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

Good afternoon, everyone. Welcome to Link's 2021/'22 Annual Results Briefing. I'm Sylvia, General Manager of IR at Link. Today, we are pleased to have our CEO, Mr. George Hongchoy; CFO, Mr. Kok Siong Ng; COO, International; Mr. Greg Chubb; Chief Corporate Development Officer, Mr. Ronald Tham, with us. I'll now turn over to George, our CEO. George, please?

Thank you, Sylvia. Thank you, everyone, for joining us. Very glad that we can do this physically, albeit that some of you are online. I'm pleased to have K.S. and a number of our new members to Link family on stage today. Let me introduce 2 of them briefly here. Greg Chubb, our COO, International. He will steer the asset management operation of our overseas platform. Ronald Tham, our Chief Corporate Development Officer. He will be responsible for corporate development, mergers, acquisitions, corporate finance and capital transaction. And with them, there are other recent senior hires. And they bring to us new wealth of experience that will make valuable contribution to our future growth journey. Right in front, Kenny Lam, CIO, Strategic Investment. Zhu Haiqun just joined us from SCP (sic) [ SCPG ] being our Managing Director for Mainland China. With COVID cases decreasing and social distancing restrictions relaxing, we are pleased to see you all here. I will share the highlights for 2021/'22. K.S. will then talk about operation update. Ronald and Greg will talk about the portfolio changes, our Australian portfolio, especially, and then I'll wrap up about strategy and priorities. So '21/'22 was an encouraging year for Link as COVID recovery was well underway in Hong Kong before the fifth wave emerging in late January this year. Our diversification strategy and active asset management bear fruits. Revenue, NPI, all recorded increases, 8.0% and 6.5% year-on-year, respectively. We continue to see DPU growth and our final DPU amounted to HKD 3.0567 per unit, with contribution from both organic recoveries and also new inorganic drivers. Excluding the discretionary distribution, distribution for the year increased by 8.2% year-on-year and NAV went up slightly by 1% to HKD 77.1. Thanks to our Linkers and our portfolio's resilience, we showed encouraging results and solid operations in spite of pandemic challenges in the fourth quarter. Firstly, retail occupancy in Hong Kong reached a historical high of 97.7% as at the end of March. Reversion has turned positive to 4.8% for the year. Committed occupancy rate of the office in Hong Kong improved to 96.6%, and these are significant drivers to our revenue and NPI growth. Mainland China reversion was 9% for the year. But if we exclude Happy Valley vacant department store area, retail occupancy was 92.3%. And occupancy at Link Square was at a high level at 97% despite the competitive landscape in the Shanghai office market. Recent COVID outbreak in Mainland China, obviously, impacted our shopping and working mode and also our Mainland China performance. This will impact on our 2022/'23 financial year. Overseas office occupancy has been stable. Outlook is supported by the reopening and returning to office themes. And rental collection across our portfolio remained very healthy at well over 95% in all jurisdictions. And with a positive effect brought on by the increase in occupancy rate, overall results were not impacted much by the rental concessions that we offer. We were proactive in addressing the impact of the fifth pandemic wave hitting Hong Kong in late January. We announced a HKD 120 million Tenant Support Scheme in February and later on upsized that to HKD 220 million subsequently due to a prolonged disruption to our tenants business. Similar to previous schemes, the support measures we offer on a case-by-case basis in various formats, including rental concession, waivers, lease restructuring and others. And we believe the amount will be -- should be sufficient at this stage as gradual removal of social distancing measures since May has been very positive to our tenants business. Other than financial support, we work tirelessly with our stakeholders to help them to get through the short-term challenges. These measures include sponsoring over HKD 13 million worth of F&B coupons to shoppers, stepping up sanitation and distributing care packages to families in need. To deliver sustainable return to our unitholder, we have been searching for growth and diversification prudently and strategically. We started as a pure Hong Kong retail player with portfolio size of HKD 36 billion in 2005/'06. We entered the mainland market in 2015. And we have grown through that with thoughtful diversification, adding our exposure to logistics, a new asset class and strengthening our Australian platform through co-ownership with very strong local partners. Our portfolio value is now 75% in Hong Kong, 17% in Mainland China and 8% in overseas markets. Including our investment stakes and acquisitions of 3 logistics assets in Mainland China announced last month, our portfolio value has reached HKD 228 billion. And we have made remarkable achievement across all 3 pillars of Vision 2025 in this financial year. Throughout the pandemic, we maintained very high occupancy across our portfolio. We continue to drive inorganic growth through prudent diversification. And until May 2022, we announced investment in 17 assets spending across different geographies and asset classes. Credit rating from our 3 agencies all remain at A level with stable outlook, acknowledging our resilient fundamentals. A strong talent pipeline and leadership succession planning that align with our growth strategy and directions are essential to support our growth sustainably. So we have strengthened our management bench with new capabilities to manage our new assets across geographies and asset classes. On -- operational-wise, we have set up a Sydney office in April 2022 in [ Australia Red Square ] for growing Australian platform and established group organization structure to segregate regional operations from our group functions. We also have -- yes, we have undertook a comprehensive review of our competency framework to ensure our talent and leadership pipeline possess the qualities and attributes required for future business successes. Something that you may not see externally, but what we have done also over these 18 months is to roll out numerous new softwares from ERP, HR, facility management, CRM, treasury management, et cetera. These will help to provide a strong foundation for efficiency and growth going forward. We continue to progress towards our 2035 Net Zero target to enhance our resilience and improve efficiency. So during this financial year, we remain steadfast in achieving our long-term goals at the climate front. We stopped distributing single-use plastic umbrella bags at our shopping centers, piloted styrofoam box recycling in Hong Kong rather than sending them to Mainland China. We expanded solar panel installation across 47 Link properties. This is one of the largest solar energy generation projects in Hong Kong. And we've lowered our property exposure to flooding risk by commencing a detailed flood risk exposure assessment. So we will continue to apply our visionary and creativity mindset as we grow our portfolio in a sustainable way. Now let me pass on to K.S. to talk about the operational update.

