Good afternoon, ladies and gentlemen. Welcome to the analyst briefing of Swire Properties interim results announcement. Today's briefing will be hosted by Guy Bradley, Chief Executive of Swire Properties, and Ms. Fanny Lung, Finance Director of Swire Properties. Guy and Fanny will take us through the interim results, followed by the Q&A session. As usual, before the presentation, we are going to show you a video which highlights the key developments and achievements of the company in the first half of this year. Let's have a look.
Good evening, everybody, and thank you very much for coming. It looks like a great turnout this evening, and I do appreciate your attendance. I know it's been a really busy day for probably all of you, and there's two or three other competing opportunities to attend going on at the same time. So thank you for joining Swire Properties this evening. As you can see from the video, it's been a very busy six months. I'm just going to dive straight into the presentation here, and then we can get to some questions at the end. This captures really the main news, the three big points for the results. That's very strong underlying earnings growth driven by better performance of all of our investment properties, coupled with some profits of sale from the non-core properties.
We've actually embarked on some active capital recycling, which puts us in a strong position to pursue pipeline growth, and I think that's a very positive statement of intent from the company. The other big highlight for 2018 is that we've got three projects which are very exciting, which all are scheduled for completion this year, including the flagship, One Taikoo Place, down in Quarry Bay. Good news for shareholders, dividends are up 8%, which is in line with the growth in recurring rental income. Underlying profit up 34% and the value to shareholders is up 7%. So lots of green there. Good story, I think, for the first half. I mentioned capital recycling. Obviously, it's no surprise that we've been selling the Kowloon Bay office. That completed in June, so we've been able to book the profit on that, and that's contributed to the half year results.
The other big news, of course, this year, which you'll all be familiar with, is the conditional sale of our interest in Cityplaza Three and Four down in Taikoo Shing for the sum of HKD 15 billion. Why are we looking at capital recycling? Well, the answer is that, as ever, we have a very attractive looking forward pipeline, and we need to find the money to develop as much of that as we can. This year, I mentioned that we've got three projects opening, One Taikoo Place, South Island Place, and Tung Chung Town Lot 11 Extension, which is the Citygate retail extension. Next year, we're going to build on the Sanlitun portfolio and add to it another 300,000 sq ft in the southwest corner there. Then we have Qiantan coming through again in China, in Shanghai in 2020.
2021, the second of the 2 million square feet office buildings in Quarry Bay comes on stream as Two Taikoo Place, alongside a small residential project in Wing Fung Street, which will be very exciting when it gets built. Going beyond that, two pieces of news that I am able to talk about now. The Po Wah Building that we mentioned we had been successful in January at the compulsory sale process, it is now under planning application, and we expect that that will become an office tower, which will connect 28 Hennessy Road to Queens Road East. So that is pretty exciting in terms of scaling up the Pacific Place portfolio.
The real newer news, I guess, is the compulsory sale application that we submitted a couple of months ago for the Zung Fu and Wah Ha industrial buildings down in between One Island East and Taikoo Station, which, if we are successful in achieving 100% ownership, will be redeveloped into further office stock to add to the already quite exciting decentralization theme. Lastly, on there you can see there is a phase two there for Brickell City Centre over in Miami, and that is another very, very large tower that we intend to be a composite use tower. Office, retail in the bottom, and some condominiums for sale at the very top. Just put that on there just to show that the pipeline is not just in Hong Kong, it is in Hong Kong, it is in China, and it is in Miami. Key developments this year. We have mentioned the first two Citygate Outlets extension.
The Middle House opened in May, which is the final piece in the long-running Taikoo Hui Shanghai saga. It has taken us a long time to get it all open, but now with the hotel open, we can finally say that it is complete, and started off very well. On the same theme, being Shanghai, we really like that city, and we have been looking to do a further project in Shanghai for a while, and we have finally been able to conclude the joint venture on a fantastic piece of land in Qiantan, which will become a retail development. It is a 50% interest with Swire and Lujiazui Group, who are the master planners for that Qiantan District. So we are very excited about that. Then lastly is the One Taikoo Place building that we all know by now. It topped out in January, and we are hoping to get OP very soon.
