Good afternoon, everyone. A very warm welcome to Wharf REIC interim results briefing. Let me introduce the panel members to you. First, the gentleman in the middle is Mr. Stephen Ng, Chairman and Managing Director. The lady is Ms. Doreen Lee, Vice Chairman. I am Angela Ng, Investor Relations Manager. As usual, we will first start with our chairman, who will deliver the opening remarks. I will then deliver the presentation of the interim results, followed by Q&A session. Doreen will be more than happy to answer your questions in relation to investment properties. Now, let me pass the time to chairman to deliver the opening remarks.
Thank you. Wharf REIC is a very simple company. We have six assets primarily, and the largest of which is Harbour City, which accounts for two-thirds or more than two-thirds of the company's balance sheet. We actually don't have a very long presentation because it's such a simple company with simple assets, simple balance sheet, simple P&L. Everything is simple. The tagline of today's announcement is record retail sales drove robust performance. That's exactly what happened in the first half of this year. What happened was, if we focus on Harbour City as an example, we registered very encouraging year-on-year sales growth in the first half of this year to set a new record for Harbour City, the mall. In the first quarter, our total retail sales in the mall approached HKD 10 billion, and that was more or less repeated in the second quarter.
For the first half as a whole, Harbour City delivered HKD 18.6 billion of retail sales, and that was more than 30% more than over a year ago. For our entire portfolio, our total retail sales in the first half of this year was almost HKD 25 billion, which accounted for 9.9% of Hong Kong market of just under HKD 250 billion. That sets the backdrop for the company's performance in the first half of this year. A lot of it was because of the favorable currency, the Hong Kong dollar being pegged to the U.S. dollar. The U.S. dollar was, for most parts of the first half of this year, weak. Of course, that has changed since a couple of months ago. The U.S. dollar is now a lot stronger and therefore the Hong Kong dollar is a lot stronger.
We don't know what that would mean precisely for the second half of this year. We only have early results from our tenants for the month of July, and Doreen will be pleased to talk a little bit more about that later on. With that, I'll pass the ball back to Angela to take you through the presentation, and then we can do Q&A after that. Thank you.
Thank you, Chairman. The theme this time, as said, is record retail sales drove robust performance. The recovery of the retail market and the group's retail expertise and active asset management have been driving the performance to a new record, as witnessed by the key figures in the following slide. Wharf REIC is a pure IP play in Hong Kong. The six core assets are all located at prime locations, comprising the three iconic malls, namely Harbour City, Times Square, Plaza Hollywood, and the Central portfolio, namely Crawford House, Wheelock House, and The Murray, Hong Kong. Most of the properties enjoy 999-year land lease, which is rare in Hong Kong. During the first half of the year, total revenue of the Hong Kong IP and hotel increased by 9.8% to a new record of HKD 7.9 billion.
The three iconic malls took up 73% of the Hong Kong IP revenue of the group. The robust retail sales grew at a rate of 31.4% to set a new record of HKD 24.6 billion. That represents 9.9% of total Hong Kong retail sales during the period. Harbour City alone already represents 7.5% of the total market share. Revenue at Harbour City grew by 11%, contributing to 63% of the group's revenue and 72% of operating profits on the back of an operating profit margin of 89%. Occupancy costs at Harbour City and Times Square improved to [80.2%] and 24.5%, respectively. The pie chart here shows the revenue splits of our Hong Kong IP revenue. Retail took up 73% of the revenue while office took up 25%. Valuation of the five core Hong Kong IP was HKD 255 billion, of which retail properties account for HKD 151 billion.
Moving on to the next slide. The chart here shows that the retail market is back to the peak level in 2013 and 2014. In the first half of the year, Hong Kong retail sales grew by 30.4% to HKD 247.8 billion. Also, the total tourist arrival grew by 10%. Tourists from Mainland grew by 30.4%. Harbour City has definitely achieved a robust performance during the first half of the year. In fact, Harbour City has also been demonstrating strong resilience during market downturns. Total retail revenue of Harbour City witnessed positive growth all the way, despite the volatility of the Hong Kong retail market over the past decade. The 10-year CAGR for Harbour City total retail revenue growth was 14%, versus Hong Kong retail sales growth of 6.1%.
