Thank you all for joining us today at Hysan Development's 2019 annual results webcast. Due to the outbreak of COVID-19, we believe this is the best way to conduct our session today, and we really appreciate you for being with us despite the inconvenience. Now, let me introduce our panel for this afternoon. Our Chairman, Ms. Irene Lee, our Chief Operating Officer, Mr. Ricky Lui, and our Chief Financial Officer, Mr. Roger Hao. We'll start today's session with a presentation from Irene, Ricky, and Roger, and we'll follow that with time to take some questions online from wherever you are. Before that, though, I will invite Irene to speak a little bit about how Hysan is handling the present COVID-19 situation. Irene?
Thank you very much. Welcome, everybody. Hong Kong went through 2019 social unrest and now the COVID-19 virus outbreak. Hysan is facing one of the biggest crisis period in our recent history in terms of impact on our business, perhaps even bigger than SARS during 2003. However, we need to look beyond today's crisis as a low point over a long period. Hysan has been in Causeway Bay for nearly 100 years. There have been many ups and downs. We will continue to navigate changes brought about by natural evolution, such as changes in consumption habits or unexpected black swan events, as we have seen in the last two months. We believe we can overcome adversities, adjust, and deal with changes. Hysan has a commercial portfolio that exudes quality in terms of physical location, building designs, and tenant mix. The company is managed by dedicated, experienced, and forward-looking professionals.
We have formed strong partnerships with our tenants and our community. I'm confident our partnership with our stakeholders will endure the test of time. While we are certain the COVID-19 virus will end, the situation with timing and intensity is still not clear. We will do our best to provide support to our stakeholders. Importantly, for our tenants, in order to ease the pressure on their business during this challenging period, Hysan will be offering a meaningful rent concession with reduction in basic rent in February and in March. The rent concessions are in addition to those provided during the social unrest in the latter part of 2019. We believe the situation will improve. We intend to be well-prepared when the virus ends and the situation normalizes so that Hysan, together with our tenants, work to stimulate spending with confidence and with mutual support.
For our tenants, shoppers, and staff members, we are doing our very best to provide a clean, safe, and enjoyable environment. I would like to use this opportunity to thank our frontline staff for their hard work, and we will ensure they receive the best care and protection while carrying out their daily tasks. The coming weeks are likely to remain difficult. With all of Hong Kong pulling together, we will overcome these challenges, and I look forward to better days ahead. Now, let's start our presentation for Hysan's 2019 results. Turnover and recurring underlying profit increased by 2.5% and 2% respectively. A robust first half helped ease the impact of a negative second half. Hysan's balanced dual engine portfolio of office and retail provides a stable platform for our company. Occupancies of office and retail portfolios were 98% and 96% respectively. We have seen impact from different fronts.
Firstly, external factors. Global uncertainties and the US-China tensions affected Hong Kong's general economic well-being. On the domestic front, social conflicts in the second half of the year had immediate adverse effect. Hong Kong retail sales dropped 11% in 2019 when compared with the year before. Office demand and rental growth dampened. Then we had the onset of COVID-19 in mainland China and Hong Kong earlier this year, further compounding the difficult economic situation. Throughout these difficult times, Hysan's management team delivered swift, proactive, timely solutions and support to manage the impact on staff, tenants, and shoppers. Office and retail tenants were largely in business as usual mode. All stakeholders worked together reflecting our long-term community building efforts. A dual engine business provided a stable platform. As you can see from the pie chart, our office and retail portfolios are both at 46% in turnover contribution to our company.
Balanced portfolio and synergies ensure Hysan remain more resilient to unexpected disruptions and impacts. Our ability to retain and continue to attract premium brands in Lee Gardens shows our area curation ability and strong partnerships with our tenants. Our portfolio is, of course, also balanced by a broad range of retail and F&B outlets with different price points for different tastes. Vibrant neighborhood, well-served by excellent public transportation. The completion of Lee Gardens Three expanded the number of quality local and multinational office tenants. The demand from increasingly discerning office tenants drive broader and more diverse retail offerings. Positive self-sustaining cycle of supply and demand continue to power our business. The convenience and vibrancy make Lee Gardens ideal for flex or co-work. Flex extended our catchment to entrepreneurs and the shared economy.
