Swire Properties Limited (1972) Earnings Call Transcript & Summary

Good evening. Welcome to the live webcast of Swire Properties' Final Results and Analyst Briefing. Today's briefing will be hosted by Mr. Guy Bradley, Chief Executive of Swire Properties; and Ms. Fanny Lung, Finance Director of Swire Properties. Guy and Fanny will take us through the final results, after which we will hold the Q&A session. [Operator Instructions] Before we start the presentation, let's have a look at the video we prepared for this occasion, which highlights the key developments and achievements of the company last year. [Presentation]

I hope you enjoyed the video. Now I'd like to invite Guy and Fanny to begin the presentation.

Good evening, and thank you for joining Fanny and myself at the 2019 Swire Properties' Final Results Analyst Briefing. It's been a testing year in Hong Kong, as we all know. So I'm very happy to report that the underlying profit more than doubled in 2019 driven by the disposal gains and growth in recurring profit from property investment. At the same time, we're able to grow dividends by 5%, and we're very -- leaving us very well placed to weather the headwinds and to benefit from improved conditions in the future with a strong balance sheet, a balanced portfolio and a healthy project pipeline. Some of the key developments that we saw in 2019 relate in April and June to the 2 divestments that I mentioned earlier, raising some HKD 17.4 billion. The other key highlights on this time line here I think that I'd like you to draw your attention to is the fact that we've now started replenishing our land bank, and there are 4 residential projects that we either began or moved forward with last year, which made the trading side of the business very exciting going forward. Just turning now to the investment portfolio. And the biggest part of our business, Hong Kong office, pleased to report that in 2019, we were able to achieve double-digit reversions. We're also, as you could see on the chart, are very close to full occupancy. In terms of valuation, we're able to grow the portfolio by a small amount, 1%, notwithstanding the disposal of 625 King's Road in the same year. And lastly, I'd just like to draw attention to One Taikoo Place, which was an absolute game changer in 2019 for our Hong Kong office business in that it established Taikoo Place as the premier business district. So we're very excited to be continuing now with the construction of Two Taikoo Place, which is another 1 million square feet, which represents part 2 in this exciting transformation and decentralization of Hong Kong's office market. Turning now to Hong Kong retail. Again, you can see that we're very pleased to maintain very high levels of occupancy in our 3 centers in what was an extremely tough and challenging, if not unprecedented, retail environment last year. We took very quick action to support our tenant base, something that we've done before and something that we will continue to do in terms of working with long-term partners. But you can also see from the chart here that we think very long term about Hong Kong retail. We're very positive about the long-term prospects, so much so that we continue to reinvest in our assets here. You can see, for example, in Pacific Place, we continue to launch new stores. We reconfigured Harvey Nichols and reopened in its new format in late September '19 and some very exciting trade mix changes taking place in Pacific Place on an ongoing basis. We also hope to be -- later this year, debuting the new ice rink at Cityplaza. And meanwhile, the extension that we finished in August 2019 of Citygate goes from strength to strength. If we look at the balance of the lease expiries in the Hong Kong portfolio, as always, we try to maintain a good balance and a strong and diverse tenant base. You can see here, if I just draw your attention to the Hong Kong office expiry profile this year, we're expecting just under 15% of expiries and about the same next year. So it's not a huge amount of expiries, and this is something that we carefully manage over time. At the same time, we continue to invest in Hong Kong. I mean our belief in Hong Kong, as our home base, is very, very strong and positive, and we're extremely focused on building and developing around the 2 existing clusters of assets that we have, both in Pacific Place and in Taikoo Place. In fact, I mentioned Two Taikoo Place already. There's also scale additions to the Pacific Place family with the development that we have down on Queens Road East. And also, you can see here that subject to compulsory sale, we hope to add another 779,000 square feet of office GFA to the Taikoo Place portfolio going forward. Turning now to Mainland China, which is making an increasing contribution to our business. You can see that the income that we're getting on an attributable basis from Mainland China has more than doubled since 2013, which is an incredibly positive story for us. Just specifically looking at last year, in renminbi terms, the income was about 12% up on prior year, which was a stellar year for China, and we are very proud of the contribution that Mainland China is making to our retail business. Again, very similar to Hong Kong. We try to maintain a very balanced lease expiry profile. It's obviously a bit