Thank you all for coming to Hysan Development's 2016 annual results announcement session. 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 will start today's session with a presentation from Irene and Roger, and we will follow that with time to take some questions from the floor. As we have a live webcast today, we will also be taking questions online. Before that, I will invite Roger to start. Roger?
Yes. Thank you, Mark, and ladies and gentlemen, welcome to this webcast and analyst meetings, in particular to old and new friends of Hysan. Welcome. First of all, let me give you a very brief background on Hysan, in particular for the new friends of Hysan. We have a portfolio of about nine buildings, eight of which is actually in Causeway Bay and one in Mid-Level in Kennedy Road. That is our residential project, Bamboo Grove. That contribute about 4.1 million square feet of space. If we include Lee Garden Three, the latest redevelopment project, the total will be about 4.6 million square feet . As of the end of 2016, our retail portfolio roughly account for half of our valuations of the total investment properties, whereas office contribute around 34%. Just some highlights on the actual results.
Turnover up 3.1% from 2015, our core performance indicator, our Recurring Underlying Profit, up 3.8%. Reported profit show a decline due to fair value change of the valuation of investment properties. We continue to see strong occupancy in our commercial portfolio. With sound financials and a strong balance sheet, Hysan is well positioned for the uncertain times ahead. Full-year dividends are HKD 1.35 per share, up 2.3% as compared to last year. Before I move on to the numbers, I would like to ask our Executive Chairman, Ms. Irene Lee, to share with you the strategy.
Good afternoon, everyone. Thank you for joining us. I will use this next section to focus on the bigger picture, our challenges, and of course, bring opportunities and how we will capture them. Firstly, the highlights. Where we are. You have heard me say new normal. We definitely are in the new normal. That involves weak retail sales and changes in tourist spending patterns. Not necessarily tourist numbers, but spending patterns. There is a big change in the way people spend. We continue to position ourselves dynamically to capture these opportunities that come from structural changes. It is good to have a little bit of a recap of where we are. We have sound financials, strong balance sheet. We, as you saw in our results, both our turnover and our RUP saw growth. Occupancy for our portfolio remained strong, 99% for retail and 96% for office.
Last year was a very satisfactory year. We have sound assets. We have no distressed assets, I'd like to say. We have well-planned property enhancement cycles, and Lee Garden Three, our newest building, is to complete ahead of schedule and on cost. We wanted to beat the rush. We continue to explore investment opportunities. I would classify this as non-core, and this will include develop for sale projects. For instance, our recent, late last year, successful bid for the residential site at Tai Po with HKR International. We will continue to seek further high-quality projects which align to Hysan's portfolio strategy in Hong Kong and beyond, while I state Lee Gardens will continue to be our core and our focus. We have a strong team to provide the knowledge, skills, and relationships.
I will continue to lead as Executive Chairman and with the addition of Ricky, who has had extensive, very deep property experience in Hong Kong, China, and overseas. We are very pleased to welcome Ricky on board. Retail portfolio. It has its own structural changes. Millennials prefer all things digital. In fact, millennials don't seem to buy very much at all. They're minimalists. I wish I could be. Sarah. They focus on health and wellness and lifestyle themes that lead to changes. In our case, we have to change our offerings to cater to that. The mainland visitors also, we see their spending patterns change. With travel and tax policy changes in China, their desire as a natural thing, as they mature, their desire to not just go and shop for a day or two days, they actually want to experience.
They want to eat and see sights. And of course, their buying power is fueled by foreign exchange. Hong Kong dollar is hooked to the U.S. dollar, so we are less competitive. Of course, China's slower economic growth, as we now know. Competition. Our competitors in the past have differentiated a little bit. They've tended to chase the mainlanders and also the high-end. And we, in the past few years, have said we will stick to our locals. Our south side loyal local customers have always, for generations, come to Causeway Bay. And we also went for a diversified portfolio. We actually went from a lot of luxury to a much more blended portfolio. Well, guess what? They've caught up. Everyone is focusing on the local customers, and the landlords are working very hard to not just attract, but to retain.
