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

Good afternoon, everyone, and welcome to Link's annual results briefing, while we are hosting via webcast in consideration of the recent public health and social distancing measures. We are pleased to have with us today our CEO, Mr. George Hongchoy; CFO, Mr. Kok Siong Ng; and CSO, Mr. Eric Yau. During the course of the webcast, you may submit your questions on the webcast portal. And the questions will be conveyed to the management team during the Q&A session. I will now turn it over to George, our CEO.

Thank you, Luna, and thanks, everyone, for joining us today. This financial year was full of challenges. With all the unprecedented events happening, not just in Hong Kong, but around the world. All of us went through rough times with frequent social incidences, which has affected 35 out of our 126 properties and recent lockdown due to COVID-19 impacted every of our assets. I want to take this opportunity to express our sincere gratitude to our staff, frontline colleagues and partners who endeavor to maintain the highest properties management and hygiene standards and ensure our business continuity, despite all the challenge. We remain agile in our operation and extended immediate and targeted support to our stakeholders. For our tenants, we have a tenant support program in Hong Kong of HKD 300 million and offer multi-pronged support measures such as school bus operators, car park tariff cuts, and we also offer various support measures in Mainland China, including lease restructuring and rental concessions. To ensure our staff well-being, we have flexible work arrangements in place and provide them necessary support and training. To solidify our platform during these uncertain times, we have shored up cash resources and strengthened our financial position to protect us from any liquidity concerns for the coming 2 years. These unprecedented challenges require unprecedented measures. Nonetheless, Link's performance in '19/'20 was still very resilient. And Eric and K.S. will provide more details now.

Thank you, George. We saw recently stable results for this financial year. Revenue and NPI both went up by about 6% on a like-for-like basis. Distribution per unit for the year amounted to HKD 2.8719, representing an increase of about 6% year-on-year, which includes the discretionary distribution of HKD 0.14, which was previously announced at the interim results in November 2019. While maintaining the resilience of our business was the key objective, our portfolio was not totally immune from impacts of these unprecedented events. We did see an increase of negative reversions and rental arrears during the year and, in particular, after the virus outbreak. In view of the dampened retail outlook, our valuation dropped by about 12% and NAV per unit contracted by a similar magnitude to around HKD 77.61. Including our newly acquired Australian office, valuation of our asset portfolio was about HKD 196 billion. It comprises of 132 assets with 126 in Hong Kong, 5 across the Tier 1 cities in Mainland China and 1 in Australia. Our core portfolio still remains in Hong Kong with about 13% in Mainland China; and Australia, representing less than 2% of our portfolio. We continue to pursue what we set out for Vision 2025. On portfolio growth, retail occupancy in both Hong Kong and Mainland China stood at respectable levels despite the adversities. We completed our first development project, The Quayside in Hong Kong, and acquired an office outside Greater China. Regarding Culture of Excellence, we have set up our group headquarters and regional centers in February to align management practices across geographies. Flexible work arrangements and mobile learning were introduced in response to the pandemic. As for Visionary Creativity, we're happy to have granted a total of 750 scholarships to university students over the last 5 years. We've also took -- taken innovative steps to improve operational efficiency and risk management practices, and we actively participate in TCFD to help combat climate change. As we continue our journey towards Vision 2025, we will constantly review our targets and remain agile while we face difficult challenges and different uncertainties along the way. As an integral part of the community, we care about our stakeholders and the new trends and changes that will impact them. It is important for us to remain agile and connected in order to create value for all stakeholders. We believe business as usual is no longer sufficient. We need to consider business as mutual as we operate as an integral part of the community and the ecosystem. I will now pass to K.S. to go through the annual results.

