Okay, thank you all for coming to Hysan Development's 2019 interim results announcement session. Let me introduce our panel for this afternoon, 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 Ricky 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 Ricky to start. Ricky?
Good afternoon. Let me give you some highlights of the interim result. Our turnover and recurring underlying profit increased by 9.1% and 8.9% respectively, taking into account the full period operation of Lee Garden Three. Occupancy of retail and office were 96% and 97% respectively. As we know, we are under volatile market conditions with ongoing economic and sociopolitical challenges.
For our company business model, you can see from the graph that nowadays, the office and the retail are basically 50/50. One is 45%, one is 48%, so we are taking this as a dual-engine business. For the dual-engine business, the beauty of it is that it provides in the time mutual empowerment. For example, there is a dynamic relation between the office and the retail, creating positive and self-starting cycle. For example, the expanded and diverse retail offering has actually attract more local and multinational company.
Also, as you see, the co-working space are very popular in our areas as well. At the same time, while these new tenants, they arrive, they also create another need, some new need and new demand on different types of retails. So they are mutually empowering each other. The two sectors that has high growth in our office portfolio are banking and finance and flex and co-working. You can see, for example, the finance industry people, they are relatively high income as you guys. Okay. Of course, you guys have families, so the families drive the need of the lifestyle and the kind of kiss elements.
You can see the Lee Garden Three has bring in all this, a lot of furniture store like the BoConcept, the HOMELESS, and then in Lee Garden Two, we got a very famous, Maggie & Rose City Club. All these are driven by the trend of topography of the office tenants. For flex, you got full range of flex here in Lee Garden, like Spaces, theDesk and WeWork. They have different offering. You can see the business of this co-working is moving away from only startup to become a very important facility even for corporate because of the flexibility and the different style of working environment that stimulate the internal productivity as well.
This become a very critical part of our ecosystem. The characteristics of this more vibrant and young, energetic working style has also create different kind of elements of retail that are demanded, like the lot of drinking place and also the lifestyle store and coffee shop, et cetera, which become very popular in our areas as well. About the community. We have been focusing in creating our community.
We take the community as a whole to really make it a very good locations and destination for people from both retail and office. Three elements we have been concentrating on. One is the special essence in the neighborhood. Probably if you visit our Lee Garden frequent enough, you will see all this kind of old and new stuff together. For example, the Shanghainese gourmet store.
You will also see the mural of Leica in one of the building on Baker Street. At the same time, some modern shared economies kind of stuff like a place called 69, which is the shared kind of recycling fashion shop. We also try to make use of the space to give more new unique features and value to the portfolio. For example, in 9th floor of Hysan Place, we create it into a place called Urban Sky, where we try to integrate a coffee shop together with a cultural and art event space. A lot of event has been hold there, and this has become a very interesting feature for both the office and the retail component. Technology. We have built our infrastructure, the Hi-Speed Wi-Fi , area Wi-Fi in 2018. Since then, we start our application phase.
Right now we have EQ point, we have the cell and the everything is under review. After that, it will become a one platform where you can ride on for membership, for product, for transactions. The ultimate goal for our infrastructure to help us to build, develop smart community, with smart mobility, smart living, and smart environment. Very hot topic, ESG.
The company is, of course, stay here for 95 years already, and we are going to stay here for another 95 years. So we try to connect the life, the working, the living, the shopping and socializing for all generation, and really make it a kind of preferred destinations. To do that, we put a lot of emphasis on ESG. Recently, we have set up our sustainability committees and try to formulate our long-term sustainability policy and monitor its execution.
For the outlook, we all know that Hong Kong is under some pressure, some uncertainties now. The global economic slowdown, the Sino-U.S. trade dispute, the recent social conflict. So all these are giving pressure to Hong Kong in short term, but Hysan curation of tenants makes focus on asset enhancement, our strength in property management and integrated connected portfolio.