That usually means pressure on rents all over. There is, of course, an increase in the rent-to-sales ratio. The occupancy cost is getting very high. I think partly because, as we know, retail spending is weak and the tenants, the shops themselves, the brands, have opened too quickly, too many stores. So they are feeling the pressure. So what does that mean? That leads to consolidation of shops and that leads to rental or terms renegotiation. Whether it is a lease ending or not, they will come and negotiate with you. Office portfolio also has seen its structural changes. It is propped up by the lack of supply at the moment. 2018, you'll see a lot more supply coming on. So in the Grade A side, there is a lot coming. So we've actually accelerated Lee Gardens Three to the last quarter of this year to capture the demand.
The trend, of course, is towards open plan and co-work space. I am not too sure how everyone can work sitting on a sofa and playing ping-pong at the same time, but that seems to be the trend. Technology and mobile intensive using leads to pressure on the demand side. How do we make sure we capture these opportunities born out of these changes? We are actually seeing Lee Gardens as a very different landlord and very different property owner than the rest of the market. We see ourselves as a community. We are a distinct part of Causeway Bay. People who live, work, and play here have formed an emotional attachment, if not from previous generation. We intend to make them form the habit. Front-of-mind destination for locals and visitors. Easier said than done. How do we do that? We need to continuously refresh our hardware.
In the past, landlords focus, oh, it is hardware, make sure the buildings are gleaming and state-of-the-art. Absolutely. That, too. Make sure your cycles, your refurbishment cycles are robust. Also the software. We are focusing a lot on the software. That does not mean just technology. That means customer service, real customer service, touching the customers. Marketing and events, very focused and very measurable marketing and event dollar spends. We need to enrich our trade and tenant mix. We do that anyway. We need to look at how the world is changing so we can curate our mix to give them what they want. We need to be involved, and we need to be committed to our neighborhood. We come back to an emotional attachment. There is never rent which is cheap enough or term which is long enough.
There are many shops which are repeated everywhere around Hong Kong and everywhere. There needs to be an emotional connection filled with rich memories. I always quote Walt Disney, "What do you sell?" He said, "We sell memories. We do not sell tickets. We do not sell meals. We do not even sell Mickey Mouse. We sell memories." We need to have them feel a sense of belonging, a sense of community. I suppose I am appealing to our tribal instincts. That seems to be such a hot word, tribal. We have all become a bit tribal. We want you to be part of our tribe. Stakeholders contribute to and benefit from multidimensional curation. Multidimensional basically means we need to look at the whole thing holistically, not just software, hardware, how we service them.
We look at our tenants, actually from those of us who are all here are bankers, I look at it actually almost like a banking relationship. I am the account officer. I look at my tenants as my account. I make sure I know everything about them. I know everything about them in my center, in my competitor center, about their global strategy, whether their Chief Executive Officer is new or just been fired, do they have a change in strategy, how they compete with their competitors, this shape of shoe versus that. We need to get to know them really well. When they do get into trouble, hopefully we would have actually helped them, and helped them through their cycles. If they actually do get into trouble, then again, like a bank, we have to decide, are they worth saving?
If they're not worth saving, then we need to deal with it. If they are worth saving, then we put them into the ICU. How do you do that? By not just cutting rent and lengthening your term. That means longer and lower. I don't like that. We need to work with them, just like a bank's workout. If I reduce your rent or I give you marketing dollars, what will you give me in return? In a workout, the client will have to demonstrate on a milestone basis they cut costs, they increased product, they sell land, whatever. They need to also demonstrate it has to be a partnership. We need to get to know them very well and work as partners.
That means we need to be very close to them from the ground up, from our property managers, who are really our foot soldiers. They are there touching them every day. They need to know if someone is doing a renovation next door and the coffee shop is having itchy eyes and itchy nose, why? We've got to deal with it right in the beginning. We need to help shape Lee Gardens as a destination for today and for the long term. Keyword is long term. We're here, we've been here 100 years, and we look at our property 100 years from now. I need to discuss how we can capture this business, how we can capture these opportunities. One area I'd like to discuss is how we see the mainland Chinese market.
Of course, there will be a huge share, big share of visitors, occasional shoppers, day-trippers, that will continue to come. But we haven't been very connected with this type of mainlanders in the past. Now, actually, the mainland Chinese professionals and their families are working and living in Hong Kong. They are part of us. Their working, shopping, dining habits increasingly are indifferentiable from us, from local Hong Kong, and from any other international community. We shouldn't be boxing people saying, they're mainlands and from Shenzhen, they're mainland, who's been here 10 years. They are part of us, and we would like to see them that way. So through their daily interaction with us and with other stakeholders in our portfolio, we want them to become part of our multinational Lee Gardens community. We are very inclusive.