more mature in Hong Kong. So we've had longer to do that, but you can still see it looks reasonably healthy in terms of the expiries this year and next year. So we're very confident about the business that we have there in China. In terms of the China retail, just a little bit more detail. You can see at all 5 of our centers, we had double-digit sales growth, which is an absolutely fantastic achievement. At the same time, we're nearly close or at full occupancy in all of those centers. So the story continues, and it's a very good story. And so we want to add to the story. And this chart here shows that the 2 additions that we're going to open in 2020, namely Taikoo Li Sanlitun West, which is about 250,000 square feet as an extension on Taikoo Li Sanlitun and Taikoo Li Qiantan, which is the sixth big investment we've made in China, opening in Shanghai, hopefully, finishing by the end of this year and opening in early 2021. That's a 50% business that -- joint venture that we have with Lujiazui that will add another 1.25 million square feet of GFA on a -- for retail, and we're very excited by the prospects that it has in a location that's now being called the New Bund. This is the first time I believe that we've separated out Mainland China office for you. So you can get a little bit more color on how that looks. You can see both in Guangzhou, Taikoo Hui and in Shanghai, Taikoo Hui, we're close to full occupancy in office. INDIGO up in Beijing, 500,000 square feet building we have there called INDIGO ONE. It's a little bit softer, reflecting the conditions of the Beijing market. Meanwhile, over on the other side of the world, in Miami, you can see that the retail business continues to look very satisfactory in what is an extremely tough and challenging market. But on the office side, it's a very strong market for landlords, and we're pleased to report that we're close to 100% occupied. Just turning to trading. I mentioned at the start of the briefing that we got our land bank figured out, and we were starting to sort of replenish after having had a very good run in the mid-levels in the -- about 5 or 6 years ago. And these are the 4 projects that I mentioned at the start, which threatened to add about 1 million square feet of residential trading, in Hong Kong, over the next few years, and this is very exciting for Swire Properties. As you know, most of you, that we do have a very strong and admired residential brand, and this is a testament to the effort that we put in, in the last year or 2 to try to make some of these projects happen so that we can take advantage of that strong brand. That was in Hong Kong. We're also pleased to say that the projects in Miami that we've been selling Reach and Rise for -- since 2014 are nearly fully sold, with 93% sold in Reach and 72% sold in Rise. So that project is well on its way. Very excited to be launching our first project in Singapore, which is called EDEN, and it happens to be the first project that Thomas Heatherwick and his studio have completed on the residential side worldwide. It's a wonderful product. There's 20 units, 1 unit per floor. I've been down there a few times. It's -- I'm very excited by the prospects of it, and it's certainly game-changing in terms of the Singapore residential market. So we're really watching that carefully. At the same time, we've got our first project in Jakarta -- in South Jakarta, which we'll be hoping to tell you more details about later in the year. It's not yet launched, but we finished the demolition, and we're hoping to move into foundation anytime soon. Again, it's a joint venture, and it's going to hopefully be a product that we'll be very proud of. Just turning to hotels. It's the -- 2019 was a year of mixed results. On the managed hotel basis, the operating profit was a reasonably strong HKD 168 million. It was 16% lower than prior year. But that was due very much in part to the impact that we had in Hong Kong from the social unrest, which, of course, doesn't help the hospitality business. The good news is that also we saw last year improved results in Shanghai and Miami. And those 2 hotels, reasonably new openings, again, from strength to strength, and we're very proud about what is The Middle House in Shanghai and East in Miami, 2 great products. If you haven't been there already, do go and stay. On the nonmanaged front, part of the Citygate development, of which we're a 20% consortium member, we're opening a new hotel there that's called the Silveri, Hong Kong. It's part of the MGallery brand, and that will be a 206 room hotel, which opens in Tung Chung later in the first half of this year. Finally, on hotels, I'd just like to say that we're very proud of the 7 hotels that we've got. The 2 brands, The House Collective and the EAST brand of hotels, basically from a standing start almost just over 10 years ago, achieved really great things. And the strategy on the hotel side of the business is to extend those 2 brands to other cities in Asia Pacific on an operating basis only. And so we've got a team that are trolling some of the best cities we can find in Asia to try and roll out houses and EAST in -- as fast as we possibly can. At this point, I'm just going to hand over to Fanny, who's going to take you through the financial highlights in a little bit more detail. Fanny?

