Okay. Thank you all for coming to Hysan Development's 2016 interim results announcement session. Our apologies, of course, for not being able to hold this yesterday due to the storm. Let me introduce our panel for this afternoon. Our Chief Financial Officer, Mr. Roger Hao and our General Manager of Treasury and Investment, Mr. David Woo. We start today's session with an introduction and presentation from Roger, and we will fullow 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 talk about our achievements from the first half of 2016. Roger?
Thank you, Mark. Thank you all for coming this afternoon. Before I start, as you know, our Chairman, Irene, and I were supposed to meet up with you yesterday, but we were stopped by Nida, the typhoon. We had to give the webcast and technical people time to set things up. Unfortunately, the typhoon signal, number eight, as you all know, stayed up an extra hour beyond our noon operating timeline. From a logistics standpoint, we had to cancel the meeting yesterday. Irene has a commitment overseas, and she has to fly out this morning, so she is unable to join this evening. She asked me to apologize on her behalf, and she looks forward to meeting with you in our next result announcement, as well as other catch-up opportunities.
As Mark just mentioned, today we have David joining us, and I am sure many of you know David very well. Without further ado, let me do a quick presentation, and then we can go for Q&A. First of all, just a quick highlight on the interim results. Turnover up 2.7% and recurring underlying profit 1.3%. There are strong occupancies across our commercial portfolio against a backdrop of challenging global and local economic conditions. For the full year of 2016, we expect a steady performance despite uncertain economic climate. That is primarily because a majority of our 2016 expiring commercial leases had already been committed. The reported profit declined, reflecting fair value losses on our investment properties valuations.
As you all know, the first half of 2016 proved to be a challenging one on a global basis. Hong Kong is also adversely affected by strong headwinds from abroad with social-political volatility, like the U.K.'s Brexit vote and the U.S. presidential elections, which all putting pressure on economic and financial conditions. Hong Kong retail sales are impacted by a weaker domestic demand and decline in inbound tourists from Mainland China. Whereas the office leasing market remains strong with tight supply and robust demand.
As we communicated before, we had anticipated the normalizations of retail growth and started our diversification strategy several years ago, but the general retail downturn did not spare any particular price category. In Hysan, we needed to extract the most value of our retail hubs. So we focus on the overall consumer experience, which includes not only a well-curated and constantly evolving retail portfolio but also exciting events as well as new and interesting F&B outlets.
We also focus on needs and wants of the millennial with regards to their shopping habits, evolving mindsets, and reliance on social and mobile media. We highlighted the omnichannel online plus offline experience to pull in the shoppers, including testing a number of sales model, which have proven very popular with our Club Avenue VIPs. We also need to ensure and continue to ensure interesting happenings at our malls to retain visitors. We also aim to expand the uniqueness of Lee Gardens with state-of-the-art buildings, concentrations of flagships, abundance of sweet shops, and contrast of low rises, which is fast changing to offer exciting F&B outlets, concept stores, and smaller retailers.
We also want to provide unique experience to families, office workers, and shoppers and to continuously building a sustainable community. It is a destination offering what people want and what Causeway Bay has always been famous for. Talking about our medium-term targets on our portfolio. We want to improve walkability and pedestrian safety in the area. As such, we have explored provisions of tunnel linking car parks and submitted applications to build two footbridges. As you can see from the map now, the two T1 and T2 are the proposed tunnels that we have in mind linking the Lee Garden Three, Lee Garden One, and Lee Garden Two. Whereas the two Ls, the L1 and L2, are the proposed footbridges linking Lee Garden Three and Lee Garden 5 and Lee Garden Two.
Apart from these linkages, we also set up a Lee Gardens Association with neighboring businesses as members. Our aim is to have a coordinated area-wide events and provide a forum to give input to and support future developments in our neighborhood. On this, I guess, turnover and recurring underlying profit, we already touched upon. On the reported profit, as you can see from this table, basically, it is primarily driven by the fair value change of our investment properties. As you can see from this table, in the first half of 2016, we have seen a loss on the Hong Kong investment property portfolio valuations.