Thank you, George. Good afternoon, everyone. Looking into the Hong Kong portfolio, we saw encouraging recovery with retail revenue increasing by 2.7% year-on-year. Productivity was enhanced with occupancy high at 97.7% and reversion healthy at about 5%. Average monthly unit rent also went up slightly by 0.5% to HKD 62.70 per square foot. Our portfolio remained highly resilient with a diversified tenant base, where top 20 tenants account for about 40% of our income. Despite the challenging leasing environment, we are pleased to welcome over 660 new leases, demonstrating our malls attractiveness and our asset management strength. Recent relaxation of social distancing measures and supportive government incentives, including the consumption vouchers and employment support scheme, have been positive to our current first quarter performance. The committed occupancy rate at The Quayside in Hong Kong has increased to 96.6%. The Quayside is well positioned to attract quality tenants with its best-in-class building specifications and state-of-the-art green features. We believe Hong Kong office leasing momentum will continue as the flight to quality trend persists backed by upgrading demand for Grade A office spaces. Tenant sales recovered well from strong local consumption until interruption from the fifth wave at the beginning of 2022. Our tenants experienced some disruptions and have since resumed normal operations as COVID restrictions are gradually removed starting April. Overall, our tenant sales growth increased by 7.8%, outperforming Hong Kong's average of 5.9%. Overall rent-to-sales ratio returning to a healthy level of 13.1%. Revenue of car park and related business and monthly car park income per space recorded 13.2% and 10.4% growth, respectively, during the year. Average valuation per parking space went up by about 4% to about HKD 607,000 per space compared to September 2021. The acquisition of 2 institutional grade car park car service centers and godown buildings was completed in December 2021. The newly acquired assets are secured with long-term leases and annual rental increments. They provide steadily growing income with relatively low risk. The Mainland China portfolio delivered stable performance during the year. Revenue increased by 24.4% with Happy Value Shopping Mall bringing in new income since June 2021. Excluding Happy Valley, which is planned to undergo an asset enhancement, occupancy was 92.3%. A robust average reversion of 8.8% was recorded despite the market turmoil and pandemic. Our joint venture, Qibao Vanke Plaza, achieved a strong reversion of 27.5%. Our office building in Shanghai, Link Square, recorded a reversion of minus 8.1% due to the headwind experienced in a highly competitive market. Nevertheless, office occupancy stayed high at 97% as the building quality and prime location remains attractive to tenants. Since March 2022 with the sporadic pandemic restrictions and lockdowns, there will be some operational impact on the mainland business in this financial year. We marked a new milestone in diversification with the addition of Mainland China logistic assets in our portfolio. In October 2021, we completed the acquisition of 75% interest in 2 modern warehouses in Dongguan and Foshan, which are highly sought after logistics hubs in Greater Bay Area. These 2 high specifications and well-located assets are fully let to high-quality tenants, and we expect them to provide stable income streams to our portfolio. Our overseas offices, 100 Market Street in Sydney and The Cabot in London, helped to diversify our portfolio exposure. They provided stable income in the retail market while shadowed by COVID impact. These fully occupied assets are highly defensive in nature with long-weighted average lease expiries of 7 years and above. And they experienced high rental collection rates. We believe the office sector in the overseas markets will continue to benefit from the reopening and the return of office workers. Asset enhancement is our vital tool to realize the full potential of our assets. In the second half of this financial year, we completed our first large scale asset enhancement project in Mainland China, Link CentralWalk, in Shenzhen's Futian district. Through this RMB 286 million transformation, we upgraded CentralWalk into an urban paradise and increased its retail offerings and green features to serve a wider spectrum of experiences. Despite the pandemic outbreak, this project still achieved a strong ROI of 11%. In Hong Kong, we are pleased that the 3 market renovations projects were on track in spite of partial lockdowns earlier. We are now finalizing the enhancement plan on Happy Valley Shopping Mall, our second AE project in Mainland China. This slide shows you some of the before and after photos demonstrating the enhancement works that will support long-term value creation of CentralWalk. You're also welcome to scan the QR code on this slide to see a virtual tour of Link CentralWalk. We are finalizing the plan for Happy Valley with the aim to capture the spending from middle income households that are underserved in Tianhe and Zhujiang New Town. The work scope includes rebranding, renovating and repartitioning of the vacant space previously occupied by a department store; facelifting work to both the interior and exterior of the mall. The AE work would be conducted in 2 phases with the first phase to kickstart in this financial year. The estimated CapEx for the first phase will be more than RMB 150 million, and we hope to improve the occupancy rate and retail offering, the positioning and circulation of the mall. With the backdrop of political uncertainty and more aggressive rate hikes, we have proactively secured low-cost financing in advance to preserve liquidity for business development and acquisition needs. Average borrowing cost was at a record low of 2.3%. Pro forma gearing ratio after adjusting for the announced acquisitions in Australia and Mainland China will increase to 25%. With all the financing arrangement in 2022, our available liquidity has increased to HKD 26 billion. Around 61% of total debt has been fixed. Average maturity was 3.5 years, which was staggered to 2029 and beyond. Funding cost is a top priority in capital management. With future rate hikes in mind, we arranged 2 financing in January and March to still favorable terms and lengthened our maturity profile. We raised several loan facilities to finance our investments brought in April and May, and our credit ratings with all 3 credit agencies remain intact, reaffirming our business resilience. During the year, HKD 1.3 billion of cash distribution was reinvested by our unitholders. We also bought back 1.3 million units at an average price of HKD 65.20. And we are still holding to HKD 2 billion in investment-grade bond, generating an average yield of about 3.5%. In April, we redeemed HKD 3.2 billion of the CB that was issued in 2019 with about HKD 800 million of the CB still outstanding in the market, paying 1.6% coupon per annum. Valuation of investment properties rose by about 7%, mainly due to the various acquisitions completed during the year. Valuation of Hong Kong portfolio went up by about 4% with the addition of car park-related business. Increase in car park valuation was offset by the drop in retail market rent assumptions. Valuation of Mainland China portfolio increased by 41.5%, mainly due to the newly acquired assets and currency gain. Valuation of overseas office portfolio remained stable, reflecting the resilient nature and outlook. We saw cap rate compressions in Australia and U.K. office of 10 and 5 basis points, respectively, on a back of improved market sentiments. Cap rates of other markets and assets were largely unchanged. I'll now pass to Ronald to talk about our portfolio changes. Ronald, please?