Thank you, Guy. We have a very strong performance. Total underlying profit for 2019 was up 138% from that of 2018 to reach a record high of $24.13 billion. The increase mainly reflected substantial profit arising from the sale of interest in our investment properties, including our entire 100% interest in Cityplaza Three and Four, and our entire 50% interest in 625 King's Road. Recurring underlying profit also increased by 1% in 2019, primarily reflecting the higher underlying profit from our investment property portfolio in PRC. Our USA portfolio and Hong Kong office portfolio also did well. There was underlying loss from our trading properties in 2019 of $18 million related to the residential units. In the U.S.A. partly offset by profits from the sale of CapEx at the last year of development in Hong Kong. And from the share of profit from the sale of offices and car parks at Sino-Ocean Taikoo Li. There was increased underlying loss from hotels in 2019 as compared to 2018. But in fact, our hotel portfolio did well in the first half, generating positive underlying profit in the first half of 2019. As Guy mentioned it about, the impact of the social unrest made our second half performance, particularly on the Hong Kong hotel portfolio, deteriorated quite a lot. But on the other hand, our PRC and U.S.A. hotel portfolio improved. On the investment property portfolio, we recorded a 2% increase in attributable gross rental income. Positive growth was recorded across all major portfolios, except Hong Kong retail. Despite the rental contribution loss from the divestment, Hong Kong office portfolio recorded a 4% growth in GRI. The strong performance was supported by the positive rental reversion, very firm occupancy and a full year rental income contribution from One Taikoo Place. Our Hong Kong retail portfolio recorded a 10% drop in the GRI. But looking at the first half result of 2019, our Hong Kong retail portfolio did quite well, recorded 3% up in the GRI. The social unrest in the second half of 2019 had resulted in a significant reduction in the sales as well as the turnover rents and also the needs to provide temporary rental subsidies to help our tenants' partners to keep their business afloat. As a result of that, our Hong Kong retail portfolio GRI reduced. But excluding the impact of the temporary rental subsidies, the overall GRI reduction was very slightly reduced by 1%. The good news is we keep our occupancy very full during 2019. The story in PRC was a complete opposite. As mentioned by Guy, all our 5 portfolios recorded a tremendous growth in 2019. Overall, PRC retail portfolio recorded a positive growth of GRI at 8%, supported by the strong positive rental reversions, firm occupancy and higher retail sales all across our 5 existing projects. PRC office portfolio also got a stable increase with a 3% increase in the GRI. Miami continued to improve their sales performance in the retail portfolio, and contributed 8% growth in the GRI in 2019. Despite the near-term uncertain business outlook, we managed to deliver dividend growth. The total dividend growth in 2019 as compared to that of 2018 was 5%. Over the past 5 years, the cumulative annual growth rate was 6%. So we are on track to deliver according to our dividend policy, to deliver a sustainable growth in dividends and to pay out approximately half of our underlying profits over time. Going to the balance sheet. The biggest item is, of course, the investment properties value. Total value of the investment properties increased by 1%, and these waterfall charts shows the reason for the key movement. The first item is in relation to the fair value gains for the investment property portfolio. There was a $3.7 billion increase in the fair value gains. The background for this particular gain was, there was no change in our cap rates and the increase in the fair value gains mainly due to the rental increase in our Hong Kong office and our PRC portfolio, which was partly offset by our rental decrease in the Hong Kong retail portfolio. The other movement are quite self-explanatory. Looking at this slide, you can see that we have a very strong balance sheet. Total net debt reduced from $29.9 billion at the end of 2018 to $15.3 billion at the end of 2019. This is primarily due to the significant net proceeds of disposal of our investment properties. This brings the 2019 year-end gearing to a record low of 5.3%. But if you look at the table on the right-hand side, you may notice that our gearing and our net debt continued to reduce over the past 2 years, particularly. That was the result of our divestment program in the past 2 years. In total, we generated $27.9 billion proceeds from the divestment of our noncore assets over the past 2 years. With this very strong balance sheet, we can support the -- all the capital commitment of the company or the development pipeline that Guy mentioned about in our trading portfolio and also the potential new investment, then they come into our way in the future. We also got a very healthy debt maturity profile and liquidity position. The table on the left-hand side is the maturity profile of our available committed facilities. You can see that the maturity profile is very widely spread out over the next 9 years, which can mitigate the refinancing risk of our portfolio. Looking at the table on the right hand -- middle part of the slide, you may notice that the total cash that we have at the end of 2019 was about $15 billion. Together with the undrawn committed facilities of $10 billion the total committed liquidity buffer that we have amounted to $25 billion at the end of 2019. I think this slide is very similar to the capital commitments' slide that we show in the previous time. The position actually doesn't change too much. As at the year-end of 2019, we still see a $16.6 billion capital commitment outstanding, of which Hong Kong portfolio had an outstanding capital commitment of $14.7 billion, which mainly included Two Taikoo Place, Zung Fu and Wah Ha as well as the Queensway East development. For the Mainland China portfolio, outstanding capital commitment was 1.9 billion, mainly included the Qiantan Salintun West and the Taikoo Hui CapEx. I have to mention that these particular capital commitments schedule does not include the trading properties development cost, which was mentioned in Slide 17. With these, I finished my session and pass it back to Guy.