Now, going into individual sectors. For retail, the turnover increased by 3.8% to HKD 986 million, with turnover rent at HKD 28 million. Occupancy stood at 99% at interim date. In terms of rental reversion, we have seen around 10% positive rental reversion in our retail portfolio as we continue our strategy of increasing base rent while shifting our focus away from turnover rent. Around three quarters of retail spaces expiring in 2016 have already been committed as of interim date. We have also seen a total foot traffic increase of around 5%.
Again, this is achieved against an overall fall in visitors numbers in Hong Kong. The estimated overall tenant sales number, we saw a double-digit percentage decrease that is heavily impacted by the estimated sales decline of certain electronic goods within our portfolio. Excluding that, we saw a decline which is milder and was comparable to the decrease in overall Hong Kong retail sales during the period. Now, going into individual hubs within the retail portfolio. First of all, Hysan Place.
We have seen a 5% foot traffic increase in the first half of 2016. We have seen a gradual transformation into a more all-rounded retail revenue with more venues and spot shops, including increased offerings for men. Hysan Place is a popular food and beverage destinations with new Asian-themed eateries launched or to be launched in 2016. For Lee Gardens hub, Lee Garden One foot traffic remains stable, while Lee Garden Two saw an increase of around 10%. The growth is attributed to strong offerings of children's product and Kids Connect activities. Our French restaurant, Seasons provide fresh dining ideas and remain a good business meetings and retail promotion venue.
The last of our hub, Lee Theatre, we see an around 15% increase in foot traffic. The flagship stores in Lee Theatre Plaza and the sports-themed street in Leighton Centre remain popular. The Lee Theatre Plaza high-floor restaurants also were well-supported. As you may seen this before, we've had pop-up stores at the location called 25 Lan Fong Road. We saw pop-up stores like Nike, Columbia, and Gentle Monster, which are all showcasing creativity and diversity through limited editions items that is not found in their existing shops. These store freshness and surprises managed to lure shoppers to return time and again.
Our latest marketing event also helps consolidate our malls as gathering places for the community. Most recently, a very popular basketball star figurines exhibition, a three-point shooting competition, and other sports workshops to coincide with the focus on sports during the Olympic Games season. We continue to expand our projects on online plus offline. We've added variations to product to be sold, as well as delivery and pickup methods. That include a special beauty product service and limited edition beverage sold online and delivered or collected at physical venues.
Next on office. Hysan Place office accounts for more than half of the overall portfolio GFA and contribute around 36% of its turnover. In 2016 first half, the turnover of office portfolio increased by 2.8% and occupancy stood at 96%. In terms of rental reversions, we've seen a 25% increase across the office portfolio. In terms of the overall market environment, the banking and financial sectors ramp up demand in Central and MNCs. Our Causeway Bay portfolio offers up-to-date facilities, convenient transportation, and is in a district with exceptional retail and entertainment offerings. Cost-effectiveness also help the portfolio to be considered as an attractive alternative. Here are some new joint tenants, Mistra, GAM.
Our office portfolio represent a balanced tenant mix with banking and finance, high-end retailers, insurance, as well as professional and consulting, representing more than half of our office lettable area. No individual single category took up more than 20% of the total lettable area. Finally, the last of the three business unit, residential. The portfolio turnover decreased by 4.8%. We've seen a positive rental reversion around 5% throughout the first half. Valuations are being carried out in one block, meant a number of flats were vacant during the first half of 2016. At the end of the first six-month period, occupancy stood at 89%.
Next is a summary of some indicative cap rates our external valuer adopted. As you can see, there are no changes on cap rate adopted by them between these two six-month period. On our development project, Lee Garden Three, basement structure was completed in June 2016, and the above-ground construction is now making good progress. The overall project is expected to be completed around quarter four of 2017. On other asset enhancement project, the final phase of Lee Garden One Ground Floor Lobby and High Floor Retail Space Enhancement project was successfully completed in mid-2016.