We want to make sure we capture their spending, and their patronage, and their memories. Just lastly, a few words on Lee Garden Three. Roger has already mentioned, we are coming out of the ground, 4.5 days of floor, very fast, and the anticipated completion date is end of 2017. We have very strong green and wellness credentials. We have a running track. We have a garden in the top. We have balconies. So, restaurants and shops actually can have an open space as well, and that's very important, interaction between the outside and the inside. We will, again, promote multidimensional interaction involving the landlord, the tenants, the workers, and the community. So that's all I have, and I will hand it back to Roger to give you some numbers.
Yes. Thank you very much, Irene. Let me give you some brief update on the numbers. Basically, they are already included in the preliminary announcement, then we can quickly go to the Q&A sessions. As you all noticed from the announcement, our turnover increased by 3.1%, now reaching HKD 3.5 billion, with underlying profit demonstrating a slightly higher growth, HKD 2.369 million. As you all noticed, our reported profit reflected a decline, now is HKD 1.2 billion. As you can see from this slide, basically it's due to a fair value change in Hong Kong. The cap rate adopted by our valuer, Knight Frank, are the same as those used in interim and at the end of last year. Basically, this change primarily affect the rental change.
As you can find more detail in our announcement, the segmental reporting parts, most of this drop in valuations are coming from the retail portions. In terms of the contribution from the three sectors, both 2016 and last year, 2015, they account for pretty much the same proportions, with retail contributing about 56% of our revenue, office 36%, and the remaining 8% from residential. On our retail portfolio, it recorded growth of 3.5% at HKD 1.969 million, of which turnover rent is HKD 46 million. Occupancy at the end of 2016, 99%. The rental reversions we see for the whole year of 2016 is around 5% positive. We continue to create retail experience, including new food and beverage outlets and innovative in-mall marketing activities. Total foot traffic rose around 5%, achieved against a fall in visitors arrival, as you all know.
Estimated overall tenant sales saw a double-digit percentage decrease, heavily impacted by the estimated sales decline of certain electronic goods within our portfolio. However, if we take that away, we saw a overall decrease in estimated sales of around 5%. So, slightly better than the 8% drop for the Hong Kong overall retail situations. Just some update on the individual hubs buildings. For Hysan Place, consistent with the overall group in retail, 5% foot traffic growth. We, as you noticed, added some trendy stores and wellness, sports shoes to the tenant mix. We conducted many popular in-mall events as well as adding new food and beverage outlets. Lee Garden hubs, Lee Garden One, in particular, the foot traffic remains stable, while Lee Garden Two, we saw around 5% increase in foot traffic.
Again, similar to Hysan Place, we have a new food and beverage offerings added for the hubs attraction. Finally, the Lee Theatre hub, again, consistent with the rest of the group, we see around 5% increase in foot traffic. The Lee Theatre Plaza flagship stores and The Leighton Centre sports-themed street remain popular. We see that all these hubs have special characters, but we believe the retail portfolio should be also considered in a more holistic manner. We are working to improve the connections among different hubs, both physically and from an overall ambience point of view. On top of the individual buildings' retail performance, we are actually enhancing our Lee Gardens Plus tenant membership program. This offer and reward program now are app-based for today's, in particular, the tech-savvy user, the millennial.
We also upgrade and improve our loyalty program, Club Avenue, with an extra tier as well as better training our staff to provide good service to our Club Avenue member. In terms of office, they account for around half of our total GFA, contributing around 36% of our rental income. in 2016, we see a 3.9% increase in rental income while occupancy stayed at 96% at the end of 2016. Overall annual rental reversion is 25% positive. We continue to see mainland Chinese banking and the financial sectors ramp up the demand in Central and Admiralty. Companies, we observed that in other industries, leading quality space with good facilities and transportations turn to Causeway Bay and Lee Gardens. The latest additions to our office tenant include Uber, AXA, the insurance company, and Southwest Securities.
We continue to have a balanced tenant mix with the top four being professional and consulting, insurance, high-end retailers, as well as banking and finance. All of them together represent about slightly more than half of our office lettable area. Of these four categories, no single category accounts for more than 20% of the total lettable area. The last of our segment, residential portfolio. In 2016, we see a drop of around 4%, resulting in a rental income of HKD 274 million. Rental reversion, +5%. Occupancy, 82% at the end of 2016, primarily due to some large-scale upgrade we conducted throughout 2016. In terms of cap rate, this is a quick summary table. These cap rates are actually the same for the past few years.