Thank you, Fanny. Just before I talk about prospects for 2020, I'd just like to spend a couple of minutes on sustainable development or otherwise known as ESG, which is a subject very close to our hearts, and hopefully yours. First thing I'd like to say is that our investments in sustainable development do continue to flourish across the entire portfolio. And I'm very happy to report that we're now ranked #1 in Asia and #8 globally, according to the DJSI World, that's a very, very pleasing achievement that I'm extremely proud of. On the green building performance side, 100% of our new projects under development have achieved the highest certification ratings in 2019, and 97% of our existing developments are certified green buildings, of which 84% achieved the highest ratings. So there's some really stellar performance going on both from a LEED certification and on wellness, which, I think, is the future way to go. In terms of long-term decarbonization. On energy management, we're happy to see as shown by the graph on the left that we continue to decouple our GFA growth with absolute energy consumption in Hong Kong, which is why these lines continue to diverge. You'll have seen these in previous years, but the story continues and it's a good one. Just like to finish before we do some questions with a couple of words on prospects for 2020. The office portfolio, again, the strongest, biggest part of our business. We expect the high occupancy in Hong Kong to result in fairly resilient office rents in Taikoo Place and in the central business districts in Shanghai, in which we operate, office there. The weak demand that we've talked about previously continues to exert downward pressure, however, on office rents in Central, in Hong Kong and also in central business districts of Guangzhou and Beijing. The retail side of the house is slightly more under the weather, I would say, with the virus affecting both Hong Kong and China retail investment properties. And of course, our hotel business, both in Hong Kong and in China. And social unrest and economic uncertainty are obviously also impacting in an adverse way retail sales in Hong Kong. On the residential side, we think demand is going to be slightly weaker over the near term. But we're expected to be resilient in the medium and long term due to the fact that there is still a limited supply of housing and a very low interest rate environment. So overall, I think we're very well placed in Swire Properties with a balanced portfolio, and as Fanny mentioned, a very strong balance sheet in order to weather any adverse conditions that we may find this year. We also have a very healthy project pipeline to support future rental income growth. But I think we can expect in 2020 certainly some lower rental income from the retail side of the business and from some of the service departments and hotels that we have. With that, we'd both be very happy to take questions. Thank you.

Thank you, Guy and Fanny. We now proceed to the Q&A session. I will read out the questions we receive through the online platform, and our senior management will address them one by one. The first question is from Mark, UBS. This question is about rental concession update in Hong Kong and Mainland China, you like to get some information on that? And also any business recovery update in Mainland China so far?