Looking to the second half of the year, there are potential challenges to the market, including the trade tension between U.S. and China, renminbi depreciation, global currency movements, reduction of import tariff in China, and high comparison base in the second half. We will closely monitor the market conditions. Moving on to our financial highlights. Inclusive of a net IP revaluation surplus, group profit increased by 108% to HKD 10.2 billion. Revenue declined by 15% and operating profit by 10%, mainly due to the orderly exit from development properties by the group's listed subsidiary, HCDL. Having said that, core profit increased by 8% to HKD 5 billion. IP valuation surplus was HKD 5.2 billion. Valuation of Hong Kong IP and hotel amounted to HKD 271 billion. The first interim dividend of HKD 1.05 per share will be paid.
In the following slides, I will give a close-up to the group's key properties, namely Harbour City, Times Square, Central Portfolio, and Plaza Hollywood. Then we will also walk through the financial management. Now, let's focus on the performance of Harbour City. Harbour City is one of the most productive malls in the world in terms of retail sales. It achieved a retail sales growth of 36.1% to a new record of HKD 18.6 billion, or HKD 2,700 per square foot per month. Harbour City is the international destination retail landmark and prime showcase to the Mainland market for the world's best brands. Retail revenue at Harbour City increased by 15% to HKD 3.7 billion. It is worth noting that the retail growth rate of Harbour City has significantly outperformed the market by over 22.7 percentage points, surpassing the previous peak in all time.
Driven by the solid rental reversions at both retail and office segment, revenue grew by 11% to HKD 5.2 billion. In continuation of active asset management, one block of the Gateway Apartments is closed for conversions to office for completion by mid-next year. Moving on to the Ocean Terminal extension. It has quickly become the new icon with Foster designed terminal tip. This value creation investment is successfully drawing shopper traffic and enhancing Ocean Terminal's destination. It also houses 11 exciting dining outlets, of which seven are opened and all are debuts in Hong Kong. In addition, the three Canton Road hotels in Harbour City enjoyed four consecutive outstanding quarters. In the first half of the year, revenue grew by 16.8%, gross operating profit by 32.1%, and the overall occupancy rate was over 94%. Moving on to our second iconic mall, Times Square.
Times Square is a shopping and lifestyle landmark in Causeway Bay. Housing a cluster of luxury brands, the tenant mix optimization done in the first half is providing upside and enhancing the mall's competitiveness. Retail sales increased by 21.6% to HKD 4.6 billion. In the midst of a major re-tenanting exercise, retail revenue of Times Square still maintained at HKD 1 billion. Total revenue in both retail and office was maintained at HKD 1.4 billion. Then let's focus on the Central Portfolio, comprising of Wheelock House, Crawford House, and The Murray, Hong Kong. Wheelock House is a valuable commercial property in [Ground Zero] area. Office rental reversion increased by 28% during the first half. Crawford House is a premium commercial property with diverse tenant base, and also home to Zara's flagship in Hong Kong. Office rental reversion was 14%. Then switching to The Murray, Hong Kong under our Niccolo brand.
This is an award-winning iconic hotel in Central, which successfully launched in January this year. This is the group's long-term strategic investment. Being part of the government's Conserving Central initiative, The Murray, Hong Kong is a rare asset in strategic location. Full operation began this month. It has been awarded by the prestigious Condé Nast Traveler and National Geographic Traveler. Then moving on to Plaza Hollywood. It is atop Diamond Hill MTR Station, which is also a future interchange station for the Sha Tin to Central link. First phase of the link is expected to complete next year, which would further enhance Plaza Hollywood's geographical advantage. During the first half, total retail sales increased by 9.5% to HKD 1.3 billion, and rental revenue was HKD 290 million. Moving on to our financial management. The group maintained a high level of financial discipline and flexibility.
Own debt was HKD 40 billion, declined by HKD 2.8 billion. Gearing ratio was 18.7%. Average interest cost was 1.5%. It is worth noting that Moody's has assigned a first-time A2 issuer rating to the company with stable outlook. Moving on to the corporate social responsibility. Wharf REIC is a constituent stock of Hang Seng Corporate Sustainability Index. Our in-house program, Wharf Architectural Design Internship, continued to nurture young local talents, and a total of 24 architectural postgraduates have benefited from the program. Meanwhile, Wharf Art Scholarship had also provide scholarship for 12 students. In addition, the signature project, Project WeCan, is currently linking 53 schools and benefit over 50,000 students. The network is expanding to cover 76 schools by September this year. That concludes my presentation. Now let me pass the time to our chairman, who will deliver the closing remarks before the Q&A section.