Lee Gardens, again, a quick update, 22nd floor as Irene mentioned, and we expected to complete the buildings available for take-up by tenants towards the end of this year. The Lee Garden One as an enhancement, as you all probably will notice when you come up to this floor, the enhancement work and the project was successfully completed in the middle of 2016, and a new flagship store for Valentino was just opened in January. Alongside, we also added some new F&B outlets. Finally, some gearing. The net debt to equity is 5.4%, slightly increased from the 3% last year, primarily due to the funding for the Tai Po project on the land premium portions. In terms of fixed rate versus floating rate, again, the temporary has been like 75% fixed and with 24 floating. We expect we will probably continue with this ratio through 2017.
The overall debt maturity slightly reduced to 4.3%, again, primarily due to some bridging banking facilities we draw down for the land premium. The average cost of financing overall after hedging is 3.8%. We continue to maintain a good interest coverage of around 24 times, and credit rating remain at investment grade. Moody's A3 and Standard and Poor’s BBB+. In terms of outlook 2017, we continue to expect a political and economic volatility in the global environment and together with a weak local consumer sentiment. As Irene has explained to you, we have key strategy for our business, and we continue to curate Lee Gardens as a community. That is all for my brief presentation. Thank you very much.
Okay, great. Yep. Thank you, Roger. Now time for questions from the floor, and we would appreciate it if you can let us know who you are, which company you represent, and please use the microphone when asking questions as they are going out live online. I hand it back over to you guys and to Irene, Ricky, and Roger.
Yes. Oh, go.
Hi, Karl Choi from Merrill Lynch. A couple of questions. First, can you break down the retail tenant sales performance for the three major hubs? Second is if you can give us a pre-leasing update for Lee Garden Three. Thank you.
Okay. Thank you, Karl. As I mentioned earlier, overall, the tenant sales drop for the group is also around 30%, but if we exclude certain electronic goods, that is about 5%. Spreading among the three hubs, the Lee Garden hub is around 7% drop annually. Hysan Place is about 2%, and Lee Theatre Plaza, about 5%. So that is a breakdown by hubs annually. There is one more additional information I would like to share with you.
We mentioned during the interim announcement, we look at the quarter on year-on-year performance as well. So out of these four quarters, Q1 we saw a year-on-year - 12%, Q2 is - 5%, and Q3 and Q4 is around - 1%. So from a trend perspective, it seems that the drop is narrowing down. Obviously, the next question is what is going to happen in 2017, which is a key area to continue to monitor.
LG3?
Oh, sorry. LG3, I'm glad to report to you that we have signed the leases for both our office and retail. We look forward to update you later on, when we see you again at the interim stage. Because right now, we are about a year or two to the OPM competitions. Obviously, we have been stepping up efforts on both office and retail, and we recently see some very good opportunities. So we expect the leasing time, and then we'll ramp up. I think having said all these, we do recognize there is a challenge ahead in terms of the overall environment. At this moment, it's still very hard to tell you exactly what the commitment percentage we want to see. So we'll continue to monitor the situations.
Okay.
Yes, Ken Yeung from Citi. I heard from you regarding the residential is kind of the non-core part, and I do see that investor concern on your investment in this portion. So, basically, how much do you want to further invest in it? Because recently we do see that you are actively participating in some of the recent land auctions. So what kind of percentage are you targeting to expand this portion to?
Yeah, maybe you talk about the percentage, and I'll talk about strategy.
Right. Well, first of all, as we presented, residential is part of our core existing business as compared to what Ken Yeung asked about redevelopment projects. Residential, although because of the valuations and all that, we see a drop in the occupancy. As you can see that from a rent performance perspective, last year they still recorded a + 5% increase in rental reversions. In terms of the overall environment, we do recognize that expatriates coming to Hong Kong is not as popular in the past, and the package they got is also not as big as before. We have, from an operation point of view, trying to refine some of these offerings in our properties. I am sure some of you or your colleagues or actually have friends staying in Bamboo Grove as well. We will continue to maintain a good service with that.
