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

Good afternoon, everyone. Welcome to Link's Investor Day 2023. We are pleased to have our C suite and also senior management team here with us today, including our CEO, Mr. George Hongchoy; CFO, Kok Siong Ng; Chief Corporate Development Officer, Mr. Ronald Tham; Chief Operating Officer, Mainland China, Mr. Greg Chubb; Managing Director, Leasing Hong Kong, Mr. Gary Fok; Managing Director, Mainland China, Mr. Haiqun Zhu; Director, Asset Management, Hong Kong, Mr. Emmanuel Farcis. [Operator Instructions] I will hand it over to our CEO, George, to begin the presentation. George, please.

Thank you all for joining this Investor Day. This is our pleasure to host this event in Singapore. Today, we would like to cover several topics namely our Link 3.0 strategy going forward, business updates across regions and our Capital Management strategy. We have invited quite a number of our senior colleagues to present and to answer the questions at the end. The market has been volatile, turbulent over the past few months and we continue to see political tensions and uncertainty over interest rate and inflation continues to cloud the global economy. Over the past months, bank failures from Silicon Valley Bank to Credit Suisse, have raised concerns over the global banking system and whether interest rate hikes should continue or not. In the end, the Fed has decided to raise 25 basis points last week. And they also said that rate cuts are not in their base case while they are monitoring the situation closely. I am very grateful that we have successfully completed our HKD 18.8 billion Rights Issue earlier this week. We are grateful and thankful for our unitholders' overwhelming support and continuing trust. The Rights Issue has strengthened our capital base, and we are well positioned to capture opportunities that will emerge as real estate asset prices -- reprices. We are set to complete our Singapore acquisition tomorrow. Adding to Jurong Point and Swing By @ Thomson Plaza to our portfolio and incoming colleagues from the [indiscernible] will officially join the Link family from first of April. And a number of them are joining us physically here today. We are fully committed to delivering stable distribution and continuous growth. And before we dive into the details, I want to highlight the key themes today, and we will discuss more in the subsequent sections. First, bouncing forward from COVID pandemic, It has bouncing Hong Kong and Mainland China. Our portfolio has been resilient and now there is a clear growth upside from the rebound. And we are a direct beneficiary of economic and income growth. Second, with our prudent capital management, we are coping with the new normal, from interest rates to inflation, supply chain challenges to geopolitics and our capital strength and financial agility are key in this current environment. Third, our Link 3.0 strategy, as our new strategy pathway has been presented in the video that we have uploaded recently to our corporate website. We will continue to optimize our portfolio through diversification, and will become asset lighter, grow AUM with capital partners, and generate more recurring fee income. As we recover from COVID, we have seen continuous improvement in our operational data. Our Hong Kong portfolio occupancy reached 98% with tenant sales growth surpassing 2019. For Mainland China and Australia, footfall and tenant sales growth are also trending up to near 2019 levels. After the Rights Issue, our net gearing ratio decreased to below 20%, and we won't have any refinancing need for the next 12 to 18 months. After the debt repayment, we have nearly HKD 10 billion of cash available to capture market opportunities. Some people believe interest rates will go higher, some believe staying at around the current level. We are of the view that this higher rate environment will be with us for a prolonged period of time. We should forget about the return of the ultra low rate environment and embrace the new normal. Our capital strength will allow us to outperform in this environment. While we carefully monitor the market, we are not in a rush to do any deals. Indeed, we want to do only the best deals in the coming 1 or 2 years. As part of our more cautious Capital Management strategy, and we having completed the HKD 18.8 billion, [ 145 ] Rights Issue for which we received overwhelming support from our unitholders. We are encouraged to see that our unitholders, including many who have been with us since our listing in 2005, have chosen to grow with us in this journey of transformation. We appreciate our unitholders for their continuing trust and ongoing support. Overall, we have strong endorsement for Link 3.0. We are seeing real estate assets being repriced and Link REIT is well positioned to capture these emerging opportunities. We will further solidify our position as a leading Asia Pacific real estate investor and manager. Link, since its IPO, have continuously transformed from 2005 and then diversify out of Hong Kong in 2015, Link 3.0 is about our next phase of growth. I'll ask Ron to talk about this in a bit more detail. This size is about our scale, our organic and inorganic growth track record and our governance. I trust that many of you have heard about these many times from KS and Sylvia. I won't repeat all of them here. Do want to highlight that, I guess, we are a rarity as an internally managed REIT in Asia. We are looking to build to add on equity, not just at the balance sheet level, but also at the asset level. And I would like to hand over now to Ronald -- just to emphasize, we are committed to boosting our position as a leading APAC real estate investor manager. We are grateful for your ongoing support, and it is critical for us to achieve this. and to become a trusted partner in APAC real estate. Ronald. Thank you.

Thank you, George. As mentioned just now, under Link 3.0, we are going asset lighter with our third-party capital manager business. I'd just like to say, it's a lighter, not asset light, okay? We will continue to be asset heavy. We're just going a little bit more asset lighter with our new business. But in the scheme of things, it's still going to be quite a small part of it. Going forward, we need to own all our assets, not need to own or uses wholly. We can work together with third-party capital partners so that we need to use less of our own balance sheet capacity. Our capital partners, including sovereign wealth funds, insurance companies, pension funds, endowment funds, private real estate funds, asset managers, family offices. This third-party capital approach applies to new investments as well as potential capital recycling of our existing investments. We can do so in different formats, such as joint ventures. We can create thematic funds, we can create platforms or even separate listed vehicles or even simply providing management services to third-party assets, such as what we're doing for -- in AMK Hub. By growing our AUM, we will generate management fees as an additional income stream. This approach will facilitate us to continue to actively manage and diversify our portfolio, capturing trends and opportunities across public and private real estate sectors. We are confident in successfully executing this Link 3.0 strategy as we are backed by our proven track record in asset portfolio and capital management, our reputation and award-winning governance standards and our professional and experienced team. Just to repeat, we aspire to be a trusted partner in APAC real estate. Next, this slide illustrates how our total AUM stacks up. As a REIT, we have been talking about GAV throughout the years. Currently, most of our assets are wholly owned and consolidated on our balance sheet. GAV is the most straightforward measure supported by our own debt and equity capital. Leverage would be a constraint on how much and how quickly we can grow GAV going forward. As we implement our Link 3.0 strategy, we will work closely with our capital partners and the investment will add to our AUM. We have a strong alignment of interest with our capital partners as we are committed to co-own every investment with them while we generate fee income from third-party AUM. And of course, we can also generate fees for management services which we don't own. So going forward, our GAV can increase with organic growth and acquisitions of assets. Meanwhile, with Capital Partners, our AUM can actually grow faster than GAV. While we will contribute capital to invest together, there's a multiplier effect with third-party capital and nonrecourse debt of financing. Regarding capital recycling, our GAV may reduce, but we can continue with managing the AUM. So total AUM will become relevant to better reflect our business scale going forward. In the coming months, we will share more about how we will execute this strategy. As we execute this new strategy, we'll be managing investment under different formats. Of course, we have our sizable listed REITs, which will continue to be sizable, a perpetual capital platform under which is internally managed. We will continue to focus on APAC. On top of that, we will also be managing other vehicles, such as joint ventures and private funds. We will also consider listed opportunities and platform investments. And just to be -- just to add, I know many people ask us what is platform investment means. To us, it means people plus assets similar to what we are acquiring from [indiscernible]. We are acquiring assets as well as taking on the people who are actually the senior people are sitting in the back of this room. Besides buying assets, we're also focused on building our capabilities as we grow. We will be implementing our strategy progressively, rest assured that we will remain cautious, and this will not cause any major change in our risk profile. I'll now hand over to Greg to discuss our overseas business, including our Singapore acquisition. Greg, please.