In particular, with a healthy balance sheet, we believe that we can go through this short-term pressure and continue to flourish in longer term. The last thing is Hysan is very committed to cross-ray pay to in Hong Kong. We remain unchanged and the confidence about Hong Kong. May I now pass to Roger to talk about some numbers?
Thank you, Ricky. Good afternoon, old friends, new friends. So good to see you again after a while. Let me quickly go through some of the numbers and then we can go straight into the Q&A section. This page is a brief summary. As you already know from our announcement, our top line grew by 9.1% and on a recurring basis is pretty much around 9%.
For the reported profit, which was affected by the relatively lower amount of the valuation gain, which resulted into a reported profit of a decrease of about 7.6%. Shareholders' funds increased by about 2.1%. Turning into turnover. As you can see, the right-hand column is the component of the contribution from our three business units, in first half of 2019.
As you can see from the announcement, we have secured around a 9% growth year-on-year comparing to first half of 2018. As also highlighted in one of the bullets, we highlighted that part of the contribution actually coming from the full operation of Lee Garden Three. As you may recall, we started to have Lee Garden Three coming into our portfolio, started contributing to the top line. Actually the revenue from Lee Garden Three ramped up significantly starting from second half of 2018. So on a year-on-year basis, we have a baseline effect, which I will go into detail. For the 9%, if we exclude the Lee Garden Three on a like-for-like basis, our year-on-year growth is 6%. Okay, next please.
On this page is a very quick summary about our position, our financial position, which I am sure all of you are very familiar with. In terms of gearing, we still maintain a relatively low gearing, about 5%. Debt profile. During the period, the first half of the year, we have actually done a number of private placements, tapping into the corporate bond market.
As a result of that, you can see that the average debt maturity increased from four years to around five years as of the interim dates, with the average cost remaining at 3.6%. Credit rating remained at investment grade. The final point is about green financing. As again, you may recall, we have actually issued a green finance framework towards the end of last year. During the period, we issued about HKD 1.5 billion corporate bond via the private placement.
Next page, please. On cap rate, again, these are the cap rate adopted by our valuer, Knight Frank, and as you can see from this page, basically they remain unchanged from six months ago. Going into individual business unit. Retail revenue reaching HKD 1 billion, representing about a 4% year-on-year growth with first half of 2018.
Again, excluding the impact from LG3, the increase on a like-for-like basis is around 2%. Okay. Contribution from Pearl Ferry, as you can see, HKD 49 million. Occupancy at 96%. Overall, in terms of rental reversions, we managed to secure a mid-single digit positive reversions for the portfolio as a whole for the first half of 2019. Next, please. About our tenant sales, again, as you may recall, in Q1, after some of the finalization of the sales figure from our tenant.
Q1, actually, our retail tenant managed to get a 5% year-on-year tenant sales in Q1 this year. Q2, the growth rate reduced to around 3%. With these two quarters adding up together, it gave us a first half of around 4% growth in our tenant sales. Foot traffic, as you can see from this slide, increased around 5%. On the right-hand side is actually some of these public figures, which you all are very familiar with, showing, in terms of trade, what the general Hong Kong market performance is. As you can see, the jewelry, watches, and valuable gifts get a relatively largest year-on-year decrease, while food, alcohol, drinks, and tobacco have a slight increase. Next page is actually some of our newer retail tenants as we secured and opened or relocated in the first half of 2019.
I will not go through them one by one here. Next, let us move quickly to office. Again, you can see that office first half revenue is HKD 929 million, a 13.3% year-on-year increase. Again, excluding Lee Garden Three, which actually is a major office building. The year-on-year increase is 9%, so that is 4% of that growth is coming from Lee Garden Three.
Overall rental reversions, we continue to see a mid-teens positive reversions for our office leases for the first half of 2019. In terms of the mix, as Ricky Lui earlier on pointed to, banking and finance is our biggest sector in terms of the office portfolio, representing approximately a quarter of these are high-spending individuals. The second biggest is the professional and consultings, et cetera. All in all, we still see our portfolio relatively diversified without a heavy reliance on that.