Co-working industry faces inevitable consolidation in Hong Kong and actually elsewhere, and those with proven business models are expected to survive. We are confident that flex or co-work will remain a part of office ecosystem. Lee Gardens is an extraordinary place infused with old Hong Kong and the Hong Kong of today. Residents, shoppers, workers, and businesses helped build the community in the past 100 years. Hysan carried out asset enhancements, redevelopments, neighborhood curation, tenant mix changes, and community events over the years. Long-term thinking comes naturally to Hysan. Stakeholders' demand for sustainability have grown significantly in recent years. Our board established a sustainability committee to provide long-term direction and guidance to be supported by the management sustainability executive committee and task force. We're in a good position to integrate sustainability initiatives with measurable targets into our short, medium, and long-term goals. Finally, outlook.
Hong Kong's economic outlook is clouded by global headwinds and domestic factors. COVID-19 has introduced an unprecedented further challenge after so many months of social unrest. We are committed, as we have been in the last 97 years, to support our community through economic ups and downs. We continue to strive for stable and sustainable performance. A strong, reputable property investment investor, developer, and manager, we have the foundation to continue our growth. Thank you.
Thank you, Irene. Can I ask Roger to continue with the presentation?
Thank you, Mark, and thank you, Irene. Let me highlight a few summary of our results from a corporate point of view, and then Ricky will share with you in more details for the performance of each individual business unit. We are now on page 13. Overall, our top line, the turnover, increased by 2.5% to HKD 3.988 billion. Our key performance measurement from a profitability point of view, the recurring underlying profit increased by 2% to about HKD 2.6 billion. Whereas the shareholders' fund mainly represented the asset value of our investment properties increased by 4.3% to around HKD 77.7 billion. On the next page 14, again, that is just a very simple summary of the source of income or source of turnover. As Irene also mentioned, in 2019, both office and retail contribute 46% of our top line.
Moving on to a summary of our financial positions. On the gearing side, we continue to maintain a very low gearing with net debt to equity at 4%. We continue to maintain an investment-grade credit rating with one of the key credit metrics as being the net interest coverage, maintaining at a very healthy 17x . On a debt profile, fixed rate continue to be the major part of our debt, representing around 84% at the end of 2019. On average debt maturity with a few round of bond issuance during 2019. Our debt maturity has been lengthened from four years to around 6.6 years at the end of 2019. Capital market also represent around 80-something percent of our total funding source. Effective interest rate continue to maintain at 3.4%.
As part of our overall company drive on green and sustainability, after we established a green finance framework back in last year, in 2019, we have issued a total of about HKD 1.6 billion green bond. In terms of cap rate, as indicated on page 16, there is no change in cap rates employed by our valuers, both between end of 2019 and 2018 as well. Thank you very much.
Thank you, Roger. I will give some highlight of our operation, starting with office. For office, our turnover increased by 8.6% to HKD 1.833 billion. Occupancy is at 98% at the end of 2019. The increase of turnover reflect the positive reversion for our rent review, renewal, and new lettings. It also cover the contribution from the whole year effect of Lee Garden Three. About the distribution of the portfolio, our portfolio is still a fair balanced portfolio by tenants profile. The three major industry, banking and finance, professional and consulting, co-working and flex, they take up about 50% of the area. The rest will cover by another seven different categories. For retail, with the impact of the second half of 2019, there's a drop of 4.5% in turnover to HKD 1.836 billion. The contribution from turnover is HKD 66 million, with an occupancy at the end of 2019, 96%.
