Link Real Estate Investment Trust (823) Earnings Call Transcript & Summary

Good afternoon, everyone. This Luna Fong of Link REIT. In view of the COVID-19 outbreak, we are conducting this investor briefing via live webcast to give you a quick update of our operations. Thank you for joining us. We are pleased to have our CEO, Mr. George Hongchoy; CFO, Mr. K.S. Ng; and CSO, Mr. Eric Yau with us. George will first give us an introduction and the latest situation. K.S. will then talk about the latest operational update. Eric will give us a quick update on Vision 2025, and George will wrap up with market update and outlook. We will then open for Q&A. [Operator Instructions] Now I'll pass to George. George, please?

Thank you, Luna. Link's portfolio today comprises a total of 132 assets with 126 in Hong Kong and 5 across the 4 Tier 1 cities in Mainland China. We announced the acquisition of a Sydney office building at 100 Market Street in December 2019, and we expect it to complete soon. Hong Kong still remains our core market with 86% of our portfolio value, 12% are in Mainland China and the Sydney office will take up about 1.6% of portfolio value. Since mid-2019, Hong Kong has been entangled in several events, including the U.S.-China trade war, widespread protests and now COVID-19 outbreak. This perfect storm has made 2020 a difficult year to many of us. The COVID-19 outbreak has been affecting nearly every single trade category. F&B tenants has been seriously impacted as more people stay at home and cook. Education centers have not been operating as schools are suspended. In contrast, we saw relatively limited impact on our nondiscretionary tenants during the protest. We are trying to maintain normal operations as much as possible. The ongoing U.S. trade -- China trade war and the recent oil war are causing further uncertainty to the global economy. COVID-19 has brought immense challenges to our Hong Kong and Mainland China businesses. We have seen strong demand in supermarket and fresh markets, but many tenants, especially in F&B and education, are facing great pressures since late January. So far, a small percentage of tenants, mostly education, suspended their businesses and shortened their operating hours. Car park revenue have been severely impacted by lower demand and rampant illegal parking. In Mainland China, F&B and entertainment tenants were closed due to strict social distancing measures. We are also experiencing delay in the asset enhancement project for CentralWalk. However, most importantly, as Link shopping centers are an integral part of local communities, our focus has been to stimulate consumer spending and retail sales within a healthy and safe environment. With dampened consumer sentiment, Link has tried to remain agile in our operations and provide support to the most severely affected tenants. We have announced an HKD 80 million scheme to support our tenants in Hong Kong and are also offering relief measures for tenants in Mainland China. To prepare for volatile market conditions, we strengthened our balance sheet by drawing on our credit facilities to ensure that we have ample liquidity. As school bus operators are suffering due to school suspension, we have offered parking discount, and we are also offering antiseptic kits and free fruits to those in need. For our staff, we enabled flexible work arrangements, shift duties for head office and on-site staff, and we provide support through hotlines and training on well-being and mindfulness. I will pass to K.S. first to talk about operational updates.