Good afternoon. It's great to be here in Singapore in person today, and I'll start just by making some opening remarks on our pending Singapore acquisition. And just what our observations are on the market here in Singapore for retail. And it's certainly showing a positive outlook, which is supported by very healthy operating metrics that have been printed over the last 12 months or so. First, retail consumption is rising with increasing shopper traffic driving the thematic. The 2 assets that we're acquiring in Jurong Point and Swing By Thompson both have recorded double-digit year-on-year growth. Consumer spending in suburban malls like these 2 assets have recovered quickly post the COVID pandemic. And thus, we are seeing very healthy tenant retention and new leasing activity across the 2 acquired malls. Secondly, the suburban market is poised to benefit from rising rentals and strong leasing demand as we see it. Recently, CBRE released a Singapore real estate market outlook for 2023 and outlined at suburban. Rents maintained an upward trajectory amidst strong leasing demand. So that strong leasing demand that is driving the underlying rental growth. The majority of retailers also indicated a strong appetite for expansion in 2023. So the strong growth in average growth rents and nearly full occupancy recorded across 2022 means suburban Singapore retail is positioned well for really strong future growth. So on the acquisition itself, we've been working very, very closely with the seller since we announced the deal in December last year to ensure a seamless integration and a smooth handover of the operations. So with that, we've set up a regional office here in Singapore that will enable us to form the new platform and build on the existing in-market capability that we've inherited from [indiscernible]. The existing team from [indiscernible] have signed up with Link and will transition to become what we call linkers and Singapore is inaugural employees for Link, and they bring immediate end market experience and knowledge. I'm pleased to welcome a number of our senior new linkers in the room here today. So the Singapore team will work closely with our colleagues in Hong Kong for knowledge transfer and continue to enhance our successful asset management model and provide the best possible and unique retail experiences to provide differentiation for the local communities that we'll be serving here in Singapore. We'll also be leveraging on the local know-how from our Singapore team and will be providing asset and property management services for AMK, as Ronald mentioned earlier, so effectively managing on behalf of a third party which is a market important step as we transition to this asset lighter model. So the integration of the Singapore local management team covers the full platform scope. Corporate functions, including finance, communications, risk governance, legal, corporate, digital, human resources and admin. And also functions necessary for us to have a strong regional operation here includes asset management to formulate and execute budget and asset plans, project and operations to implement maintenance, operational strategies and ongoing guidelines. Leasing, all important leasing to identify the retail trends and optimize the tenant mix and our ongoing relationships with our retailers. And then marketing communications, which will be on the execution of all of our campaigns and reinforcing branding and acting as a liaison for all of our key stakeholders here in Singapore. Such integration enables us to establish this management platform with local expertise immediately in Singapore, and we're really, really happy to welcome the team to Link. In terms of the asset management strategy for Jurong Point, which is the largest asset we'll be taking on here, we see various similarities that will allow Link to build on our success story here in Singapore. Jurong Point itself is a sizable suburban mall with a focus on nondiscretionary trades. It's got robust footfall and a high occupancy rate, and it's been incredibly well managed by the team that we're inheriting. It has significant potential with its trade size and trade mix optimization, given its large and growing trade area and strong access to community infrastructure. We will look to enhance our successful asset management skills here in Singapore with the team by using our scale, our everlasting and building scale across the region. We'll be looking to conduct proactive leasing strategies, strengthening our tenant relationships and shopper engagement and exploring value-add opportunities and enhancements at all the time, adopting the best-in-class asset management practices. I'll now move on to Australian retail. An Australian retail sales have shown healthy growth during Christmas and in the first months of 2023. Our centers themselves recorded robust sales growth during the festive season, and we're seeing continued positive growth as we approach the Easter season in Australia. Occupancy rates for the centers have improved since acquisition to 97% and the committed lease terms that we're now writing are longer than the activity following the acquisition in 2022, showing stronger retailer performance and ongoing confidence. Our 3 assets in Sydney have distinct yet complementary positioning and trade mix. They cater to a wide range of shoppers throughout their unique and ongoing tenant curation. We'll continue to introduce iconic retail and F&B operators to strengthen the attractiveness of the assets in the local market. There's significant activity in the Sydney CBD and the city's plan to develop a nighttime economy and the opening of the Pitt Street Metro Station will certainly benefit the traffic in the trade area immediately alongside the Queen Victoria Building and Galleries Victoria. So we're currently looking to enhance the Queen Victoria's George Street frontage and the Gallery Victoria's Park Street entrants in line with these ongoing developments in the city of Sydney. I'll now touch on Australian office. And there's a significant market recovery, which is being underpinned by the increasing demand for prime assets. The concept has been well discussed in many, many markets over the last year or so is that flight to quality. And in Australia, it's very evident. So we've seen good, strong, high prime market absorption. And research also shows that around 2/3 of tenants moved into better buildings that, in turn, command higher rents over the last 2 years. Office space rents are showing signs of recovery. And given ongoing leasing activity and a rational supply/demand outlook, we remain cautiously optimistic about the Australian office market. Our portfolio occupancy currently sits at 91%. And I must note that current portfolio occupancy is impacted by our asset enhancement works at our Kent Street, Sydney property. With all other buildings showing occupancy rates in the very high 90% range, and we've seen good leasing success in recent times. The 6 properties across our Australian office portfolio are all top-tier buildings in prime locations in the gateway markets of Sydney and Melbourne. And importantly, I've all got very strong sustainability credentials. We're ensuring our properties feature best-in-class facilities and specifications and will benefit from the flat to quality trend. One of our strategies that we've recently been focused on is completing a number of speculative fit-outs that allow occupiers to move quickly and efficiently. And this is attracting faster take-up by new tenants. We've seen significant leasing activity in this area recently, and a number of the examples are on the slide on the screen. And finally for me, our office portfolio in Australia, its income is supported by strong tenant covenants and a long WALE -- portfolio WALE of approximately 6 years. And together with fixed annual increases offer the unique benefit of the Australian office markets. So that's it for me. I'll now hand over to Gary, who's joining us by video from Hong Kong. Over to you, Gary. Thank you.