The new shopping space there will be handed over to incoming tenants starting from August this year. Finally, some of our financial metrics. Gearing at 3.4% at the end of interim period, with an average debt maturity of 5.8 years, at an average cost of financing of 3.8% per annum, with a led interest coverage of 21.6 times. Finally, the outlook. We anticipate a continued volatility that is affected by global political and economic instability, which will in turn adversely impact local consumer sentiment for the foreseeable future. At Hysan, our quality offering will still stand us in good stead while the economic climate remains uncertain. For 2016, again, as the maturity of our leases expiring had been committed, we expect a steady performance for the rest of the year. Thank you.
Thank you, Roger. Now it's time for questions from the floor, and we appreciate it if you can let us know who you are and which company you represent. Please use the microphone when asking questions as they're going out online live. I'll now hand it back over to Roger and David.
Hi. Thanks very much for the presentation. This is Fan Tso from Merrill Lynch. I have two questions. First one regarding your revaluation loss. Can I ask is this loss is mainly due to the street shop or the shopping mall or it is a combination of both? Out of the HKD 70 billion IP on your book, approximately what is the percentage for the retail street shops? My second question is, you've mentioned on the press release that you're talking to some MNCs regarding the pre-leasing of LG3. Would you have some concrete numbers that you can share with us and what exactly are the types of tenants that you are talking to? Thank you.
Okay. The valuations primarily is coming from street shops. As I mentioned in some occasion before, we do have some investment in smaller shops in the neighborhood areas. These strategic holdings are primarily to help us to upkeep and maintain the ambience of the neighborhood area. One of the example is the 25 Lan Fong Road I just mentioned, which is part of our investment properties. And this investment properties group are quite dispersed around the area, and it is not significant for the portfolio as a whole. However, as a lot of them are actually street front shop. As you all know, the valuation for the street front shops has quite a large volatility in the last few years.
So basically, the valuation decrease or fair value loss is coming from that particular part of the portfolio, which are actually group under retail. So you can see that because of that, the increase in retail is really limited because of that. Apart from that, as you know, the cap rate remains unchanged and the rental outlook as used by the valuer with our past rent record didn't really initiate any need for a major downward adjustment.
Okay. For the leasing progress of LG3. Lee Garden Three is primarily a office story, basically, with around 75%-80% space for office. That is our offering to address the decentralization trend. We have actually started quite a number of discussions with potential client, including what Fan mentioned about MNC. As of today, we have not signed up any leases yet, but we are in very serious stage of negotiations. So I hope next time when I see you again, I will be able to give you some update.
Thank you. Just want to get some ideas about the sales performance breakdown of the three retail hubs within the portfolio. Do management see any difference for the different trade mix performance in the first half compared to the overall Hong Kong retail market? Secondly, also on the occupancy cost, rent continue to go up and sales performance have been a little bit soft. So, can you give us an update on that? How have the lease negotiation with the tenants been? Do you expect the 10% rental increase for retail would sustain in the second half of this year? Thank you.
Right. In terms of our tenant sales performance, for the first half of the year, we actually saw a 30% decrease year- on- year in terms of the tenant sales of our entire retail portfolio. So that is the double-digit decrease we mentioned in the announcement. That is for the entire portfolio. So if we exclude our very big base factor related to that electronic store, we've seen a - 8.9% drop year- on- year for the first six months for the rest of the portfolio. Okay. So, if you ask me that trend, for the first six months, actually, if we look at Q1, the year-on-year drop of sales is around 12%. In Q2, we have seen a 5.6% drop, which results in the first half of 8.9%. Whether that is a trend, we have yet to observe, meaning whether that drop will narrow or increase.
But as to occupancy cost, as you rightly point out, the sales is decreasing while our rent is at least not decreasing, so the occupancy cost must be increasing. What we are seeing is the overall occupancy cost, again, excluding that large base of product, the electronic store. The average occupancy cost slightly increased 1-2 percentage point from, I think, 22 at the beginning of the year. Low 20s, 21, 22, to now around 23, 24. Whether that will affect that, definitely. I think that actually is a challenge for the operator as well as us as a landlord as well. As you can see, and if you recall, in 2014, for the whole year, our rental reversion is close to 50%. Last year, 2015, the rental reversion reduced to around 25%.
