Wharf Real Estate Investment Company Limited (1997) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to the webinar of Wharf REIC final results briefing. I am Angela Ng, Investor Relations Manager. Our management team in the webinar includes Mr. Stephen Ng, Chairman and Managing Director; and Mr. Kevin Hui, Director. Before the presentation and Q&A session, we will start with an opening remarks by the Chairman. Mr. Ng, please.

Thank you, Angela. Good afternoon, ladies and gentlemen. 2020 is behind us. I don't think anybody needs 2020 vision to tell that it wasn't a very good year. I remember telling you in August that the first half of last year was already a washout. Indeed, it was. And we did not encounter a miracle in the second half to make up for the losses in the first half -- to make up for the downturn, I should say, in the first half. So the year as a whole is obviously disappointing, but probably no surprise to anyone. I'll let Angela take you through it, and then we'll leave some more time for Q&A. Thank you.

Thank you, Chairman. Now I believe that you can see our PowerPoint presentation on your computer screen or mobile device. The theme of the presentation is Unprecedented Pandemic Spared No One. COVID-19 has caused great distress to IP and hotel sectors with cross-border tourism largely at a standstill and social distancing measures made a serious dent in domestic consumption. Hong Kong retail sales declined for the second consecutive year with 24% drop in 2020. All this has led to a drop of the group's IP revaluation. Under the pandemic, retail tenants have shortened operating hours and step-up anti-pandemic measures to support social distancing. F&B business were hard hit. In this abnormal period, the group has granted over HKD 2 billion of rent relief to support small tenants, majority in the form of base rent. In line with the market, negative rental reversion was recorded. During the year, retail revenue decreased by 26% to HKD 7.6 billion. After rents drop, rent relief and tripling in marketing expenses, mall net operating cash flow dropped 36%. On the other hand, the office sector was hit by downturn in the global economy, slowdown in economic activities under local work-from-home arrangements and new supply in the market. As a result, the group's office revenue dropped slightly. Although the pandemic continues to drag down our business performances, we see a narrowing decline in Hong Kong IP revenue in the second half of 2020. During the year, the group has made significant investments to retain our market position and support our retail tenants. With tripling marketing expenses, extensive campaigns have been rolled out to subsidize shoppers' consumption, in particular, the first of its kind city-wide spending, Rewarding Everyone campaign in May and the several runs of voucher program have been proven to be an effective stimulus. Ongoing re-tenanting exercise also helped bringing excitements in the changing market environment. As a result, we saw robust footfall and sales recovery in between COVID-19 waves. Sales drop in our malls slowed down despite the occurrence of COVID wave in the fourth quarter. Moving on to our financial highlights. Group revenue and underlying net profit decreased by 3% and 24%, respectively, with underlying net profit of IP decreasing by 23% to HKD 7.3 billion and hotel turning to a loss. Noncash IP revaluation dropped 5.5%, contributing to a net loss. The group has a stable dividend policy maintaining at 65% of underlying net profit from IP and hotels in Hong Kong, which represents a DPS of HKD 1.47 for the full year. In the following slides, we will walk through the performance of our IP and hotel portfolio as well as financial management and outlook. First, Harbour City. The pandemic hurt all business segments at Harbour City, with hotel segment hit the most severely by the paralyzed tourism. For the retail side, we are glad to see activity gradually reviving. However, office demand remains subdued amid cautious sentiment. Total revenue at Harbour City was HKD 8.7 billion. As at year-end, retail occupancy was 90% and office occupancy was 85%. Featuring a unique critical mass with over 500 shops, tenant demand continues at the landmark retail destination. We believe the comprehensive