Swire Properties Limited (1972) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Swire Properties 2020 Final Results 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 walk through the final results with us. Before we start the presentation, let's have a look at the video we prepared for this occasion. The video highlights the key developments and achievements of the company in 2020. Please enjoy. [Presentation]

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

Good evening, everybody, and thank you for joining the Swire Properties' final results presentation for 2020. We've captioned the headlines as the strong fundamentals of the business, delivering increased dividends, and we think it's been a very solid year, given the extreme challenges that the world and our business has faced. Just a few highlights from the results. We've continued the robust program of capital recycling strategy that we began a couple of years ago, namely the disposal of non-core assets in Hong Kong and Miami. Excitingly, we made new investments in 2020, led by the office-led extension of INDIGO Beijing and 2 new projects in Vietnam, marking our entry into a very new residential market down in Southeast Asia. The Chinese mainland portfolio rebounded strongly with retail sales up 29% year-on-year in the second half of 2020. And this was really encouraging. Meanwhile, back in Hong Kong, the resilience of the office portfolio was there for all to see, very much underpinned by the success of Taikoo Place. All of that is good news, leads to a decision to pay increased dividends, 3% up on prior year despite there being a slight drop in the lower underlying profit. This just shows some of the assets that we disposed on the left and bought on the right, and I'll cover a few of those in more detail when we get to some of the individual slides. Very excitingly this year, we've been talking about Taikoo Li Qiantan coming on stream for 2 or 3 years now. I'm delighted to be able to say that the -- we've had a very positive leasing response. And at this point, we have commitments of space of over 70%. This 1.2 million square feet of retail in Qiantan, we're very excited about it, and the opening of the mall will begin in April and carry on through the rest of the year. We've got some great names already committed from the luxury sector L.V., Dior, Hermes, Cartier, Tiffany, Balenciaga, Fendi and many more. So it's looking pretty positive for us down there. And we -- the team in Shanghai have worked very hard. We're very excited about the possibilities. . Now this is exciting news as well. You're always asking me why we've got our balance sheet in such good shape. And I'm saying, usually, well, because we've got to set aside some capital in order to do projects like this, even if I can't tell you about them every time. Anyway, since we did the interims, very pleased to announce the project up in INDIGO, which extends our INDIGO ONE project. It almost triples in size, which is essentially a reinforcement of the investment that we've already made in Chaoyang district in both INDIGO ONE and Taikoo Li Sanlitun. So very confident in that part of Beijing and very confident in increasing our investments in the Chinese mainland. It's office led. There's about 2.8 million square feet of additional office, which is about 70% of the new development. And I guess it's going to be really a transformational attempt to decentralize Beijing's office, you could think Taikoo Place. Here's the existing pipeline. I mentioned we're in a strong financial position. We're obviously ready to do more. And I can tell you there's more to come that we can't show on this chart right now, but Fanny will talk a bit about the capital in a minute. So strong finances. I would point on the left-hand side to the fact that of the 7.3 million square feet of upcoming projects, the largest amount is in our home base, Hong Kong. So we do continue to invest in Hong Kong. And I think that's important, both in adding scale to our Hong Kong office clusters and also in the residential market in both Hong Kong and Southeast Asia. Just taking a couple of slides on the investment portfolio. Hong Kong office in 2020 was very solid. I mentioned it was underpinned by Taikoo Place, who managed to keep occupancies extremely high in the 198th percentiles. The good news last year, despite all the challenges of demand, whether we manage to do positive rental reversions, ranging from 2% in Pacific Place, up to 11% and 12% in Taikoo Place, I think that testifies to the quality of the products that we're leasing out and I was very pleased with that performance. Switching to Hong Kong retail, the occupancy levels were maintained pretty much across our 3-centers: Pacific Place, 96%; Cityplaza, full; Citygate Outlets, almost full. Despite the sort of year that we had in retail sales, which was incredibly tough. I think this is testament to the