Just looking at the financial highlights very briefly. Underlying profit, as I mentioned at the start, up 34%. Obviously, the gross rental income in all of our markets is up 8%, which is very healthy for the business, and pretty much without repeating everything, all I think we need to sort of pay attention to on there. On the left-hand side, the comparable 2017 figure is obviously the HKD 4,624 million there contains the profit on sale of ALASSIO. If you took that out, you would then end up with a positive year-on-year growth on the rental income side of the business, and that is what we think really counts. Waterfall chart shows that movement. Again, there is that positive number that I just talked about there on the plus HKD 321 million , just shows the impact year on year of the investment property portfolio.
Talking about the change in the valuation of that property portfolio. Obviously, we had a fair value gain on net terms over HKD 15.5 billion, and that was somewhat offset by the removal from the valuation of those interests in Cityplaza Three and Four. So in net terms, we improved the valuation of the property portfolio by about HKD 3 billion. Again, reiterating the points I've made about twice already. Rental income growth is coming from all segments, and I think that's the first time I've been able to say that. Hong Kong retail has been a great story so far this year, up 4%. Cityplaza's now all open, and the movie theater being the last thing to open, and it's effectively fully let and going very nicely. Pacific Place, of course, going from strength to strength, has produced some great results for the half year.
In terms of Hong Kong office, again, we're pretty much full. Obviously, space constraints and supply constraints in Central are keeping office rents in Central high. Pacific Place benefits from that. Rental reversions are positive. On the China front, again, we're still getting positive rental reversions in our malls. Retail sales are growing at faster rates than the average for those cities. In renminbi terms, we're still looking at a growth of 20% on the PRC side. So very sort of overall healthy picture, I think, on the rental income. I will just skip some of the detail here in terms of office. We've basically got momentum across both Pacific Place and Quarry Bay in Taikoo Place. So it's a reasonably balanced picture looking at the office side. On the retail performance, as I said, Pacific Place is 22% for the half year versus last year.
Cityplaza has gone positive and Citygate, again, positive 9.3%. So we're looking at, as are most of our peers, I think, a reasonably healthy first half year on the retail side in Hong Kong, which is encouraging. This slide we show every year. It doesn't really vary too much, and it basically just describes the usual balance and diversity of our tenant mix and lease expiries. I think it just signals an overall sort of attempt to create a more healthy, less lumpy approach to tenant mix. One Taikoo Place. This has been the big story for the best part of 12 months now in terms of leasing. The numbers got higher and higher. We're now over 90% committed on that tower, which is a fantastic story.
If you look at the names there on the office tenants, I think there's one word that could describe it, which is just diversity. You've got great names from all sorts of different sectors coming down there. It's very, very exciting, this whole decentralization theme. I would actually go so far as to say at the moment that Taikoo Place is starting to look like the second CBD here in Hong Kong. With those sorts of names and the momentum and the people that are expressing interest, we need to be looking ahead and doing more down there, because I think there's more to come. I shouldn't skip my comments on office without commenting on another building that we've been developing down in Wong Chuk Hang, which is South Island Place. That has an OP later this year. It's 50% Swire Properties, 50% China Motor Bus.
Great product in an emerging area. Quite an interesting part of town. We are quite excited about getting that building up and running. Finally, I have also mentioned the extension for the Tung Chung Town Lot 11, which is going to make Citygate almost double in size from a retail mall perspective. That should be good for and also a very attractive location in Hong Kong. This slide just points to the key word on here, really is transformation. It is what Swire Properties is known for. That is why we focus and build clusters of assets in the same place. We try to transform neighborhoods and create value that way for everybody. Two Taikoo Place is going to be the next major tower that we build. It is already under foundation stage in Quarry Bay, ready for completion in 2021.
I mentioned earlier the Po Wah Building, which with its buildings to the rear should allow us to connect 28 Hennessy Road to Queens Road East and form a bigger part of the Pacific Place family. Overall then, Hong Kong portfolio is extremely well- positioned for growth. Not only have you got a 12% hardwired in increase in GFA over the next few years, but we have also got these projects under planning, which we have not talked about before, which will continue to add to that portfolio. So very healthy looking direction. Mainland China. This chart gets better every time we show it. The attributable gross rental income has almost tripled since 2012. It has even grown 30% year-on-year to just under HKD 2 billion, which is just a tremendous story for retail in China. It is just very, very exciting.
