Good afternoon, everyone. A very warm welcome to Wharf REIC interim results briefing. I am Angela Ng, Investor Relations Manager. Before the presentation and the Q&A session, we will start with an opening remarks by the Chairman and Managing Director, Mr. Stephen Ng.
Thank you, Angela. Just a very quick welcome to all of you, at the end of a Tuesday. I hope you all work very hard. We released our results announcement at noon today or over lunchtime. You probably have had a chance to read it. The title is very clear. Weak demand, stable results. Weak demand is the theme that you will notice throughout the presentation today. Demand has been weak since the beginning of the year, and after the end of the first half, demand turned even softer. There are many factors contributing to this weak demand so far this year. There are external factors, the Sino-U.S. conflict, the global economic slowdown, the strength of the Hong Kong dollar because of the strength of the U.S. dollar, and more recently, the civil unrest in Hong Kong.
All of them combine to give Hong Kong, some call it a perfect storm. Perfect storm. I do not know how long the storm would last, but we are bracing ourselves for possibly a longer period of disruption to the Hong Kong economy. Fortunately, we have a sound financial position and we have good recurring cash flow, and we believe we can ride out the storm in better shape than some of the other companies. But I do not have a crystal ball, and many of you probably know the market situation better than I do, and I look forward to hearing your views about what is likely to happen in the coming months, if not coming years. But first of all, let me hand the podium back to Angela. Thank you.
Thank you, Chairman. Despite the weakening demand and market conditions since the beginning of the year, the group still maintained stable performance. Underlying net profit increased by 3%. IP Revaluation Surplus decreased by 65% to HKD 1.8 billion. As a result, the group's profit attributable to shareholders decreased to HKD 7 billion. Dividend increased by 5% to HKD 1.10. Net cash flow increased to HKD 3 billion. Net debt reduced to HKD 36.4 billion. Gearing ratio improved to 16%. The group's Hong Kong IP & Hotel portfolio account for over 98% of the group's revenue and profits. The quality portfolio remained relatively resilient, with 5% increase in revenue and operating profits and 3% increase in underlying net profits, supporting the group's DPS growth. From this slide, we can see the historical trend of the group's stable recurrence DPS.
Indeed, it has been well supported by the group's stable performance of the Hong Kong IP portfolio. Throughout economic cycles, the group's Hong Kong IP maintained high level of occupancy and achieved stable revenue growth. Looking at the breakdown of our Hong Kong IP portfolio, retail is the main contributor while office providing a stable income to the group. In spite of the current soft markets, the group's retail portfolio consistently achieved positive growth and outperformed the Hong Kong retail market. During the reporting period, retail revenue of the group increased by 5% to HKD 5.4 billion. 73% was contributed from Harbour City's retail. Occupancy costs at Harbour City and Times Square were 19.6% and 21.3% respectively. Rental reversion of our three iconic malls remained positive. Moving on to the financial highlights. Group underlying net profit increased by 3% to HKD 5.2 billion.
Underlying net profits from the Hong Kong IP and hotel portfolio increased 3% to HKD 5.1 billion. The payout ratio maintains 65% of realized Hong Kong IP & Hotel underlying net profit. In the following slide, we will walk through the performance of Harbour City, Times Square, Plaza Hollywood, Central Portfolio, and our financial management. Retail sales performance at Harbour City was steady, amounting to HKD 18.5 billion. Outperformed the Hong Kong retail sales market by two percentage points. Productivity maintained around HKD 2,700 per square foot per month. Retail revenue at Harbour City increased by 6% to HKD 4 billion. From the pie chart, we can see the Diversified Retail Trade Mix of Harbour City. Fashion, leather goods, jewelry, beauty, and accessories are the key contributors in terms of rental income. Backed by the critical mass and proven productivity, tenant demand at Harbour City continued with positive rental reversion.