Thank you, Greg. I'm pleased to meet you all virtually today. In financial year '22 to '23. We experienced many challenges from the pandemic, but we have let them behind, and we are heading toward brighter future. With the gradual lifting of social defensing measures, the Hong Kong economy is resuming normalcy. We are closely monitoring the development of normalization to seize new opportunities. With the quick work of our leasing team and the confidence tenant in our portfolio, we have achieved a record high occupancy rate of 98%. Average unit rent also improved from HKD 63.2 per square foot in last September to HKD 63.4 per square foot in December 2022. Similar to the previous trade mix pattern, F&B and food-related trade tenants continued to make significant rental contribution to our portfolio. Leveraging on the solid consumer basis of our shopping centers, our tenant sales in general have continued to outperform that of overall Hong Kong as COVID deceased and the economy resumed normal. We are very pleased to see them. Our tenant sales continue to improve, and the rent-to-sales ratio are staying at healthy levels at around 13.1%. As said just now, the robust consumption in our mall has weakening a preferred vendor to many retailers and prospective tenants. Up to the end of third quarter in this financial year, we have signed over 560 new leases -- we are delighted that over 200 of them are new brands to name, which helped enhance our retail attraction and more offering to the customers. In terms of trade mix from these uses, besides F&B and food-related trade, we also see that fashion and learning institutions are returning fast as market sentiment improves with the social defensing measures easing, we organized different culturing events at our shopping mall to drive more traffic, to drive more business for our tenants. For example, the municipality at Stanley Parcel margin carving a temple mall during CM REIT Period as well as the mini concert by the up incoming singer and TOP, all these events were well received by shoppers during the event days. Thank you. I now pass the time to Emmanuel.

Thank you, Gary. Looking at our car park business. So in '22, '23, our Hong Kong car park and related business have demonstrated steady organic growth monthly car park income exceeded the previous years due to high occupancy and adjustment to the tariff. Car income has also exceeded pre-pandemic levels. Last, our 2 showrooms and Car Service Center contributed steady income for the full financial year. We also continue improving our asset as part of our strategic portfolio management to support and generate growth. That includes ongoing identification, planning and rollout of asset enhancement initiative. In '22, '23, among other projects, we transformed Tak Tin fresh markets into a community stronghold with a much improved variety. We also completed and are rolling out a number of place making project. This support footfall, strengthen community engagement and activation with various partners and NGOs. Development is also in progress of Anderson Road for a new shopping center of about 140,000 square feet that will support the new surrounding residential areas under construction and that also add synergies with our existing assets in [ Kwun Tong ] in the same neighborhood. Completion is targeted by 2027. Looking forward, we expect the market to continue evolving, and we have developed strategies in response to this trend accordingly. First, the next few years, we'll see a significant supply of new retail and office in Hong Kong. While most of this will be targeting discretionary spending, our strategy is to continue strengthening our trade mix, grooming new tenants and creating a unique and compelling offer to our tenants and shoppers. Second, midterm and long-term rail and world improvement will make cross-district connection within Hong Kong, but also connection to the Greater Bay Area, much easier and faster. This will also support population growth mainly in the new territories, which is where most of our assets are located. So new bridge and tunnel in Noah's Park, for instance, in [indiscernible], is a very good example of recent infrastructure positively impacting our assets there. So we are assessing both the short-term and the midterm opportunities but also risk these changes will create for our assets. At a micro level, we developed specific strategies for each property and for overall portfolio, taking into consideration asset and tenant performance, evolution in population, nearby infrastructure and competition. Third, people lifestyles and expectations are evolving. And for instance, in the past few years, we introduced a number of 24/7 gyms in our portfolio, given the increased emphasis on health and wellness. So we conduct market research on a regular basis to gain a better understanding of the local demographics, consumer behavior and purchasing power within our community. The revamp of our mobile app link up, which we are just relaunching, will also enable us to engage and understand more about our community. And last, we continue to roll out various ESG initiatives for sustainable growth. And for instance, we install solar panel to provide sustainable source of energy. We also rolled out energy management system that provide better precision at Energy Management, which in the context of rising energy cost is very significant. I'll pass the time now to Haiqun who will talk about our operations in Mainland China.