From a cash flow perspective, it is still generating a very good sum of around HKD 300 million a year. In terms of the amount that we spend on our core, I think we mentioned to you that we are in a good position to go beyond our core portfolio in Causeway Bay. With low gearing, still 5%, we believe that financially we will be able to invest part of our capital to that. We do not have an exact scientific formula or come up with an amount. But using our investment-grade credit rating as a reference point, which we were told that if we were able to maintain the gearing at 20%-30%, with all other things being equal, we will probably still be able to retain the investment-grade credit rating.
Doing a bit of calculation, that probably will give you something like 10%-20% of our total assets. Again-
Yeah. I would not interpret too much into back solving using a gearing, because that could come up to be a large number.
Yeah.
Maybe I would just add is we need to look at other engines of growth.
It has always been on the cards. Engines for growth could well mean develop for sale. That is why we are very safe, but that is why I continue to say our core portfolio is being a landlord in Causeway Bay. You can see our numbers, you can see our buildings. However, where we can develop for sale and where the projects actually align to our own core values. For instance, Tai Po, why Tai Po? Tai Po is high-end residential, low density. It is very well located between half an hour to the border in China and half an hour to University Station at Chinese University of Hong Kong. For us, that is a very prime piece of land and partnering with HKR International. It is just a fantastic way for us to build another engine of growth for sale. This is developed for sale.
We do have experience in that area where we are co-project managers. We will continue to look for opportunities. Yes, Peel Street, we just put in a bid on the 20th. Goodness knows whether we will get anywhere near it. I think that will be quite well bid. But we will continue to look for value add opportunities, which actually fits in very well with our own strategy. We are premier, but we do not see ourselves as premier resi. We are premier resi in Bamboo Grove, but that is a new engine of growth that will not compromise our core. Our core strength is still in Causeway Bay. That is why we spent 95% of our time this morning on Causeway Bay. Sarah?
Sarah?
I do have to ask maybe two things. You say Hong Kong and beyond. Can you just touch on that?
Yeah.
And then maybe, since Ricky hasn't said anything, he can give us his
Sure
Impressions of the opportunities that he sees.
Okay. Well, I'll just go Hong Kong and beyond, and Ricky can talk a little bit about opportunities. We have, in the last couple of years, been looking at investment properties in liquid English-speaking countries. So that narrows down to the U.K., Australia, because I know Australia, and then the other growth areas, which is in China. We've talked about China, Shanghai and Southern China, Pearl River Delta, and then Singapore, and Japan. I think Asia-wise, we look at those. Opportunities, we are continuing to look at China. We have something in China already with Hang Lung, Grand Gateway 66. So maybe, since Ricky came from Hang Lung recently, and his specialty really is Well, he's got deep property experience, but development has been one of his work streams. I can only say work streams. He's very broad.
Okay. Yeah. Nice to meet everybody. I think when we talk about opportunity and the strategy, Irene has mentioned about the area and also our strength already, financial strength already. But when we talk about opportunities, we don't limit ourself to say we do retail, office, or residential. It's more about where is our core strength, adding core asset. I think we have been doing great in retail. We're doing great in office. At the same time, we also have some retail experience, Bamboo Grove and also some apartments nearby. As a developer for long term, I think we would need to strengthen a very balanced kind of portfolio. So adding the residential portfolio to us should be a big plus. As Irene has mentioned, probably, we talk about community. We talk about how many people live here, work here, buy here, shop here, children study here.
That's why I think we don't limit ourselves in opportunities. But at the same time, we don't really go into fair mass market because we think Hysan has a tradition to build quality stuff with fine positioning. That's why when we look at type of, we think this is for people of the target customers, our target customer. We probably understand what they need, and then we are confident that we can deliver the product. So financial strength, we have capability ourselves, our knowledge of the market, and our capability to deliver the product will be the key factors when we consider an opportunities.
And similar for Peel Street, it's a different product. It is small, central. It'll cater, and I'll have to do an immediate focus group here, whether it would appeal to our young friends sitting here because we're going to be developing small apartments, not micro, but small apartments, where the lump sum can drive the desire to purchase. And it is 10 minutes to Central on the walkalator. So that, again, is the sort of product we think we are very strong in that.
Hi, this is Nelson from Goldman Sachs. I just have two questions. The first one is regarding the revaluation loss. I think last time, in the last briefing, you mentioned that the revaluation loss was mostly from the street shops. I'm just wondering, in the second half this year, has the revaluation loss spread to the prime shops in addition to the street shops?
