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

We are pleased to have our Group CEO, Mr. George Hongchoy; CFO, Mr. Kok Siong Ng; COO, Mr. Greg Chubb; and CCDO, Mr. Ronald Tham, to be here with us to provide this update on our business. We'll begin with company highlights, then operational update, followed by financial and outlook. Lastly, we will have our Q&A session. Now I would like to pass the floor to our Group CEO. George, please.

Thank you, Christy. We appreciate everyone joining us today for what will be the last time we're doing the pre-blackout briefing. And going forward, we'll be shifting to a quarterly update instead. And further information will be shared at the end of this presentation about what we have planned and the reasons that we will be making this adjustment. But let me start with some highlights and a reminder of the uncertainty that we are dealing with as we operate and the strategy that we have been pursuing these past years. Let me give an overarching summary of the big picture for Link. We continue to operate in a highly uncertain times for higher for longer interest rates and uncertainty around how the global economy will fare in the face of various challenges. In the geographies where Link operates, we are facing challenges in Hong Kong where our retail tenants are facing significant pressure in terms of rising costs, sales leakage through online and cross-border travel. And this, together with the continued challenge in reenergizing the economy in Mainland China, is leading to significant pressure on rental reversion. At this time, we're glad that we have started our diversification effort when we did -- as the picture in Singapore and Australia is more positive. Looking ahead, we remain committed to our Link 3.0 strategy, which builds on our capabilities and track record achieved over almost 2 decades, to further strengthen Link REIT portfolio and to develop our real estate investment management business under Link. Just to provide a bit more detail on the global and local context for our business in the year ahead, globally, we anticipate the growth outlook to remain mixed due to factors, including the U.S. policy environment, continued challenge with Mainland China economy and unclear interest rate cut timing. These factors combined together with evolving technology and changing consumer behaviors create an uncertain global backdrop and demand that we act with caution. In our key markets, Hong Kong and Mainland China, the outlook is less favorable. However, monetary policy loosening and the focus on boosting domestic demand are expected to stimulate economic activity, though we expect it will take some time before things will improve. Meanwhile, Singapore and Australia offer a more positive outlook with robust economic indicators and consumption support. Despite the prevailing macro conditions, our portfolio has continued to endure. A quick reminder of the shape of our business and our diversification strategy. Currently, our Link REIT portfolio comprises 74% Hong Kong, 15% Mainland China and 11% international, which includes Australia, Singapore and the U.K. As we diversify and grow through Link 3.0, we are focused on optimizing our portfolio by exploring opportunities in the APAC region, including Australia, Japan and Singapore. And at the same time, we are also committed to maintain a high bar for rights acquisitions and inorganic M&A. In line with our strategy to grow our real estate investment management, we officially launched Link Real Estate Partners, a private fund management business line in February, and Ronald will provide further details on this later. Let me now pass the time to Greg to share more on the operational update.