tenant relationships that we've built through supporting them through tough times with rental concessions and the long-term relationship approach that we take. And we're delighted to be able to say that the occupancies are this high after enjoying a really tough 18 months in Hong Kong. Switching to the Chinese mainland portfolio. You've seen these slides before, but they continue to impress. We've nearly doubled our gross rental income since 2014. And I particularly like to point out the 2020 number, where we actually managed to achieve an increased gross rental income versus prior year, the effects of coronavirus notwithstanding. So excellent performance, achieving double-digit rental growth in the second half of 2020 for China mainland. . This just adds a little bit of color on the retail side, focusing on the bottom right, where you can see that we've grown sales overall in China last year versus prior year by over 10%. So that's a fantastic achievement given the sort of challenges that the business has faced out there. . And then if we zoom in a bit and add some more color on what a staggering recovery we did have in the second half. You can see that overall, we grew sales by 29% in the second half up in the Chinese mainland, which is quite phenomenal. You can see great performances in the second half in Guangzhou, where we delivered a 65% increase on prior year at Taikoo Hui. In Shanghai, it's HKRI Taikoo Hui, it was 25% up. And in Chengdu, 26% up in Sino-Ocean Taikoo Li. These are phenomenal numbers. The 2 centers in Beijing, slightly down a bit last year. Beijing took a little bit longer to recover. But we're very confident that they started the year 2021 in really good shape. Office wise in the Chinese mainland, largely steady in terms of occupancy, continues to be a business that we're building and the extension to INDIGO will be the latest addition to that. In terms of lease expiries, if you look at the bar on the left-hand side, it shows very clearly that we only have about 9% of office leases in Hong Kong due to expire in 2021. And I can say that most of those are already covered. So we're not very highly risked or exposed to 2021, both either on the office or on the retail side. If we look at the completed investment properties chart here, this just basically demonstrates that we're getting growth out of our 2 main markets of Hong Kong and the Chinese mainland. It's nice to have a balance. And I think we've managed to achieve a decent balance here in 2 very important growth markets to our core business. . Switching to trading, some good news here. We have launched EIGHT STAR STREET in Hong Kong, sold 2 units out of 37. There were special units. We got very good prices. Looking forward to putting a price list out for the remaining units in the next weeks and months. Anyway, really high-quality development. The market seems pleased that Swire is back in the market. We also have projects on the way in Wong Chuk-Hang with our participation in the joint venture for the MTR Station Package 4 in Chai Wan with China Motor Bus, and again, in King's Road, Quarry Bay, where we're working on a residential project in Pan Hoi Street. So good after a few years without a good residential pipeline in Hong Kong. Outside Hong Kong, I think everybody is familiar with Singapore and our EDEN development, which is a wonderful project. We're building in South Jakarta, another luxury project with over 400 residential units. And we've been almost got to the end of selling in Miami with our Reach and Rise. We're now at 94% and 84% of sales of those units. The new news is Ho Chi Minh City. We opened an office there about a year ago. We took a small stake in a project called The River in Thu Thiem district and has had a good run on that, selling almost 85% of what a very, very well-built and well-designed units just on the river there in Thu Thiem district. And most recently, we took an extra minority investment in March of a residential-led mixed-use development also in Thu Thiem, which will -- is selling well. It's about half sold on the residential side, has a commercial component, which will complete in phases between now and 2026. So we're very excited about the opportunities that Ho Chi Minh City is throwing up for our residential brand. On the hotel portfolio side, it's 2020 in the second half, we saw a gradual recovery in the Chinese mainland and in our Miami property. But the Hong Kong situation hasn't got better, and we continue to think until the border opens up and we can get visitors to come and stay, there will be a continued tougher outlook for Hong Kong in the hotels. The operating loss before depreciation last year was HKD 134 million. But I would say that the division had generated positive EBITDA for the preceding 9 years. . At this point, I'm going to ask Fanny to dive into the financial highlights, and I'll come back and talk at the end. Fanny?