Still, there is positive rental reversion in renewal rent review and new lettings. About the retail sales. Our retail sales align with the Hong Kong retail sales with an overall drop about 10%. The category of jewelry and watches has a serious drop of over 22%, while the F&B has a mild drop of 3%. In this very two ends 2019, we still make a lot of advancement in our trade mix enhancement. In 2019, we have 35 new brands added to our portfolio, and also 27 shops have been majorly renovated. All this reflect the confidence of Lee Garden areas. For residential, there's an increase of 14.3% of the turnover to HKD 319 million. The positive rental reversion is contributed by the renovated units and also the enhanced environments of the public areas, including the lift lobby and the lift modernizations. The occupancy is 87%. About Tai Po development.
All the design work has been done, and now we are refining the landscape and compound design. Foundation basement work has been completed and superstructure has started early this year. We expect the construction work to be completed by 2021. In Hysan business model, we emphasize on our community. As mentioned by chairman, the dual engine model has bringing a lot of benefit to our business. On top of that, we also add in a lot of accents and characters to our communities. One of the new initiative is a product called Bizhouse, which was a specially designed property for the entrepreneur who really need a good living space, but at the same time they want to use their living space to operate their business in the daytime. This is a very unique new product in the market.
We also have the Urban Sky, which is a new venues created for art and culture at the ninth floor of Hysan Place, which gaining a lot of traction from the market. To fill the content for art and culture, we also have our arts program curated by our management trainees, mentored by our project and design team. We have a lot of collaboration with the local artists. There's one modern piece of art that is being hanged at the atrium of Lee Garden One. We hope you can spend some time, come and have a look. Lee Gardens Association has spent years to curate the neighborhood, engage the neighbor. They're still making a lot of effort this year getting the neighbor to be more aligned in our interest and also in our roadmap about how to form the Lee Garden areas.
About loyalty program, which is one of the key pillars of Hysan business. Last year we run the Lee Garden apps, and now we have the Lee Garden Club apps nearly launched later last year. We are going to put in the Club Avenue into the same platform. So the Club Avenue members will also enjoy the benefit from this new technology. But at the same time, the classic pampering of our members is still very important. We just finished our new Club Avenue launch at the fifth floor of the Lee Garden One. We are going to open and serve our members soon. Talking about the loyal members. We believe families also a very good members unit.
We have been enhancing our children and family program to include a lot of art, culture, sports, and other kind of training that will benefit the kids while they have the fun in this area. We also make use of the modern technology about the electronic gift coupon last year. This is a trial year for us. The electronic gift coupon, e-coupon, can be used in our area. There's over 20,000 of transactions. We have been giving a good multiplier effect of the tenant sales, which will be another channel to help our tenants. In 2019, we have 160 marketing event, which include a lot of Hong Kong list of global events, or even first time in Hong Kong shows or pop-ups. Finally, we talk about some business technology.
On top of the apps we talk about just now, we also have invest in the area Wi-Fi, as well as the IoT. Which help us to give a clear pictures of our demographic of our visitors and their traffic pattern. It help us to gain better foresight of our operational planning. In 2020, we are going to adopt the data analytics and AI. We hope this will strengthen our understanding of our customer, as well as moving towards to predictable approach. We also talk about the social media. Our WeChat and Instagram has double to triple digit growth in 2019. With the new marketing program, we expect the growth will continue.
Finally, we would like to say we use business technology to help us to improve our operational efficiency, making data-driven decision and create value, and taking strong consider. But at the same time, we will take strong consideration in data privacy. Thank you.
Thank you, Ricky. Now it's time for questions from you guys out there online. I will try to read out as many questions as possible which are coming in. But as we only have about 20, 25 minutes for this session, I can only promise you I'll do my best. Now, the first questions are from Justin. Justin Kwok, Goldman Sachs. It's a three parter. The first one is, how has the tenant relief program affected your retail rental in the second half of 2019? And how much would that financially impact into 2020?
Right.
The first one first?