This first half, we've seen a rental reversion around 10% for the first half. Internally, I think based on the leases we concluded and committed, we expect the rental reversion will further narrow. I would expect something like a low single digit this year. We still expect a positive rental reversion for 2016. For 2017, it's quite difficult to say. First of all, because of the retail sales performance as well as the occupancy cost ratio, which are all pointing to a direction, which will mean there will be something further, a downward adjustment. I won't be surprised if we start seeing some negative rental reversions towards the later part of this year.
Yeah, David.
Thank you. David Ng from Macquarie. Just to drill down on the sales figure. So first half decline of 12% is basically in line with the overall market.
Q1.
Q1, sorry. Q1 is basically in line with overall market.
Correct.
But 2Q of 5.7% actually is slightly better than the overall market.
Yes.
Any particular things that you guys have been doing much better in second Q to outperform the overall market? Thanks.
So let me say a few words on this first. Because that is the macro environment we are operating in, and obviously there are some of these macro things we can't change much. So from an operating standpoint, we try to extract, as we mentioned, more value. I think at this stage, we first of all, as you might notice that the foot traffic actually increased across the board, by 5%. That is on top of the 5% increase in foot traffic last year. And if you refer to particular dates like the May 1st, actually that season, that week actually, we saw a 15% increase in the foot traffic. So that is against the backdrop of declining visitors. So we believe that that also help to prepare us, especially from an overall mall environment perspective.
When the condition change, we already attract a regular type of customers coming to our part of the portfolio. Another thing is the online, offline and attention or trying to address part of the millennial requirement. That is a fast-changing subject, but basically, I think it's not just only Hong Kong, but around the world you see a lot of very good mall operators are all focusing on that. So in Hysan, of course, it is something we already done late last year, is trying to link up the offline and offline, meaning like we have the physical locations.
At the same time, we use the online environment to get in touch with some of these customers, either our loyal customers or in future, a bigger group of loyalty group customers, not just to cover revenue . These are the things that we are trying to do to maintain the attractiveness, even though the overall environment is not that encouraging. These are the things that we've been doing and will continue to do.
Sorry, among the three major exits, between Q2 and Q1 w hich one actually you see the most improvement, like among Hysan Place, Lee Garden, and Theatre?
Right. In terms of the numbers, I think the Lee Garden helps, we continue to see a double digit. I think it's low tens drop in the retail sales. But whereas for the Hysan Place and Lee Theatre the drop in the retail sales is around mid-single digit. I guess that also ties into the general expectation of Lee Garden with some higher price items, the impact is larger than the other areas.
For Hysan Place, as you know, we have a few key anchor tenants, and some of them has, for example, opened more than one shop in Hong Kong, and that particular factor may affect our view of some of the showing in quarter one. Whereas in quarter two, we start to see some stabilizations. As you know, when there's a new, for example, athlete shops, there will be some distraction in terms of the number of visitors coming to Causeway Bay for their particular brand or shops.
I would like to add that for Hysan Place, I think basically we changed that to a lot of the sports and lifestyle related companies. Those are doing okay, so it helps in turning the HP number.
Hi. Hysan has been quite active in capital management so far this year, actively buying back shares and has been paying pretty generous dividend. Just wonder, with the change in the CEO, is that going to change that active capital management strategy going forward?
Well, let me put it this way. The strategy of the capital management is also endorsed by the whole Board, and with an overview of providing a stable and progressive return to our shareholders. I think the logic has been like we had a good operating result and we are piling up cash. At the same time, as part of our long-term strategy initiative, we try to find investment. Obviously, we don't want to just do the investment for the sake of doing one. In the meantime, before we got a better use of those invest cash for the investment, which generate longer term return, we think it's a sensible way to return some of the cash to shareholder.
For example, especially given the discount between the price and the NAV. We will continue that share buyback initiative. Since you mentioned about the CEO, as you all know, Mr. Lau stepping down as a CEO and remain on the board as a non-executive director effective yesterday. I think we will continue to receive his wise counsel on, in particular, the retail market. At the same time, I don't think his movement will affect our established capital management strategy, which makes sense in the current operating environment.
Hi, this is Foo from Deutsche Bank. I got two question. The first one is that, on tenancy mix, what is the current percentage for the F&B outlets, and what will be our target percentage on this? The second one is about the CapEx on Lee Garden Three, and what is the payment schedule? Thanks.