Thanks, Emmanuel. In this session, I will provide our operational updates and the recent observations on the ground in Mainland China. Compared to Hong Kong and overseas, the operating environment in Mainland China has been more challenging in 2022. The Chinese government has successfully contained the spread of viral with dynamic zero-COVID policy and has stabilized the economic conditions in the earlier 2 years. However, unlike the previous strength, Omicron has been much more transmissible. As a result, we paid a great price with extended lockdowns and more frequent home printing. All in all, we experienced a year that was more difficult for companies, retailers and shoppers as compared to the previous 2 years. And the operating environment has been tough in the first 11 months of 2022. Our retail and office portfolio together in the 4 Tier 1 cities has seen impacts to a different extent. [indiscernible] located in the densely populated community in Shanghai, suspended operations for more than 80 days in 2022. A higher unemployment rate and a lower annual income have dampened consumption sentiment and created a difficult operating environment for our tenants. During this tough period, we supported our tenants via various means when the tenant do not pay their rent on time due to tight cash flow, we will try to boost their sales by increasing our marketing efforts, and we will also negotiate with our tenants and granted the payment declares. And for the tenants heavily impacted by the lockdown and mandated to suspend operation, we granted rental concessions. We tailored these supportive measures for tenants based on our understanding of our tenants business. As a result, our tenants maintain the steady business performance. And at the end of the December of 2022, our retail occupancy was 90.4% and combined with upside brought about by a lift of restrictive measures and the border opening, we expect the occupancy to continue to recover by March. The stable occupancy rate is a testament to our commitment to creating a community-focused environment that connects our customers and retailers. We firmly believe in this discipline and are proud to see it reflected in our occupancy rate. And with around 70% of the community-oriented trades, along with a stable occupancy, we expect encouraging outcomes after reopening. In the last quarter of 2022, we still suffered from a double-digit decline in footfall and sales year-on-year. During the Chinese New Year this year, we already saw footfall rebounded by 1 fold compared to the 2022 level higher than Beijing and Shanghai is average level around 90%. [indiscernible] announced by the local bureau of the commerce. Meanwhile, in the post-COVID era, we will closely monitor the changing market conditions. And I would like to shed some new shopper and retail trends as well as our corresponding actions to cope with this change. First, on the shopper front, the consumption pattern is shifting towards more rational consumer behavior. At the same time, the market saw high demand for products relating to more outdoor activities, such as hiking, campaign, rock climbing and skate boarding. When it comes to brand names, consumers prefer buying local brands for closing designers, toys, et cetera. And on the tenant front, retail remain cautious on expansions in the first half of 2023, especially in the fashion sector and sales of which maintained sort. F&B saw a rebound in sales during and after the Chinese New Year, some market-leading and well-operated brands are more active in expansion. Leisure and entertainment have become a major chain, especially trending lifestyles, such as urban campaign, indoor climbing and the true play park. Some operators are also looking for expansion given the rental has come down to a more affordable level. So to capture the new opportunities and cope with the challenges from the tenant side, we have adopted 4 proactive approach. The first strategy is precise positioning. Our asset management team closely monitors market trends and adjust the asset plan every half year. To meet our customers' demand better, we have introduced a few trendy experiential brands like skateboarding, ramps and rails, urban campaign, rock climbing wall and indoor playground. This experience focused brands can attract more for benefiting retail sales and F&B tenants. Secondly, our asset enhancement initiatives, now the Happy Valley, a retail asset with 90,000 square meter meters located in the CBD district in Songjiang is undergoing asset enhancement. We will lay out and reopen the area previously occupied by department store with over 10,000 square meters, and we will introduce retail entertainment trade to improve the rental income and assets of the assets. Meanwhile, the style and the corridor will be upgraded and the outdoor PSR will be built to shape a good ambience for dining and entertainment. As the late March 2023, we have already finished the requisition of the [ East wing, L1 to L5 areas ]. [indiscernible] are on schedule and are expected to complete by October this year. Leasing progress of the renovated area is also encouraging. The newly renovated area and the entry tenants are gradually spring up by the second quarter of 2023 and 2024. Link set up the Mainland China regional office in Shanghai in 2019. With the continued expansion of asset management scale, we have acquired more tenants and more optimizing the organization structure. In the following financial year, we will implement centralized management for better resource allocation and standardization. Centralized leasing can help us to forge closer ties with our key tenants, key accounts and improve the bargaining power of different retail assets. central marketing income, better exploiting marketing resources and enhance the linked brand awareness core cities. Central property management can help to improve building standards to minimize operating costs and push up our service level. Besides we are developing our loyalty program by upgrading the membership system. Our customers can use the one-stop mini apps in WeChat to obtain members' points, pay the car parking fee with a member-only parking discount or redeemed retail or F&B coupons online with the member points so they can reduce the frequency of working through the service back. The loyalty program can increase customers' stickiness and ultimately driving sales. Meanwhile, the data legally collected from the system can be further generated into different analysis reports, which will provide valuable insights to the operation and marketing teams. Happy Valley has already upgraded the system a few months ago while other shopping malls in our China portfolio will upgrade their system within the fiscal year 2023 and 2024. Our Mainland China portfolio is comprised of office logistics assets that generate stable income streams. Our competitive advantage slide in our ideal locations of high-quality property services and our reputable tenants and our good relationship with the local government. We will continue to sharpen the competitive advantage of our portfolio. As of December 2022, office occupancy is around 94%, and occupancy of the logistics portfolio is 100%. So K.S., over to you.

Thanks, Haiqun, and good afternoon. Great to see all of you again. I'll cover our views on the interest rate outlook and our capital management in light of such an outlook. We continue to believe that a prudent capital management approach can help us navigate through an increasingly volatile market ahead. With all the uncertainties in mind and high inflation sticking around, market still expects interest rates to stay higher for longer in this new normal. Except loan prime rates in China, interest rates are expected to increase further and see at an elevated level in the next 12 to 18 months. For prudence, we intend to maintain a fixed debt ratio of around 60%. So as better manage funding cost impact. However, [ BPU ] will inevitably be impacted by any material increase in funding costs in the short term. In light of the uncertainty as well as the potential opportunities arising. We have taken a preemptive approach to strengthen our capital base to power our next phase of growth. The HKD 18.8 billion Rights Issue has substantially strengthened our balance sheet and enhanced funding certainty. As a result, gearing has decreased to below 20%. And after repayment of debt, we have no refinancing risk or refinancing needs for the next 12 to 18 months. The balance of about HKD 9.5 billion or HKD 10 billion will be ready to fund potentially new accretive investments. After taking into account the impact of the announced acquisitions and Rights Issue, it is estimated that a 100 basis points increase in interest rate will increase our gross interest expense by about HKD 240 million on a pre-tax basis. So broadly about HKD 200 million on a post-tax basis if interest rate continues to rise by each 1%. We would like to reiterate our prudent and dynamic capital management strategies. We will continue to keep to 60% fixed rate, manage our ForEx exposure by hedging out both the investment and income streams where possible. Maintaining a strong credit rating will be a differentiator in this market, and that allows us to preserve our dry powder for growth. We continue to commit to delivering the capital return to our unitholders and will continue with 100% payout ratio. While safeguarding the value of our unitholders of our prudent strategies, we strive to create value through opportunistic acquisitions. At this stage of the game, we believe we are one of the safest investments available in the real estate market amidst all the uncertainties, complexities and ambiguities. As a concluding remark, we expect our delivery of continuous growth in distribution challenge this year. We should be able to deliver strong positive operating underlying results. However, clearly, it will be offset by an increase in funding costs as the market evolves and that's very much less under our control, although with the lower gearing, clearly, we are in a different position. We'll share more on this when we report our full-year results. Thank you.