Thank you, K.S. I'm delighted to join the Link's family and look forward to contributing to Link in its next phase of development. Despite short-term operating challenges due to the pandemic, we continue to redeploy our capital for quality growth and risk diversification. During this financial year, we seized several opportunities. We invested in Mainland China, acquiring 50% interest in Qibao Vanke Plaza in Shanghai and Happy Valley Shopping Mall in Guangzhou. In Hong Kong, we acquired 2 top quality car service centers. We also diversified into new arenas, from logistics portfolios in Greater Bay Area and Yangtze River Delta to retail and office portfolios in Australia. These activities demonstrate our active portfolio management strategies and progress towards delivering Vision 2025. Looking ahead, despite headwinds in global and domestic economies, we will continue to seek opportunities to enhance and grow our portfolio prudently, strategically and sustainably. Last month, we announced our second investment in the Mainland China logistics sector. 100% interest in a portfolio of 3 modern warehouses in Jiaxing in Zhejiang province and Changshu in Jiangsu province at an agreed property valuation of around RMB 1.1 billion. These top quality logistics assets have excellent specifications and connectivity with the Greater Shanghai area through artery expressways. They are strategically located to serve surging demand from third-party logistics, e-commerce and consumer products sector. The transaction is expected to complete by coming July and will immediately be yield accretive. Together with our logistics portfolio acquired in October 2021, these acquisitions enable us to gain presence in 2 highly sought-after logistics hubs in Mainland China, namely the Yangtze River Delta and the Greater Bay Area, and increase our exposure to this fast-growing sector. I will now pass to Greg for a brief update of our recent Australian deals. Greg, please?