Thank you, George, and all of you for dialing in. Our Hong Kong retail portfolio has shown resilience and occupancy was high at 97.2% as at December 2019. We maintained the nondiscretionary nature with 63% of the portfolio in food-related trades. Slide 8. Link's overall average tenant sales growth has slowed in light of softening markets and was flat at 0.4%, still outperforming the overall Hong Kong market in the first 3 quarters of this financial year. While F&B tenants recorded a gentle growth of 1.4%. Supermarket and foodstuff have done exceptionally well with a 5% growth. We saw a bigger hit on our general retail tenants, the sales shrank by 2.8% during the period, which was relatively milder compared to the Hong Kong market in general. Rent-to-sales ratio of the overall portfolio was steady at 14.5% as at December 2019. However, the figures here have not yet reflected the impact of COVID-19, which started in late January. The virus has severely impacted our tenants, especially Chinese restaurants and education centers in the last 2 months. Through our proposed schemes, we have been working with our tenants to ride out this challenging period. Occupancy at The Quayside. Our joint venture development in Kowloon East is gradually ramping up. This 20-story office building has almost 14 out of 17 floors filled. 2 new additions, including Manulife and an FMCG tenant have committed to take up 2 office floors in recent weeks, pushing occupancy to over 80% as of March 2020. Around 70% of the 3-story retail podium is filled and provides a variety of amenities, especially F&B, to satisfy nearby demand. We hope to create a lively community for office tenants and their staff, offering suitable work-life balance. Moving to Page 10. In Mainland China, the overall occupancy of our retail portfolio stood at 98.6% as at December 2019. They performed well up until Chinese New Year, then the outbreak of COVID-19 impacted shopping centers' businesses at the end of January onwards. Footfall dropped significantly in February, it is now showing early signs of returning and more than 80% of our tenants have resumed operations. However, most entertainment tenants, such as cinemas and gyms are still closed. On our Mainland China office, Link Square. Link Square, our office in Shanghai delivered stable returns with occupancy at 95.8%. Office tenants have now resumed normal operations after over a month's suspension due to the virus. In December 2019, we announced the acquisition of 100 Market Street in Sydney as our first foray into overseas market. This asset is fully occupied by 3 high credit-rated tenants, providing stable income with steady rental escalations, which contributes to our sustainable portfolio growth. We just announced a 5-year sustainability-linked loan of AUD 212 million for this investment. The transaction is expected to complete soon. On capital management, Slide 13. We have been adopting prudent capital management strategy, which is proven to be invaluable with the recent market volatilities. We have a diverse funding base and a low effective interest rate of our Hong Kong debt portfolio at 3.23% at the end of September 2019. Gearing ratio increased slightly to 13.5% after the acquisition of the Sydney office building. In March, we increased our cash balance to HKD 6.5 billion as a precaution. Only HKD 0.8 billion debt were mature in financial year 2020-21, and we have ample financing headroom. Our 3 A ratings also allow us to enjoy industry-leading cost of capital. For unit buyback, we have completed 52 million out of the 60 million announced buyback program, and we will consider further buybacks subject to market conditions. The discretionary distribution of HKD 0.14 per unit will be paid for 3 years as our announcement in November 2019. I will hand it over to Eric to talk about our progress in implementing Vision 2025. Thank you.

Thank you, K.S. We developed our value creation model and launched Vision 2025 last year to articulate our growth targets and value for our stakeholders. Asset management, portfolio management and capital management continue to be our core strength and allow us to capitalize on business opportunities across different geographies and asset types to drive portfolio growth and innovation. In the past few months, we have made good progress on all 3 initiatives of Vision 2025, namely portfolio growth, culture of excellence and visionary creativity. We aim to deliver sustainable growth and create long-term value for unitholders and other stakeholders. Since our listing 15 years ago, we have been improving our portfolio quality by active management, acquisition and divestment, and our portfolio value has grown at 40% CAGR to HKD 224 billion. We remain a responsible real estate investment manager, active in portfolio management to drive progressive growth. Our goal is to deliver high single-digit unit -- high single-digit growth in CAGR and AUM, while sustaining DPU growth and maintaining A credit rating. We aim to capitalize on opportunities with appropriate diversification and capital recycling. We will explore different opportunities that provide quality and stable income. We have been exploring opportunities in Hong Kong, Mainland China Tier 1 cities and overseas developed markets, namely Singapore, Japan, Australia and the U.K. In terms of management guidance, Hong Kong will remain our core market at 70% to 75% of the portfolio value, while we are currently at 86%. Mainland China will take up less than 20% and no more than 10% in overseas markets. In terms of asset class, we expect about 15% to 20% will be in office. We identified Singapore, Japan, Australia and the U.K. as our additional investment focus because we believe developed markets offer a relatively lower risk due to their stability, market liquidity and favorable regulatory environments. These key gateway markets are highly institutionalized with good growth prospects and liquidity. They're also highly transparent with abundant transaction data, and due diligence can be more efficiently conducted. Our acquisition strategy has been consistently applied in our Mainland China acquisition as well as in Australia recently. Good connectivity, limited competition, sizable catchment and long-term growth potential remain our key primary focus. And as always, we will remain prudent in our asset selection. On culture of excellence, we believe by cultivating the culture of excellence, we target to build a highly functional team with good morale and drive to achieve business excellence. We aspire to become the employer of choice, and we are committed to continuous learning by such as offering E-library for our staff with unlimited access by tablet devices in office and online platforms. In terms of employee engagement, we are organizing workshops to promote work-life balance and inclusiveness. We have made good progress since the launch of Vision 2025 and have transformed our organization structure to support the strategy. In February, we launched the global headquarter regional center structure to meet the needs of our expanding geographic diversification. Group headquarters will provide functional and advisory support to the 3 regional centers in Hong Kong, Mainland China and now Australia. Each regional center is responsible for driving revenue, operational excellence and executional efficiency within its portfolio. And we continue to acquire and retain the right talent to prepare for a more diversified and quality portfolio, and we can report success across different functions. In terms of visionary creativity, we believe stakeholder engagement has always been very important to Link. By applying creativity and innovation, we contribute to our community through initiatives, such as waste management, placemaking and our charity program Link Together Initiatives. In the 2019/2020 cycle, we earmarked HKD 14 million for 6 community projects and 190 Link University Scholarships. These projects are related to resource management to support sustainable development as well as youth empowerment and active aging. A few key areas of innovation are environmental sustainability and placemaking. We identified 4 pilot sites in Hong Kong to install solar PV panels. Blockchain technology are employed to record their energy output and track environmental performance. We're also promoting green living and the use of ecofriendly alternatives in our shopping centers. We are engaging fresh market tenants to participate in the pilot program for the biodegradable bags, substitute plastic bags. We're also revitalizing public space in our shopping centers to better serve our shoppers and tenants. These efforts achieve sustainable practices interaction with creativity and innovation. I will now pass over to George to talk about our outlook. Thank you.