Okay. Maybe I'll answer the CapEx question and then let Teddy talk about the tenancy mix. The CapEx, I think the overall budget for that project is between HKD 2 billion- HKD 2.5 billion. Right now, I think we have spent around between HKD 800 million- HKD 900 million. As we mentioned, we finished the basement. We are now building up the superstructure, and that is most of the material cost, like the steel and concrete comes in. So we expect the peak of the CapEx will be later half this year and a good part of 2017.
So we expect we will need to spend CapEx in the range of like HKD 1 bilion or HKD 5 billion or something like that.
I think most of the payment will be in 2016 and 2017 because it is finishing up. There will be about 10%-15% payment in 2018 after the finishing. As for the F&B percentage, I think right now we are around 23%-25%. We do not expect that number to increase significantly. I think in the presentation, we say that we want to increase the, I think the variety or the quality of the products or the outlet there.
And-
Your office performance is still very good. Can you still give us an outlook on what you expect on the rental reversion towards the end of this year and especially on 2017? Other than that, just fullow up on the retail sales as t he breakdown is talking about mid-single digit and low teens. Is it possible to give us the exact number?
Oh, okay. I will let David answer that interesting question. The rental revision outlook, I think for the whole year, given all the leases that we have secured so far, we expect we will end the year with a 20%-25% rental revision should be okay. I think it is safe to say that based on the leases we have. In terms of the next year outlook, frankly, it is quite difficult to say at the moment. First of all, in terms of expiry next year, we do not have a particular high concentration on expiry. First of all, I think expiry plus rental reversions, those under rent review, is around 1/3, so it is quite stable. We do not have any lumpy repricing risk, so to speak.
In terms of the spot rent, I think right now, for example, the high floors in Hysan Place, although we don't have any vacant floor, the asking rent, we're talking about something like HKD 80 million. I think that is quite a good rental tone we've seen, and I'm sure you guys talk to the agency a lot and you can get some input from the agency as well. Based on the demand and all that, it seems that, especially when compared to retail, I think office is a bit better in terms of the outlook on the rental reversions.
I think on the exact figures, I don't think we want to really pinpoint the numbers. I think the guidance we have given is quite good, actually.
Shall we take a question from here?
Sure.
Online? Okay. This one is from Chris Bedingfield from Quay Global Investors . Chris said there was a fall in property expenses for retail versus the first half of 2015 and a large increase in expenses for office. Was there a relocation of costs or some on offs? Can you provide more color? What are your expectations for the second half?
Okay. Thank you. I think, well, that's a very good question. So in terms of those cost ratio, I think first of all, for office, as you all know, we managed to re-lease most of the Manulife S pace at the interim date. So the sort of like increase in the property expense primarily, I would say predominantly coming from the agency fee related to that renewal. If you take away that agency fee spike because of that large amount of space being concluded within this half-year period, the increase is actually I mean, the GP percentage is actually very consistent with last year office percentage .
As to the retail GP, I think that ties primarily to the marketing expenses we spend and that ties into the timing of some of those program or depending on the scale of the program. For example, this year, I would expect in the second half of the year, we had a higher cost ratio because a lot of our activities are focusing like on summer and all that in the second half. That's primarily the driver of these two. All in all, if you look at the company as a whole, because in particular all of the agency facing, you see the 1 point something percentage drop in GP.
We expect that will come back to a normal level because when we sign a lease, we had signed a lease for like three, six years. But no matter how many months of agency we need to pay, we need to account for it at the commencement of the lease. From an expense standpoint, I mean from a expense over turnover ratio standpoint, that will be a bit lumpy e specially when there's a large phase of renewal.
Thanks. J ustin Kwok of Goldman. I saw a slide showing the asset enhancement project for Lee Garden One. I just want to get a sense on, after this AEI, how much more retail space will be added to the building or to the project in a way? Thanks.
Well, that is the Lee Garden One renovations. I am not sure when you come up, where you pass with that side of the building. The new retail area, I think, is around 5,000 sq ft.