Thanks, George, and good afternoon, everyone. And I'll start this afternoon with a review of our overall portfolio occupancies. Our portfolio has demonstrated solid performance with occupancy levels remaining high and our international retail assets approaching nearly full occupancy. In Hong Kong, the resilience of our nondiscretionary retail portfolio is reflected with high occupancy and showcasing stability and strength in the underlying markets. In Mainland China, we're pleased to report healthy occupancy rates across various asset types, underscoring the effectiveness of our focused leasing initiatives. In the international markets, our retail assets in Australia and Singapore achieved nearly full occupancy with robust ongoing leasing demand, while ongoing challenges are noted in the Australian office market. Now let's look at Hong Kong in some more detail and our retail portfolio where the occupancy rate has remained robust at 97.1% as of December, highlighting the resilience and stability of our essential needs-focused trade mix even amidst challenging market conditions. Rental reversions for the period experienced negative low single digit for the first 9 months of the period, which also impacted the unit rent per square foot, bringing it to $64.10. Despite tenant sales being affected by changing consumption patterns among visitors and residents, which recorded a decline of 3.3% year-on-year for the first 9 months, this was a narrower drop compared to the broader Hong Kong market at negative 7.6%. Occupancy costs have slightly come down compared to the first half of the year, indicating potential stabilization of trading conditions. Then when we break it down by trade mix, both food and beverage and general retail segments outperformed the Hong Kong market, while supermarket and foodstuff saw some weaker performance for the period. In terms of the Hong Kong car park and related businesses, we observed moderate growth in parking revenues for the first 9 months of the year. While parking ticket sales experienced a decline, this was balanced out by increases to parking tariffs. We aim to stay responsive to market trends, creating plans to enhance performance and rolling out our new car park management system and ongoing enhancements to that program. Now let's shift to Mainland China where, as previously mentioned, occupancy was healthy across our various asset types. Our retail team on the ground in China has been able to manage tenant remixing very effectively in order to secure more productive and innovative operators. We saw softer demand in specific trades such as cosmetics and jewelry, while sporting goods, in particular, and retailers featuring intellectual property designs are doing really well. As for office, our occupancy exceeded the district average despite new supply. We will continue to upgrade our facilities to enhance our customer satisfaction and also attract new tenants by carrying out fit-out works on vacant units to improve occupancy. The logistics occupancy in our portfolio remained healthy at over 96%, and demand for our facilities are predominantly driven by e-commerce and third-party logistics operators. And turning our attention to our international business, which consists of retail and offices located predominantly in Australia and Singapore. At our Australian retail assets located in the Sydney CBD, positive leasing momentum continues from tenant demand and now sees occupancy of 99.5%. This was supported by our active ongoing leasing efforts, which has not only introduced the curation of new brands, but also has allowed for continued upgrading of retail offerings. Out of the trade categories, in particular, food and beverage and apparel performed well across the 3 properties. Now moving on to Singapore where our malls of Jurong Point and Thomson Plaza performed very strongly, achieving occupancies now at 100%, with ongoing positive leasing reversions. The ongoing enrichment of our tenant variety has been boosted through strong leasing interest from overseas retailers, including those from Mainland China and, in particular, food and beverage brands. F&B and beauty and wellness categories were the main drivers of tenant sales growth over the period. And finally for me on office, we note the further bifurcation in the Sydney office market with the flight to quality trend continuing. We've made some good progress, however, through the backfilling of vacant tenancies, in particular, at 347 Kent Street in Sydney, and our retention rate on renewals remained strong. Under current market conditions, it's essential for us to continue to enhance the appeal of our office spaces through placemaking and the provision of amenities. And now I'll pass over to K.S. Thank you.

Thank you, Greg. Good afternoon to everyone. Moving on to capital management. Our robust financial position is well supported by a healthy balance sheet, as shown by the key metrics here. As of 30th September 2024, net gearing remained low at 20.6%, while the average borrowing cost remained competitive at 3.69%. Our EBITDA interest coverage stood at 4.8x. Fixed debt ratio in the upper range of 50% to 70% is in anticipation of more gradual and shallow rate cuts. Supported by our A ratings from all 3 credit agencies, we have the stability and credibility to attract investors as well as secure favorable terms for future funding needs. Between 9 December 2024 and 7 January 2025, we deployed over HKD 500 million to buy back approximately 17 million units. Overall, our robust financial position will enable us to effectively navigate the uncertainties in valuations. The disciplined approach to debt management with diversified sources of capital across debt instruments has helped us to achieve a competitive average borrowing cost as well as robust credit ratings. Our financial stability is reinforced through FX management, which includes extensive hedging of non-Hong Kong dollar distributable income and the currency risk of overseas assets, alongside capitalizing on lower RMB interest rates. After repaying some debt, the debt balance as of end September 2024 was reduced to HKD 55.6 billion, and we have been proactively managing our maturity profile. I now pass the time to Ronald to cover other updates. Thank you.