Thank you, Eric. So Hong Kong economy and consumption will remain under pressure in 2020 due to COVID-19, so both GDP and PCE are expected to decrease in 2020, driven by poor economic sentiment, consumption and also tourist arrivals. Hong Kong's unemployment rate, especially in construction and retail accommodation and food services have risen and will suffer further if the overall economy stays weak. Overall, median monthly total income has slipped to 2.5% year-on-year decline in Q4 2019 and is expected to fall further. The government has announced various supportive measures, and we believe they will support the economy and our tenants to some extent. Discretionary sales have shrunk drastically, mainly due to low visitor arrivals and spending. F&B and supermarkets are relatively less affected in 2019, reflecting their resilience. However, the data shown does not reflect the impact of COVID-19, and we expect that the F&B and general retail sectors will face a difficult 2020 despite rental relief measures from landlords. While we cannot predict how long will COVID-19 outbreak last, we are positive the strong fundamentals in Hong Kong and our nondiscretionary tenants should remain resilient in the long run. While COVID-19 outbreak is hurting Mainland China's economy, its urban residential income growth is likely to slow down as extended -- as external demand weaknesses gradually spill over to the labor market. Consumer confidence is also affected, resulting in slower growth in retail sales. However, the disruption to domestic consumption will not last long as the government slowly adjusts its control measures. Local governments in Mainland China have already issued supportive measures to revitalize consumption. This current environment has painted an unclear picture for the upcoming year. Tenant sales and reversion in Hong Kong and Mainland China are both experiencing pressure at -- amid poor sentiment. Given the future of COVID-19 is still uncertain, we remain cautious on tenants' affordability, and we will keep close dialogue with all our tenants. On capital management, our previously announced discretionary distribution will continue, and we will consider further buyback subject to market conditions. In such volatile market and uncertainty, mainly -- maintaining a strong balance sheet gives us more buffer and safety net. We continue to explore acquisition opportunities in Hong Kong, Mainland China and overseas. And although investment activities have slowed due to travel restrictions and social distancing requirements, the suppressed market may present good value for attractive assets and potentially better returns. As we pursue Vision 2025, we will strive to maintain our resilience and agility to deliver long-term sustainable growth. Thank you for your attention so far. We'll now open the floor to any questions. Thank you.

[Operator Instructions] The first question comes from Ken Yeung of Citi. For the HKD 80 million tenant support program, so far, which period is it covering? Given that situations are unlikely to improve in April, will there be any upside for this program size?

So the HKD 80 million tenant support program is to help our SMG tenants. The amount will actually be accounted for over the next 1 or 2 years. We are still reviewing the situation, looking at how long this lockdown and reduction in activities will impact our tenants. Obviously, the government have new measures, just few days ago, and so we are also reacting to that. So I don't think we can give you an assessment whether there's more upside and how much. But so far, we are in regular dialogue with our tenants.

There are two more quick questions from Ken, which are quite similar to a lot of questions from many other analysts as well. So without any disposal last year, should we expect -- what should we expect for the share buyback program for 2020-21?

I guess, we have a remaining part of HKD 8 million that we have announced and not done. In addition, I think, along with the support of the Board, there is consensus that if the share price looks unreasonably discomfited triangulating what we think the value of our share price, the funding cost. We do have a part of budget that we want to continue to do buyback.