Yeah. Hi, Justin. Regarding the rental support we provided to our tenant with respect to the year of 2019, had been fully reflected in the 2019 results that you are seeing from the announcement. I believe that—
There's no spillover into Q1 of 2020. But as we talked about earlier, Q1 2020 is now We're now rolling out a program to help our tenants to get over the COVID-19 crisis.
Sure. Second part is, what is the guidance for office and retail rental reversion outlook into 2020, and what is the situation of the renewals?
Okay. Well, let me do a quick recap on the 2019, and then I will touch on 2020 that we have seen so far. As you will see from the announcement, basically all three business units managed to achieve positive reversions. Of which I think I would like to particular highlight retail, because after two years of negative reversion of flattish reversions, 2019 actually is the year we see the impact and the result of our period strategy of curating the mix and all the other matters. So that is the main driver of the retail reversions being positive. For office, again, as I share with you guys, in the interim announcement, we had a mid-teen positive reversions, which actually basically last year throughout the year.
So overall for the annual portfolio for office, we managed to generate a positive mid-teen reversions. And for residential, while a little smaller than the other two commercial counterparts, in terms of reversion, they also managed to get to an early teens, two digit figures reversion. So all of that provide a very good starting cushion in terms of cash flow to support us in our mitigation program on the 2020 challenges. Coming on to 2020, again, from an expiry point of view, as you guys probably can now see from our announcement, for both office and retail, we do not have a particularly high percentage of space coming up for renewal or expiry. And for office, it is around 22%, whereas our retail is around 26%.
Both of which are not particularly high given our three-year duration of normal leases. All of that, I would say, because it is a bit early in the year, but for office, according to the latest number, we have actually done around 25%+ of those spaces already re-committed. And all of those re-committed leases, the reversion continue to be a positive teens. So in terms of reversions numbers, it continue to help us. For retail, while we do not have a particular high percentage, they are actually also quite spread out through the years. And in Q1, we have completed around half of it, roughly. And with the others, we are actually in discussions. Obviously, given the current sentiment, we expect to see a little bit of a slowing down in terms of the conclusion of the lease. And we do expect some headwinds in these negotiations.
It is not inconceivable to see some negatives. As I said earlier, it is still early in the year. When we see each other next time in interim profit, we can have a better view in terms of the reversion situation for retail. For residential, it is kind of like a normal business in terms of the negotiation because it is just a two-year lease with one year commitment only. It will not be committed too early through the year.
Right. The third part of Justin's three parter is about borrowings. He said he noticed a much higher level of cash balance from more borrowings. Is that just a timing issue before you retire some other debts or if you intend to keep a much higher war chest for some specific purpose?
Right. Simply put, the answer is the second point primarily. As you all know, we have been talking about our readiness in terms of moving beyond our core portfolio in Causeway Bay. I guess at that point, maybe I can also talk a little bit about EMSD. I will hurry you into it.
Yes. I think also the other part of the cash balance is we wanted to take advantage of good borrowing conditions and lengthening maturity conditions. We wanted to actually do a bit more. Of course, it is for a purpose. We are not just hoarding the cash. As we know, EMSD should have actually started the process, but with COVID-19, the hearing has been postponed. Instead of happening during the first half of 2020, we believe that we will see EMSD come out towards the end of 2020. Perhaps Q3 would be optimistic, Q4 is realistic.
Yep.
EMSD is a project that we have talked about and have been waiting for. We shall see. In terms of other opportunities, we are always ready to look, and we do look both in Hong Kong, out of our core, as well as beyond. Apart from that, we do not need to say anything more.
Okay, great. Next question is from Citi's Ken Yeung. Can we give investors assurance of a steady DPS policy even if 2020's recurring profits may drop?
Maybe I will just say a few words from a board's point of view. As you know, it is the board's prerogative and decision to determine our dividend policy. However, you can see from our very, very long progressively inclining dividend payout that it is something that we are very, very proud of. Not too many companies can claim to have a, how many years, Roger?
I think it is 15.