As a result, total revenue at Harbour City increased by 5% to HKD 6.2 billion. For asset enhancement in Harbour City, the conversion of service apartment was just completed last month, providing an additional GFA of 360,000 sq ft of office space. Currently, more than half of the space has been leased. For the Marco Polo Hotels in Harbour City, despite the drop of occupancy and average yield across hotel industry, the three hotels still achieve occupancy of 95% and achieve stable RevPAR. Moving on to Times Square in the competitive Causeway Bay district. Retail sales at Times Square was basically in line with the Hong Kong market under the softening consumption sentiment. Backed by the stable office demand, total revenue at Times Square maintained steady at HKD 1.4 billion. The retail performance of Plaza Hollywood has been affected as well.
The group will continue the constant tenant mix optimization to tap the Kowloon East CBD2 potentials. In the following slide, we will focus on the Central Portfolio comprising Wheelock House, Crawford House, and The Murray. Office demand in our Central Portfolio remained firm. The occupancy of Wheelock House was 97%, with 32% office rental reversion. Crawford House was fully occupied with rental reversion of 29%. The Murray Hong Kong is the group's latest long-term strategic investment. Operates under the Niccolo brand. The Murray Hong Kong has just been in full operation for one year, and the business is still ramping up. This internationally acclaimed hotel has received numerous best hotel awards from the reputable organizations and trade magazines. In addition, Popinjays, which is the rooftop restaurant upstairs, has been selected as one of the best rooftop bars in the world.
Moving on to the financial management. Net cash flow increased to HKD 3 billion. Net debt reduced to HKD 36.4 billion. Gearing ratio improved to 16%, and interest cost was 2.4%. The group maintained the Moody's A2 issuer rating with stable outlook. Looking ahead, in view of the following major factors, including trade disputes, Brexit in October, global currency and interest rate movements, the group holds a cautious outlook towards the market. Lastly, the corporate social responsibility. Our sustainability efforts have made some remarkable achievements, including the reduction of greenhouse gas emissions and water consumption. For Project WeCan, the group's business units are partnering with seven schools to provide opportunities and care to the secondary school students. Wharf REIC continued to be a constituent member, enhancing corporate sustainability index and awarded the CSR Index Plus by Hong Kong QAA.
The Wharf Young Arts program was awarded the award for arts education by Hong Kong Arts Development Awards. That concludes my presentation. Now we will come to the Q&A section. May I invite the Chairman, Mr. Ng, and Ms. Doreen Lee, Vice Chairman, to come to the stage, please. Okay, so now is the Q&A section. Please raise your hand and identify yourself and the organization that you are representing. Raymond Liu from HSBC?
Hi, good afternoon. This is Raymond from HSBC. I got three questions. The first question is regarding to the phrase, dividend sustainability, which the Chairman highlight in March this year. As you project in the presentation slide, steadily growing dividends here. But there's one thing that I would like to ask is that actually, since the demerger of the Wharf REIC , there's a very clear dividend policy, which is the 65% payout ratio. In case, on the worst case scenario, if there's any decline in the underlying earnings, what would management consider in terms of dividend? Would you consider to declare any special DPS to maintain a sustainable or stable DPS for the long-term loyal shareholders? This is the first question. The second question is, can you share with us the latest retail sales performance in July or the latest week?
This is the second question. The last question is related to the strategic investment in The Murray Hotel. Can you provide us more color about the operation performance, like a RevPAR or the timing that you expect to turn it more profitable from the EBIT level? Definitely, in the cash level, this is already very good result. Thank you very much.
Good, thank you. Three questions, I will leave Doreen to answer the second. DPS. We have a formula to work out DPS. Under normal situations, we will simply apply the formula. I guess your question is, what if an abnormal situation arises? I do not think I have the answer to your question today. I hope that the abnormal situation never arises, but if it does, then it is up to the board to consider its options at that time. The third question is about the performance of The Murray. Out of our six core assets, Harbour City is, of course, the largest. It is in Tsim Sha Tsui. Tsim Sha Tsui, as you know, has been affected by the recent unrest. Causeway Bay, Times Square, that is very much in the eye of the storm as well. The Murray is between Central and Admiralty.