Thank you, management, for the presentation. We'll now invite the management to go to the stage to start the Q&A section. [Operator Instructions] Maybe I will start from a question we received online first. So it comes from Mark from UBS. He would like to know the reversion outlook in both Hong Kong and Mainland China year-to-date and also in 2023. Management, please.

Okay. So we are definitely looking at reversion. I think what we are targeting is constantly CPI plus. So that's where -- and that's on a yearly basis. And so that puts us in a mid-single-digit reversion target for Hong Kong. What we've been seeing in the past few months through the recovery is -- and the reopening is an increase in our sales, in our tenant sales. What we see is more confidence from our retailers. And so we do believe that these objectives are on target, I would say.

For the reversion in Mainland China, maybe Haiqun can talk about it.

Yes. For the reversion in Mainland China for the retail, I would say, in the short term, I mean over 6 to 12 months. Footfall and sales will gradually recover, and I expect it to exceed 2021 and the 2022 levels. And footfall and sales of our mall are expected to be 80% to 90% of the pre-COVID level, I mean the 2019 level. And the retail reversion is expected to continue to be positive, we'd say single-digit in 2023 this year. Thank you.

Is there any question from those attending physically?

Hello, can you hear me? Yes? [ Johann Kier ] from Center Square. One question. You talked a little bit about going asset-lighter as opposed to asset-light. Everyone else seems to be going asset-light. I'm just curious if you can delve a little bit deeper into the rationale behind asset-lighter as opposed to asset-light, and maybe you can define the term relative to going asset-light.

Yes. So I think I've shared with you -- many of you during the [ Deal Roadshow ] about 4 weeks ago. I think directionally, we would like to go progressively asset-lighter over time. I think we recognize from the marketers view to other things that we're looking at. I don't think today, it's -- we are going to be able to do a 2% GP and a 98% LP stake overnight. I think there's a process where Link wants to go down that direction. We'll do with a larger GP stake. And over time, as we build the reputation, the track record, we will hopefully be able to do even a blind [indiscernible]. But I think where we are today, we need to start this ball rolling. I think the only comment I would say is that the vintage looks right to start this business model, now where things are being repriced, and building a positive strong track record at the expense of incumbents whose track record is difficult to uphold, I think we are coming in the right cycle. But I think to go towards all the way to say that we could become one of the Blackstone, BlackRock, I think it's not practical today. But I think we want to kick the ball going. So the work we have chosen is actually from 100% that we used to own progressively with -- done a few capital partnerships, 50,49. And now I think we are prepared to slowly go down and then bring in capital partners.

I think the other key when we talk to our various capital partners that they do like the fact that we like to manage our assets, and that is the alignment that -- and the differentiator rather than focusing on it, just a financial investment. We did start off that way, has a heavy business. We'll continue that way in terms of the detail that we spent in understanding, analyzing and managing every line of the P&L, every little aspect of how to improve the asset in terms of tenant mix and trade mix. When those spend, you overlay it with financial structures and all that, hopefully, will improve the return even further. But as [indiscernible], said, this is an evolution. We're not seeing, at least in the near term, a transformation transaction, what we build and merge with the platform and we become much asset-lighter than I think an evolution will allow. So I guess you've seen us being cautious over the years, and we will continue to build even in this path cautiously.

Sorry, I want to follow up. This is [ An ] Chen from [ ADW ]. Following up on the Link 3.0 and, I guess, asset-lighter strategy, what do you think differentiates us relative to other fund managers that are out there at the moment? If I look at the various assets or real estate investment managers out there, everyone is trying to develop this platform and strategy, right? And if I look at the differentiators, there are some that are targeting thematics. So their expertise is in logistics development. So they are hoping to get better returns for their investors. There are some that are targeting via various thematics, DC, that could also be, I guess, differentiators where they are doing developments. If I look at Link, our main focus has been in Hong Kong retail. In other markets and asset classes, I guess we've only been investing, we've not really done development in a big way. With core assets today, the returns aren't great. So I guess my question to you is what differentiates us? And what do you think are the challenges as we try to be an asset manager or a real estate investment manager, whether it's in this region or globally?

I might start. I just think that '17, '18 years since the IPO in 2005 and that focus on active asset management is something that can't be underestimated. So truly understanding I guess, the opportunity that exists in each and every asset and how we can respond is part of the DNA of the group. I've only been in the business for a year. And that's my initial observation, is the absolute asset management skills that exist in the business. So I think initially, that's what we bring to third-party investors is that razor-like approach and that ability to extract value where others can't. And where that takes us over time will be part of that journey as the guys who said, it is a journey, and that's why we're saying asset-lighter rather than asset-light as we move through that journey.