As you may also notice, especially when we saw each other in the last six months, co-working or business center now is also one of the key elements in our offering. All in all, that represents about 10% of our overall office portfolio. Finally, on the last business unit, the residential. Overall, you can see that the year-on-year growth rate is actually the best among the three.
We managed to get a 20% year-on-year increase, reaching HKD 156 million turnover. With a good positive reversions around mid-single digit. The increase or 20% increase is actually a combination of two factors. First of all, we have renovated more than a dozen units in Bamboo Grove, which actually gave us a very strong rental reversions. At the same time, it also helped uplift the remaining units' asking price.
At the same time, we managed to get an occupancy back to the 91% level. These two factors contribute to the 20% increase in our revenue from residential. Before I wrap up, two more points, a few more points. One is the Tai Po residential project. The progress is on track, all major statutory submissions approved. Now, the site formation and foundation construction work is on track.
We are finalizing some of the more core discipline detail design. We have already started seeing a few rounds of visual mockup on these units. Next is also one of the key elements in our new retail. Most of them revolve around technology, which I am sure Ricky Lui can share with you a lot more later on. As you may notice, we already have our gift vouchers put online with e-coupons and with the area-wide Wi-Fi, Hi-Speed Wi-Fi .
We start to collect more data with a view to give us a better platform going forward to understand our customers, shoppers much better. Again, another very crucial element is our loyalty club. We actually experienced quite a significant growth in numbers of members in 2019 first half. We have conducted around 20 marketing and branding events. Finally, in terms of some of the year on which I also actually saw a lot of you in there, which you can see the names there. I won't repeat here. That, I hope I give you a very quick roundup of activities, both financials and marketing. Let me stop here and see if any of you have any questions.
Thanks, Roger. Questions from the floor, and we'd appreciate 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 live online. Now handing back to Ricky and Roger to pick up questions.
Okay
Yes. I think let me ask the simplest question, which is the hottest topic now. Can you share with us what is your latest, let's say, July retail sales performance? Hence, how do you see the outlook of your second half? I think this is what most of the people want to ask. Secondly, also regarding the retail sales, seems that this time your overall retail sales performance seems to be quite resilient when compared with others. For example, especially in the second quarter. Can you share with us why is this the case? I mean, why you are doing better than market while you are focusing relatively high-end, and the high-end is doing bad?
Yeah, Ricky, please.
I answer the second question first. I think if you look at our, we talk about dual engine today, because the office picked up quite a bit over the time, so now we are a more balanced portfolio. Secondly, if you really look into our retail, you will see, yes, we used to give people impression we are high-end area, but we really break down our income.
The Hysan Place non-high brand portfolio basically is not smaller than the high-end sections. Right now, secondly, although our clientele is very balanced, means we are not very concentrated or focused or reliant on the PRC tourists only. Hysan Place or even the Lee Garden are quite as recognized by people being quite a Hong Kong local, Hong Kong customer favorite place.
Because of that, I think you will see that we are a bit more resilient to the current situation. For the outlook, obviously for July, August, there will be quite some pressure. Really, we need to see when will it stop or how will it be settled and see any good force to do the rebound later this year. But at this moment of time, we got to be conservative in looking at the second half.
Yeah, thank you, Ricky. To supplement Ricky's point, for the month of July, obviously we haven't collected all the tenant sales data. Normally, it should be in around the 20th to the 25th, actually towards the end of the month. So far, we have collected about around 70%, 70%, in terms of number of retail tenant. I guess based on that, I guess our forecast for this month probably will end on a year-on-year basis at negative early teens in terms of tenants growth. Negative early teens in terms of growth rate. Okay. Also the performance for the first half, again, as Ricky mentioned, for the company as a whole, we have dual engine. At the same time, the office also help the driving some of the demand on the retail side.
As you can see from that, both Hysan Place, as well as the Lee Garden Hub, secure quite a good tenant sales growth. Of course, as you know, Lee Garden Hub, which we have a lot of high brand. On a per ticket size, they have a much larger in terms of the sales. But in terms of growth rate, we see that both Hysan Place and Lee Garden managed to get a relatively decent growth. Hysan Place for the first half of the year is around 4%, first half year-on-year. Whereas the Lee Garden Hub is around 6%. Anyone else?