Thank you, Eric. Our Hong Kong retail portfolio continued to show resilience despite various challenges and uncertainties. On a like-for-like basis, retail revenue achieved about 7% year-on-year growth. While we saw an increase in rental arrears and more cases of negative reversions, we achieved a reversion rate of about 12.6%. Our portfolio occupancy was over 96% as of end of March, which has remained steady since. Average unit rent increased by 3.4% year-on-year to HKD 70.3 per square foot. Car park revenue was also affected and recorded about 4% year-on-year growth on a like-for-like basis. Income per space was HKD 2,800, and average valuation per parking space was about HKD 561,000. In view of the dampened sentiment, we have canceled the car park tariff review in April for this financial year. Our tenants were affected by the dip in retail sentiment, yet their nondiscretionary business continued to show resilience and outperformed the overall Hong Kong market. Sales numbers have slowed, in particular, after January as the public stayed home. As a result, retail sales performance dipped about 2%, with F&B and general retail being more impacted. Nevertheless, supermarket and foodstuff performance recorded a strong growth at about 8% as people bought more groceries and cooked at home. Rent-to-sales ratio of the overall portfolio was steady at 14.7%. The leasing status of The Quayside has been encouraging. Office occupancy reached about 80% with commitments by 3 new tenants. We will be welcoming Manulife, a local finance firm, and Adidas to The Quayside, occupying over 2 floors. Over 70% of 3-story retail podium has been committed by various tenants, mainly F&B outlets to serve the nearby catchment. Our assets in Mainland China performed well to Chinese New Year. Full year results remained intact as business was only disrupted from February 2020. Full year retail reversion stood at about 30%, and shopping centers were nearly fully occupied as at end of March. Over the last 2 months, operations have steadily resumed from April, with about 60% of previous footfall by May 2020. Shanghai office was relatively less impacted and occupancy maintained at 97%. Leasing inquiries remain encouraging for our Link Square office given its prime location. On asset enhancement, we have completed 5 projects in the past 6 months with a total CapEx of HKD 510 million. Impacted by the unexpected events and dampened retail sentiment, ROIs of these 5 projects were affected, but still delivered credible returns. Going forward, we will be more selective in planning our AE pipeline. We have currently 4 projects underway and over 19 projects under planning, which we target double-digit returns. We are also planning a RMB 400 million renovation of Shenzhen CentralWalk to begin in third quarter of this year to strengthen its appeal as the retail destination in Futian. The AE works will be done in phases across approximately 12 months, that will cover repartitioning, interior renovation, facelift of façade and outdoor areas. CentralWalk will target office workers and young shoppers with increased retail and F&B offerings. In December 2019, we expanded outside Hong Kong and Mainland China and acquired a premium office, the 100 Market Street in Sydney. The acquisition was completed in April with all Australian dollar financing secured. The asset is fully occupied by 3 high-quality tenants for a long WALE of over 8 years. This new asset in our portfolio will contribute a stable income stream with stipulated escalations in rents and it marks a milestone in our portfolio diversification. Our capital management strategy continues to be one of key strengths. Our gearing ratio rose to 16.7% as a result of acquisition and valuation change with average debt maturity at 4 years. Our Hong Kong dollar debt portfolio remains healthy with effective interest rate at 2.94% at around 57% of our Hong Kong dollar debt is fixed. Our funding sources remain highly diversified with about 10% from CBs and the balance almost evenly split between bonds and bank debts. Despite the difficult environment, our A ratings with all 3 agencies remain intact, giving us continued access to the credit markets. In view of the volatile financial market and economic uncertainties, we continue to leverage on our strong credit quality, underpinned by the resilience of our portfolio to shore up liquidity. Over the last year, we have sealed many financing transactions at favorable pricing and terms. We have ensured that we have sufficient capacity, along with our strong credit ratings to both withstand any further downside as well as being able to capture any opportunities that may arise. Our maturity profile is well staggered with no excessive large amounts of refinancing in any single year. In this financial year, we only have HKD 1 billion to refinance. We remained disciplined and mindful in managing our capital to ensure we have ample capacity to fuel our portfolio growth. As indicated in our announcement in early May, we have recorded this year a valuation drop in investment properties of 11.6%. The drop reflects the recent weakened sentiment and overall economy. Change in Hong Kong portfolio was mainly due to the expansion of retail and car park capitalization rates by about 26 basis points on average and lower projected market rents. Change in Mainland China portfolio was because of a lower rental projection and the RMB depreciation. I will now pass to George for the last part on outlook.