Again, these are areas which are among the most affected. So together with the general downturn in both the retail and hospitality industries, our properties have been hit as well. The Murray is not doing as well as we had expected it to. In the first half of this year, however, what I can report is we did report a positive GOP, which is not exactly EBITDA, but similar. That was up to June, in the first half. In the second half, we had budgeted for an improvement in the GOP. In particular, the fourth quarter, in fact, starting from September, the last four months of the year were budgeted to be strong months. But everything has changed in the last few months. So whether or not we can continue to achieve the budget for the second half of the year is in doubt.
I think as a conservative person, I would want to reserve some margin for underperformance from the budget. But having said that, we will do everything we can in a challenging market where demand is very, very weak. Second question.
As for the second question, we are yet to collect all the data or the sales figures from our retailers. But I reckon a high single digit and even double-digit decrease would not be a surprise to us, given that last July we had a very high base. That said, we are doing the best to work with the retailers to drive business. In fact, one retailer friend called me a couple of days ago to say, no, actually Monday, said first time in her working life in the past 20 years that she has to close shop twice in Harbour City. Around 7:00 P.M. or 6:00 P.M. on Saturday and then yesterday. But she told me also that, in some shopping malls, she simply did not open the shop at all. So I guess we still have some business even under the present rather severe circumstances.
We are just working our very best to drive business regardless.
Ken Yeung from Citi?
Yes. Hi. The first question is, I want management to compare this time, which is we are around six months decline of the overall Hong Kong vs the previous downtrend, 2014 to 2016, the retail down cycle. How do we see this time in terms of duration or magnitude, the decline, what you expect vs last time? Do you think this time is more severe or more negative than or much longer or much shorter in terms of the down cycle? This is the general first questions regarding the correction of retail sales. Secondly, I still recall at that time in 2014 and 2016, Doreen was very bullish. Basically, the key thing is, when retail sales decline, she told us that occupancy costs can further drive up. Rental can still go up. Many people do not believe, but finally prove she is right.
Rental, I still look back, the data is up 10% in two years, but retail sales down 20%. Can we have the confidence this time that, same from Doreen, that the retail sales down, rental still can go up?
Doreen isn't paid to make predictions. No, but the short answer to your question is, compared to the last downturn, this downturn is more uncertain. I use the term perfect storm to describe this. We did not have a perfect storm the last time. This time, we have a lot closer to a perfect storm than we did a few years ago. The U.S., China situation is extremely complicated, and it will not only affect the economies of those two countries, but also Hong Kong in particular. Exports are down out of Hong Kong. When I say exports, I'm referring to both air cargo and sea cargo, way down. The renminbi just broke through seven not too long ago, and seven to the U.S. dollar.
Interest rate in the U.S. seems to be easing, but I understand, and I don't know whether this is a temporary phenomenon or not, many of you in the audience can advise me that HIBOR actually went up for a couple of days consecutively. I'm trying to understand what's behind this apparent dichotomy in the movement of the two interest rates. With a strong Hong Kong dollar relative to renminbi and other Asian currencies, we tend to get less consumption in Hong Kong. Fortunately, the yen is strong, then at least it deters some outflow of consumption from locals to Japan. At least, hopefully they will stay in Hong Kong a little bit more. But generally, I go back to the term I used, more uncertain than the last time.
Jeff Yau from DBS?
Sorry. I am afraid this time I have nothing to add. This renminbi is easy for us. This time, I think the outburst is a bit more sporadic, for the civil unrest. It is difficult for me to predict. We can just do the best we can.
I think in the near term, our rental will continue to rise. The question is, if it lasts much longer, then it is anybody's guess. Sorry.
Okay, next question from Jeff.