Right. Basically, it reflects the rental trend. So that covers all our portfolio. I mean, all the buildings in the retail portfolio.
Not just the street shops.
Not just the street.
I think my second question is regarding the rental reversion outlook in the next year. Can you give us some guidance on that?
Yes. I think for 2017, for retail, I think the pressure will continue. I think we are now, of course, we had aggressive budget, but at the same time, I think we need to be realistic. First of all, I think we will continue to see a negative situation. As you may recall, in 2016 1H, we have a positive. Overall, that it is around 10%. Overall, annual is around 3%-4%. In the second half, we will start to see negative rental reversions already. I expect that will continue into 2017. At this moment, it is still a bit early to tell, but I think it would be safe to see something like mid-single digit to maybe early teens in terms of negative rental reversions. For office, as you know, again, the momentum has been quite good actually as compared to retail.
For the last two years, we managed to get around 25% each year increase. For 2017, I think we will continue to benefit from the relatively strong momentum as compared to retail. But again, the rent cycles and all that, we are now renewing lease as we signed in 2014. Considering all these, I think the rental reversions will be narrow, but we still expect a positive rental reversion at this moment. Retail for residential, again, it really depends on the residential market. We don't expect any major fluctuation, like more than 5% or + 5% or - 5%. I probably will be able to share with you some clearer picture when I see you in a few months' time. At this moment, I would say our base case probably will be something like 0% to - 5%.
He shouldn't be giving guidance.
Anyone else?
Nicole from CLSA. A few questions. First one is about your cash flow in FY 2017, which obviously will drive your interest in investing in other growth engine. Wondering if you could break it down. Secondly, it's about the occupancy cost. I think last time it was around 22%. With retail sales coming down and your base rents going up, that should be higher. Thirdly, of that 4 percentage point of vacancy in your office, how much has been pre-let? Thank you.
Okay. In terms of cash flow, we don't have a lot of non-cash items in our P&L, so you can take it roughly. Our P&L bottom line will be more or less equal to our cash flow. In terms of the usage, again, the biggest one on the horizon that is committed obviously is related to Lee Garden Three. As we mentioned to you earlier, the overall cost for that project is between HKD 2 billion- HKD 2.5 billion. We paid around HKD 1 billion already, so we expect to pay the remaining part in the next one and a half year. So 2017 probably we'll need to incur something like HKD 1 billion- HKD 1.3 billion cash outflow for that, especially when it comes to the final construction stage, we need to pay for the material.
In terms of occupancy cost, for the overall annual occupancy cost is around 25%, 23%, sorry, 23% for 2016. It spread quite evenly among all our three hubs.
[inaudible].
The 4% primarily is coming from some of these non-Grade A buildings in our portfolio, and we don't see any concentration of this 4%. It's quite spread around the whole portfolio. We don't have a whole floor vacant, and some of that are actually related to the non-Grade A. We have confidence that we will be able to leverage the location advantage, especially for those upstairs retail type of things like medical office, education tutorial centers, and all that. I don't have big numbers at the moment. We still continue to marketing as part of that, but overall, from a day-to-day management perspective, we don't see it as a big challenge because it's not concentrated, not indicating a particular weakness in the building down there.
Hi, Hildy from Morgan Stanley. We see that your retail sales decline narrowed dramatically in second half 2016. Can you share with us which segment are performing well? Are we seeing luxury items or luxury goods selling better in second half or everywhere the same? What about 2017 year- to- date? Can you share some more colors on it? Thank you.
Right. In terms of the segment, again, as I mentioned to you earlier, out of that 5%, the Lee Gardens is the largest, - 7, with the Lee Theatre Plaza - 5, and Hysan Place - 2. So that pretty much reflected the trade. That is excluding the electronics goods sales. Among the luxury, actually, we see same set of year-on-year change narrowing. But it still suffer, under pressure. Lately, we've seen the first month of results, it seems that, for example, out of the jewelry and watches has continued to be under pressure. But jewelry seems that there's some recovery. So we are obviously keenly observing the trend on that. Apart from that, I think the segment performance, I would say pretty much consistent with the overall retail performance for Hong Kong.
The lifestyle and the F&B actually has some growth.
Okay. Shall we take a question from someone that's not in this room?
Sure.
It's one from Eric Shiung from MZ Asset Management, and the question is: Could you please provide the estimated return on investment for Lee Garden Three capital expenditure and lost rental income?
