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

Good afternoon, everyone. Welcome to Wharf REIC final results presentation. I am Angela Ng from IR team. You can download the presentation from the QR code displayed on LED wall. Our management today, including Mr. Stephen Ng, Chairman and Managing Director; and Mr. Horace Lee, Director. We will start with a PowerPoint presentation and then open the floor to the analysts for a Q&A section with the management. The theme for the presentation is top line challenges remain hard. Now let's take a look at the results highlights. Global economic and geopolitical uncertainties continue to pose challenges for the economy of Hong Kong and Mainland China. In such operating environment, group revenue decreased by 3% to HKD 12.9 billion. Revenue from Hong Kong IP, representing 81% of total declined slightly by 1% to HKD 10.5 billion. In response to unfavorable interest rates, our financial priority in the past few years has been the management of debt and borrowing costs. During the year, net debt decreased further by HKD 2.1 billion to HKD 34.2 billion. Gearing ratio further improved to 17.8%. Net borrowing cost has peaked, decreasing by 10% year-on-year. While Hong Kong's economy shows moderate growth, demand for commercial properties remained weak, leading to a 3% decline in the total value of our investment properties. In 2024, the strong local currency and gradual pace of interest rate cuts continue to dampen both business and consumer confidence. Notably, Hong Kong dollar against the RMB and Japanese yen hit decade high, together with the continued strength against other currency has weakened Hong Kong's competitiveness for both tourists and locals. As you can see from the chart, overall recovery of Hong Kong visitor arrivals remain incomplete and uneven comparing to the pre-COVID. Hong Kong retail sales also saw a slow recovery with 7% decline year-on-year, mainly dragged by consumption downgrade from key markets and local spending leakage abroad. Under the weak market conditions, our Hong Kong IP revenue declined by 1%, but OP margin maintained relatively stable under our effective cost controls. Retail rent was dragged by weaker retail sales. Meanwhile, office rents remained weak, but it was partially offset by the improving occupancies among our office portfolio. To support sustainable value creation of our IP and Hotel portfolio, the group has been taking an incremental approach and invested HKD 4.6 billion in total since our listing in 2017. This investment includes the addition of Ocean Terminal extension, the office conversion from Hampton Court service apartments and the recent strategic realignment of global brands on Canton Road Frontage with the additions of multistorey maisons, which have together solidified the leading position of our iconic properties. At the same time, we consistently enhance our brand value through proactive brand portfolio management. Thanks to our proven track record and strong relationship with best-in-class brands, Harbour City welcomed the Duplex expansion of Celine, while Louis Vuitton is set to expand to 4 storeys in the second quarter this year. Meanwhile, Louis Vuitton at Times Square opened earlier this year and Louis has committed to increasing its space. A series of promotional activities have also been launched to capture foot traffic and stimulate consumer spending. On the office front, in light of the high market vacancies, we maintain competitiveness by offering flexible lease terms and accelerating premises improvement. As a result, our office portfolio occupancy increased to 90% by year-end. Now let's take a look at the financial highlights. Group revenue and operating profit declined by 3%. However, thanks to improvement in noncore DP business and a 10% reduction in borrowing costs, group UNP increased by 2%. Noncash and unrealized net IP revaluation deficit widened, but cap rate remained unchanged and conservative. Since listing in 2017, we have been completely upfront and consistent about our distribution ratio of 65% of core UNP as a policy. Full year DPS was HKD 1.24. The group maintained a sound financial health with Moody's A2 rating. Net debt is at a record low of HKD 34.2 billion, down by HKD 17.8 billion since the end of 2020. Average interest cost was 5.6%. With this rate, 17.8 net debt reduction would have saved HKD 1 billion of interest every year. In view of the high rate environment, our floating rate debt further reduced to 80%. Interest cost -- sorry, interest cover stands strong at 4.7x. In the following slides, we will walk through the performance of Harbour City, Times Square and the Hotel portfolio. First, Harbour City, which accounts for 70% of group revenue. Harbour City continued to receive stable demand backed by critical mass and location advantage. Overall revenue increased by 2% to HKD 9.1 billion. Retail occupancy was healthy at 94%. Office occupancy rose to 90%, mainly driven by the expansion and commitments from finance and insurance companies. As the largest and most diverse shopping mall in Hong Kong, Harbour City maintained a steady and balanced mix of trades that caters to both local and tourists. Retail rental increased by 2% to HKD 5 billion. Canton Road Frontage now features 16 best-in-class luxury brands, including the addition of Fendi. And inside Harbour City, we also welcome the expansion of debut of various global brands and F&B outlets. Moving on to Times Square. We continue to refine its tenant mix to enhance competitiveness. The mall has been enriched by the most popular luxury brands, while the upper floor will feature more experiential retailing and trendier dining options. On the other hand, office occupancy improved by 3 percentage points from the end of June to 90%, driven by tech, media and financial companies. Then we will switch to our hotel portfolio, which includes the 3 Marco Polo hotels on Canton Road and The Murray under Niccolo brand. The Murray, which is where we are today, has been awarded Forbes Travel Guide 5 Star for 3 consecutive years in 2024. Through consistent service excellence, our hotels maintained steady occupancy rates, but the overall industry is experiencing a decline in room rates, largely due to intense regional competition and price-sensitive travelers. To encourage repeat visits, we have launched a cross-hotel rewards program along with attractive package deals. Moving on to general outlook. A full market recovery remains uncertain as concerns about looming trading wars and unfavorable interest rates and currency persist. However, the central government's substantial stimulus packages, along with the Hong Kong government's ongoing efforts to attract quality visitors may help revitalize the market once cyclical factors improve. In the last part of the presentation, I will walk through our efforts in ESG. We have formulated the 2030 targets, which are on track. Additionally, we are developing new carbon reduction targets in accordance with SBTi criteria. Our efforts have earned a strong ESG ratings, including A rating from MSCI ESG assessment. In recent years, Times Square has earned both LEED Platinum and WELL Health-Safety certifications up to the end of 2024 and accumulated total of HKD 11.1 billion sustainability-linked loan has been arranged. Energy saving initiatives are actively adopted and pursued across our IP portfolio and Star Ferry. Youth development is also our key focus, and we are dedicated to various business in community initiatives, including our flagship project, WeCan. Continuous efforts were also made on promoting corporate governance, talent development and workplace safety. That concludes my presentation. We will now proceed to the Q&A section.