I have two questions. The first question is related to the retail turnover rent. On page 19, the retail turnover rent increased by around HKD 120 million to HKD 789 million. But at the same time, the retail sales number went down from 0.6% for Harbour City to around 4% for Times Square. How can we reconcile this number? I think over time, the passing rent, the base rent should be improving because of the positive rental reversion. But on one hand, we have lower retail sales. On the other hand, we have better retail sales, turnover rents. The second question is related to the current leasing strategy. Given the current situation, if today a tenant comes to Wharf REIC to negotiate a lease renewal, if they ask for a rental cut, would you be more flexible to accommodate that request?
Or would you insist on positive or neutral rental reversion?
You deal with the second question first? No? Page 17, did you say? I understand. The question is retail sales in our shopping malls was at best flat, if not declining. But why did turnover rent increase? I think that's the question. That's the first question.
Oh, I see. I think the increase comes principally from Harbour City. There are a number of brands which are doing very well despite all the negative factors coming into play. These brands are giving us very high percentage rental revenue. I think that helped to explain. The revenue is coming from a number of top luxury brands. I would say, even though sales in most areas become flat, but because probably an increase in 1% or 2% in a particular tenancy, that would help us to get more, a higher sort of turnover rental revenue.
A simple answer is performance is uneven. The good ones do very well, and the bad ones don't do as well. But they still pay a basic rent.
Even at this time, you can still see a bit of a queue in several tenants in Harbour City, and that helped to explain the situation.
There was another part to your question, I think, wasn't there? Leasing strategy. Leasing strategy for the rest of the year.
Leasing strategies, we usually set out our business plan end of year , and we have very firm targets to follow. I think at the end of the day, it is still the desirable tenants that we are after, that can become accommodated. We are still going after a very firm principle to acquire the tenants we have in mind to complete our trade mix picture. That will not change. We will not go after tenants purely for rental, even in times like this.
We have our hit list, and we will continue to hit. We also have a miss list, and we will continue to miss the tenants that we would rather not have.
Karl Choi from Merrill Lynch.
Hi, a couple of questions. First is, the express rail train terminal site will be coming up for tender. Can you talk a little bit about your latest appetite for that particular site, given what's been happening in Hong Kong? Also from a funding perspective, would you rule out using equity if necessary? Second is, do you have the data for retail sales performance for the month of June alone? Since the protests already started back then, so want to see what the performance was back then. Thanks.
Let me deal with the first part first. It's premature to comment on our appetite for the new site, new opportunity. We are, of course, looking at it. But we need to understand, first of all, whether we can make a good asset out of the opportunity. If we cannot, then we may not bid. So it is premature at this stage. June sales.
June sales for Harbour City were down 6.7% vs last June 2018. Times Square was down 11%. Plaza Hollywood down 3.8%. To illustrate the point, all sectors, be it luxury retail or mass retail, fashion, jewelry, AV, whatever, all went down except supermarket. Supermarket is the only sector, has a gain in business. I think that explained a lot of situation in June. June, I think why Times Square suffer more than Harbour City, because in June, basically there are a lot of parades in almost like every week, starting from Victoria Park. I think we are not the only one. Causeway Bay, shopping malls, I think they were all affected negatively.
I think there was at least one other business which should have done well, but we do not have that statistic. If we can separate out under food and beverage, bar from restaurant, bars would have done well, I think.
Ramen did very well in the month of June and July, I was told. Everybody needs a quick break after a bit of action. May we have the next question?
Thanks. Justin Kwok with Goldman Sachs. In this interim period, you still see some finance cost savings on half-over-half basis, as you also touch on briefly that HIBOR is actually now start inch up. Can I get a sense on what is your view on this item going forward? Have you been doing a lot more fixing in order to mitigate the risk where at the end, we will also bring up the finance cost in a way? Thank you.
In fact, the interest cost in the first half of this year was higher than a year ago. The effective interest rate was also higher, mainly because HIBOR went up compared to a year ago. But generally, we take the view that interest rate is not likely to go up. Hong Kong dollar interest rate is not likely to go up too much, and we would rather stay in floating than to convert into fixed at today's premium. Of course, if fixed were cheaper, then that is a different story. But at the moment, we simply are not prepared to accept the premium of fixed. We will continue to stay in Hong Kong dollars. Sorry. There is a question.