Thank you, Guy. Okay. Talking about the number. I think I'll start with the total underlying profit for the year. Which was HKD 12.679 billion, which represented a 47% decrease in -- as compared to 2019, which was largely come from the fact that we had a large disposal gain in 2019 coming from the divestment of Cityplaza Three and Four and 625 King's Road, whereas in 2020, we disposed of Cityplaza One in Hong Kong and Two and Three Brickell City Centre in Miami. So there was a substantial reduction in the divestment disposal gains. But excluding these disposal gains, the underlying recurring profit was around HKD 7.1 billion, which represented 7% drop in -- as compared to 2019. But the key thing that I really want to highlight is under the difficult market situation in 2020, the key contributor, which is the property investment portfolio, had a very steady performance. And the contribution underlying profit from the property investment was pretty much the same as that of 2019, which was quite a fantastic performance for our portfolio then. The steady performance was largely driven by the fact that even though we had lower rental income for our residential and retail business in Hong Kong, it was offset by the lower net finance charges for the portfolio. That's why we had a very steady performance for the underlying profit in relation to the property investment. On the property trading side, we had a slightly higher trading losses as compared to that of 2019. That was because we had a lower number of units sold in Miami. And as well as the fact that we saw last year carparks in 2019, which we didn't have this repeated in 2020, and which contributed to part of the increased trading loss as well. Hotel division got a very significant hit by the COVID-19 impact. All the travel bans and also social distancing had resulted in a lower occupancy and also the revenue for the hotel division, and we are not alone. I think the substantial decrease in the hotel performance was largely understood. So moving on to our investment property portfolio to have a deep dive on the rental income analysis. I think this particular slide highlighted that with a diversified portfolio, the overall performance of the investment property portfolio remained very steady. If you look at the top blue bar, which is in relation to the Hong Kong office portfolio, the total attributable gross rental income was pretty much the same as that of 2019. Don't forget that we disposed of Cityplaza Three and Four and also 625 King's Road, and then we lost the rental contribution from these particular offices. But on the other hand, the resilient performance of the Taikoo Place portfolio did very well, and we had a positive rental reversion and the occupancy rate for Taikoo Place portfolio was quite high, which compensated for the loss of rental contribution from these divested properties then. So if we disregard the disposal properties contribution in 2019, we actually generated a 3% growth in the Hong Kong office rental growth there. Moving on to the Hong Kong retail portfolio. There was a slight increase of 1%. This is largely driven by the fact that we had a change in our accounting treatment for the rental concessions. Rental concessions granted in 2020 were amortized over the remaining lease terms. But those granted in 2019 were fully accounted for in 2019. The retail sales performance for Hong Kong were very much affected by the COVID-19 impact. So there was quite a significant job in the sales and as well as the turnover rent. If we were to disregard the rental concessions impact in both 2019 and 2020, then there was a reduction in the Hong Kong retail rental income of 4%, which pretty much reflected the poor sales performance affected by the COVID-19. However, the Chinese mainland retail story was rather the opposite. In the early part of 2020, we had a hard hit by the COVID-19 and then the performance of the Chinese mainland retail was very affected. To the extent, we also need to grant rental concessions to all those tenants in need. And same as in Hong Kong, the rental concession granted to tenants were also advertised over the remaining lease term. And there was also a 1% renminbi depreciation impact to the -- to the rental income of Chinese mainland. So disregarding both the RMB depreciation as well as the rental concession that we amortized or recognized in 2020, actually, there was an 8% increase in our Chinese mainland rental, which represented a very strong recovery of the retail sales performance since March 2020. And we are very pleased about this particular strong recovery. On the Chinese mainland office side, there was a reduction of about 4% for the whole portfolio due to the weak demand and also new supply in the market. Whereas for the Miami portfolio, we also recorded a drop in the rental level as well as the residential portfolio for our whole portfolio, which also was impacted by the COVID-19. So overall, rental income more or less stayed the same as that of last year just because that we had a very diversified portfolio with one part of the portfolio affected, but it was compensated by the other part of the portfolio. Moving on to the dividend. Despite that we had a 47% decrease in the underlying profit, we managed to maintain a dividend growth of 3% for 2020, which is in line with our dividend policy. Our dividend policy is to deliver sustainable growth in the dividend per share, which we did. If you look at the past 5 years, we had a year-on-year growth in our dividend per share. The cumulative annual growth rate for the past 5 years was 6.4%. Our dividend policy also request to distribute approximately half of our underlying profit in ordinary dividends over time. And if you look at the past 5 years' total dividend that we distributed, it represented 39% of the total underlying