mix helps to mitigate the market risk to our tenants. The retail income distribution by different types of tenants is shown in the chart. With an established position of must-have address for renowned brands, Harbour City has attracted a variety of forward-looking local and international brands to open doors or expand. New openings included a number of debut brands and a variety of dining options. In addition, a number of top-tier brands unveiled their new flagships after expansion in Harbour City, including Hermès, Alexander McQueen, Christian Louboutin and Jimmy Choo. Moving on to the 3 Marco Polo Hotels in Harbour City. Marco Polo Hong Kong and Gateway Hotel proactively draw in the local market, while Prince Hotel was closed since February last year for a major renovation. An operating deficit was inevitable in spite of stringent cost control measures. Then we will walk through the performance of Times Square. The competitive landscape of Causeway Bay has intensified with higher vacancy nearby. Market adjustment is in process. We believe the current consolidation would allow more new enticing brands to enter the mall. Under our extensive marketing support, we are glad to see a rise in footfall and year-on-year sales growth resumed in the fourth quarter. As at year-end, retail occupancy was 93% and office occupancy was 86%. Total revenue at Times Square was HKD 2.3 billion. Then switching to Plaza Hollywood, the more enjoyed relatively stable neighborhood market demand and footfall. Occupancy was 95% at year-end. The next one is Central Portfolio comprising Wheelock House, Crawford House and The Murray. With prime locations, occupancy at Wheelock House and Crawford House remained high. As for The Murray hotel, in response to the cross-border travel halts, a range of tenting staycation packages and dining overs are promoted to welcome more local guests, and it has successfully achieved total RevPAR -- achieved top RevPAR and an outperforming occupancy against its competitive set. However, an operating deficit was still inevitable. Moving on to our Singapore portfolio, which comprises Wheelock Place and Scotts Square, both located at the BC Orchard Road intersection, the most recorded mild sequential recovery after the circuit breaker period. Moving on to the financial management. The group maintained a prudent approach on financial management. Net debt was HKD 52 billion and maintained a comfortable gearing of 24.8%. Average interest cost lowered to 1.9%. The group continued to maintain the Moody's A2 rating. This year, we are glad to welcome a coming attraction. Niccolo Suzhou is scheduled for opening in early April. Same as The Murray, Niccolo Suzhou is operated under the Niccolo Hotel brand, and it is the fifth hotel in the collection. The hotel will comprise over 230 spacious contemporary chic rooms and common stunning view of Jinji Lake. It has already garnered a number of The Most Anticipated Luxury Hotel of the Year from different organizations. Looking ahead, Mainland China is leading the world with rapid recovery, but there are a number of lingering uncertainties that add challenges to the post-pandemic economic outlook. We believe the road to recovery will be uneven to different business segments in different parts of the road. As the pandemic has accelerated the paradigm shift across all sectors, especially to the retail and hotel, the group will adhere to the proactive business strategies to stay ahead in the changing business environment. In the last part of the presentation, I will walk through our efforts in sustainability. Wharf REIC is a member in Hang Seng Corporate Sustainability Index. Through Wharf Emergency Relief Fund, the group provided instant support to the needy affected by COVID-19. The group has also devoted to making a positive impact in the phase of climate change and committed to arts development and nurturing talents. The Star Ferry launched the first low-emission Green Ferry Morningstar to reduce emissions of air pollutants. The group has also introduced the Wharf Hong Kong Secondary School Arts competition since 2011. In regard to youth development, our business units are partnering with 16 WeCan schools to provide support. That concludes my presentation. Now we will come to the Q&A session.