Thank you, K.S. It has been a challenging year for many businesses across Hong Kong, including Link. These unprecedented events lead to structural changes and new normals representing new risks but also opportunities. There have been substantial fluctuation in both property and credit markets, and this lockdown period has led to a temporary proliferation of online working and shopping. The public is generally more concerned over health and safety, and some of these trends lead to questions that we may not be able to answer today. But we will continue to monitor and remain agile and adapt to a new normal. As we pursue Vision 2025, we need to ride through the headwinds and capture new trends and opportunities. Given the challenges we will face, this new normal is what we will call business as mutual. Being an integral part of the community and a large ecosystem, we need to collaborate with all our stakeholders to improve overall resilience. Through portfolio growth, culture of excellence and visionary creativity, we aim to create mutual share value with our stakeholders as we continue our Vision 2025 journey. We will leverage on our core strengths to achieve portfolio growth. On asset management, we will constantly review our strategy, considering new shopper behavior and support our tenants during this difficult period and drive growth with new tenants and asset enhancement. Thanks to the hard work of our leasing and property management team, it is encouraging to see new tenants joining our portfolio. Despite the dampened retail environment, we managed to introduce more than 120 tenants in Hong Kong portfolio since January. Our portfolio management, we have looked at opportunities in Hong Kong, Mainland China, overseas selectively, and we'll seek displacement opportunities prudently. On capital management, we are mindful of the importance of agility in such uncertain times. People play a crucial role in the execution of our corporate strategy. And with the support and guidance from the Board, we will further strengthen management within Mainland China and across the regions, collecting employee feedback constantly. We will continue to extract more value from being innovative in creating long-term sustainable value, and we will invest to improve operational efficiency and generate commercial benefits, including the use of technology, for example, installation of rooftop solar panel. Link Together Initiative will be one of the key platforms for engaging the community and helping those in need. Admittedly, there will be bumps and roadblocks ahead along our Vision 2025 pathway. It is indeed the worst operating environment in the history of Link with the lack of clarity ahead for business planning. April sales were dragged by social distancing measures, especially F&B and general retail. And we offered tenant support with around 1/3 of our Hong Kong portfolio, mostly to SMEs and education centers. So far, the announced HKD 300 million of support program should be sufficient, but we will constantly review and extend timely support to our tenant. We expect lease negotiations will take longer time with more cases of negative reversions as we focus on maintaining a steady occupancy level. Barring from any drastic changes, we expect Hong Kong retail rent to stay flattish and Mainland China reversion to maintain a positive level in the coming year. And despite difficulties in maintaining the past high-growth trajectory, our nondiscretionary portfolio should continue to demonstrate resilience. With all the uncertainties ahead, we will remain vigilant and diligent in our portfolio and capital management. While our financial position protects us from liquidity concerns, it also enables us to explore selective markets and capture any displacement opportunities prudently. We will reintroduce the distribution reinvestment plan to preserve capital, but we will also commit -- continue to commit to the discretionary plan of HKD 0.14 per unit per year up to year 2021, '22. As for buyback, we may consider continuing with -- given the right market conditions. So finally, the important dates for the final distribution payment are set out here for your information. Please note that the above dates are just at this time to accommodate the resumption of the distribution reinvestment plan. Now we will open the floor for any questions. Thank you.

The first question comes from Justin Kwok from Goldman Sachs. On car park in Hong Kong, is there any update on the segment? And given it was quite disrupted during the second half of 2019. And the second question is on M&A front, how do you evaluate the opportunities or priorities among Hong Kong, Mainland China and also overseas?

I think the car park situation in has broadly stabilized compared to last year. I think when we saw the peak of the social unrest, there were indeed more rampant parking outside of the organized parking or car parks. And I think coming to this quarter, we are starting to see the car park coming back. I think what has happened this quarter is actually with the COVID-19, I think, destination shopping has come off where people are not going to travel far and consumption has been localized. So I think while we can see that hourly has come off slightly; I think, overall, the situation has stabilized. Other than that, I think to be fair, given the outlook, we believe that it's the right thing to suspend the car park tariff review for now. Acquisition?

Yes. With regards to acquisitions, we are seeing opportunities in both mainland China and overseas. Of course, the travel ban and the restrictions do make travel overseas a bit more difficult, but we already have a team on the ground in China. As you know, we have assets in -- across Guangzhou, Shenzhen, Beijing and Shanghai. So having that team on the ground does facilitate with the due diligence process. We're still reviewing, and we'll see as some deals come to fruition, we'll update the market as and when.

Next question comes from Winson Fong from Manulife. And actually, it is also a question from Ken Yeung of Citi. How is the HKD 300 million rental concession accounted for in our P&L? And also would you see any potential further upsize of this program?

The amount that we have budgeted for, I think, should be sufficient as we see it today. But obviously, we don't have a crystal ball whether we need more support -- need to provide more support to our tenants. But so far, I think the amount should be sufficient. Accounting wise, I'll answer it on behalf of K.S., it depends on how we give it. But the easy way to say that it will be written off over the remaining life of the lease. So depending on the each of the particular circumstance, each lease will be different.

Okay. Next question comes from Hildy Ling from Morgan Stanley and also actually another question from Justin as well. On buyback strategy, the company has not announced a buyback budget for the financial year 2021. And should we assume you will only buy back the remaining 8 million units carry forward from last year? And will there be any more color or any concrete budget on this?