A quick housekeeping note for the analysts before we begin. [Operator Instructions] Now may I invite Mr. Ng and Mr. Lee to come to the stage, please. So now may we take the first question from the floor, Cindy from Citi.

Two questions from me. One is on retail. So we see from results that second half '24 is seeing some more challenges in retail comparing with first half. So would you mind like sharing with us the reversion in retail sales performance in the second half last year? You remember, first half, we see still positive reversion in Harbour City. So how the second half performance has been doing? And what's your initial outlook for 2025, say, do we see sentiment improve in the first 2 months, so still quite challenging? This is the first question. And the second question is actually on the retail occupancy. So obviously, occupancy is still very healthy, but we see some fluctuation at both Harbour City and Times Square retail. Is it more a function of some proactive tenant remixing? Or what's the reasons behind? And how is your plan in, say, retaining the brand, say, attracting more brands this year?

Thank you. The retail market in Hong Kong, as you know, is going through a downward trend -- is experiencing a downward trend. And that started actually from March or April 2023. And ever since then, the year-on-year "growth" has been negative with the exception of, of course, January and February of last year because they compared to preopening January and February. So this is a general knowledge, and I don't need to dwell on it. And at Harbour City and Times Square, we're not performing too differently from the market. Generally, it's been down. And we don't -- looking ahead, first of all, we don't yet see improvement in the first half of this year. The first quarter is almost behind us. And we know there is no "good news" and the second quarter may surprise us, but given that we haven't started to see momentum yet, even if the second quarter does improve, it will take a little while for the full impact of it to be realized. So that is the way we look at the retail situation in Hong Kong in the first half of this year. Second half is difficult to predict. The U.S. President is toing and froing, and it makes the forecasting extremely difficult, if not impossible. The 2 sessions in Beijing produced favorable comments from certain quarters, from a number of quarters, but we have to see how quickly and how significantly that would translate into real dollars and cents at the Hong Kong level. So I can't predict with any measure of certainty what the occupancy going forward would be or the rental would be other than to say that I am not optimistic about the first half of this year. Second half, hopefully, I don't know, not.