Thank you, Angela. All in all, we had a rewarding first half. The second half has only just started, so I can't predict what the second half may bring. What the board decided to do is to follow the distribution guideline, which was announced at the time of the IPO of Wharf REIC, and that is we would be paying 65% of our realized recurrent IP core earnings. Which worked out to HKD 1.05 for the first half of this year. Assuming the core profit from our Hong Kong IP portfolio continues to be maintained and hopefully grow, we hope to be able to continue to pay at a similar rate in the coming halves. But everything depends on how we eventually perform from quarter to quarter. At this point in time, I don't see any reason why there'd be major concerns.
There are uncertainties, but as I was trying to say at the beginning of this presentation, so far, we feel reasonably comfortable about July. In terms of body count, first week of August continues to be strong. Whether or not the body count converts into retail sales is something that we'll need to be watching. With that, I'd like to open the floor to questions.
Please raise your hand and identify yourself and the organization that you are representing.
Hi, I am Karl Choi from Merrill Lynch. Just a couple of questions. First, I want to drill down a little bit into what Stephen mentioned, or maybe Doreen can give a little bit more color about the July retail tenant sales performance. I did the quick math. Looks like maybe turnover rent was around 13%-14% of total retail rental income. Can you give us your breakdown of what the percentage was over at Harbour City versus Times Square in terms of turnover rent? Lastly is on debt. Can you give us a little bit more about what your expectation for fixing some of your debt? Because the average interest rate was obviously very low in the first half. Thanks.
Doreen?
July sales, up to date, we have gathered only a portion of the sales report from our retail tenants. Probably too early to say, but from what we have seen, our retail tenants are still enjoying growth. Some ranging from high single digit to double digit growth, despite the FIFA World Cup and the looming trade war and t he weaker Hong Kong dollars.
A stronger Hong Kong dollar, sorry. Stronger Hong Kong dollars. Still, it is a bit too early to say, but early signs are saying that it should not be too bad in July.
Debt. I guess the question is floating versus fixed. Is that what it is? Okay. Right now, very little of our debt is in fixed. We contracted some fixed rates. For instance, we issued a bond and so on and so forth. But typically, what we have been doing is to swap fixed rate into floating, and that strategy has so far worked for us. We are not in a hurry to get back into fixed rate. We think floating in the next few quarters would still work out to the advantage of the borrower. We are likely to stay in floating for at least a few more quarters.
Next question. Please feel free to raise your hand if you have questions.
It is too [crosstalk]
Too simple.
Hi. It's Citi, Ken Yeung. Just to follow up on your July retail sales. It seems that you are telling it's a high single digit to double digit. How is the deceleration rate versus, let's say, in terms of the versus the last quarter, which we still report more than 30% for Harbour City?
That would be difficult to repeat because first of all, if you look back into our sales records, since the second half of 2017, actually, Harbour City sales started to rise and perform better than market, the overall Hong Kong market. Which means it's from a higher base for comparison. Whereas first half, we're all beaten in a similar way as the rest of the Hong Kong market. But second half, we've seen the Harbour City's performance is slightly better than the overall Hong Kong market, which means we have a more higher sort of benchmark than the first half. We'll have to work extremely hard to reach that 30%. That's probably difficult to repeat.
To clarify, what Doreen Lee said, what she said about single digit growth to double digit, that was referring to some tenants reporting single digit and other tenants reporting double digit.
Very high double digit growth.
Right. That is not to say she is not predicting a range between 9% and, for instance, 12%. That is not what she is saying. Let me make that very clear.
Yeah.
Based on what the proportion of tenants who have reported so far, I think we are expecting a good double-digit growth.
Other follow-up questions on your turnover base rent. You got 18% for Harbour City. Do you see that that kind of ratio are likely to drop when you are averaging the full year, basically because the base is already high, and secondly, we are likely to have a better first half versus second half?
I think the percentage rent performance will continue to do well as long as business is good. It is an indication of how much business you are doing. We are doing whatever we can to draw a bigger crowd from other sectors other than just Mainland Chinese tourists. We go to India, we go to Philippines, Indonesia, South Korea, anywhere to increase our client base. I am quite confident that it should be okay. Whether it would remain 18.3% or slightly more, let us see. By end of the year, hopefully, we will give you a pleasant surprise.
Thanks. Justin Kwok with Goldman. Looking at Times Square, you have these revenue from retail pretty much flat for a while. I know you're doing some AEIs or the tenant reshuffling exercise. What exactly you want to achieve there? What are you aiming for, and when do you see that would be some uptick in this number? Because I guess from the turnover rental proportion or from the retail sales proportion, it seems to be lagging for a while. Should we expect some uptick or meaningful uptick when you have finished this exercise? Thanks.