I think it's -- it will be nice to grow from 1 to 10 in 2 days. And we've described this as Link 3.0 from our early days of just managing our assets in Hong Kong as 1.0, and then the diversification is 2.0. And as Greg said, that attention to detail for asset management, it's, I think, unique because if I look at some of the acquisitions that we have done from private equity real estate owners that sell to us, they care a lot about the entry and the exit and not much in the middle. In a volatile world, when you can't predict that much in the exit, then the management of what's going on every day is actually very important. And as a REIT, we do need to pay out 100% every year, and that is important. So how we manage that is quite different. I think a lot of people look at our plan and say, "Oh, you want to be like some of the specialty PE manager, where they care a little bit less about the J curve. as long as the -- the exit allows them to make the IRR." We care a lot more about building that distribution over time for our unitholder on the GAV and then building AUM in terms of fees and then delivering also that 2 points to our capital partners. So I think we will be managing a more complicated transformation and set of drivers, business drivers in this transition. And as we get towards, I guess, our AUM being a lot larger than our GAV, then we may be different. But we don't underestimate the change and the challenges that is needed. And even just since we signed the deal, acquiring the few assets here, the amount of time that we spend with the team here, the amount of detail that we spend in terms of the platform that Greg presented to you earlier, it's no different from what we have done in China. But we are doing it in a lot more detail and intensity than we have done in the past because we've learned. And every time, I think, as we evolve, the partners that we are talking to, were just impressed about that attention of detail. The other little thing that matters, and it's actually important for a lot of these investors as I travel and meet them, is [ covenant ]. As a least-listed REIT, the amount of transparency that you have enjoyed as investors is a lot more than what they get in the private equity world. And we will continue to provide that level of detailed transparency and accountability that I think would stand us very much apart from the others. Because we have to tell you anyway, we might as well tell our capital partners, those level of detail, so that they actually are co-owner with us rather than we just take their money, and then one day, we'll return it at a decent return, that we would want to treat our capital partners as we try to call them partners rather than just people who will provide us some of their money. And then lastly is this commitment over the last 10-plus years in sustainability. We'll continue to do that. And I think whether it is in a listed world or in a private equity world, capital providers these days are finding it important, for their own reason for existence and for their investment, the need to really have sustainability upfront and center. So it's financial return, it's sustainability, it's [ covenant ], accountability and our attention to details are some of those points that I think we have demonstrated over the last 17.5 years, and we'll continue to do so.

Thank you, management. There is a related question. So from Ken Yeung of Citi. Do we have any update on the capital partners for the Singapore deal?

We are in the process. I think when we started the acquisition process, the partners have been informed, but they are not going to commit until we complete the deal. Some of them are already in process of doing their own structuring due diligence. I think what we can share at this stage is that we will have to come out to AGM to 6 special approval because we will be selling down within 2 years of acquisition. So under the record, Link cannot sell unless we get approval from unitholders. And I think this is something that we are trying to dovetail here into the AGM if the timing is right. That's fair to say, I think, coming from that side of the fence as they look at this portfolio, clearly, these are long passes. These are people keen to diversify. And clearly, Singapore is currently a pretty warm to hot market, I would say, for most real estate play. It's probably one of the easiest-to-read market in Asia Pacific. So fairly comfortable that we should see some investors that will come through, come AGM.

So I'll add a few points. One is, given the strength of our balance sheet, we were able to take on this deal using our balance sheet and then sell down over time. As you would expect in any transaction, real estate transaction, the seller will give us a period of time as exclusivity and then a period of time to complete the transaction. For capital partners, they don't really engage with us until they know that we are a "winner". So even if we start engaging them, the real discussion really start after we sign, and then they will start talking to the ICE for preapproval to spend money, et cetera. Until we are in that phase, even if we're trying to complete the acquisition at the end of this week, we still continue on that discussion with those few parties. But we can take it on. We don't need to wait for them. We don't need to sign a deal that is subject to financing. And therefore, its uncomfortable because I would like to actually have it signed and [ complete ] both in terms of bringing in the partners and the transaction at the same time. But as Hongchoy said, the recall require us to come back to you to ask for your approval to sell down, hopefully, you'll give us that approval. The other transaction that we are working on is capital recycling, that we don't see the need of selling everything 100% in the future, that there are opportunity where we sell down the majority stake of some of the assets that we own, whether in China or Hong Kong, and bring in capital partners, and then we will continue to manage for fees. So those are discussions that are ongoing. We hope that over the next few months that we will be able to do some of these transactions. And so you will see us, especially with capital recycling, a transaction will reduce our GAV, we'll reduce our DPU as we signed -- well, as we [ complete ] those, no different from disposal. But then we will earn fees. We'll have capital coming back, and then we'll have to deploy. But we then don't have to come to unitholder for equity. We don't need to increase our leverage that much. But different from the disposal that we have done over many years is that we will continue to hold on to a minority stake with management fee.

Thank you, management. [ Shinca ].

I'm [ Shinca ] from [ Sumitomo Mitsui ] Management. So can you elaborate 3.0 strategy's third-party capital in terms of the markets and the country, also subsector, you're focusing on for building platforms or divesting the funds as a part of asset recycling?

The target markets and segments are no different from what we have explained, presented in the past. So we -- as good investors, you look at a market that has good growth and also liquidity. So Hong Kong, Mainland China, Singapore, Australia and Japan. We have stated today that we are trying to develop our reputation as a trusted partner in Asia Pacific real estate for both investment and managing. So we do have a distraction in London that we will be dealing with. This is not the time to talk about exactly how we're going to deal with it. Come to us with suggestions, but it has become a distraction if we want to focus -- we do admit at that time, it was the right deal to do. But as we want to refocus, is something that we need to deal with. In terms of asset class, retail is our core, and we'll continue to focus on that, nondiscretionary retail, to a large extent. We do want to look at selective discretionary retail with right location. Office, very selective, because I think there is a significant opportunity for repricing that has to happen across many different cities. We want to wait for those repricing to happen. There is a different mode of working. I don't believe that everyone will work from home. I have told our Singapore colleagues to come back to the office, although there are still a lot of them working from home. But you can't socialize, you can't build the team without sitting together. Zoom is good, but Zoom was created for a pandemic. We are social animals. We can only be strong as a team. No one can do a successful business on their own sitting in the room at home. So we believe that people will come back to the office. We have seen signs of that. Yes, it may not be 5 days. It may be 3 days. It may be flexible hours, et cetera. And everyone is trying to work out that more for their own business. Everyone has their different requirements, and we're dealing with that at Link ourselves. But people will come back. Whether it will mean a smaller demand of space, I guess it depends because I think over the years, also the per square foot space that each employee have, have shrunk, maybe they will end up having more hub, working areas, et cetera. And so the reconfiguration is still happening. Logistics, we are interested. We have looked at various opportunities. We have invested in a few. We are cautious because we think that pricing has gone ahead of itself. Again, there will be repricing that will happen. You can't have -- in Australian terms, we call them [indiscernible] from [indiscernible] and then you call them logistics center that cap rate will go from 7 down to 3, it's just not right. So I think you will see repricing that will happen, especially from stress that some of the owners currently are having. Until then, we'll be cautious, but it is a sector that both ourselves and our capital partners are interested in adding to. So those are the 3 particular areas. We continue to be -- we've been avoiding, and I don't know what is the catalyst that will change, but we don't -- we avoid anything that have people staying there overnight, whether it's hotels or service apartments and all that. But I would only -- but I would say, if there is a mixed-use development that require us to have, say, currently a 2-storey shopping center that needs to be redeveloped into a mixed-use with a resi on top or office on top, we will not shy away from that if it works, right? But it requires a lot more speculative assessment about what it will end up in terms of leasing of the enlarged shopping center and the office or resi, et cetera. But we'll work with our colleagues and our partners to do that. So those are the few facts. Then when you put it on the 2-dimension matrix, we don't tick every box. So we don't necessarily like retail in every country, every city or office in every country, every city. So it's very selective. I won't go into detail today. But we will look at, obviously, economic cycles, real estate cycle in each -- and that's the purpose of diversification, that you have a mix of those so that you -- once you mix them up, it will grow on a steady basis as a portfolio.