One more question on the reversion. And can we get an update on the latest reversions on the Hong Kong portfolio?

We are obviously working very hard to -- with all various tenants to come up with a bunch of lease arrangements, what we have done, including structuring some of our leases. In some cases, impairing some of the payments, having a reversion, which is hopefully lower than our previous budget. The range obviously go from negative to positive, and the average reversion will be lower than what we have announced in the past. Now this is still very fluid. So unfortunately, we can't give you too much guidance of exactly where we'll be going to achieve for this year and also looking forward to next year. But I think the key for us is to make sure that our tenants and us and partners can actually deal with this current situation as best as we can.

Thank you, George. Next question comes from Justin Kwok of Goldman Sachs. Given the recent devaluation of certain currencies against Hong Kong dollar amid macro-volatility, would you be even more willing to continue to invest overseas?

As I -- as we mentioned that we are still very focused on delivering on Vision 2025, so there's still quite a few years before we get there. We believe that if there is any market dislocation, there may be some attractive assets that -- even asset that were not previously available, we may be able to access them. We recognize that it is very difficult right now to travel to do due diligence or to actually come up with underwriting and financing, but the team actually have been spending a lot of time coming up with our target lists, working through what we can do on the desktop basis to achieve a list that we would like to be on the offensive, but when we can actually go and execute, it's obviously depending on quite a lot of factors, including what I just mentioned, whether we can actually even get on the plane to go and visit some of the assets.

Next question comes from Daniel Feldmann of Timbercreek. Relating to the occupancy cost. So for the occupancy cost for the first 3 quarters of the financial year has hit a record high of 14.5%. How does the management interpret this number? And where should we expect this number to go within the upcoming 12 months?

I think it is probably not worthwhile to talk about that number on a business as usual basis, given what we're facing right now. So for some tenants, we are obviously watching their occupancy costs going up, partly because their sales number would have dropped quite a bit. We need to watch whether they are able to survive on a short-term basis or if it is extended for longer term. So their liquidity and their onus on financial strength is obviously key to answer this question. We are trying to support them to the extent that we believe that they are our tenant in the long-term. So what I'm saying is that if we believe that some of the tenants might need to be replaced, we have to obviously find new tenants. And over the last couple of months, we actually had new tenants coming in, renovating, et cetera. So what we have seen actually is that the community more on the markets and all that have attracted people to balance their portfolio that some of the district, which have been hard hit, actually means that the retailers are more keen to rebalance and add more stores, more outlets at our shopping centers. So we will probably see increase in that number for selected trade. In fact, we mentioned Chinese restaurant and education, if their business have dropped for a period of time by quite a lot, then you would expect that number to shoot up, but who is going to manage that is not just...

Question from Hildy Ling of Morgan Stanley. Despite that Hong Kong portfolio, what about the China mall? Is there any rental support for the malls in Mainland China?

We have, likewise, provided rental support to the China malls. And I think what you have read and heard is that there are regulatory restrictions on some trade categories. And what has happened is that it's slowly coming back. The footfall is pulling up and tenant is about 80% back [indiscernible] are opening. Ours could be a bit short, but all is now going up and [indiscernible] is always almost twice, 40% of normal.

One more question from Hildy about the AEI. You mentioned that AE for CentralWalk will be delayed, and what about the AE pipeline in Hong Kong?

Let me just expand on the AE at CentralWalk. When this whole virus situation started early this year, we thought that the business is going to be slowed down. And rather than doing the asset enhancement project over 2, 3 phases, we might as well bunch it up and do it over a shorter period of time, which means that within that shorter period of time, more areas we win, the more we'll be affected. But hopefully, when it reopens, then we'll be ready with a brand-new proposition for shoppers. So that was our plan. And then as we get into -- deeper into this crisis, what happened is that it is very difficult for workers to go on site. Some of the building materials cannot be delivered, and so we believe that this project will be just extended rather than delayed. We still hope that it will be -- we'll kick-start ASAP, but slightly delayed. So for Hong Kong, a lot of the projects are still ongoing. We have 1 or 2 big projects, one in Lok Fu in Tai Sin, and those are ongoing. And we believe that those will continue to -- in terms of -- from a project point of view will continue maybe 1 or 2 months delay. Beijing is still doing reasonably well. The take-up rate continue to be -- maybe slightly below budget, but still ongoing. The rest of the pipeline, I think we're still looking at building that pipeline. We will say more when we announce results, but I think in terms of the pipeline, we still see projects to be done over the next couple of years.