May we take the second question from Karl Chan, JPMorgan.

So on Hong Kong retail, just a follow-up question. Just curious if you can share a bit more color on the performances by category in the past, let's say, past 6 months, say, is luxury doing better? Or is it like F&B? Or is it other retail? Can you share a bit more color on that? And then with that, do you think we would need to do even more trade mix upgrades or trade mix changes in the coming year? So that's my first question on Hong Kong retail. And then the second question is more on AEI. Just curious, in the coming year, do we plan any AEI? I guess from our side, we have always been anticipating some sort of AEI in Times Square because as we see, the rental income in Times Square has been still declining. So just curious, do you have any plan for Times Square for the next 1 to 2 years?

Good. Thank you. AEI and retail. Okay. There is no marked difference between categories, so to speak. The difference is actually within each category, some retailers within each category performed better than others, uneven performance. It depends on the brand. Some of the brands are doing very well. Others are lagging quite far behind. But on an average, there is no marked difference between, for instance, luxury and nonluxury. A good example is along the Canton Road front, we talk about 16 shops. And those 16 collectively performed similarly as the rest of the mall. So that's probably the best way to answer that question. For AEI, we do have some schemes, which we're still trying to finalize for Times Square. Yes, we will be investing. The question is, what is the best scheme to make the investment worth every dollar of it. And hopefully, sometime within the next -- well, the rest of the year, we'll be able to finalize it and implement it. In the meantime, we're doing smaller -- taking smaller steps. We're bringing back some tenants that would help us to reboot retail sales. But those are relatively small steps at this stage. The bigger plan is still in the making.

May we take the next question from Raymond Liu, HSBC.

Maybe I have 3 questions I want to ask. Maybe the first question actually want to reconcile the current situation in the high-end retail market in Hong Kong. Because if you look at the overall market, we actually saw that some of the top luxury brands do reexpand in a couple of shopping malls, including the Times Square, what you just mentioned in the Harbour City also saw some expansion here. But the overall retail market has been quite challenging. Can you share with us and connect the dot with us and as well as investors? That's the first question. And the second question is actually about fixed rent as well as the turnover rent of your shopping malls here? Because do we see like the fixed rent continue to receive positive rental reversion? Or like there are some challenges going forward? That was the second question. And the third question is actually will be related to the second half, the Chairman just mentioned, hopefully to be a bit better. What -- can you share a bit more color that what are the key things that you are looking for other than the policy from the Mainland China? Anything that you particularly -- you want to focus more that we see some improvement in the retail and tourism market down the road?

Okay. Thank you. Now to be fair, Angela suggested 2 questions. You asked 3. I'll give you a choice, which 2 would you like me address. First two, okay? We can come back to the third later on if there are no other questions, okay? For luxury retail, what we see is overall consolidation, i.e., most brands are looking for a smaller exposure in Hong Kong generally, but they're becoming selective. So some of them are expanding at those locations, which they consider priority while downsizing, if not closing other locations. And hopefully, we'll be one of the landlords benefiting from this process of consolidation. So far, we're doing reasonably well, but there is competition clearly. And on the question of turnover rent versus fixed rent, turnover rent certainly dropped in the year 2024. Part of it is because of the -- when new leases were written, the base rent increased. So part of it was because of conversion of turnover rent into base rent. Whether or not we can continue to see the same trend of conversion from turnover to base, I can't be very confident. I think in some cases, we will see that. But in other cases, we may see the reverse. So overall, I would think that the base rent portion would probably be stable. And the upside or downside will come in the turnover rent in 2025.

May we have the next question from Karl Choi, Bank of America.