Thank you, K.S. Good afternoon, everyone. We have made significant progress in developing our real estate investment management business through the launch of our new business line, Link Real Estate Partners, which focuses on serving third-party private institutional capital. It will leverage on Link's robust operational skills, deep knowledge and scale in Asia and provide track record -- and proven track record to identify and execute compelling real estate investment strategies and match them with capital across the risk spectrum. It will also help accelerate our diversification and create new income from co-investing and managing assets for new partners. We have spent much of 2024 assembling a fund management team led by John Saunders, our Group Chief Investment Officer, along with several new hires, including Head of Australia Investments, Head of Research, Portfolio Director and a Product Strategist. While we are unable to disclose too many details at this juncture, we expect 2025 to be busy for both fundraising and investments. Before we move on to Q&A session, I would like to discuss our new approach to providing operational updates in between our interim and final results. We always strive to continually improve our engagement with investors and as part of that, to provide robust, transparent information on a timely manner. Starting with the operational update, after our next final results, we will be able to provide our Q1 and Q3 operational updates approximately 1.5 months earlier than we currently do as we will transition to providing quarterly operational update announcements instead of pre-blackout briefings. We plan to provide Q1 update in February and Q3 in August. This change, made after feedback from the investment community, will allow us more time to engage with investors and analysts prior to any blackout period as the timing of our quarterly update and results will be distributed more evenly throughout the year. To facilitate this, we will upload the quarterly operational update to the stock exchange and our corporate website, ensuring timely access to essential information. This will enable stakeholders to access our performance more effectively and make well-informed investment decisions. I'll now pass over to Christy for the Q&A session.

Thank you, Ronald. So let's move on to the floor of our Q&A. [Operator Instructions]

We got a few questions already. Maybe we can start now. So quite some questions on the retail sales in Hong Kong. So let's start with [ Cindy ] from Citi. So how is the retail sales trend in the first Q of calendar year 2025? Any green shoots or early signs of recovery?

I'll take that question. Thank you, Cindy. So just looking at the, I guess, the period up to December, we've seen an improvement, and we've just spoken to a negative 3.3% total sales position. And just to remind you that at the end of the first quarter of the financial year, that was negative 5.9%. And then at the first half, it was negative 4.3%. So a gradual improvement over the period. And we've seen that across the 3 major categories that we report to. So as at December, food and beverage was flat year-on-year, and that was an improvement from negative 1.5% for the first quarter. Supermarkets, we're seeing some gradual improvement, and I think that's largely off a lower base. So supermarkets were negative 5.9% in the first quarter, negative 5.2% at the first half and negative 3.9% at Q3, and general retail has also improved significantly. So as we move into the last quarter of this financial year, we are seeing that trend continuing. But I will say that there is a lag from this improvement in sales and flowing through into rental reversions. The other associated metric to the sales is our footfall, which we've seen ongoing improvement over the last few months. And in particular, we've seen more of a dramatic improvement on weekend footfall, and that, I think, is associated with some of the stabilization of the northbound linkage. So some green shoots, but still some way to go.

Thank you, Greg. So another question is also from Cindy. Will you consider any disposal to recycle capital given higher-for-longer rate outlook?

I'll take that. So obviously, we always look at optimizing our portfolio, and we're always constantly reviewing acquisitions as well as disposals. And so, yes, if there is a right deal in the market, if it's the right price, we will consider recycling. I think right now, we're still looking for those opportunities, and we're constantly assessing those recycle opportunities.

Thanks, Ronald. So next question is from Sam of Jefferies. Could you share a bit more color on China side, sales and reversion?

Yes. So China from a retail perspective -- Mainland China from a retail perspective is stabilizing. Our biggest challenge at the moment is Beijing, in particular, our Zhongguancun asset where we're doing some ongoing asset enhancement and tenant remixing. When we reported the first half result, we spoke to the fact that it was a negative reversion for the Mainland business. But if you excluded Zhongguancun, it would be slightly positive. That is still the case. But pleasingly, there's quite a lot of tenant activity in the Mainland market. So the markets of Shanghai, Guangzhou and Shenzhen for us continue to be pretty stable. Beijing is where a lot of our focus is. And the slight dip in occupancy from the first half to this reporting period, we think, will show signs of improvement as we get to the end of this full financial year. So probably the most pleasing thing with regards to Mainland retail is very good underlying tenant activity and tenant demand, but that is offset somewhat by significant increases of supply, new supply in markets like Beijing and Guangzhou in particular.