We have not been able to achieve the target last year because we did have a period where we had blackout for results and also for acquisitions. We do plan to complete the exercise this year. We will also consider further buyback when we believe that the price -- the unit price is at a level that is providing us an attractive option in terms of use of funds. But given the uncertainty, it is very hard for us to actually give you an estimate of how much we will do. But we are in the market, watching it every day.

One more question from Hildy. It's about your view on online retail in Hong Kong and Mainland China. Since e-commerce in Hong Kong seems it has expanded very rapidly all over a sudden after COVID-19, do you think this is sustainable? And how would that affect your business?

We have seen an increase in the use of online retail. And I think over the many years in the past, we always say that Hong Kong is probably the sort of last bastion of physical retail where we've not met many people switching. Having said that, we also have seen some of our larger tenants delivering better result through ordering online, but picking up at the stores. We have obviously a lot of supermarket and fresh markets, those will continue to be attracting people to go and shop physically. Our food offering, whether it's fast food restaurants, et cetera, continue to require people to go and eat there. The takeaway business has been additive to them, and we hope that, that will continue to be so. In China, I think the pattern is similar. I think it has increased the number of people going online, partly because of the stricter social distancing requirements. But I think if we provide a right shopping environment, attractive tenant mix, then we believe that people will come back once the trust of being able to gather in crowd, pickup, and I think business of our tenants will improve very quickly.

This question is from Mark Leung from UBS. How are you planning to do the AE at CentralWalk? And what will be -- how would AI impact on the occupancy?

We actually -- we were planning to do the asset enhancement over a longer period of time by several phases. What happened with the impact to the business in the last few months, we decided to shorten it to a bigger exercise with fewer phases. So you'll see work starting in these -- in the coming few months. It will finish very quickly -- reasonably quickly. It will be quite a dramatic change in terms of the -- how we change the interior, the tenant mix, et cetera. Some of the new tenants are already coming in, and we have seen a pretty good reversion. We will say more later on, but the design has been done, and has all been finalized. We're just going through the process to get all the contractors ready to start work. I think the experience that we have over many years in Hong Kong put us in a very good position to get a good return out of this change. And when the time comes, we will report more. I think this will be transforming the property. We'll be rebranding it. It will be repositioned. And so we're very happy that so far, the tenants that we have talked to are very supportive of this, despite obviously some disruption during the construction phase.

Questions from Karl Choi from BAML about footfall on both the Hong Kong portfolio and Mainland China. He would like to ask about the footfall recovery status of the Hong Kong portfolio. And also for China, as it is about 60% of the level of the normal level of the Link's China's malls, how confident are we in achieving positive rental reversion for next financial year?

So far, we've been seeing a gradual recovery in footfall in both Hong Kong and China and as well as reopening of most of the tenants in our malls in Hong Kong and China as well. The leasing team, obviously, has been engaging with the tenants in all jurisdictions that we're operating in, talking about rental concessions for those who are in greater dire need and also talking about negotiating for lease renewals as well. Based on the negotiations so far and admittedly, this year, negotiations have slowed down because of the pandemic. But based on the negotiation so far, what we see, the trend is quite still positive in Mainland China, where we think we should still be able to achieve a positive reversion for the full year. As for Hong Kong, still needs to be seen, but we expect full year rental should hopefully be stable, barring any unforeseeable drastic change or deterioration in the economic situation in Hong Kong and China.

We have about 120 new tenants joining us opening shops since January. And because we didn't have a lockdown in Hong Kong, they've been able to fit out and open stores over in the last few months. We have a few dozen new tenants, new leases under negotiation. So we are seeing people coming to Link seeing that we have the footfall that is more stable than in some of the other shopping districts. We believe that, that have provided as a cushion, not just with our existing tenants, but also with new tenants. Some of the new tenants have not operated at Link properties before. They are creating new brands to come to our malls, while they have been very successful traditionally in some of the more traditional shopping center -- shopping areas, but they are now moving into our portfolio. We have also, as a matter of strategy, decided that it is better for our property to maintain high occupancy rather than insisting on very high rent for every tenant. I think that is a strategy that we believe will serve us well in the long run. It might challenge us financially for a short period of time, but we believe that the shopping environment is a lot better than having more vacant shops. So that obviously demand us to be flexible in dealing with some of the tenants that are more challenged. But then if you look at our trade mix, most of our tenants have actually benefited from the COVID-19 situation because these are community malls. We have a supermarket and fresh market that have really been beneficiary of people buying food to cook at home, et cetera.