profit, which means we still have some room to catch up in the future then. Investment properties, which is a very big part of our balance sheet. The total investment property value as at the end of 2020 was HKD 266.831 billion, and there was a 4% drop. The 4% drop, as highlighted in the waterfall chart here, was mainly come from the big bar which is represented by the disposal. It represented the disposal of Cityplaza One office tower in Hong Kong and the 2 office towers in Miami. But looking at this particular waterfall chart, one of the other eye-catching number is the net fair value losses, which amounted to about HKD 4.5 billion. On these, I would like to make a few points here. The HKD 4.5 billion net fair value losses was coming from the losses in Hong Kong investment property portfolio and the Miami retail property portfolio. But there was a gain in the Chinese mainland investment property portfolio, which offset part of the fair value losses. The key things that I also want to highlight is, number one, there was no change in the cap rate in the Hong Kong investment property portfolio, and the fair value losses recorded in Hong Kong mainly reflected the decrease in market rent. And for Chinese mainland, the gains in the fair value in Chinese mainland property portfolio was mainly due to 2 factors. Number one is there was an increase in the open market rent and as well as a reduction of 25 basis points in the cap rate applicable to Taikoo Hui Guangzhou and as well as Taikoo Li Sanlitun retail properties. Moving on to the Miami retail portfolio. There was a fair value losses in Miami. We factored the open market rent reduction and as well as an increase of 25 basis points in the discount rate and the terminal cap rates applicable to the retail properties of Miami. So the other big number in this particular waterfall chart is in relation to the CapEx. The CapEx of HKD 1.7 billion was mainly on the Taikoo Place redevelopment and the other capital expenditure requirement in Hong Kong as well as in Chinese mainland. So this is the net debt and gearing position of the company. We have a very strong balance sheet, as you can see from this particular slide. Net debt was at HKD 6.6 billion at the end of 2020, which was about HKD 8.7 billion lower than that in 2019, primarily due to the proceeds of -- from the disposal of investment properties in 2020 in relation to Cityplaza One and Two and Three Brickell City Centre. With that, the net gearing ratio was at historical low at 2.3%. And we are very pleased about this particular financial position as it can provide a very strong support for the company to capture any new opportunities that come in our way then. And for the cash flow or the net debt reconciliation on the left-hand side, I think the net proceeds from the disposal of investments, which amounted to HKD 9.5 billion was the one that I want to highlight, which contributed to the very strong cash position of the company. Well, this particular slide showed the maturity profile of our credit facilities. As you can see, we have a very well-spread maturity profile for our committed available facilities. And the liquidity position of the company as at the end of 2020 was extremely strong. And as you can see from this table, cash holding at the end of 2020 was HKD 21 billion. And on top, we also have HKD 12 billion undrawn committed facilities. That means the total cash and undrawn committed facilities came up to HKD 33 billion, which is an extremely strong liquidity position to support the company for the future growth. And the other key highlight from this particular slide is that during the period, we have been actively engaged in quite a lot of green financing. And as of the year-end and also currently, about 30% of our total credit facilities actually came from green financing, and we would like to do more, and we have a key target, which Guy is going to cover later on there. This slide summarized the capital recycling program that we had over the past 3 years. And as you can see, we, in total, generated about HKD 38 billion from the divestment of the non-core asset in our portfolio so that we can reinvest all this money into the new projects of our core business. So -- and for 2020, part of the -- quite a lot of the proceeds for Cityplaza One have been received. So you can see an HKD 8.2 billion number in this particular table. But I'm also very pleased to say that the remaining HKD 1 billion, representing 22% of the shares in the company holding Cityplaza One, was also divested or the proceed has been received in February, so that all the remaining shareholding has been completed. So there will be another HKD 1 billion that you can see extended to 2021 there. Capital commitments. This particular capital commitment only cover the investment property portfolio and it does not cover the trading property portfolio as this is trading nature then. Looking at that, we have a very exciting pipeline of investment properties -- investment that we have for the coming few years. Total capital commitment came up to almost HKD 19 billion. We have a balance between Hong Kong and also Chinese mainland, which represented our core business sector, which we want to divert our capital into. For the HKD 13 billion outstanding commitment, this represented our core investment into the redevelopment of the Taikoo Place and the Pacific Place clusters, which are very key to our office portfolio there. And on the Chinese mainland side, we have an increase in our capital commitment, which mainly represented the Phase 2 extension of the INDIGO development. And on top of that, we also have outstanding commitment also for the Qiantan and Taikoo Li Sanlitun West extension then. So I think that's about the financial numbers. I'll pass it back to Guy to cover the sustainable development.