And then another question is on China business as well. Regarding Guangzhou, Tianhe, the second phase of asset enhancement, how is progress now? And then when will we estimate to be fully opened after the asset enhancement?

Yes. So Tianhe, we're progressing well, building off the success that we had for the first phase. I was on site a few weeks ago, and progress is good. Leasing momentum is fairly strong. So as we move through into the new financial year, we're fairly confident that we'll have the lion's share of that project completed. And we're very satisfied with the ongoing leasing demand for that property. It's a very well-positioned asset with a very strong catchment. But again, the major issue with Guangzhou that we're facing into is increased competition. So getting well ahead of that new competition is important as we complete this project.

Thank you. And then the next question is from Principal Asset Management, [ WH ]. Can we please get some idea on the current reversion trend? And should we be raising for DPU contractions in second half?

So just the general trend on leasing reversion for Hong Kong, as we mentioned during the prepared remarks, we have seen a deterioration from the first half to the third quarter. So it's very, very slightly negative leasing reversion for Hong Kong. And as we've discussed many times, the composition of activity in any given year usually tapers off in the back half of the financial year. So we reported plus 0.7% at the first half. As I've just said, very, very low single-digit reversion as of December. And that trend will continue through until the end of this financial year. And I think that the concept of negative reversion is something that we should be prepared for, for this new financial year that we'll be embarking on shortly, but very moderate negative reversion.

Thank you. And the next question is on the fund business from Jefferies. Sam asked, any update on capital raising for the fund business?

So I'm afraid we can't really say much about that at this moment. We understand we're under regulatory restrictions to say anything about the fundraising.

And then the next question is from Goldman, Simon. To the extent you can, can you provide us with some targets or milestones you are setting out for your Link Real Estate Partners fund business?

I'll say that the answer is the same.

Okay. And then I think the next one will be from UBS, Mark Leung. What is the rental reversion guidance for next year?

Yes. So I think we touched on that in the previous question. So we're anticipating slightly negative reversion for Hong Kong, fairly flat for Mainland and positive for Singapore and Australia. The main focus I will point to, though, and we've said it on numerous occasions now, is preserving occupancy across our portfolios. And I think the numbers that we've spoken to again today illustrate that. What we are experiencing is that the reversion on new deals or replacement tenants is significantly worse than the reversion for us in retaining tenants. Pleasingly, our reversion -- our retention rate, I should say, remains at our long-term averages in the high 70% range as of December. So a big part of our strategy is retaining our existing tenants. We do an analysis that we call right tenant, right location. And a large proportion of our portfolio sees us having pleasingly the right tenants in the right locations. So we'll be working with our tenants to retain them. Another strategy that we're working through is endeavoring for our tenants to invest in upgrading their facilities. And if that means that we forego some reversion in return for some capital investment by those retailers to improve their environments, that's something we'll be treating on a case-by-case situation as well. So a long-winded answer to a very simple question. But yes, there is some pressure on reversion, but we anticipate that, that will be offset by preserving occupancy here in Hong Kong.

Next question will be from JPMorgan, Karl. Any guidance on how average financing cost will be in second half of the financial year 2025? And will it further go down from the average 3.69% or stable?

I think the third option that you didn't mention is, will it go up marginally? And I think, Karl, the answer is yes. We have fixed 66.4%. So there's about 1/3 that's not fixed. And if you look at our maturity profile, this coming financial year, there's about $12 billion of refinancing. Clearly, today, HIBOR is already at 3.8%, 3.9% with our ABC at 3.7%. It's unlikely that you can beat that because a lot of these were hedged when rates were much lower and swaps were much cheaper. So we do expect borrowing costs to inch up marginally this coming year.

Thank you. And next question is also from Karl. Any color on when the stock may become eligible for Stock Connect?