The total around 10,000 sq ft.
The total.
The one on the street fronts is about 5,000 sq ft. I think on the way, if you walk up, you will see the signage there.
Okay. Apart from that, I think the objective of the enhancement is also to enhance the circulations between the mall section of the building and the other part of the office entrance and all that.
Okay. Another question from here. This was from Eric Shum from ANZ Asset Management. Last year in 2015, the office rental reversion was 30% positive, obviously. Why in the first half of 2016 was office rental turnover growth only 2.8% and not higher?
Yeah. Thank you very much. I guess for the office, there is one thing that I want to highlight. While we continue to have a very high occupancy, during these two half-year period, we do have some individual cases of early surrender or lease restructuring at the request of the tenant, due to their own situations. I am happy to report that basically under all of this situation, we managed, first of all, to have surrender charges and valuation reinstatement cost reimbursement, as well as a very minimal void period. Because of that, we had recorded some extra income on top of turnover, meaning rental.
For 2015, we had something like HKD 14 million, HKD 15 million w hereas in the same period this year, we had only around half of that. Because of that skewed the increase from the on a like-for-like basis, although they are part of our operations. If you exclude those one-off arising from early surrender or rental reinstatement or reimbursement, the growth of the office portfolio rental should be around 3.8%, 3.9%, quite close to that of retail.
Yes, Sarah.
Thanks. I just wanted to ask, Bamboo Grove doesn't get much of a mention. I see the cap rate's flat at 3.75%. Can you just tell us what, per square foot valuation that puts Bamboo Grove on?
Well, thank you, Sarah. I think, as you know, the valuation was done on a per block basis. For the Bamboo Grove, I think the valuation right now is around HKD 11,000 per sq ft basis.
Roger, I'm interested to know in terms of the retail sales change, can you break it down by trade? We know that it's been down by 5.2% year-on-year, in quarter two, but do you have a number by trade?
Well, we don't have that by trade, but I think if you look at those figures, I referenced to the hubs, which generally represent certain positioning. As I mentioned, the Lee Garden hubs, that is a 13% drop year-on-year. Whereas for the Two Hysan Place and the Lee Theatre Plaza, which are more general F&B mass offering, so that we see - 5% drop.
Secondly, in terms of the revaluation loss, you also have a revaluation loss in second half last year, which was a bit bigger than what you have recorded this half. Is that trend a downtrend in terms of for your street front shops? The other question is, what portion of your book value for your retail properties is actually street front?
Right. I think, let me put it this way. The valuation drop, the one that we see in this first half of the year and the one that you mentioned in the second half of last year, primarily coming from the same group of properties. That is the smaller strategic holdings in the neighborhood area. When I say that portfolio is not big, I think on a very rough basis, that account for around 5% of our total portfolio values. Basically, I think what we see is, we see the valuation of that group of properties, their value peaking at one year ago, like at the interim last year. Starting from the second half of last year, the valuation gone down a bit, first through the second half of last year and then in the first half of this year.
5% of the total book value of all your investment properties, yeah?
Yes.
Then the final question is, how do you value your retail portfolio, retail space? Is it by passing rent or the spot rent?
Oh, okay. Based on what I understand from the valuer, I mean, who provide the external valuation, I think first of all, it's income capitalization approach. They take into account the current passing rent of our existing portfolio. At the same time, they will consider the reversionary potentials based on their understanding or based on the events happened during these six months. For example, if the retail outlook is weakening, they might need to adjust the reversionary part. Because when our portfolio or when leases expire, that will be the reversionary impact coming in. According to my understanding, they take that into account as well.
How have your turnover rent as a percentage of the total retail income has changed in this past six months?
Well, I think right now the first half is HKD 28 million, and it's gradually coming down all the way while the retail turnover overall is increasing mildly. Just by simple math, that means the basic rent increase, and that is a result of our focus on shifting the rental away from turnover rent to base rent.
Less than 3%?
Well, I think 28% over-
Hundred.
Something. So it's-
30%.
3% now.
Thank you.
Any other questions? If not, then thank you very much.
Okay.
See you next time.
Thank you, guys.
Thank you.
Thanks everyone.