A couple of questions. First, could you discuss with us -- share with us the occupancy cost that you saw in 2024? And is that sustainable? And whether -- or in view of some vacancy, is there a chance that you actually need to lower some rents in order to boost the occupancy sort of in terms of your outlook? And second is the percentage of debt that is floating rate went down to 80%. What's the expectation for 2025, if you do see more chances to fix more of your debt? Ideally, how much would you want to fix?

Okay. Occupancy cost is a little bit higher than what it was a year ago. And Harbour City's occupancy cost is -- we're doing just about 20% overall. And Times Square is not too different either. That's because of rental adjustment. But again, there are great variances from tenant to tenant. Some of our major tenants are reporting occupancy costs of single digit. But there are others that are reporting triple digits. But overall, it is about 20%. Now clearly, you would ask and I have asked the same question, why are they still there if they're paying in rent as much as they get in sales. I'm asking the same question. Clearly, we need -- these tenants will either have to improve their sales or they have to have a good reason for continuing to be there. Maybe there's an advertising value in it. Maybe there are reasons, we don't know or hopefully, they're not underreporting their sales. Debt. We don't have a fixed target as such to reduce our debt. It's a natural process of debt reduction. It goes back, I suppose, in a way to -- when we listed, we structured the listing vehicle to be not a REIT, but a REIC because we never like the REIT code, which was rigid about distribution at 90% or higher. We didn't think that would allow the company to manage its debt down when interest rate goes up. And so at the IPO stage, we made it very clear that our dividend policy is 65% of our core earnings, i.e., underlying net profit, the basic earnings from Hong Kong IP and hotels. And that allowed us to claw back the remaining 35% into, a, CapEx; b, debt management, which was a good reason why we were able to reduce our debt by HKD 18 billion in the last 4 years at an interest cost equivalent to about HKD 1 billion last year. So how much we can reduce our debt in 2025 can be quite easily calculated. Again, take our underlying net profit from Hong Kong IP and hotels, assuming it's not too different from last year. 35% of it will be cash that we can plow back into repaying debt, minus, of course, capital expenditure. We do not expect very large capital expenditures in 2025 because even if we go ahead with the Times Square expenditure, the bulk of it will probably not happen this year or payment of it in any case. So more or less, it's a natural progression, which you can estimate.

Any more questions from the floor? Simon Cheung from Goldman Sachs.

I just broadly wanted to get a sense what you are seeing on -- in your shopping mall because I think your competitor mentioned that what, 85% of the tenant sales is coming from locals. For example, I think there was in the briefing that Hong Kong land mentioned about the land properties. And for your property, I'm not sure whether you have any number that you can share and also on your membership program, like VIC program, what sort of spending are you seeing? And then related to that, I do remember back in the COVID period, you spent quite a bit of money to give out coupon and all those. Given the backdrop that you're seeing, are you seeing the need to do so again?

Right. We don't have a scientific number about what proportion of our retail sales come from locals versus nonlocals. But we have a reasonable guesstimate that at Harbour City, up to 50% of it is generated by visitors and a lower proportion of Times Square, probably less than 1/3. VICs, we call VICs, I don't know what other people call them, do not contribute a great part of our sales because particularly for the visitors, unless they are frequent visitors, they wouldn't care to join loyalty programs. And that is why I think overall, our VIC proportion is probably lower than what some of our competitors claim. Coupons, we have no intention at this stage to restart coupons. It was a costly program, as you pointed out. And it was a program we used in exceptional times, and I don't think we're in exceptional times again yet.

And then we will have the question from Raymond Cheng of CGS.

Can I have some color about the -- your shopping mall foot traffic, especially after the government, right, they'd be less the multi-visit visa. So how is the foot traffic, especially in January and February? And also any changes for those shop tenant sales, whether it's high end or F&B better? So this is my first question. And the second question, the Hong Kong new stadium just opened, right, recently. Any expectation whether are you guys say, given those are concerts, right, those are big event could potentially bring some high-spending customer. Do you think your shop, your mall should be -- could be benefited?