I think when you look at the announcements on various topics around Stock Connect, there has been a lot of discussion around the Stock Connect issues. Since February this year, there's already a conclusion to implement it as soon as possible. And our sense is, hopefully, somewhere next month, we get more announcement on how fast CSRC is willing to make clearer announcement. But my sense is, so far, the regulators have been very supportive and progressively has been trying to accelerate the implementation.

And the investment conference happening in Hong Kong this week, the Financial Secretary also say the same that this is coming. It's a matter of when, not if. And so obviously, we're still waiting for the time, but it should do more.

And just to add to that, we've been doing quite a bit of IR on China, and we know there's demand, and we are ready to capture those when it comes.

Thank you. Next question is from BOCOM, Philip. Will we consider to increase borrowing from Mainland China to lower average financing costs? And what's the financing cost outlook for the FY '25 and FY '26?

So I think I'll take the first question. The second, I just answered, it will be the same. There will be a marginally higher financing cost. On taking advantage of the RMB lower financing cost, in reality, what we are doing is actually to use RMB borrowing to hedge against the RMB assets, and there's no intention to over-hedge. There's no part of our business to take hedging risk. So we will continue to hedge, and each of these hedges does have their maturity profile. And as it expire, we will continue to hedge. And so far, hedging RMB, we have paid a premium to help reduce our financing cost. And today, we are already in the -- almost fully hedged against our RMB. So it's just waiting for hedges to expire and then we will renew.

Thank you, K.S. So there are actually a few questions regarding the M&A or acquisition. So in general, they are asking how the progress is and then how the M&A environment in Asia, whether it's for the fund or for Link.

I think I'll just answer that in general terms. I think in certain markets, in particular, Australia, we've seen price correction, and there's been a bit more activity there where the buyer and seller's bid-ask spread has narrowed. And we've also seen funding costs starting to drop in Australia. So that market remains interesting for us, and we still spend quite a bit of time looking at that market. And so we will continue to look at that. The other markets, Singapore is still -- the pricing is still pretty tight, so is Japan. And I guess our focus is probably at the moment in Australia for M&A activity.

Thank you. And then next question is back to Mainland China operations. So the question is about CentralWalk. So how the sales is doing? Is it bypass exceeds the level pre-COVID already?

So sales in general and footfall in general at CentralWalk is progressing very, very well and our best performer across Mainland. It's probably our best performer across all of our shopping centers. We are also in the process of some fairly significant tenant optimization work there. So we're seeing ongoing better-quality demand from retailers for CentralWalk. So a lot of the strategies that we've executed on over the last few years are really starting to pay some significant dividends. So good continued sales growth, good continued NPI growth. And now we're focused on really managing our costs, not just on a project like CentralWalk, but doing what we can to preserve -- or at least enhance, at least preserve our operating margins on our portfolio of assets.

Thank you, Greg. So a bit more questions on the operations. So why the occupancy drop Q-on-Q for Hong Kong and China?

It's a phasing thing. So as we gear up to the end of the year, we anticipate that those occupancy numbers will get back to what they were around the half year. So it's a phasing and timing thing more than anything else.

And then another question from Sam again. So what it takes for Hong Kong reversion to return to positive in your view: weaker dollar or Mainland visitors?

We're not really impacted by Mainland visitors. We're obviously servicing Hong Kong as for their daily needs. I think the main issue that we need to see is the stabilization and growth in margin for our retailers. So their operating margins have been under pressure with increased costs, and then that puts pressure on our negotiations with them. So I think the main thing that we need is continued growth in sales, which we're starting to see the benefit of. Our purpose is to provide footfall for our retailers so they can capitalize and execute that into sales and then hopefully starting to see some improvement in the bottom line for the retailers, not just the top line, and that then will allow us to see some growth in our revenues. I will say, though, that our portfolio occupancy cost is stable at 13.1%. Our sales densities are very, very strong. So we're facing into what is a very challenging market in a very strong position. And our continued focus on the nondiscretionary trades, particularly food and beverage, places us in a reasonably strong position in relative terms.