This shows the sales of the existing assets. You can see the percentages in the green box in terms of half year-on-year growth, all very positive. I would like to just add that HKRI Taikoo Hui in Shanghai has got off to a great start. We cannot give you a comparable sales growth figure because it was not open the year before, but it is very encouraging so far, and it is going to be a fantastic asset for us going forward. Probably worth the wait. As part of that, obviously, I mentioned The Middle House. This is the latest hotel in The House Collective. If you like The Upper House here, go and stay at The Middle House. It is part of the same family. Very impressive. Designed by Piero Lissoni. I think it is worth a try.
We are very happy that it is finally open, and we think the city of Shanghai needs a hotel in that sort of quality and that caliber. So do try The Middle House for us now it is finally there. In terms of the China pipeline, mentioned Qiantan. It is a fantastic looking project. One of the reasons it took us this long was obviously a complicated way to get into the project. That is now behind us. We are fully formed as a joint venture. But the exciting news was that while we were trying to do all that, Lujiazui was so confident and large that they began to build the project to our design. So we had this very unusual situation in China where we had such mutual respect for each other that we got on and they got on.
You can see in the picture that the building's already broken the surface, and we're already building the superstructure. The capital injection's only just going in this year. We expect to complete that project in 2020. It's actually just around the corner in development terms. That's been a fantastic project so far. Can't share too many details about the design at this stage, but we will as soon as we can. It's an emerging part of Pudong, and I think that's the right place to be in the city of Shanghai going forward. Just a quick word on the Yashow building that I mentioned at the start of the presentation in Sanlitun. It's really just another example of the way we do this place-making philosophy of scaling up and reinforcing existing assets.
You'll see in most of our China projects, there are opportunities to do that, and it's something that we take very seriously because we create value, and then we just build on that value. This is just the latest example. We're adding another 300,000 sq ft to what's already a very successful project. Its location is absolutely spot on. It's right between the busiest corner of Sanlitun and the emerging new metro station. It's going to help us get much closer to traffic flow. We're very excited about that. It should complete next year. Miami, again, a fantastic project. It's really transforming that city. Again, that word transformation, it's very important to us to do these things which have a big impact and therefore create value for everybody. Brickell City Centre is just one of those projects.
On the office side, we're completely full, and on the retail side in America, it's been a very challenging story for a couple of years now on retail, but we're 89% occupied, and about 80% of the shops are now open and trading. It's not looking too bad. If you look at the tenant profile there, those are the anchor names. There's some great names on there, and we're very confident about Brickell City Centre's future on the retail side. Quickly on to trading. The new news since the full year results in March is that WHITESANDS in South Lantau is now completely sold out. You've all lost your chance to buy one of those. I did warn you, I think, at the last presentation that there was only a few left. Well, they've all gone now, which is great. A fantastic product.
We are, meanwhile, working on 21 to 31 Wing Fung Street, as I mentioned, so we don't want to sit still on that. Love to do more in Hong Kong in terms of residential. We've just struggled to find the right thing at the right price. There's no lack of appetite on management's behalf in terms of trying to do more residential. But the reality is, at the moment, we're pretty quiet on that front, having now sold all the mid-levels and now WHITESANDS. I'll just take a pause there and hand over to Fanny Lung , who will just take us through some of the financing metrics.
Thank you, Guy. On the financial position of the company, this is getting stronger and stronger. As you can see from this table, the net debt reduced from the balance of HKD 35.3 billion by the end of last year, down to HKD 30.9 billion by the end of June 2018. Quite a number of contributors to this very good improvement in our financial position. One is we still got a very strong soil rental income from our operation, which generated HKD 4.8 billion. As well as you may see, there is a very large inflow of proceeds arising from our sale of a couple of investment property, including in that is a large proportion of that is the completion of our sale of the Kowloon Bay in June 2018, which we received the balance of the payment.