Thank you, Ronald, and it's my pleasure to meet you all here physically today in Hong Kong. I'm very excited to have recently joined Link and having established our Australian regional office in Sydney. Following our earlier acquisitions of The Cabot in London and 100 Market Street in Sydney, in November 2021 we announced that we're expanding our Australian platform with investments in 3 iconic retail assets located in the Sydney CBD. These are truly outstanding retail landmarks in the heart of the Sydney CBD with healthy footfall, high occupancy and steady income derived from leading local and international retail tenants. Australia has strong economic fundamentals and has demonstrated its resilience. Since February, international borders have reopened and COVID-related restrictions have been abolished. Now taking advantage of this reopening with strong consumer spending and improved tenant demand in very close collaboration with our partner, Vicinity, we've seen retail occupancy increase since the transaction was announced by 1.2% to now being 95.5%, and there is further positive activity pending. We will continue to work very actively and closely with Vicinity to deliver the best retail experiences to our shoppers across these 3 landmark retail assets. The acquisition is expected to complete soon. Then in February 2022, we announced our partnership with Oxford Properties in a joint venture that consists of 5 prime office assets in Australia's core office markets of Sydney and Melbourne. This office portfolio has excellent attributes and is one of the highest quality, sustainably focused prime office portfolios in the Australian market, offering high occupancy and resilient income from top-tier major corporate occupiers. And catching the most opportune time, this portfolio is set to benefit from the current post-COVID reopening momentum in Australia with the return of office workers and the theme of flight to quality seeing companies moving to the best quality prime grade office buildings for hygiene and better employee experiences. And leveraging on our strategic partnerships, we are set to explore future growth opportunities and scale up in a prudent and effective way. I'm also very pleased that the acquisition of this portfolio was completed this morning and will contribute income immediately. On that note, I'll now pass on to George for strategies and priorities. Thank you, George.