[Operator Instructions] Now we will receive the first question from Karl Choi of Bank of America.

Can you hear me?

Yes.

I have 3 questions. One is glad to hear that retail sales were up in the fourth quarter for Times Square. Can you give us a little bit of sense of the rebound that you saw sort of for the -- in between the COVID sort of episodes? Or -- obviously, we don't know when the borders will open, but if we are in sort of the current kind of situation, just based on local spending, what kind of sort of retail sales rebound do you think we can see in 2021? Second is on occupancy. Based on your advanced negotiations, can you give us a bit of a sense about your occupancy outlook for both office and retail? It was stable relatively half-on-half, but I think there were some news stories recently about some store closures at Times Square. And then lastly, the third question is on the Central commercial site that is being tendered. Can you give us an update on your latest thinking about your interest level and also the sort of likelihood that you go for either on a stand-alone basis or more in a consortium basis?

Okay. Thank you very much. First of all, the market has been unstable. These different waves, which you referred to, have made analysis and planning a bit of a challenge. We get retail sales reported to us on a monthly basis. And unfortunately, waves do not follow months. So we can't tell you exactly from -- in between wave X and wave X plus 1 how the tenants sales perform and precisely within wave Y how the tenant sales perform either. But generally, we see, I suppose, after the -- after Chinese New Year this year, when the social distancing measures began to be eased, we see happier faces among our tenants. I think it's a combination of several factors. First of all, business begins to come back. And secondly, the -- after a year of reversion, more tenants are now on a lower rate compared to 15 months ago or 12 months ago. So the affordability or the ability for tenants to trade and to make ends meet has improved. However, all of that is a matter for today. What is more important for tenants is what would happen tomorrow. And there, nobody has a crystal ball. If you ask me about the outlook for the current year, I would use today's weather to describe it, overcast with patches of shower. We don't expect clear skies completely very soon. And even when vaccination works and when the border starts to reopen, it will take some time for markets to get back to better days. So generally, we are cautious about the rest of this year. In terms of tenant movements, I think maybe that's a better way to answer your question. Day in day out, we get a lot of tenants who come in and tenants who move out. In this particular case, we have a couple of high-profile tenants that get reported. In other cases, they don't get reported. That's all. But this is a time for the -- some of the tenants, whether they are weaker tenants or whether they have changed their strategy or whatever, to scale down. And this is also a time for some of the stronger tenants or some of the more aggressive tenants to scale up. That is precisely what we're seeing with our malls. We see major international tenants making long-term commitments with us -- new long-term commitments with us to move into, for instance, Harbour City. They -- when the market was a lot hotter, they were not able to get the locations that they wanted. Now that the market has softened, some of them have come back to ask for these locations. And we negotiate reasonable rents for both, and they're prepared to sign up and make very substantial capital expenditure commitments at a time of uncertainty. So that just points to a phenomenon, which is a little bit of a K that sometimes people refer to, except in this case -- in our case, it's not a K of the rich versus the poor. It's a K of those who are more ambitious versus those who are more conservative. So tenant movements will continue, but it will take some time for the current market to stabilize. And so we do expect vacancies to remain noticeable in the most part of this year. And as to your third question about the site in Central, yes, we have a task force working on it. As you know, the design is as much a component or is bid as money. And so the first thing we're working on right now is to try and come up with a winning design that would give us a maximum score on that count. If we can't come up with a good design that we aren't ourselves happy with, we may not bid. And whether we bid by ourselves or with partners, that's also part of the consideration we'll be making in the course of the next few months.

Thank you. So now we will receive the next question from Ken Yeung of Citi.

I have 3 quick questions. First, you mentioned about the rent relief of HKD 2 billion plus, which in the first half is HKD 1 billion plus. So I think it's somewhat similar for first half and second half. But I do see that your foot traffic is excellent. I mean in the last -- past couple of months, my wife also using your -- that kind of coupon [Foreign Language] and cannot escape that because when they spend HKD 10,000, they gain another HKD 7,000 and then they need to spend more. So very successful program I said on this. But can I say on that -- on back of this, are we seeing an increase in sale, which we are seeing a trending down on this rent relief? Can you give us explanation on some of the guidance, let's say, in the January, February, December, that kind of things? Are we seeing the rent relief overall going down? And if possible, give us a sense that how much is going down? So this is the first question. And secondly, I'll also follow-up on this is on the foot traffic. It's very crowd, so further with people. So how can we compare with this? I know that you may not be want to tell on the retail sales. How do we see on the foot traffic versus the pre-COVID level versus the pre social unrest level for what you are seeing in the recent couple of months? And lastly, I think -- I want to drill down on the sales as well. So anything that you can give us on the guidance on January and February Harbour City and Times Square tenant sales?