Right. Yes, footfall has certainly increased. The number of visitors into Hong Kong has recovered, although overall, there's still something like 30% below 2018. The recovery is not yet as healthy as most of us would like to see. But compared to even 2023, the numbers are higher, and we see that in our malls as well. Unfortunately, they're not translating into a commensurate improvement in retail sales, implying the per capita consumption has dropped and we're no different from our competitors in generally. The opening of the sports park in Kai Tak is obviously a stimulus for the hospitality industry in Hong Kong. First of all, we do hope that the hotels will benefit. Our hotels are beginning to see a little bit of that, but it's still a little early to be too definitive about it. It will hopefully also benefit the retail trade. A slight upside to an additional slight upside too, I hope, is when the multi-visit visas rather than 1 visit a week from GBA, right now, it's only -- it's limited to Shenzhen. Now when that's extended beyond Shenzhen to the other GBA -- some of the other GBA cities, if that happens, hopefully, we'll bring more visitors from those cities as well. And hopefully, too, because those cities are a little farther away, they would tend to stay in Hong Kong rather than go back the same day. But all of that is, at this stage, hypothesis. Whether or not other cities will be added and when, we don't know, which is why I can't be too optimistic about the first half of this year. Second half is anybody's guess.

And then we will have the next question from Percy, DBS.

This is Percy from DBS. Just one question regarding your equity portfolio holding. I recall previously, we have actually sell a portion of our equity portfolio and to reduce our debt. Just wondering what is your view on the current positioning? Is there any chance that we could replicate as well as to reduce our debt as well?

Yes. Right. It was in 2023, when we sold a significant portion of our investments and the purpose was to deleverage. And that's exactly helped us to reduce our -- not only our debt, but also our interest cost. What we sold at that time was primarily lower-yield equities. And what we have kept are the higher-yield equities, high enough to result in a slight positive carry. Now if they were also negative carry, we would have considered liquidating some more. But to the extent that they are slightly positive carry, we can afford to hang on to them. And hopefully, when interest rate falls further, the positive carry will become bigger.

And then the next question from Mark Leung, UBS.

I have 3 questions. I think the first one is regarding on the Hong Kong visitor mix. So I think everyone knows that the Mainland maybe visitation has not gone back to pre-COVID level and the per capita spending is quite weak as well. But on the positive side, we have seen the non-Chinese visitors actually is growing pretty strong. And according to the Hong Kong government, their per capita spending is even higher than the Mainland. Just want to check if management see any tenant mix reshuffle needed for both of our tourist district mall in Harbour City and Times Square. I think that's the first question regarding on the tenant mix. And second question is regarding on the competitions regarding to our neighbor, Shenzhen. I recall that in early December last year, Shenzhen has allowed [indiscernible] to allowing Hong Kong residents to have a tax refund after they shopping in Mainland China. How do management view that the possibility for rollouts on the other land ports in Hong Kong? I think that's the second question. And what is our impact for the Hong Kong retail market in general? And thirdly is maybe I should wait on this first day, but I would like to check with management is for 2025 for the Hong Kong retail and China retail outlook because we have both operations in both regions, right? Which regions you think will outperform in this year?

Thank you. Well, first of all, again, the rule is 2 questions. And it's convenient for me to defer the second question given that it would be price sensitive or could be price sensitive. We haven't announced for the other company yet. So I'll deal with the first 2 questions. Visitor mix, there are a few destinations or rather a few source markets where visitors recovery has exceeded 100% or are very close to 100%. The Philippines is one of them, certainly Macau, Thailand and...

Taiwan as well.

Taiwan. And we see ourselves benefiting from them as well. In particular, our hotels in Harbour City for historical and other reasons, they've done well in some of these markets, the Philippines and Thailand. So we're doing not too badly in that regard. The tax rebate in Shenzhen, as far as we know, it's not been a significant factor. The volume is relatively insignificant as far as we know. So I don't think it's had much impact on Hong Kong retail sales.

Due to concern of time, we will receive the last question from the floor, if there is any.

Thank you.

So I think we can conclude my briefing here today. We wish you a nice evening. Thank you for joining.