Thank you, Ronald and Greg, for the brief update on the portfolio changes and about Australia. For asset management, we will continue to focus on improving operational performance and productivity. Riding on our resilient and nondiscretionary portfolio, we will continue to engage our stakeholders actively and respond to their needs with our business as mutual mindset. Asset management and enhancement plans will be tailored for our tenants to help them to adapt to changes in operational environments and create pleasant traveling places for our community. After a period of planning, we are pleased to have our second Mainland China asset enhancement project starting soon, and we aim to redefine its market position and better service catchment areas. All of these will help us to reinforce the resilience and sustainability of our core portfolio. Portfolio growth is contingent on how we manage our capital, and we will continue to apply a prudent approach in view of the changing dynamics of capital markets. We will manage our maturity profile and reserve sufficient resources to support operational needs and portfolio growth, and we will regularly review and fine-tune our interest rate and foreign exchange hedging policies. Different funding channels would be used to optimize our debt portfolio, including sustainable financing and distribution reinvestment scheme. Our credit rating would be maintained at a healthy level to obtain the most favorable terms in light of rising funding costs. As always, we will consider appropriate and sustainable ways to return capital to our unitholders. To replace DPU loss resulting from prior divestment, we'll continue with our earlier capital return commitment. And with the remaining HKD 150 million, we believe that an announced unit buyback program would be of greater benefit as unit price is currently trading at a discount. And unit buyback will deliver longer-term positive impact on DPU yield accretion in contrast to a one-off discretionary distribution. Our execution of the buyback program, however, obviously depends on market conditions, unit price, trading volume and other regulatory considerations. We are reshaping our portfolio progressively to enhance the resilience and productivity of our portfolio and realize our goals set under Vision 2025. Organic portfolio will continue to support our growth trajectory and applying suitable asset management strategy will be instrumental to further enhance its quality and value. For inorganic drivers, we will continue to assess investment opportunities along 3 axes: geography; asset type; and the role in value chain. And we will deliver on our proven asset management strengths in office, retail, car park and cautiously extend into logistics. We remain positive on the geographies that we have identified previously, including Hong Kong, Mainland China, top-tier cities and their surrounding delta areas and overseas market, including Australia, Japan, Singapore and United Kingdom. While Core and Core-plus investments with low risk and management effort will continue to be our investment focus, we will prudently assess value-add and opportunistic investments for higher growth potential. And we will create a diversified, productive portfolio that provides both growth and stability. Geopolitical and market volatilities will continue to shadow 2022 and '23. And we will rely on our 3 pillars, asset management, capital management and portfolio management, to sail through these challenges. In terms of asset management, we'll continue to be agile in responding to fast-changing operating landscape and strengthen rapports with our stakeholders. Prudent approach will be adopted to maintain our financial strength in meeting daily and strategic needs. And we will actively create our portfolio to strengthen its resilience and grow beyond the current footprint and exposure if that aligns with our aspiration. Supported by our resilience and strength, we aim to continue to grow our portfolio along an upward trajectory being one of the few REITs globally with consistent track record in value creation for all our stakeholders. This slide summarize what we are today and our aspirations for our next phase of growth, and we are committed to achieve these ambitious targets, Vision 2025 and Net Zero Carbon by 2035, while we pursue -- while pursuing ourselves to be a leading global REIT that delivers sustainable growth and create long-term value for our unitholders and stakeholders. Set out here is a schedule of the date for payment of distribution and also scrip election date. Now let's open for questions.

Thank you, management. [Operator Instructions] Should we have the first question, Karl from BAML.

A couple of questions. First is on rent relief. Could you give us more color on how much rent relief was taken in the fiscal '22? And also how much you have spent so far in Hong Kong? And also, can you give us an update on the China COVID situation? How that has impacted you most and also the rent relief that you are giving out in China? And lastly is can you give us a bit of a sense on the types of rental reversion trends you've seen in Hong Kong in fiscal '23 so far given some of the -- during the sort of COVID, the fifth wave, presumably some of those lease negotiations were maybe during those times when things were quite difficult. So wondering if you could give us a bit of an update there.

