you will see from the announcement, basically, all 3 business units managed to achieve positive reversions, of which, I think, I would like to particularly highlight retail because after 2 years of negative reversion or flattish reversions, 2019 actually is the year we see the impact and the result of our prudent strategy of curating the mix and then all the other matters. So that's the main driver of the retail reversions being positive. For office, again, as I shared with you guys in the interim announcement, we had a mid-teen positive reversions, which actually basically lasted throughout the year. So overall, for the annual portfolio for office, we managed to generate a positive mid-teen reversions. And for residential, while a little smaller than the other 2 commercial counterparts, in terms of reversion, they also managed to get to an early teens 2-digit figures reversion. So that provides a very good starting cushion in terms of cash flow to support us in our mitigation program on the -- on 2020 challenges. Coming on to 2020, again, from an expiry point of view, as you guys probably can now see from our announcement, for both office and retail, we don't have a particularly high percentage of space coming up for renewal or expiry. And for office, it's around 22%, whereas our retail is around 26%, both of which are not particularly high given our 3-year duration of normal leases. So all of that, I would say, because it's a bit early in the year, but for office, according to the latest number, we have been -- we have actually turned around 25-plus percent of those spaces already, I mean, recommitted. And all of those recommitted leases, the reversion continue to be a positive teens. So the -- in terms of reversions, numbers continue to help us. For retail, while we do not have a particular high percentage, they are also quite spread out through the years. And in Q1, we have completed around half of it, roughly. And with the others, we are actually in discussions. Obviously, given the current sentiment, we would -- we expect to see a little bit of slowing down in terms of the conclusion of the lease, and we do expect some headwinds in these negotiations. And it is not inconceivable to see some negatives. But as I said earlier, it is still early in the year. When we see each other the next time in interim, probably we can have a better view in terms of the reversion situation for retail. And for residential, it's kind of like a normal business in terms of the negotiation because it's just a 2-year lease with 1-year commitment only. So it won't be committed too early throughout the year.

Right. The third part of Justin's 3-parter is about borrowings. So he said he noticed a much higher level of cash balance from more borrowings. Is that just a timing issue before you retire some other debts? Or if you intend to keep a much higher war chest for some specific purpose?

Right. Well, simply put, the answer is the second point, primarily. And as you all know, we've been talking about our readiness in terms of moving beyond our core portfolio in Causeway Bay and I guess, at that point, maybe I can also talk a little bit about EMSD here. You need to...

Yes. I think also, the other part of the cash balance is we wanted to take advantage of good borrowing conditions and lengthening maturity conditions. So we wanted to actually do a bit more. But of course, it's for a purpose. We're not just holding the cash. As we know, EMSD should have actually started the process. But with COVID-19, the hearing has been postponed. So instead of happening during the first half of 2020, we believe that we will see EMSD come out towards the end of 2020. Perhaps Q3 would be optimistic, Q4 is realistic. So EMSD is a project that we have talked about and have been waiting for, so we shall see. In terms of other opportunities, we are always ready to look and we do look both in Hong Kong, out of our core, as well as beyond. And apart from that, we don't need to say anything more.

Okay. Great. Next question is from Citibank's Ken Yeung. Can we give investors assurance of a steady dividend -- DPS policy even if 2020's recurring profits may drop?

Maybe I'll just say a few words from a Board's point of view. As you know, it is the Board's prerogative and decision to determine our dividend policy. However, you can see from our very, very long progressively inclining dividend payout that it is something that we are very, very proud of. Not too many companies can claim to have a, how many years, Roger, 15 years-plus of steady, gently upward inclining dividend payout. 2020 will be a difficult year. As you saw, for 2019, despite a mild increase in recurring underlying profit, we retained a flat stance compared with 2018. I think that is realistic and conservative. And we expect to remain conservative given the uncertainties that we face, especially in the next few months, this year, in fact.