We hope so.
We hope so, yeah.
The first sign is actually retail sales. If retail sales is good, then that would give us more margin for rental adjustment. Retail sales in the first half at Times Square grew by 22%, 23% over a year ago.
Yeah.
That's, as one of Angela Ng's slides indicates, the occupancy cost has rapidly improved at Times Square. If it continues to improve, that would give the landlord more bargaining power in terms of getting higher rents. It is now down to about 20% occupancy cost, 20.5%. It was 25%. When it was 25%, there would have been limited scope for rental adjustment. But as it gets down to 20%-ish , then we're beginning to get into a different zone. There's no question, retail sales is what we need, or growth in retail sales. We seem to be getting some interesting numbers.
Yeah. We are continuously bringing in some new tenants, which we hope that can sort of enhance our sales volume.
Yeah. There's a time lag between retail sales and rental enhancement.
Praveen from Morgan Stanley. Two questions for me. First one for Doreen. Would you remember what percentage of GFA was either down year-over-year in case of Times Square because of asset enhancement? As well as Harbour City, what percentage of GFA was added because of the Ocean Terminal? I'm trying to understand what percentage growth coming from GFA, not because of just rate increase.
Times Square, GFA down?
I am just asking if there was.
You are really referring to sales per square foot.
Right.
Okay.
[audio distortion] Yeah, exactly.
Well, for Harbour City, we.
Or the rental per square, if I may say.
Rental per square foot.
Because your rental is up in Harbour City by, let's say, 15%. I'm trying to understand, is it because of 2% GFA increase, Ocean Terminal, and 13% actually rental per square foot?
I think the Ocean Terminal, if you see, most of the leases in Ocean Terminal are restaurant space. You do not expect to collect gold from restaurants. So that impact on the overall rental is very minimum.
Okay.
It is very minimum.
In both the cases.
Yeah.
Okay, thanks. The second question I have was, for hotel.
Yes.
The Murray had a loss, which we expect obviously early on.
Yes.
Just trying to understand, how should we think about the time horizon? When do we expect that to turn positive? Thank you.
Okay, thank you. The Murray is now fully open. We obtained our last license last week, and it was a license for the swimming pool. We are preparing the swimming pool for opening in a week's time or something. Until the swimming pool is licensed and until it is open, we were not able to sell it as a full-service hotel. With that, our next challenge is to embark on converting the very good reputation we have been able to build up in the last six to nine months into sales. We did very well in terms of awards and word of mouth and so on and so forth, but sales in the first six months of the year, during the soft opening period, was behind the competitor set.
As I said, our next challenge is to build that sales in the remainder of this third quarter and in the fourth quarter leading into next year. To put things into perspective, because it is a hotel property, the land and building cost, which come up to somewhere in the range of HKD 8 billion, is depreciated over the remaining life of the land lease. The land lease is 50 years in duration, and we have already used more than four years of it. In between when depreciation first started and the end of the land lease, there is about 46 years. Roughly, the depreciation of land and building alone is somewhere in the range of HKD 150 million, HKD 160 million a year.
That is how much operating profit we need to make for it to report a profit, and we are certainly not making that much operating profit in the first year. Hopefully, by next year, its first full year of full operation, we will come up to that number or better, by which time, hopefully, we would be able to report a contribution to the bottom line. Our horizon is not one year or two years, it is much longer. Because of the accounting policy, we do have to depreciate the HKD 8 billion over the 46 years, unfortunately. Thank you.
Thank you. Any more questions?
Jeff Yau from DBS. Can I understand update on the Harbour Centre development disposal of the remaining China asset?
Okay. Exit from Harbour Centre's China assets. They had really three assets. One, we have an office joint venture in Shanghai, with Vanke. We own 27% of it. That is a DP project, and Vanke is the project manager. We booked some transactions in the first half of this year. So it is a DP project. They will continue to sell it. The second asset is a hotel in Changzhou. We have not made a lot of progress yet on finding a buyer for the hotel in Changzhou, but efforts are continuing. The third asset is a project under development in Suzhou called Suzhou IFS. In Suzhou IFS, there are three parts. There is a residential portion, there is a hotel portion, then there is an office portion.
Parts of it will be sold as DP, and parts of it, under the terms of the lease, we need to keep for a period, which we will hold on as IP. However, we can sell the company that owns the asset, the IP asset. Construction is still underway, and the first phase will not be completed until next year. The DP portion, we would probably start to sell in the second half.