As well as for our conditional sale of Cityplaza Three and Four, which we have also done in June 2018, we received a deposit for that particular conditional sale, along the line of other disposal of investment property. With this inflow, we also support the capital expenditure that we continue to spend to support our expansion in the portfolio. The total capital expenditure for the period is HKD 2.7 billion, largely due to the One and Two Taikoo Place redevelopment. Also, you can see that there is a large number which is in relation to the investment in the joint venture. This is basically largely reflecting our investment in Qiantan, which is a 50/50 joint venture with Lujiazui that Guy mentioned. With this very strong cash flow during the six months of this year, the gearing also substantially reduced from 13.6% to 11.1%.
Apart from the reduction in the net borrowing, we also benefited from the fact that there was a fair value change in our equity. Total equity increased because of the fair value change that we are taking on board for the first six months as well there. Looking at the bottom table, you may also find out that the other financial parameter continued to get stronger and stronger in terms of not only the gearing but also the interest cover and as well as the underlying interest cover is improving and down to a record good level. This slide shows the total committed facilities of the company. The total committed facilities of the company is HKD 45.5 billion, which we have drawn down to HKD 33.5 billion.
That means the available committed facilities are available to support our future capital investment as well as other investment is amounting to a quite high level, which is HKD 14.7 billion, including the cash of HKD 2.6 billion. The maturity profile of the committed facility is also very evenly spread over the next 10 years, which provides a very strong protection against the refinancing risk for the next few years. In relation to the currency profile, I think there is not much significant change from the picture that you have seen last year. We have the majority of our borrowing in Hong Kong dollar with a little bit of renminbi borrowing as we generated quite a lot of cash inflow from our PRC portfolio. So the overall borrowing for renminbi reviews, as you compare that with the last time that you saw this.
On the fixed to floating rate ratio, the total fixed debt ratio increased to 72% from last time what you see, which is lower than 70%. I think in the current rising interest rate environment, this will be adequate to protect the company against any volatility arising from the interest rate hike. We have always said that our objective is to maintain the current credit rating. The current credit rating that we are mentioning about for Fitch is single A and Moody's is A2. In order for the company to maintain the current credit rating, we look at several parameters. I can tell you that with the current financial position of the company, we have plenty of liquidity headroom to support the company's growth in the future. These show the capital commitment for the company as of the end of June 2018.
The total capital commitment is almost HKD 19 billion. Majority of that is for Hong Kong. Guy mentioned it about the Taikoo Place redevelopment, including One and Two Taikoo Place, as well as we have submitted the compulsory sale for two buildings in Quarry Bay. Most of that is reflected in these capital commitments. As well as you may notice that under the PRC portfolio, we also got increase. The increase mainly represent our commitment in relation to the Qiantan project, as well as a little bit in relation to the Yashow building that Guy mentioned it about.
In order to show the change in the capital commitment profile from last time to this time, I think you may see that the bar is quite a big significant increase for the first six months just because that reflect the fact that we have additional commitment in relation to Zung Fu and Wah Ha building as well as to the Qiantan project as well. On the right-hand side, there is a table showing the capital commitment profile over the past few years. I think the thing that I want to highlight is over the past few years, the major capital commitment was mainly due to the Taikoo Place redevelopment for One and Two Taikoo Place, which over the period we substantially reduced as we spend all the money and incur that.
Now you may see that we are kind of the capital commitment slightly picking up again. I can assure you as we showed just now, the financial position of the company is very strong and we have enough liquidity to support the company growth, including the future capital commitment. That's all.
Thanks, Fanny. I won't say much about prospects in detail other than to say that we broadly expect the trends that we've seen in the first half to continue for the second half and we'd be happy to go into more detail in the questions and answer stage if you'd like more color on some of that. That probably takes us to that point. Questions and answers, right?
Thank you, Guy and Fanny. We now open the floor for questions. As today's briefing will be live broadcast, a gentle reminder that please wait for the microphone, state your name and organization represent, and try not to ask more than two questions at a time. We'll take the first question from the floor. The first question from this gentleman on the left-hand side, please.