Talk about Hong Kong, the rental relief obviously includes also adjustment to rent, especially when we have to renegotiate leases when they expire. So if you think about how to model this coming up the lease expiry in the next few months the rental reversion will be against leases that we would have strike in 2019, 2020, during the protest and during the first year of this pandemic. And now with the business picking up and we see continued relaxation of all these restrictions we are quite positive. But for risk management purpose, we only have a portion of lease expiring every year. And so whatever good things that we do in the coming -- in this financial year will have a impact on the result in '22/'23, but a longer-term impact going forward. So '22/'23 will be impacted by the lower rent that we strike 2 years ago and also last year. They will continue for the duration of those leases, whether they are 2-year leases, 3-year leases, right? So it's challenging for all landlords because this whole -- the protest and the COVID affected us for 3 years, which is actually the entire -- almost the entire portfolio barring some longer-term leases, 4-, 5-year leases. So we'll see ourselves coming out of this in probably 18 to 24 months from now to really clear through all these lower rent. Having said that, as you see in the result this year, we offset that by inorganic growth, buying NPI from different geography, different asset type. We will continue that exercise. We'll continue to model that. Again, it's obviously rising funding costs, hedging policies that we have in order to ensure that when we get together again this time next year we'll continue to show an upward trend. China, all fine until, obviously, this recent wave. And so, as K.S. mentioned, the reversion rate at Qibao was impressive. The last 3 months lockdown in Shanghai was severe. Qibao was closed for 3 months. We are going to give some concession to the tenants there, obviously in discussion with our partner, SCP. What we do not have to do is that, as a private enterprise, we don't need to give 100% rental relief whereas SOE in China are required to provide very generous rental relief. We hope that this -- as we see in a lot of other countries, once Omicron tailed off, things will rebound subject to, obviously, government relaxing the rule. So we are hopeful in terms of lease discussion with our tenant.

Thank you, management.

It's Ken from Citi. I just want to further follow-up on this HKD 220 million rent support program because as to recall during the Investor Day on 1st of April, management saying that something like this HKD 120 million is so far didn't use up. And when we are stepping into April, we have the consumption voucher and today announced the April number is surprisingly good. It's up 10% plus. So I just wonder why this HKD 100 extra million needed if we are -- let's say, on the 1st of April we said that it's only HKD 120 million. But now April number come out very good and we still need to upsize to HKD 220 million. So is there anything that is just a deferral that we need to give back to February and March on this? So this is the first question. And secondly is I just asked, George, the acquisition seems to be quite active in the second half of the financial year last year. And also, this is for K.S. is gearing seems to be a little bit towards 25%. How should we see the acquisition pace going forward? Are we expecting similar to last year second half or we were slowing down a bit?

Thanks, Ken, for your question on the tenant support scheme. I think when we -- clearly, when we pack the slides in the early days of March, we did plan for HKD 120 million. And as time goes, I think there were some requests, and we then package a bit more. And this HKD 220 million is -- actually expands into the last financial year. So the process of all these rent negotiations with the rental moratorium that is underway is that most likely it's more than enough, this HKD 220 million, and we need to liaise with the tenants to agree and then to redo some of the lease agreements. So I think there's a bit of prudence in those numbers. And then clearly, with the opening, we suddenly realize that everybody is back to doing a pretty good business. So hopefully, we don't have to use up the full HKD 220 million. I'll take the gearing question. I think you are right. After we have paid up for all the announced acquisitions, gearing will be indeed at 25%. With the pace slowdown, I think if you look at the source of funding from the reinvestments, including the bonds portfolio that will self expire, we probably still have a couple of millions, billions to go. And I guess your point is how should we look at gearing? I think where we are at today's A rating, we are probably good 4, 5 notches away inside the threshold of the IG grade. And I think we want to be able to have this buffer to play with when we see great deals. But at the same time, this gearing can keep going on. And then we are happy to explore opportunities for capital partnership, including JVs. We have been going on for years. If you think of Quayside, the JV was done 4, 5 years ago or longer and then Qibao which is also a JV. So I think most importantly is to figure out how to apply the capacity to the best deals. And with the best deals and I guess whether investors are happy to reinvest other options like CB JV partnerships, we are happy to look at that.