Yes. Well, as you're probably well aware, we were one of the first large landlords in Hong Kong to move very quickly last year to take -- to engage in retail concessions, rental concessions with the Hong Kong tenants. We've continued to do that into this year as the situation has not got any better with the COVID-19 situation. And also, again, now for 2020, we're engaging over the Chinese New Year period and into March with our Chinese tenants to talk about rental concessions to help support their businesses. It's very important when we take a long-term view that these relationships are strengthened through adversity, and we're committed to working on a case-by-case basis with all of our long-term tenants. Was there a part to that question?

No, that's it. And the second question is from Ken from Citi. His question is about Hong Kong office. How do you see the reversion outlook for Pacific Place and Island East portfolio?

In 2020, well, I think as we said, the demand situation is much, much softer this year than it was last year, and last year was softer than the year before. So we're starting to see this downward pressure and there's vacancy opening up in central. That vacancy, of course, is largely caused by the decentralization effect that we initiated through the development of One Taikoo Place and the entire Taikoo Place portfolio. So we're largely to -- somewhat because of some of the vacancies in central, but we're also taking advantage of it down in Island East. So I think there'll be a little bit of downward pressure in the central market, but for Island East, we're very confident in Taikoo Place that rents will be reasonably resilient, given the fact that we're so fully occupied. And there is still a lot of interest in tenants wanting to benefit from the economic story of Taikoo Place and also the technical specification of the products that we're building. So it's a very exciting outlook, I think, for Taikoo Place, in particular, and we're very focused now on getting Two Taikoo Place opened, which is the second part of the story here, another million square feet that should be complete by the end of 2021.

Guy, Ken's question actually consists of a second part about dividend policy. His question is, requiring net profit up 1%, while DPS up 5%, how should we expect for future dividend policy?

Well, I'll let Fanny cover that one, I think.

Okay. Our dividend policy is to pay out 50% of our underlying profit over time, and we would aim to deliver a sustainable growth in the dividend per share. So if you look at the past 5 years, dividend payout -- the dividend payout was 41%, taking into account the total dividend over the total underlying profit. So I think we still have some room to catch up in the future.

Thank you, Fanny. Moving on to the next question. The company enjoys high occupancy rate across offices and retail portfolios in Hong Kong and PRC. Do you see risk to occupancy rates after rental portfolio due to the headwinds in the market?

There is certainly some risk in certain parts of our portfolio. And specifically, to [ send ] the Pacific Place submarket that it's in the central and some of the markets in Beijing, particularly on the office side, under a little bit of pressure. But all in all, I don't think there's much risk in 2020 to the occupancy levels that we currently have. We're obviously in a high mode of tenant retention, and we're very confident that we'll be able to keep those high levels of occupancy in place.

The next question is about our trading portfolio. Congratulations on your residential acquisitions last year in Hong Kong. How big do you expect trading portfolio to grow back to over time?

Well, thank you for the congratulations. We're also very excited as well because it's been a very successful part of Swire Properties over the last many, many years, but it's been a bit ad hoc, I think. And what we're seeing now is a very conscious decision by the management to try and do a lot more trading property business, given the fact that we have such a good brand. So we haven't set ourselves very firm targets over the next 10 years, but we're certainly going to be allocating a bit more capital than we have done previously to that side of the business, given the fact that it can be very profitable and it has been very profitable over the years. So yes, I've mentioned 3 or 4 projects in Hong Kong, Southeast Asia, we'd like to do a bit more in Miami where we've got more of a land bank. And so going forward, you can expect that the trading side of the business will kick in over the next few years to contribute to the overall profit story of Swire Properties, and we're very keen on that.

The next question is from [ Dasman ] of Morgan Stanley. The media has reported on the possible sale of Two and Three Brickell City Centre and EAST Hotel in Miami. So any color on where we are in that process? Potential selling price compared to book values and interest from potential buyers would be appreciated?

Okay. I think we are still at the very early stage of this particular sales process. At this stage, there is very little that we can disclose. But I think by the time later on, when we get to the point that we can conclude a deal, we definitely will disclose more information.