And then another question is regarding whether our company will consider to help bringing in some brands from Mainland China into Hong Kong and so as to help the consumption in Hong Kong.

Sure. Absolutely, and we are seeing that. So pleasingly, of the new leasing transactions that we do, approximately 1/3 of those are to retailers new to the Link portfolio. So we're bringing in about 100, 150 new retailers to our portfolio every year. We're seeing an increasing number of Mainland businesses, predominantly food and beverage. The move into Hong Kong by Luckin Coffee, for example, has been well documented. We've secured a number of locations with them. The first of those is opened at Tseung Kwan O and is performing really, really well. So yes, we're hopeful that our portfolio is incredibly well suited to support the introduction of new Mainland brands. The other thing I will say is that we've seen a significant increase of demand from Mainland retailers to our Singapore portfolio as well. So I think a lot of the very good innovation and market positioning from Mainland retailers is seeing them spread their wings more broadly across Asia Pacific. And we're well positioned to be able to support them to grow in our portfolios, whether it be in Mainland, Hong Kong, Singapore or even Australia over time. So that's a big part of our strategy is to harness the strength of our portfolio and grow our retailers as they look to expand across the region.

Thank you. Another question is regarding the recent public housing rent increase. What will be the impact on Link?

Yes. I mean I think there's a negative there. There's also a positive in the increase to the minimum wage, again, more recently at 5.25%. So again, we're not servicing the discretionary spending patterns of our population. We're servicing their daily needs. So I don't think that, that would be a significant impact to us.

I think if we look at the minimum wage going up, which will increase our costs for those, it will obviously help us to run the shopping center, especially the frontline cleaners, fuel and such. And as Greg said, they will typically spend at our shopping center. So that increase in income will help our tenants' sales. The rental increase, for those who may not know, most of the public housing rental for each unit is less than HKD 1,000, a few hundred Hong Kong dollars a month. For those who park their cars at our own carparks, we'll probably be charging $2,000-odd for carparks fixed. So I think on relative terms, you can see that the amount of the rents that they are paying, albeit to a different -- to that segment of the community, it may have a certain impact. But to a large extent, it's still affordable, and the impact on the spending, I think, will be offset by the minimum wage increase.

Thank you, George. So due to the time limit, we have the last 2 questions. One is from UBS. What is the short-term lease as a percentage of area in Hong Kong as of December? And should we expect that to further increase?

It's actually fairly stable. So it's an insignificant number in terms of our overall portfolio. And I can also say that the number of tenants on holdover has reduced quite significantly from the first half to this period. So for the most part, leasing transactions in Hong Kong are on a normalized basis of a 3-year cycle, and we don't see that short-term or holdover leases being an issue to call out.

I think we have in the past a few times announcing results for interim and final results, we talk about how many new tenants that we have signed. And well, not every center have a queue, but the ability for our colleague to replace tenants as some need to vacate for various reasons has allowed us to keep that occupancy strong, albeit obviously sometimes we do need to subsidize some new tenants, especially we want to change the mix, but the strong occupancy has continued to help.

Thank you. So last question is from [ Manuel ]. Despite the slight negative rental reversions, can we keep the overall revenue flattish?

I think there's a lag effect. And we have only roughly 1/3 of the lease expiring each year. So if you look at a downtrend, it will take several years to hit our P&L. And certainly, the last year, this year has been challenging. We expect 2025, '26 financial year also will be challenging in the discussion with our tenants. Greg mentioned that some of that is the retail market is stabilizing, but I think the positive impact will take a little bit of time to come back into our portfolio. Again, because it's 1/3 expiring each year, even the upside will take a little bit of time to run in. So I think we'll see probably some challenge to our top line as a result of the activities that -- leasing activities that we've done from about calendar year '24 to about late '25, '26 with like an impact on both the downside and the future upside.

So here comes the end of our update. So thanks for joining us today and look forward to seeing you again in our final results in May. Thank you.

Thank you.

Thank you.