Yes. In terms of pace, a lot more coincidence than design because it depends on what the deals in the market that we like. We have obviously looked at a lot more than what we have announced because some of them we didn't win, some of them we didn't like. And the Link team has been diligent in pursuing everything that we think have potential. We have added more people to do this as well who have experience, both in China, Australia, et cetera. So I wouldn't see naturally a slowdown in the pace. Whether we will have the same number of deals announced, it depends on whether we manage to get it at the right price.

Thank you management. Mark from UBS.

Yes. So basically I have 2 questions. I think the first one is about we are announcing budgeting HKD 150 million unit buyback. Does that included the active 3 million that we have repurchased? That's my first question. And second question is regarding on the -- our capital allocation so far because I saw Slide 25. We haven't seem to acquire more China retail since last year. So because now I think the retail mall may be a good opportunity to buy on the dip. So not sure how will we see the near-term capital allocation. So we prefer to acquire asset in overseas or China logistics rather than China retail in the near term?

So the HKD 150 million that we will budget for the buyback will be a new package for this financial year. And if there are opportunities where we think that the unit price remain too low, then we'll probably increase that number. For allocation to China retail, we have looked at a number of opportunities. Again, we haven't been able to get them either at the right price or the seller just being unrealistic. So we are interested in looking at adding more in China retail. I think that there is a lot of opportunities at the right location. And I think the rebound in retail spending will help us. But there's a lot of work and we'll announce it when we come across the right opportunity.

Thank you, management. Simon from Goldman.

I just have 2 questions. One on -- we've been talking about -- a lot about inflationary pressure globally. I was just wondering that how would inflationary environment help you because we have seen, for example, some of your cost item has gone up quite significantly. And equally, over the cycle, we have seen rents been really plateaued and not really growing partially because of the COVID situations. Alongside, we also see you've been doing a lot more M&A. So wondering, under these circumstances, what are you thinking that would impact your business, both from M&A as well as organic growth? That's my first question. I have another follow-up.

Okay. Just on costs, I think we'll probably need to drill down a little bit to explain 1 or 2 cost item, which I'll ask K.S. to do because just looking at it, it looks like some of them have jumped, but it also means there's a reversal last year, et cetera. We haven't seen cost inflation to our asset enhancement so much. So far, in the last 6 months, we haven't seen any significant increase in cost. Labor cost is going up, Hong Kong, China, especially, and that is unavoidable. But we have to pay the market. I guess the other point is if inflation lead to interest rate increase, therefore, we have increased the hedge ratio. Our fixed rate percentage has increased. We will continue to monitor whether we should increase it even further. But so far, I think, we're happy with where we are. Whether inflation will help our tenants? I think for retail business, it's -- tenant sales, to a large extent, is linked to CPI growth anyway. So that will in return help us to have a lower rent to sales. So inflation to that extent is good. Obviously, it will also affect our tenant's profit margin. So we'll see how they -- whether they are able to pass on costs to the shoppers.

I think on the cost inflation, if you were to look at a couple of things that is hopefully not structural. One is at the direct property level, there is an element of salary cost that is related to LTI. There's also a component of the cost that is related to COVID cleaning, deep cleaning that we have now started to slow down slightly, given that it's looking more and more endemic. And then separately, as you look at the AUM and the asset size that have been growing, clearly, we needed more head count. So the Shanghai regional office has been increasing head count in preparation for a couple of deals that we are looking for. And then, again, at the base layer, most of us at the mid- to senior management have been on wage freeze and bonus-related performance only. And at the direct cost to the more junior staff, clearly, there's a minimum which has stopped for all and potentially that may come through, but that is across the city and industry. And then, again, at the management level, a huge portion of our package is LTI-related. And depending on how it's modeled, sometimes it goes through a bit of volatility. So in this financial year, almost to the scale of HKD 90 million to HKD 100 million is due to LTI movement. Doesn't mean that you will be paid out again. It has to be granted, vested, meet performance indicators. So we recognize there are good reasons for some of the cost inflation, which is market-driven. There's good reasons for the inorganic growth that is now needing more skills, more people and attention to manage the business. But I think, generally, when you look at the overall cost to AUM ratio, I think, we are still pretty tight or rather competitive.