In fact, to just supplement the overall story going on there with the divestment processes that we want to recycle our capital in Miami, it's a long way away. We've built some great products over there, but we want to build more. And in order to do that we want to bring in fresh capital to allow us to do more things. And that's what -- this is the first step in that process.

Thank you. So the next question is from Jeff, DBS. What's the percentage of retail income of Pacific Place mall and China malls came from turnover rents in 2019?

For the Hong Kong retail portfolio, our percentage of the turnover rent on overall basis in the teens region.

How about Mainland China malls?

Our Mainland China mall varies quite a lot. I think it range from teens to 20-something percentage.

The next question from Cusson, JPMorgan. What's the accounting policy for the retail concession that is being given out this year?

Our rental concessions that we granted in 2019 have been all expensed and reflected in the book of 2019. So there won't be any spillover effect into our 2020 results.

The next question from [ Keith ] of HSBC, would you might shedding light on the Taiwan residential site its latest development? And how is the likelihood of further noncore assets disposals after the sale of Pacific -- of Cityplaza and 625?

Well, I'll take them in that reverse order. As I said at the media briefing for -- in terms of further noncore asset sales, we won't rule that out. We've said for several years now that we'll be opportunistic about noncore assets. And if we get an offer that we like on a noncore asset, we'll take that very seriously. And as you saw, we just did very successfully last year with Cityplaza 3 and 4 and 625 King's Road. So yes, to the extent that we have other assets that we deem noncore we'll take a good look at what to do with those and react very seriously to opportunistic offers on that. But there's nothing at the moment in the plan for 2020. On Taiwan, which was the first question, look, the -- it's a great location. It's a very good potential project. It's subject to various land exchange and a government premium negotiation. So there's quite a bit of work still to do on that. But we're very excited to be able to be back on Hong Kong Island with something of that scale, I think we could end up with a project that will have about 700 flats to sell in a few years' time if we're successful with our premium negotiations.

Moving on to the next question from Justin, Goldman Sachs. At record low gearing, what's your strategy in deploying the cash resources amid micro uncertainties -- macro uncertainties? And he asked about the differences between different markets in Hong Kong, Mainland China, Southeast Asia?

Well, I think this macro uncertainty, we take the view that it's reasonably short term. I hope we're right on that, which, therefore, means that we do not change our overall strategy. We invest in all of our markets over the long term, with a very long-term approach. And therefore, there's no reason to change what we're doing and to build -- in building a pipeline of assets for the long-term growth of the business. Obviously, at the moment, there are various turbulent impacts to the business, but they -- again, we see a slight pickup in China. I'm very hopeful that Hong Kong will get through the worst of the effects this year, and we're really looking forward to doing more in places like Mainland China, where we've got such a successful track record now. At the same time, Hong Kong is our home, and we've got some great plans to reinvest some of the capital in the Hong Kong business itself, specifically in the Taikoo Place and Pacific Place clusters but also and as I mentioned a few minutes ago in trying to realize more and more trading projects going forward.

The next question is about land acquisitions. Are you interested in the new Central harborfront phase three that will be put out for tender this year?

Well, we look at all sites of that sort of quality, and we'll be looking at that one, too, as I'm sure will most of our peer group in town. So it's an exciting site. It's a very good location, and we'll be sure to be taking a look.

In the interest of time, I think we will take the last question from the online platform. Would you consider share buyback given the steep NAV discount?

Share buyback is only one of the capital deployment options that we monitor, amongst others, for example, getting our capital into the investment pipeline that Guy mentioned about. With a very strong investment pipeline and the potential investment opportunities, we prefer to put our capital into new projects, which can drive the long-term income growth and which we -- in return, we can support the ongoing dividend growth, which is another form of shareholders' return. But we will keep an open mind and will not rule out the possibility of share buyback. We'll also be very mindful about our small free flow in the market. So any buyback will have a negative impact to our stock liquidity. So -- well, to conclude, there is -- we will not rule out the possibility of a buyback.

Thank you very much. That concludes our analyst briefing today. Thank you for joining us.

Thank you.