Hi. A couple questions. I'm Karl Choi from Merrill Lynch, sorry. A couple questions on retail. First is have you received any feedback from tenants over at Pacific Place about July retail sales? Have you seen any impact from the weakening renminbi? Second question is Cityplaza retail rental income was up 10% in the first half, very strong. I know you've done a lot of re-tenanting. But was there anything unusual that drove the strong performance? Was it turnover rent? Could you elaborate a little bit more? Thanks.
Turnover rent in Cityplaza you're asking, Karl, is it? Yeah. Well, I think it's reflecting the fact there was some closures, specifically the theater, which affected the 2017 number and that's now fully open and running and there's one or two other major stores that are now up and running. I think you're just seeing Cityplaza at its sort of full steam ahead best in the 2018. On Pacific Place, the July figures we haven't finalized those just yet, but the evidence is that it's been another good month for Pacific Place. I think you can probably all feel the foot fall's exciting, the momentum down there is very good and as we speak, there's lots of new ideas coming through in terms of both pop-up and regular store new names. We continue to take that on and it's very encouraging at the moment.
We'll take the second question, the lady in white shirt.
Hi, this is [inaudible] from CLSA . I want to ask, how much was turnover rent as percentage of total rent? We want to know the number for first half 2017. The second question is that we saw that there is a 21%-25% rental reversion in first half for office portfolio, but why the office rental growth was only just up 2.4%? We also see that there's a 5.6% half-on-half growth on our Hong Kong retail portfolio. We want to know what contribute to such fast growth. Because we saw that in this half year, the Hong Kong retail growth surpassed the office portfolio, and this rarely happens. We just want to know the reason. Yeah.
Okay. On the turnover rent question, we do normally disclose the total turnover rent proportion. I can tell you that, on an overall basis, the retail growth in terms of the retail rental growth, is largely driven by the increase in the turnover rent. You mentioned about the question as to why the rental reversion for the office is so high, but the overall total rental growth for the first six months is lower than that of the retail. I think you may understand that the rental reversion may not take the full six-month effect. Sometimes we have the rental reversion at the back end, so it may not be a full so-called six-month effect for that then.
Whereas for the turnover rent, I think what we have seen is every quarter, even if you were to look at the first quarter and the second quarter, the driver for the turnover rent is the sales. If you look at the first quarter and the second quarter sales figures for [OMO], you may understand that why the rental income for the retail is so high then.
We'll take another question. Any question on the floor? Gentleman over here.
Hi, it's Citigroup, Ken here . I just want to check regarding the disposal of Cityplaza Three and Four. So total HKD 15 billion is going to come progressively till April. Given that your gearing is only 11% and the CapEx, you talk about just HKD 18 billion. So you don't have much CapEx even spread over the next five years. Will it be an option to consider to return the capital to shareholders?
I think we have included in the Chairman's statement a clear intention for us to use the proceeds from the sale of Cityplaza Three and Four for reinvestment into the projects that Guy just mentioned about. Also to capture some other potential future investment that we may have in the pipeline. Because we believe that by reinvesting our money into projects like the Qiantan and also the Zung Fu and the Wah Ha building, if we can get it, is going to create higher shareholders value to support the future recurring rental income growth, which in turn will support the sustainable growth in the dividend in the future.
Carry on. Any question?
It's David Ng from Macquarie. Maybe kind of to the opposite end of that question. In terms of if you do come across some very gigantic opportunities for acquisitions, apart from that HKD 15 billion available capacity, are you also able to get additional intercompany loan from parent? Will you be also able to get some additional financing once One Taikoo Place is completed? Are there additional financing venue if you come across some gigantic investment opportunities? That's question one. Question two is for the Taikoo Place service apartment, which you guys have put up for sale. Can you update us on the progress? In view of the latest policy from the government about this idle property tax, is there any particular rush that you need to launch it for sale to avoid potential tax implication?
Okay. On the liquidity question. Apart from the HKD 15 billion, which we already received a part of that, and we have the balance to be received. You may see in one of the slides, the committed banking facilities, which is not drawn. There is another HKD 15 billion there. I'm sure that there are quite a lot of bankers sitting here. They may know that we have a very strong balance sheet. So if we raise our hand to say we want to have a few billion, I don't think that they would say no. I think ultimately, what they will look at is the gearing ratio and also the debt to EBITDA ratio, and the interest cover as well.