Okay. Thank you. Rental reversion, certainly, we are -- we continue to experience negative reversion, and that's been the trend in the past 12 months. As the market adjusts to a new retail environment, we need to adjust as well. And there are situations where the negative reversion can be quite substantial depending on location, trade and specific tenant. But generally, it has been a major factor in the decline in our rental income. We don't see that stabilizing yet. Rather, I should say, we don't see that ending yet. The negative reversion is less serious today than it was 6, 12 months ago, but we don't see that ending in the very near term. And that is why we continue to be cautious about the retail side for the rest of this year. Foot traffic is good. I don't have specific numbers with me about how it compares precisely with 15 months ago, 18 months ago, 24 months ago. But another measure is that we've been getting a much heavier utilization of parking facilities. For those of you who drive to malls, you would have noticed that weekend parking is very crowded, very congested. And a lot of times, long queues form usually around lunchtime, beginning from Harbour City all the way to West Kowloon Cultural District or beyond. It is a bit of a problem sometimes. All that points to what we think is that we've been able to gain market share among local shoppers, at least in terms of bodies. And hopefully, we've been able to gain market share from among local shoppers in terms of their wallets as well. But clearly, what is still badly missing are the tourist dollars. And as you may know, tourist dollars have been a significant part of the sales at both Harbour City and Times Square, more so at Harbour City than Times Square. And when that's down to a very, very low level, overall, the tenants are still not able to report better sales than before, although there are obviously exceptions. Locals are spending, however. And you may have noticed queues forming in front of some of -- even some of the luxury brands. And I think everybody has to adjust. The retailers have to adjust. We have to adjust. Sales, we obviously don't have sales from February yet. We have some from January, but they're not good indicators because last year, Chinese New Year fell in -- at the end of January, whereas this year it fell in the middle of February. So it would be extremely misleading to try to compare January 2021 to January 2020. Suffice it to say, again, I go back to what I said earlier. We have happier tenants now. And renewal conversations with tenants seem to be less sticky than they were only a few months ago. Thank you.

Thank you. Now we will receive the coming question from Mark Leung of UBS.

Can you hear me?

Yes. Please go ahead.

Yes, sure. Actually, basically, this is Mark from UBS. I've got about several questions. Number one is regarding on the marketing expenses. Not sure, could you give us the amount how much marketing expenses have been booked in 2020 as well as in second half of last year? And what is our upcoming budget for that? That's the first question. The second question is, I realized we got about HKD 13 billion long-term investment. I'm not sure under what condition we will monetize the investment. That's my second question. And my last question is regarding on the luxury brand CapEx outlook. What is your view for the luxury brand CapEx outlook in Hong Kong versus Mainland China going forward?

Thank you. Marketing expenses, I can't give you a precise number for commercial reasons, but it's in the hundreds of millions of dollars. That's for sure. In terms of the listed investments that we hold, they're generating good yield for us. And it forms part of the reserves that we would be able to resort to, if you like, if we succeed in making a new investment, for instance, the Central site, right? We haven't decided we would bid, but we need to put ourselves in a position to be able to support the bid. Otherwise, it will be highly risky. It is in blue chips and stocks generating yield. And in today's low interest environment, we see that as a plus to the shareholders. Your last question about luxury brands CapEx is a very good one. As I was indicating, some brands are prepared in today's weak market to make large commitments. In Harbour City, for instance, we had Hermès that moved from one Canton Road location to another and effectively doubled its store size. And as you know, with these major luxury brands, they spend a lot on opening the new store. That's precisely what they have done. It indicates clearly their commitment to Harbour City. They've been a tenant of Harbour City. So they know how much they can sell. It's not as though they were guessing in the blue. They know how much they can sell, and they made their calculations and were prepared to commit to this major commitment. And the new store opened in December. And since then, I believe, they are very happy with the performance of new store. And all of that points to justification of their original decision. Another example -- and I can't disclose the name of this tenant yet for commercial reasons -- is that may have removed and the next shop [ dunhill ] having moved at the same time. That was part of our mall plan to vacate 2 adjoining stores. And what we're doing right now is to combine the 2 stores into a bigger store, for which we already have a binding commitment with full deposit paid from another major luxury tenant to move in. But first of all, we need to take away some structures and comply with fire requirements and so on and so forth to get the store ready for handover to the tenant. This is another large store and the tenant is, again, a very demanding tenant when it comes to CapEx to fit out a new store. Again, that's clear evidence of confidence in Harbour City.

Thank you. So the next question from Justin Kwok of Goldman Sachs.

So I think on the office front, I just want to get a sense on what are you seeing in the market. Across the Harbour now -- in both Harbour City and Times Square, the occupancy is now falling to around mid-80%. So do you think it's more or less already bottomed out in a way or do you think that there are still further headwinds into 2021 and '22? I guess, given what we're seeing from the agents, it seems across the district, things are not yet improving. So what's your expectation on that? And actually, on a similar question is also on the retail side. Would you be able to share a little bit on your expiry profile now into the year? Do you expect some legacy impact from the short-term leases kind of overflowing in 2021, where you're going to see a relatively bigger size of renewal?