The next question is from [ Shin Kawa Sang ] from Sumitomo on valuation. Link has reported a valuation loss of HKD 24 billion this year, and mainly due to the lower rental projection and higher cap rate. Do you expect further downside for valuation?

I think when the Board and management look at the latest valuation numbers, I think we recognize that it's the valuation as of end March. So it has taken, in effect, a share of what has happened in the market due to the pandemic. I guess, going forward, is anybody's guess. If we could manage to see some stability and clarity in the outlook, I think, there's a chance that valuation will hold. But I think it's tough at this stage as much as we can't give you a clarity on outlook to tell you whether valuation will hold or fall further. But I think the key thing is that the business as a whole and the balance sheet has the ability to withstand further movements in valuation to the downside. I think that's what is important in running this business now.

I think if you want to look for any sort of forward guidance, what we can say is that looking at the tenant's performance since year-end, I think most of the trade -- most of our tenants have started to find a floor, seeking that bottom and then picking up. Barring any other surprises that we may not be aware of, I think, we see that this portfolio of the assets that we have, both in Hong Kong and China, we hope that we will be seeing more upside. Accounting wise, obviously, some of the concession will flow on to the next year or 2. But in terms of tenant businesses, I think we hope we have seen the worse and it really have stabilized and then have improved.

In view of time, we will refer to 2 more questions from the online platform. This question is from John Lam of UBS. Regarding online penetration, Link REIT is the biggest landlord in Hong Kong. Will you consider partnering with some online companies for -- on your leasing strategy?

We have decided that we will facilitate our tenants to do the business. We hope that some of the tenants will take advantage of the recent change in shopping behavior to really do their omnichannel, online, offline integration a lot better. Over the past few years, we have, for example, encouraged companies to have, for example, delivery lockers, adding facilities for them to have online ordering and picking up in the physical stores. We are having as much conversation as we can to figure out what is the new normal. I think we are also very keen to work with our tenants to try and deliver their new design as well. Early days, a lot of them are doing soul searching, changing and all that. But you use one extreme. The education center was almost totally closed when the schools are locked down in Hong Kong. And that's probably the most drastic because, as I said, restaurants were not all closed, et cetera. But schools were and, therefore, the education center was largely closed. Some moved to online, Zoom and all that. But even before the schools reopened, some of the education centers, tutorial centers, have already restarted classes. People went back and go and learn piano and other musical instruments and take tutorials for their courses already. So I think the physical retail is not going away. It probably need to be done in a better way, and I think it's a wakeup call for some of our tenants. We continue to try and search for those tenants that will do well in the new normal. We have set up a task force to figure out what does that mean? And we are talking to a lot of our tenants to see how they are changing themselves to get our property ready to fit into their future strategy is very important. And I think we have demonstrated our agility and our speed and reaction in enhancing our assets. And so we actually feel that our balance sheet is in a good position. Liquidity position is strong to handle any particular crisis that may come in the financial capital markets. We hope to see dislocation in certain markets so that it allow us to do some acquisitions. And then in asset management, if we continue with our current team in proactively talking to our tenant, I think they will do well. And provided that this is all done in a coordinated manner, as we say, business as mutual, working together with all our stakeholders, we should be able to see a rebound sooner than I think a lot of our peers globally.

The last question is echoing to the question on valuation and also on Vision 2025 from Hildy. With a decline in valuation, have you changed your 2025 Vision for single -- high single-digit AUM growth? Is it a rolling target? And will you keep the same AUM target?

It depends on how you look at it. I think you see a valuation drop. Question is whether you think, by 2025, you will bounce back. And so we'll be buying something that is at good price. And then within the next few years, it will pop up, and then it will get us back to where we were. Obviously, that is a rather robust way of looking at it. We probably are, as you know, more conservative. We do review our vision and our targets at regular intervals. We will be talking to our Board, reviewing how we're going to achieve the target. I think the direction is very clear. The exact targets probably need some fine-tuning. I want to perhaps remind those on this call that Vision 2025 has 3 elements: portfolio growth and the -- also the excellence and creativity as they are three-pronged approach for us to bring us to the next level. So we have a strategy for each one of them. And so far, I think just in the past year, despite all the challenges, we've made some achievements along each of these parts. And when you add them all together, I think we are in a much stronger position as we continue to look towards that date. Thank you.

Thank you very much, management, and thank you, everyone, for viewing this webcast. The webcast archive will be available later tonight or early tomorrow morning. And we look forward to meeting every single one of you in person. And thank you for joining us today. If you have any questions, please feel free to contact any of -- any one of us, our management team and also our IR team. Thank you.

Thank you.