Hi. Javon here from JP Morgan.
Hi.
A question quickly on dividends. Your core profit has a pretty respectable increase of roughly 9%, but I understand that management has kept the interim DPS flat. Just wondering what's the rationale behind the reduced payout ratio? Thank you.
Right. Well, first of all, in terms of the first half of the result, obviously the 9% is including the contribution of the, because of the ramp up, the timing thing of the Lee Garden Three contributions. Excluding that on a recurring, we are seeing around a 6%. Right now at this moment, overall for the entire year, we probably will be seeing something similar.
But again, there's a big question mark in terms of, for example, turnover rent, which depends on retail tenants' contributions or the turnover. As Ricky also alluding a little bit to is in this. At this very juncture, it's actually quite difficult to have a very clear view on some of our retail tenants' performance. Actually, we are now in August, and a lot of things happening in August, let alone in the coming months. We have no idea.
But we only have the visibility on the July partial numbers. I guess with that, given our financial management philosophy, we want to see what is going on there on the second half. Obviously, if you look at the entire portfolio, assuming no unforeseen or major factors, all the contractual obligations being met. This year, I think we have done, for example, retail around 70% of the lease that is expiring this year. For office, we are 90% done. Subject to unforeseen events, we had that idea about mid-single digit growth. Obviously, we will look at how things go in the second half and then take that into considerations in the full-year dividend. Hey, Karl.
Hi, Karl Choi from Merrill Lynch. A couple of questions. First, I noticed, I think there was some turnover rent for the office component, probably in relation to your relationship with some of the co-working firms. Just wondering, can you comment a little bit on how the co-working tenants are working out for you? If you can tell from, in terms of membership versus what your original expectations are. Second is, a lot of questions about office pressure potentially, given slowing in the economy. Can you talk a little bit about the spot rent outlook? Thanks.
Yeah. In terms of the co-working, apart from the operation and strategic side, which Ricky can share, actually, this year, this first half, we actually see turnover rent from co-working tenants.
Yeah.
Which is a good thing. Which is our original strategic intent as well. That's one thing. In terms of, Karl, your second part of your question, do you mind repeating?
Office spot rent outlook.
Oh, okay. Rental reversion, as you can see, mid-teens so far. Actually, with 90% of the deal done, I think we will probably end up with around that magnitude in terms of the reversions. Next year, 2020, we had around 20%, so about one fifth of the office space coming to expiry. The expiring rent, since we are talking about the deal primarily done three years ago, that is 2017, which is still not at the peak of it. Based on the number we see, at least for our portfolio, we see that expiring rent, comparing to this year expiring rent, will be 5%-10% lower. Assuming the spot rent can maintain at current level, we will probably see another positive rental reversion situation. Of course, the million-dollar question is the spot rent trend.
Again, that ties to the overall demand, supply, and all that. Again, suffice to say, we do not see an extra large amount of expiry coming up next year. Partly thanks for the new Lee Garden Three office addition to the portfolio, which lengthen automatically the expiry profile for office, which give us a near-term stability.
Maybe I add a little bit on this co-working stuff. We got Spaces, we got WeWork, and also theDesk. From the experience we can see from them, basically, they take six to nine months to ramp up to like a 75%, 80%, something like that. Both two of the already established co-working operator have the same pattern. Right now, the upcoming is the WeWork with these are both the Hysan Place and the Lee Garden One. It seems that they are very popular, and they also tell us that the trade in Causeway Bay is quite different from Central or the east side. There is a more wide range of customers in Causeway Bay, which similar to our office portfolio.
Hi. I have a follow-up question on the office turnover rent. Can we assume that you have turnover rent cost in all leases related to the co-working space, or it is just applied to that operator?
Yes.