Right. The Lee Garden Three project, again, for this type of project, we expect an IRR of mid-teens overall. Or another measure is the year-on cost. I think at the moment, with the latest estimate, we expect on a fully run, fully ramped up annual revenue of around HKD 400 million, out of that HKD 2.5 million or HKD 2 million- HKD 2.5 million cost.
Okay. Thank you. Anyone else?
All right.
Thank you. It is David from Macquarie.
Okay.
Two questions. One, a little bit on the dividend and the share buyback strategy. Seemingly 2017 may be a trough with negative rental reversion in full force, and maybe some opening costs for Lee Garden Three. Can you give a little bit guidance that even if the bottom line has maybe some weakness, how should we interpret the dividend? Should we look at an absolute dividend type of policy or kind of like a stable payout? Similarly, how do you choose especially now that you have residential development appetite, how do you allocate your resources to share buyback? I kind of grouped that into one category of question. The second thing, a little back on the tenant sales trend. The ratio that Roger mentioned over the four quarters, that is a YoY decline, not QoQ, right?
The funny trend, of course, is in the previous two years, if you exclude that big electronic goods company, then the sales decline is actually worse. It was worse, right? In the past two years, because they were doing well, right? Now that this time around, if you include it actually make the tenant sales decline more. Can you explain a little bit? Is it because of the base effect? Thank you.
Right.
Maybe I'll let Roger deal with the last bit.
Let me talk about that base effect first. I want to start by saying that one of our tenant is one of the most productive on a per square feet basis company in the world. The sales number, actually, when it comes to the equation, it basically turn everything upside down by including that or by excluding that. While we going to continue to report to tell you that the overall tenant sales being reflecting part of the activities reflecting in that building, I think what you all know that to call the proper bill, we'll be looking at the ex basis number. I think that the anomaly that you mentioned primarily driven from that. Although, I won't be able to share with the exact calculations.
In terms of the sales performance, I would say that the last few years, sometimes especially when we see a big drop in their business or a big increase for that matter, that basically turn the direction per the analytics very difficult if you're not seeing the actual number yourself. I can just tell you that that is a very, very, very big number. In terms of the rest of the group. That's-
Really moves the dial.
That is primarily the reason. Looking at the fundamental of the performance of the rest of the tenants, I think that's more meaningful in that sense. That's why while we think for consistent purpose, we want to mention to you in particular in our written announcement, the overall numbers, but we always look at it from an ex, that store perspective.
Maybe I'll give a few words on dividend without giving you any guidance. We really only have our company philosophy, how we behave as a landlord, and our history as our guide. There are very few companies who can claim to have gradually upward sloping dividend return to, or total return to shareholders. When we look at paying out a dividend, of course we have all the considerations of our earnings. Your esteemed estimations, we of course take that into consideration. We also look at our many years behind, how we shape the curve. Without having a crystal ball, we can only say, okay, we would like that curve to continue. It could be a slightly flatter, less steep curve when times are not as good, but this is the way we hope to maintain our company. That's on the dividend point.
On the share buyback point, I think I have a philosophy. If you can find a better way to add shareholder value, may not be today, because share buyback does give you EPS uplift, instant gratification, which I know all of you love. We have to think long term. We have been here for 100 years, and we will be here for 100 years. We see the use of our capital. We need to use it wisely to create value for the company for the long term.
Again?
Just one quick question on the Ralph Lauren. The new center, the Ralph Lauren surrendered space. Just wondering, what will you guys do with the space?
The space will officially come back to us on August 31. They are doing reinstatement work, so you can see it is all wrapped up. We think that the area will benefit from more food and beverage. In fact, Lee Garden Two doesn't have enough food. We only have Seasons there. So we are in very, very deep discussions with a couple of restaurants, which will be new concepts. I look forward to sharing that with you. I am very excited about those concepts. It will be very, very destination oriented. So two because the big space is 7,000 sq ft per floor. We will carve out probably a section for another shop. Then the other because it was a very, very big, it is 20,000 ft space. So two floors of very, very nice concept restaurants is what we are hoping.
Yes. Very healthy portfolio.
We will sign it very soon. Anyone?
Anything else from the floor? If not, then thank you very much, and look forward-
Thank you.
To seeing you guys again very soon.
Thank you. Thank you very much.
Thank you.