I think the slide also mentioned that in order to achieve some sort of downgrade from what we currently look at to maintain the credit rating, it has to be a very dramatic increase in the debt in order to trigger that. So I think we have plenty of headroom to do the investment there.
I'll just take that second question on the Taikoo Place apartments. That was we indicated that we were seriously looking at converting those into flats for sale. I would say the latest news on that is really that we're still reviewing that decision, and it may not be the case that we decide to do that. Why not? Nothing to do with the vacancy tax issue. As you probably heard me say in the media, we don't even know the details of the vacancy tax issue till it gets confirmed through LegCo, so we can't react to that. The way Swire Properties think about assets like that is on a much more long-term basis. So we're currently reviewing the best long-term use for that building. It's a 999-year lease building, so we need to be very smart about what we think we're going to do with that.
I would say it is still under review. It is quite likely that it could end up still being a service department building going forward.
I think we still have time to take two more questions. This gentleman on the front row.
Hi. Jeff Yau from DBS. I have a question about the pre-leasing progress of two new projects, one in Wong Chuk Hang, the other in Tung Chung. Can you share if you have any update on this one?
Pre-leasing?
Yeah.
Well, if we leave aside the speculation on a certain very large rental deal that has not happened yet, I can tell you that the current net of that happening, the current pre-leasing status is just over 20%. Of course, that deal, were it to conclude, would take the building to well over half leased.
Tung Chung. Citygate.
Oh, sorry. I thought you said Wong Chuk Hang, was it?
Both.
Both. Tung Chung, we're currently over 50%.
Any more questions? Gentlemen there.
Jonas from Daiwa. Guy, you mentioned earlier that in China, other than Sanlitun, you see other opportunities to scale up the portfolio. I wonder whether you can elaborate more on this. Like which city you see the best chance of scaling up Swire's presence in?
Well, there's nothing that's not in here that we can talk about at this stage. But obviously, it is true that each of those projects do have either contiguous or opportunities to scale. The one that's most obvious is probably the Guangzhou Cultural Center, which we built for the government and is actually sort of almost joined at the hip with Taikoo Hui in Guangzhou. It's been the long-term intent of Swire Properties to take an active role in either management or co-ownership of that. We haven't been able to move on that just yet, but if that happens, we'd be very interested. And it's those sorts of examples, that one Yashow . We'd love to do more around what we've created in that fantastic project in Taikoo Li Chengdu , and there are opportunities to do that.
I can't really give you more details than that, Jonas, other than to say that it's a very sensible way to sort of reinforce the assets for us, and it works everywhere we go. We've got opportunities like that in Miami as well. And so it's the sort of first priority place we look when we're trying to do increased investment.
We'll take the final question. Any volunteer?
The market you are in has been, I'm [inaudible] , BC Capital. The market you are in has been in the upward cycle for a long time. You know the property market is going through cycles. What do you think you have hedged all your interest rate foreign currency risk. What about the market risk you see in your market you operate? The second question is, you always invest in the pipeline in developments, or you buy and get a yield from the existing built properties?
Right. For the interest rate and currency risk, I think in one of the slides we show that fixed rate is 72%. So even though interest rate increased, only 28% was exposed. Basically, if you take out the renminbi portfolio, which basically do not follow the HIBOR/LIBOR rate changes, it will further increase the so-called fixed rate to 74%, maybe. So with such a high fixed rate of interest, I think even though there is an increase in interest rate, there will not be any material impact to the bottom line. On the currency risk that you mentioned about, we hedge our portfolio in a way that, first of all, our operation in China are mostly funded by renminbi loan. All the income and expenses are met. So basically, it's in a natural hedge position.
In the overall context, the RMB portfolio is not that material to our total portfolio. As you can see that our Hong Kong portfolio is still the majority part of our portfolio in the overall context.
Answering your second question, it's generally the case for us that we like to take the development risk. You know that we love to design our own buildings, and we think we can create a lot of value out of doing that. So we tend to shy away from designs that other people have done for their buildings because it may not be what we were looking for. So that's normally the approach.
Thank you. I think that then concludes our analyst briefing today. Thank you for joining us.
Thank you very much.