Can we assume that if the operator rent up the occupancy to, say, 70%-80%, you can start to receive the turnover rent?
Again, the standard is we do not comment on individual lease. I think the reason why I want to highlight that is, as also Ricky pointed out, there are a period for their business to ramp up. Apart from the trade mix consideration, which co-work sort of offer the amenities to our other tenant. From the business model point of view, we also want to grow together with our tenant, the co-working tenant.
I think that is an important sign from our perspective that we start seeing that, and we look forward to more. I guess that also bring out another point about the deal engine. The very traditional classification between retail and office might be coming over each to the other side a little bit. Even in the old days, we do not deal with office tenant like the way we serve our retail tenant. With these co-working tenant coming in, it is kind of like a quasi-retail model as well. That is an important aspect from an operation point of view. Other questions from the floor? Good. Justin.
Thanks. Justin Kwok with Goldman. With a more challenging outlook at the moment, is it a good time to do AEIs for the portfolio? Is there anything in mind where you think can t ake this opportunity, given you have some potentially downtime in some of the projects. Thanks.
Yes, we will continue to consider the AEI projects for this year. Some minor one, and we are also looking at any potential bigger one as well.
Any guidance on that ?
Not too specific.
Right. But overall, as we saw each other for the last couple of years, we. First of all, in terms of the existing portfolio AEI, apart from the redevelopment, I guess one of the things is our existing building. Not to the extent to redevelop it, but some of these function service may be a little bit dated. So this is also a good time for us to do a larger scale of AEI. In terms of the usage of cash, actually some of these technology system and all that, it take quite some investment to build it up. So I would expect that these are the two source of AEI or use of cash in our existing portfolio.
Again, for other opportunities, like Ivan mentioned in last year final result, and the annual reports, we think we are now in a position to consider opportunities beyond our core portfolio in Causeway Bay. A couple of times when we see each other during the last six to eight months, we talked about potentially, for example, the Caroline Hill locations. Which, according to the government, they have plans to put it out to the market, although without a specific timeline.
So, we are interested, obviously, in a space like that. At the same time, we also keep our eyes open in terms of opportunity. The strategic intent for that is we have a good portfolio, good asset in Causeway Bay. But in a sense it's concentrated, and for the longer term growth, we are open in terms of the potential opportunities outside.
But with one big caveat is we'll continue to treat our core asset in Causeway Bay being our core. Practically, it is that part of the asset that churns out most of the cash. And we will work our very best to maintain the cash generation ability, while at the same time, for example, because of our low gearing, we can consider gearing up for this investment.
Hey, David.
Okay. It's David from Macquarie. Just maybe two small questions on the departure of Esprit a while ago. Has it been fully reflected in 1H 2019? That's basically is done. I guess maybe looking forward, you have another U.K. retailer maybe pulling out of Hong Kong, not just from that space. Is that something that is similar to the Ralph Lauren, that they still have to pay some penalty, or do we need to worry about quite immediate vacancy in that area and some negative reversion? Then maybe also for just the Leighton area, any other major reshuffling that we need to worry about, say, the next 12-18 months? Thank you.
Okay. Maybe I'll talk a little bit about the Jack Wills things. To the extent we know, that is not only a Hong Kong only initiative or actions. Again, as far as we know, it's a kind of voluntary steps. We had, like with most of the other tenants, a good coverage of rental deposit. Overall, we don't see a big exposure from that particular news.
At the same time, in the business of retail in particular, from time to time there will be certain things like that. We will continue to manage that space and see what is the best solution for that. In terms of the Leighton area, again, as you can see from the past few years, HP, we have done quite a number of things. Lee Garden area, with Lee Garden Three coming in, also help us a lot. For the Leighton area, we will continue to work on the trade mix, like Lee Theatre Plaza as well as the Leighton area, the Leighton Centre retail offering.
I think for the next 18 months, the Leighton Centre will still operate as normal from the leasing side. Anything else? Shall we?
Good. Thank you so much.
Thank you.
Let's stay in touch.
Yep.
See you soon.
Thank you.