Any questions here in Singapore? I have a question online from [ Fung Lung ] CCBI. How do we determine what kind of assets to be put for asset-lighter model?

If you look at our approach over the years, clearly, there's a portfolio management ranking that we go through as a discipline. Most of the time, I would say, 90% of the portfolio assets that we believe is coming to a mature state, if it's the, I guess, the third party in terms of the yield requirement, but it may not generate the growth. And sometimes we do bundle 1 or 2 to make the portfolio palatable from a marketing point of view. So I think the reality of the Hong Kong portfolio is yes, there are estates that are decades old, demographics are evolving. You fit certain strategic intent, but not necessarily the financial discipline and requirement that we are looking for. And if we could find investors with [ fleet ] that can appreciate that kind of, I guess, attributes and the demographics for certain reasons, we are happy to then put that into that portfolio and recycle and yet manage for them for a fee.

I think one of the things is listening to the capital, what the capital is looking for? So it will be largely driven by what responses we're getting from the capital more so than us determining what the investors will want and then responding accordingly, so whether that's part of our existing portfolios, whether it's acquisitions. But probably the most important thing in all of that is that we're partnering with like-minded capital. So we see that word partnership not being taken lightly, and we want to be partnering with like-minded parties.

And if we look back at what we have done in terms of capital recycling, every time we take out those that are not performing as well, the portfolio average goes up. And I think that is probably something that we will continue to try and achieve over time, take out those that are less productive and then let the rest perform.

Will the fee income be 100% distributed as well? And also, if the -- if we introduce capital partners, will it change our risk appetite?

The fee income will be 100% distributed. So we will be part of DPU. It's a bit hard to model at the moment as we just started to build this business, but Ronald presented that graph for you to think about. I can't apologize for the challenge that you would have modeling it compared to how easy it is when it is asset-heavy, then you just have the NPI and our funding costs, and now you have to assume a certain AUM that will grow to. But as you would appreciate, the AUM fee relative to the asset value was a lot lower than the NPI that will come out from it. So we do need to do a fair bit more in order to drive that. In terms of risk appetite, if it involves the money, the GAV of Link, then it will be, to a large extent, the risk appetite that a REIT should have. So it will not move too much towards the value add or especially opportunistic, except that we, as we just said, want to have a higher stake as a GP, as a partner contributor to that JV or to that platform. So let's say, 10%, 15%, 20% rather than 3%. But for the AUM, it could go to more value add. For example, I mentioned just now, if we do have a development opportunity, then most likely, we'll work with partners rather than put it all on the balance sheet. So those are variations that we're working on.

This question is about the Australian business. So this is from Clara from Resolution Capital. Regarding the retail CBD, can you comment on the rental growth outlook? And also, you mentioned you continue to introduce new retailers. What are the retailers optimistic about the CBD? Is it return to work or tourism? Are leasing discussions changing the likes of mounting economic and consumption strengths?

It's a bit to unpack in that question, but I'll endeavor to work my way through it. Interestingly, we're seeing that Saturdays and Sundays, by some margin, the busiest days for the 3 properties that we've got in the Sydney CBD. Certainly, the return to work in Sydney is gathering momentum, but still Mondays and Fridays are much quieter than Tuesdays, Wednesdays and Thursdays. In terms of then the performance of the assets based on the increasing footfall, and this is on the basis that still tourism is not coming back as strongly as it should in Sydney, so for most of the trade that we're getting is local Sydney [ siders ] and also some domestic tourists. But certainly, the rebound in sales is profound. And as a consequence, the confidence that is coming back with the retailers are seeing us going from doing 12- and 24-month lease renewals with our existing tenants, say, 6 or 9 months ago to now doing standard 5-year leasing transactions today. Reversions vary from tenant to tenant. But broadly, we're flat on renewals and we're slightly positive on new leases. But as I mentioned in my earlier presentation, let's not forget the fixed annual reviews that we get on the leases in the Australian context. So the standard lease fixed bumps that we're getting on our Sydney CBD portfolio is 5%. So we're getting 5% year-on-year growth until we get to a reversion. And then for the most part, it's fairly flat at the moment. But all in all, the signs are very, very promising. And most importantly, we're dealing with 3 landmark assets. So the Strand Arcade is virtually 100% full. Galeries Victoria is about 98%, and QVB is about 96%. And most of the work that we have to do to continue the repositioning of that portfolio is in the Queen Victoria Building. But all things being equal, very positive signs.

So I'll just add two points. We mentioned this when we announced the transaction. For QVB, while everyone might take the Instagram photos on the few floors, the historical building, the majority of the income are in the basement. And that, to a large extent, is nondiscretionary. People through the busiest Subway in Sydney or in Australia, and they're buying the sandwiches and all that, while they go to work or pass through the town hall, et cetera. So we look at that as slightly different from other CBD retail, in that it is not totally discretionary, unlike some of the other properties within Sydney CBD. The other sort of -- other retail element that we've added at 388 George Street, CBD Cartier flagship store in Sydney, just opened there, and that is a new addition to the office on the ground floor, where we added this high-end retail. And so we are -- as I said, we don't do a lot of that, but it so happened that, that particular location allow the very high-end flagship store to be located there. And we're very happy about that.

And on the basis of placemaking, now that the office building above is 100% leased, so the whole ground floor plan has been transformed with the addition of that Cartier flagship. And it has allowed us to do a significant amount of leasing in the last 6 months in the office building above.