Thank you. Office vacancy, I would answer that question this way. We think the current vacancy in our office portfolio is higher than we would like to see, and we would be trying to improve from that in the course of this year. Now that's our wish. Whether or not the market will move against us, we don't know. But it's an indication at least of our intention. For retail, you're right. As you rightly pointed out, we have, in the past 12, 18 months, been more flexible with new lease terms. And that includes, for instance, short-term leases, which, therefore, increases the concentration of lease expiries in 2021. So that's a double-edged sword. On the one hand, we would be more subject to this year's market, certainly. And if the market stays low or goes lower, our exposure will be bigger. But we're banking, obviously, on the assumption that sometime in the course of 2021, the market would get better. If the market doesn't get better, what we may do is to roll over these short-term leases again, and that's sometimes preferred by tenants as well. So 2021 would be an interesting year. You're right.

Thank you. The next question from Andy So of Haitong.

Can you hear me?

Yes, we can. Please go ahead.

On the rental relief, for the HKD 2 billion rental relief that we have given out in 2020, may we know if such cost has been fully booked in 2020 and no more cost will be booked in 2021. So this is the first one. Secondly, on the -- the second thing that I want to ask is on the selling and marketing expenses. In our financial statement, what I can see is that our marketing expenses in 2020 increased very substantially by around 73% year-on-year to around HKD 0.6 billion and that numbers was just around HKD 0.3 billion in 2019. So there is a very substantial increase in marketing expenses in 2020. So should we expect our marketing expense will stay high and won't be coming down in coming like 1 to 2 years?

Okay. Thank you. First question, the HKD 2 billion-plus of rental support -- rental relief. The bulk of it has already been charged to the 2020 accounts. I'd say less than 1/3 of it has been deferred on amortization by application of the accounting standard -- prevailing accounting standard, and most of it will be amortized in the course of 2021. To your second question, this is -- selling and marketing expenses does not refer only to what we would use as marketing expenses. This includes a lot of things, including staff cost, including commissions we pay to agents for the sale of properties or for the rental properties and so on and so forth. And in particular, 2020 probably included the Suzhou IFS and so on.

Yes, in last year if we look at our sales.

Right. So the bulk of it actually does not relate to the mall.

Thank you. [Operator Instructions] Any more questions? If there is no more question, I think this is the end of the...

I would say a couple of words in closing. As the heading of our presentation and our announcement says The Unprecedented Pandemic Spared No One, of course, retailers were hit and landlords were hit as well. And as we reported, our net cash flow from our mall operation declined by about 36% from a year earlier. But of course, malls were not and are not our only business. And our other businesses were -- with the exception of the hotels were less affected. And that's why we came up with the group underlying net profit decline of 24%, which was a little bit better than the malls, not good, but a little bit better than the malls. We're hoping to see a better market for retail in 2021, and early signs are good. I wouldn't say more than that. But again, using my analogy of the weather, it's overcast with patchy showers and patchy showers can get heavy sometimes. So we're not exactly expecting a completely smooth sailing from this point on out, even if the vaccine program is widely accepted and even if the new strains of virus do not hit Hong Kong as badly as it can otherwise. So we're keeping our fingers crossed. But in the meantime, obviously, we are doing everything we can to help our retailers. Rent relief is necessary, but not the most effective way of helping them. It's necessary as a short-term painkiller, if you like. But at the end of the day, the cure is to remove the pain. And that is, we need to help them to generate more sales. Not we alone, obviously. The borders need to reopen and the local consumers need to come out and spend. And that is a problem not unique to us. It's a problem for all shopping malls in Hong Kong, for all retailer, property owners and all retailers in Hong Kong. It's a Hong Kong problem. It's not a company-specific problem. But of course, we have a large exposure to this particular sector. And I can understand why you would be concerned if you are concerned. However, it's a macro problem that we will need to deal with. And our other businesses, hopefully, will be able to help soften the impact of the retail softness. And I look forward to being able to conduct our next briefing in person rather than over the Internet as we have for 3 sessions now, right? Okay. In the meantime, I wish all of you a good evening and a successful week ahead of you. Thank you.

Thank you.