Thank you. It's David Ng from Macquarie. Two questions, kind of a more structural question for the long-term strategy of the company. I guess first one is, I guess one of your competitors has mentioned that one of their trophy assets has peaked out in its growth, and that's why they need to purchase a new site in the new area in Kai Tak to sustain the overall growth of the company. That's also a very relevant question for both Harbour City and Times Square, which have done very well, and to some people may have already optimized the sales or the revenue per square foot. Is this something getting more and more important in the mind of management that, rather than trying to get even more from the existing asset, acquisition or a greenfield project is becoming much more important than in the past?
I guess the second question related to this is, and I guess we have asked this in the past, will you take advantage of maybe current market downturn to do something even more disruptive to existing asset, say, like a larger area of renovation or something much more drastic? When the market is good, that's an uncomfortable disruption, but when it is now coming down, is it a good opportunity to do something more major for the two assets? Thank you.
First of all, continuing to work our current assets is a priority. We have a lot of capital in the current assets, and it is important for us to work them as hard as we can. That is our main thrust in any case. Whether or not we can find additional assets to invest in is not entirely within our control, not unless we're prepared to pay prices which are not reasonable. While we continue to look for other assets, we'll be prudent in how much we pay and what assets to chase. I don't think we can count on that. It's not in our business plan, for instance, that there would be an additional asset by this time next year or this time two years from now. Staying with what we've got is where we start, and working the assets harder.
This property we're in, The Murray, we can work it harder, and we will. There's a lot of improvement to the operation and a lot of improvement to the finances that we can work on.
Any more questions? Ken?
Sorry, but I just want to follow up to Doreen on the upside on the occupancy cost. I still recall at some time you told me that, "Well, why not we can be department store 27%," something like that. Because at that time, Times Square was edging up to 25%. So I want to ask again, can we be more upside? Now we still very a lot of the room, 19%, 21%?
Still have room. Only 20%, right? In Times Square.
21%.
21% Times Square. And Harbour City is ?
19%.
19%, 18% something, right? Yeah.
What is the maximum you see?
Maximum.
I still reckon is anything that around 25% is still relatively comfortable. Just like a department store concept. If you check with the department store, they do charge even up to 30%. I am not saying that we are pushing for that. We have been working very hard to lower the occupancy cost as much as possible. In fact, we saw some sign of lowering until June. We had a very good 2018 last year. The base is very high, especially for Harbour City. If you look at the figures, we excel others by a big margin. This year, because of renminbi and other issues, it is not unexpected that we will have a sort of a lower growth. But in June, when things appear a bit unrestful, then we start to see this lowering of occupancy. But still, I think we can still hang on there. Yeah.
It is dangerous to look at just one number. Bear in mind, this is an average. Given the uneven performances of different tenants, different merchants, and different trades, and different reasons why they want to be in our mall vs somewhere else, using a simple metric to measure is sometimes dangerous.
Hi, thank you. Given your recent negotiation with your many tenants, I think since June or July, what do you see the trend of rental reversion at retail? What kind of rental reversion, especially on retail, you are seeing for the second half? Thank you.
Rental reversion, you talk about the retail, right? Actually, the first half, we managed to get, in Harbour City, single digit. In some areas even double-digit increase. That's the first half of the year. I must admit that it's been relatively quiet these I think many of our retailers are not in the mood. They lost their mood for a while. We did quite a number of deals, and actually we acquired a number of desirable tenants for both Harbour City and Times Square. Hopefully we'll get them to come in and start operations soon. I must admit that for these two months, I think people are not really in the mood to go into very in-depth discussions on rentals and all that. I think I've always been very hopeful. Chairman tends to have a more sort of conservative view.
This time I would say I wouldn't dare to take my crystal ball out.
Anybody else?
Please raise your hands if you have questions.
Or criticism?
I think it concludes today's presentation. Thank you very much for joining us today. Thank you.