Okay. The next one is from Bank of America's Fan Tso. The question there is what is the latest occupancy cost ratio and retail reversion outlook for 2020?

Right. Maybe let me take that. For the OCR, occupancy cost ratio, 2019, actually, first half is at high teens. But in the second half, it increased, as you would all expect, to, I think, 22%, 23%. So it ended up with the overall annual OCR being around 20%. So what does that mean? I just want to give you a perspective. 2017, when we had quite a tough first half, which is a result extended from the second half of 2016, at the peak, we got a 23% of OCR. 2018 with the improvement in tenant sales and all the other factors, the OCR -- new OCR is reduced to around 18%. So what we are seeing, obviously, is a trend trending up. But from a history point of view, look, just looking back to 2017, '18, it's not a huge number. But again, it's still too early to say about the entire year. It also depends on the timing of various issues that are affecting us. In terms of the reversion outlook. Again, what I can share with you is, obviously, the data that we manage or we control. In terms of the rent for the leases that will expire -- or the passing rent of the expiring lease, for office, actually, it's around 4% to 5% lower than that of 2019. So that means that if the spot rent is maintained at the same level as 2019, we should expect some possibility to have a positive reversions. Then, of course, the question ties to the movement of the spot rent, which is subject to a lot of various factors. For retail, I think instead of telling you an expiring range, I think your question about OCR is probably more relevant. The view that we have now is, obviously, like what Irene mentioned earlier, the virus situation will be gone, but we don't know, for sure, the timing. And what we are trying to do now is to provide help to our retail tenants. So that, overall, the Hysan retail portfolio continues to be a dynamic, vibrant and attractive portfolio to serve our tenants and shoppers alike.

Right. The next question is from Haitong International's Bonnie Zhou. And Bonnie's question is that she saw the Tai Po residential project that's going to be completed in -- construction completed in the financial year 2021. And she would like to know if it includes several phases? And the completion schedule mentioned is for the whole project or different phases, I guess?

Maybe I explain it a little bit. For that type of project, we talk about the construction, it's actually a feasible construction work. When we talk about completion, we still need to talk about the occupation permit kind of things. For occupation permit, we are going to apply it by phases so to -- so as to minimize any potential impact if the vacancy tax come to -- come in place. So this is our current strategies. So 2021 is only the construction completion date.

And we are also -- if I may just supplement on. I think the construction team, project team are also different scenario and it is a little bit early to commit to a particular scenario. But we are monitoring issue, like Ricky mentioned, closely.

Right. So the next question is from Henry Wang from JPMorgan. And Henry's question is there is, obviously, rental concession. But is there any cost management initiatives to mitigate the impact of COVID-19?

I think what we are doing right now is we're preparing a lot of a program, a campaign, that -- to catch the rebound of the market, which we expect what should happen after the COVID-19. And that -- having said that, this is to help our tenants to get their sales, which will in return help their situation and as well as, hopefully, as well as our rental income.

Sure. Okay. David Ng from Macquarie has a couple of questions. So he's asking about the risk of occupancy dropping further in 2020 based on the first 2 months of performance so far. So is that a problem, the risk of occupancy dropping further?

Actually, we have a lot of -- as Hysan really has very good relationship with our tenants, the -- and I shall report the measures we have put in place proactive enough, we still have good confidence to retain our tenants as much as possible. And I think Hysan is still a first choice for them to stay here.

Sure. Now David also has a question about the average office expiry rents of 2020 versus that of 2019. So...

Right. Well, let me repeat again for David. While we do not go to a specific number, but as I mentioned earlier, the rents that will expire in 2020 is roughly 4% to 5% lower than those expired in 2019.

Great. Thanks. So since we have pretty much exhausted the number of questions here and we are, in fact, running out of time, so thank you all for your questions today. And we certainly hope to see you again in a more usual fashion in August for the interim results. So thank you, and bye.

Thank you.

Thank you very much.