One more question from Patrick Wong of Bloomberg Intelligence. So we see that the occupancy rate of your Hong Kong retail portfolio remained high at 97.2% as of end of December. Do you see any risk of a significant decline in occupancy, particularly for Chinese restaurants of small- to medium-sized retailers?

I think the challenge is that we do see fundamental demand in the assets, and I think a lot of the recent challenges is because of the current restrictions that's put on, rightly so, by the government. So as far as we are concerned, week-by-week, day-by-day, we are getting shocks. We cannot have more than 10, if you have more than 4, you have to have half capacity. We are really responsible, but I think we need to raise for ourselves in case. I think, clearly, sales will not be the same as it is full capacity enabled. So it's really a hard call to tell you what to look forward to. I think we're trading off a few factors, keeping occupancy high versus rental reversion lower, making sure that the renvoi can either be avoided or reduced and making sure that we don't have a lot of rental arrears. And so we are balancing a lot of things. And so it really depends on the trade, depending on the location. And so the uncertainty, obviously, does not help us or our tenants.

In view of time, probably we will take two more questions. One is on funding. So this question is from [indiscernible]. In the past, Link has funded acquisition with the lowest cost-to-debt ratio and sometimes may result in unhedged capital exposure, as gearing rises for future acquisitions, what is the thinking on hedging policy?

Our preference is always to try to have a natural hedge. I think the previous Chinese acquisition is because there was no asset level that came with the acquisition. So it was hence funded using equity in Hong Kong dollar. For the Australian, asset purchase is fully funded in Australian dollars. So it's fully hedged. And going forward, I think if we go to places like U.K., Japan, Singapore, which we articulated we are looking. Where possible, we will do a natural hedge and fund with local currency.

Okay. Last question of this webcast comes from Sarah Cooper of BAML. So the Australian dollar has been very weak lately, down by 13% to Hong Kong dollar yesterday. When did you fund this acquisition of 100 Market Street? And how should we look about Link looking outside Asia now for opportunities?

We have paid a deposit to Blackstone. The deposit was paid in Hong Kong dollars. So there has not been any currency risk so far for the deposit. And the idea is on the day of completion we'll draw down on the Australian dollar loan, a 100% in Australia dollar and then pay back -- pay Blackstone all that Australian dollar and then they will give the Hong Kong dollar back to us. So it would be a perfect match from the day of completion, and we shouldn't have any risk from paying the deposit to completion. And if you look at the acquisition in general, rather than just outside of Hong Kong, or out of Asia, we will continue to look at the best possible opportunity. The team has been discussing what are the best assets that may be unlocked in the countries and cities that we are focused on, and we have mentioned those publicly. I think this will give us a very unique opportunity. If I paint the picture to you that if we were relying on acquisitions to grow towards our Vision 2025 targets, you can imagine that the gap might have expanded if property valuation dropped. But then at the same time, the cost of acquiring assets would have dropped as well. So we hope that as we get towards 2025, the market will rebound and we'll actually make a good return from our acquisition as well. So now is the time when we need to make sure that our balance sheet continues to be strong, our liquidity is strengthened to a level that can last through a prolonged period of uncertainty, at the same time that we stand ready to take advantage of any market dislocation to buy assets that we are interested in. In order to deal with the uncertainty, we have made the underwriting requirement tougher for our team so that we achieve better return to building a safety margin for any volatility to come. I'll close by saying that this is a unprecedented time for us. We went through many years of good growth. And this is the time when a lot of things that Link has done over the last few years to prepare for something like this, although we never prepare for all the severity, but certainly, the team have done a lot in terms of capital management, in terms of assessing our assets, we've uploaded -- we have sold some of the noncore. So we've done a lot of things as we approach this crisis. So we think we are in a strong position. We believe that we will emerge from it with strength. And albeit that there is a fair bit of uncertainty, which makes it difficult for us to answer some of your questions. But I think the team have really been very focused. We like to thank the team, especially our property management staff and also thank the -- all the medical people around the world. And hopefully, this situation will be resolved very soon for all of us.

All right. Thank you, everyone, for joining all of us. Thank you George, K.S. and Eric for the presentation and the Q&A. Once again, thank you for joining us, and stay healthy, stay safe.

Stay home.

Stay home.

Thank you.

Thank you, everyone.

All the best.