15 years plus of steady, gently upward inclining dividend payout. 2020 will be a difficult year. As you saw for 2019, despite a mild increase in recurring underlying profit, we retained a flat stance compared with 2018. I think that is realistic and conservative, and we expect to remain conservative given the uncertainties that we face, especially in the next few months, this year, in fact.
Okay. The next one is from Bank of America's Fan Tso. The question there is, what is the latest occupancy cost ratio and retail reversion outlook for 2020?
Right. Maybe let me take that. For the OCR, occupancy cost ratio, 2019 actually our first half is at high teens, but in the second half it increased as you would all expect to 22%, 23%. So it ended up with the overall annual OCR being around 20%. So what does that mean? I just want to give you a perspective. 2017, when we had quite a tough first half, which is a result extended from the second half of 2016. At the peak, we got a 23% of OCR. 2018, with the improvement in tenant sales and all the other factors, the annual OCR is reduced to around 18%. So what we are seeing, obviously, is a trend trending up. From a history point of view, just looking back to 2017, 2018, it's not a huge number.
Again, it's still too early to say about the entire year. It also depends on the timing of various issues that are affecting us. In terms of the reversion outlook, again, what I can share with you is obviously the data that we manage or we control. In terms of the rents for the leases that will expire or the passing rent of the expiring lease, for office, actually, it's around 4%-5% lower than that of 2019. So that means that if the spot rent is maintained at the same level as 2019, we should expect some possibility to have positive reversions. Then, of course, the question ties to the movement of the spot rent, and which is subject to a lot of various factors. For retail, I think instead of telling you an expiring range, I think your question about OCR is probably more relevant.
The view that we have now is, obviously, like what Irene Lee mentioned earlier, the virus situation will be gone. But we don't know for sure the timing. What we are trying to do now is to provide help to our retail tenant, so that overall, the Hysan retail portfolio continue to be a dynamic, vibrant, and attractive portfolio to serve our—
Bonnie's question is that she saw the Tai Po residential project that's going to be construction completed in the [finance] or different phases, I guess.
Maybe I explain a little bit. For that Tai Po project, we talk about the construction is actually a feasible construction work. When we talk about completion, we still need to talk about the occupation permit kind of things. For occupation permit, we are going to apply it by phases, so as to minimize any potential impact if the vacancy tax come in place. This is our current strategies. 2021 is only the construction completion date.
We are also Ricky, may I just supplement one? I think the construction team, project team are also planning different scenario, and it is a little bit early to commit to a particular scenario, but we are monitoring issue, like Ricky mentioned, closely.
Right. The next question is from Henry Wong from JPMorgan, and Henry's question is, there is obviously rental concession, but is there any cost management initiatives to mitigate the impact of COVID-19?
Okay.
I think what we are doing right now is we preparing a lot of a program, a campaign, to catch the rebound of the market, which we expect should happen after the COVID-19. Having said that, this is to help our tenants to get their sales, which will in return help their situation and as well as, hopefully, our rentals income.
Sure. Okay. David Ng from Macquarie has a couple questions. He is asking about the risk of occupancy dropping further in 2020 based on the first two months of performance so far. Is that a problem, the risk of occupancy dropping further?
Actually, we have a lot of. Hysan really has very good relationship with our tenants, and also with all the measures we have put in place, proactive enough, we still have good confident to retain our tenants as much as possible. I think Hysan is still a very preferred choice for them to stay here.
Sure. David also has a question about the average office expiry rents of 2020 versus that of 2019.
Right. Well, let me repeat again for David. While we do not go to specific number, but as I mentioned earlier, the rents that will expire in 2020 is roughly 4%-5% lower than those expired in 2019.
Great. Thanks. Seems we have pretty much exhausted the number of questions here, and we are in fact running out of time. Thank you all for your questions today, and we certainly hope to see you again in a more usual fashion in August for the interim results. Thank you, and bye.
Thank you.
Thank you.
Thank you very much.