I would encourage you to look at 3 years because we only show 2 years in the appendix. But if you go back 1 more year and then you see sort of a more normalized trend. Last year, there's a lot of reversal. We reduced marketing expense last year. There was a big reversal of LTI charge because share price came down. A lot of our LTI were actually lapsed. So as it's gone to zero, obviously, we roll back the charge to staff costs. So look back 1 more year I think will be helpful to see the trend.

Just another follow-up question on M&A. It's great to see you have beefed up your management team here, but wondering the fact that you're opening an office in Australia. And that's -- some of your management team has a background of China. Does that mean your priority is still going to be these 2 countries? Or do you have any other plans in your mind or any other geographical locations you have in your mind?

I'll let Greg introduce himself.

Thanks for the question. So obviously, the geographies that are in our wheelhouse or our strike zone are being well articulated. So we've invested in the United Kingdom. We've invested in Australia, and we have aspirations for Japan and Singapore. We're assessing opportunities in all of those markets currently. And as George just said, we underwrite a lot of opportunities that we don't necessarily progress with. So we'll be opportunity led. We will be focusing on top-tier real estate leased to top-tier tenants that will provide good, sustainable underlying returns to unitholders. That's, I think, something that Link's been famous for, for a long time now, so that won't change. But we'll continue to assess opportunities in those stated markets, and it will be top-tier real estate leased to top-tier tenants.

Jeff from DBS.

I've got a question on the rental reversion. You mentioned that the retail reversionary growth outlook in Hong Kong will be positive in this financial year. How about the rental reversion for the retail mall in China? When we look at the numbers, the rental reversion for last year remained healthy at around 8% to 9%, but when we compare it to the first half number, it seems to be slower a little bit. So how do we see the outlook going forward?

So I think, in my view, what has happened in Shanghai in the last 3 months is hopefully 1 of the darkest period like what we went through for the fifth wave. So as we are speaking now, Shanghai is open. Slowly people are streaming back. Even our malls are starting to see a couple of thousand footfalls, not in the 20,000, 40,000 yet. And I guess is you asked me what's the outlook of China? My guess is by the time we get to November, we get back to a new stage of political stability, whatever that turn is. And I guess is people will start coming back again in terms of revenge spending. China will continue to have to [ hop ] again because I don't think this series of COVID restrictions they realize how big the impact is. And now having realized they are scrambling. If you read the news the last 1 or 2 weeks, lots of rules and policies to help restart the economy. And I think once you start again, it's not going to decommission again, and they will slowly manage whatever they define as the dynamic zero. So I'm actually quite positive about where we are heading into. And if Shanghai can get through this as a pilot case, then, clearly, Beijing, Guangzhou, all this will then figure out how to manage COVID. And as we are -- as every day that we are trying to get out of the COVID, then more and more of our main lenders, friends are getting vaccinated. So again, there's a criss-cross of how you get to an equilibrium of living with the pandemic. So I'm not all that pessimistic. I guess what we want to see then is as things get a reset, how do we quickly ramp up to meet shopper demands, new tenancy requirements, new changes in demographics that we need to address. And my sense is we should be able to achieve the kind of rental reversion in the low single, high single, low double-digit range because at least about 1/4 of the leases will be up for renewal.

Thank you, management. The questions from the webcast have already been covered previously. So in the interest of time, shall we take -- we will take the last question. Okay. Thank you very much for coming today. Please feel free to contact the IR team if you have any questions, me, Carol, Fannie and Chloe. Thank you, and have a good evening.

Thank you, everyone.

Thank you.