Okay. In the interest of time, we will take the last question from online, and then we'll see whether there is a last question in Singapore. So this question is about China operation. Can you quantify what the rental concession that we have given to the Mainland China tenants in the second half? And also, are the rents less affordable for the tenants now compared to pre-COVID?

I'll take that question. I think we have not officially been talking about the China concessions. There will be some in the second half. I think granted, it was pretty difficult from November, December, January, before the opening. There will be some rental concessions. I don't think it's anywhere near the same magnitude as the one in Hong Kong that we went to. I think safe to say is that after the second half, next financial year, we do not expect any more concessions from Hong Kong and China. So that will be our support. I think the opening of China has come back with a very nice bounce, very much on, like [indiscernible] said, F&B, experiential. And I think it's still probably a bit early, in my view, to get a sense of where that new normal is. But safe to say, other than those assets that are going through AEI as we continue to lease out, most of our other assets are actually in the 90s in terms of occupancy. F&B has done well, fellowship, gatherings and all have come back. I think retail, as you know, nationalism is still very strong. A lot of local brands are still doing well. Foreign brands are still, I guess, trying to find their way back in the last 2 years, quite a fair bit have departed. Looking at the signages and signals from Central is they are back to open for business. Now we can go in with APAC, and more and more businesses will start to explore again. I guess, give ourselves another 2 to 3 months and get a good sense of where China land in terms of how much retail bounce-back we are talking about. As of now, I can say, we are about 90% of pre-pandemic. Of course, we hope to get to 100. And where is that 10%, I guess, whether is it tourism coming back, enter without Visa, no APAC [ card ] needed, then that goes back to that normal business. Otherwise, it's just a tad lower without tourism.

Sorry, I just wanted to follow up on An's earlier question, George, your answer with regard to the fact that previously, the entry and the exit point was key for investors. Increasingly, the middle of the management of the asset is important, given the volatility in the market. Obviously, for Link, a lot of that expertise, you've acquired that expertise in Singapore and obviously looking at capital partners for the assets here, then you have a lot of expertise in Hong Kong that you've built over the last few decades. In terms of interest from investors to capital partner with you in Hong Kong, are you seeing strong interest? Or is the fact that cap rates are as low as they are in Hong Kong, is that inhibiting potential interest?

We are in discussion. And I guess at the right time, we will make the necessary announcement. I just want to clarify, I was saying that for private equity, then they tend to look at the -- the entry and the exit. For us, we always look at the cash flow every year because we focus on the distribution. And then obviously, we do look at, when we do our IRR and our modeling, the terminal value. But we tend to hold on to it a lot longer, not to 5 years maybe 10, maybe 15, depends. So that's the point. But Hong Kong capital recycling, we are working on several projects, that's not the right time to talk about.

Yes, maybe the very last question.

This is Terence from JPMorgan. One of the key benefits for Link is actually access to a lower cost of capital. And I think in the presentation you shared earlier, you said that potentially for Link 3.0, you'll be able to tap nonrecourse loans. So I think two questions from here. Firstly, how do your banks and lenders view financing, nonrecourse loans, let's say, to somewhat these capital partnerships versus lending to Link directly? And the second question, in terms of hurdle rates, do you see that hurdle rates could be higher for some of these capital partnerships?

So if you look at what we have been articulating around capital partnerships, I think largely, it's in the nondiscretionary retail space. I think vis-a-vis office and potentially even hospitality, clearly, the credit margin is lower, and that facilitates that dialogue. Definitely, if it's 100% Link and not 100% Link, there's a difference, I'll give it about 5 to 10 bps. And then underlying that 5 to 10 bps is what quality of capital [ partners ]. So I think what we have been saying that we have to look for like-minded guys, who the banks do see us in that same league. I think going forward, if you think about this business, I think going into a mix of treasury level and asset level is probably the right way, even if it's 100% because there are instances whereby different geography, Link doesn't get that huge premium because it's not my home country. If it's Hong Kong, Singapore, we are clearly one of the best credit, people understand us. But when you go further far to Japan, to Australia, that difference is not that pronounced. Sorry, Josh.

Now the funding advantage is something that you want to keep. And one of the reason why we want to keep a very high credit rating is something that you'll lose within seconds if you do the wrong things. So -- which is one of the reasons why we have been very cautious over the years, and we'll continue to do it that way. What we have presented, and thank you for joining, it's a lot -- good -- hopefully, overview and update for all of you, and then we'll see you all on the 31st of May when we announce final results. But I do want to just finish with one point. I mentioned a few points about how we want to grow and what differentiates us. The other thing that is important is how we actually want to make sure that whatever knowledge and skills and experience that we have can be transferred across geography. So one of the things that we have done is really upgrading the leadership team and hiring some of the best people. And so you've seen, well, on stage with Greg joining us from Australia. He has been, since last year, COO for International. From 1st of April, he will become COO, excluding China. And when he manages to speak Chinese, then we will let him manage China as well. So the COO, excluding Mainland China, but including Hong Kong from 1st of April. Kok Siong will continue to lead the China business, working together with [indiscernible] will obviously bring to us years of experience in, especially, retail asset management in Mainland China. And then Ronald focusing on some of the transformational transactions that we are going to work on in the coming years, in terms of -- whether it's corporate finance, platform investments, et cetera. Kenny, who is not with us today, busy talking to potential capital partners. I have traveled with him to the U.S., to Middle East to other bases to talk to various parties who will invest together with us. And those dialogue will continue, and we'll report as soon as we can on some of these transactions. Gary has transferred back to Hong Kong. He was the person leading our investment in China, doing asset management in China. He is now Head of Leasing for Hong Kong. We see Hong Kong continue to be extremely important to us. It is the largest part of our portfolio. So putting someone senior who started his career in Hong Kong, spend a lot of time in China, coming back to Hong Kong and in fact, visited Singapore as well. One of the things that Greg will do more of is how actually retail tenants can actually, from a different country, transfer to other parts of our portfolio. We've already brought some tenants to visit malls here in Singapore. We brought some Hong Kong tenants to China, Mainland China, et cetera. And so I think that is, again, a synergy as we have this footprint. So thank you very much. I hope this is informative. And as we move forward, just rest assured, we'll continue to focus on delivering outstanding value to all our stakeholders and a steady return through increasing distribution. Thank you.