Thank you, Fanny. Well, for those of you that are as interested in sustainable development as we are, we've expanded the section this year. First chart I'd like to show is just a few of the key highlights. Number one, we were the first real estate developer in Hong Kong and the Chinese mainland to join the list of global companies that commit to business ambition for 1.5 degrees. We were the first real estate developer to do that. That, of course, sets some very ambitious targets on the way to net 0 by 2050, but we feel that we need to take a lead in this, and we've gone ahead and done it. Secondly, as Fanny mentioned, we've got about 30% of our current bond and loan facilities emanating from green financing. We're very proud of that. And as Fanny alluded to, we've set a new target for that to be 50% by 2025 and 80% by 2030. So we've got a fairly aggressive plan to raise the level of green financing going on, which I think is an attempt to push green market -- capital markets as far as they can go. Thirdly, on low carbon specs, in terms of procurement, in 2020, we spent about HKD 1.2 billion worth of procurement spend on building materials that were particularly low carbon spec. And I think we aim to do more with that. Directly on the performance of the environment, which is where I think we can make our biggest impact, you could see we've exceeded our 2020 targets for energy reduction in both the Hong Kong portfolio and the Chinese mainland portfolio, generating about in 1 year about $125 million worth of energy savings along the way. On the decarbonization, the targets are also heading in the right direction. We've exceeded those targets too, largely assisted by in 2020 by Sino-Ocean Taikoo Li Chengdu, which is now powered 100% by renewable electricity, which is very, very, very encouraging. So we got to 2020 our first 5-year targets. We now have to set 2025 and 2030 targets. And I won't go through them all here, but they're in the pack. We've tried to stretch ourselves even further as we go towards our vision of 2030 being the best in the world in our industry. Just in terms of prospects finally, got a new slide here on digitalization because it's very clear that there's a lot of work being done in Swire Properties to digitalize our business, and we're trying to accelerate that in 2021. On the retail side, facing the consumer, we've got over 120 digital projects across 9 centers in Hong Kong and the Chinese mainland, working on various things like contact-less parking, AI chatbots, using robots, virtual reality experience lounges and online shopping. We did over 100 live streaming sessions in 2020. You may be interested to know on Douyin that Sino-Ocean Taikoo Li, since it opened about 5 years ago, has now had over 12 billion viewings, which is an incredible number, and it's testament to the success of Taikoo Li Chengdu and the number of people that go there. On the energy side, which is all about cost, I mentioned we saved $125 million of energy. We're also employing artificial intelligence to try and optimize our building management systems. And we're pleased to be able to say that when Taikoo Place 2 opens, we will have it all equipped with 5G, all the way through Taikoo Place. So there's a lot of sort of technical innovations going on, on the energy side. And finally, just in terms of the tenancies on the B2B, all our tenants in Hong Kong now have the ability to get on and track and talk to us over a hub, which is a platform that we've created for more efficient leasing management and tenant service. Lastly, prospects for the business. Well, I think we think that the resilience of the office portfolio as shown in 2020 ought to continue, particularly led by Taikoo Place despite there being market headwinds in 2021 and there clearly will be. On the retail side, we think brighter days are ahead for the shopping malls in the Chinese mainland. The momentum that we saw in the second half of last year has clearly carried on into 2021. And we're looking forward to a strong year of rebound and recovery there. It's going to be difficult, I think, in Hong Kong on the hotels for much pickup unless the border can open. But we are seeing a strong domestic travel within the Chinese mainland supporting our hotels there and East Miami seems to be going quite nicely as well. So I think there's cautious caution all around, both on the office side and on the residential side. But medium to long term, we're very positive about the sectors that we're in.

Thank you, Guy and Fanny, for your presentation. That concludes our analyst briefing today. Thank you for watching.