Ladies and gentlemen, thank you for standing by. Welcome to Champion REIT's analyst briefing for 2022 interim results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Ms. Christina Hau, Chief Executive Officer, and Ms. Amy Luk, the Investment and Investor Relations Director. Thank you. Please go ahead.
Hi, everyone. This is Christina. Good afternoon. Thank you all for attending our 2022 interim results analyst briefing. Together with Amy, who is also on the line, we would like to welcome you all and thank you for all your continuous support. The past six months remained a challenging period for us in the face of pandemic and volatile market conditions. Nonetheless, we're determined to stand firm and weather the challenges with our stakeholders together. To kickstart, I would like to pass the time to Amy to walk you through the 2022 interim results highlight first, and I'll continue with the property portfolio and wrap up with the outlook of Champion REIT. Amy, please.
Hi, everyone. This is Amy Luk. In the first half of 2022, the prolonged and tightened social distancing measures attributed by the fifth wave of COVID-19 pandemic has further dampened the already subdued leasing activity and our property portfolio performance. Negative rental reversion was recorded for both office and retail properties. Our total rental income dropped 5% to HKD 119.6 million. Net property income fell 8.2% to HKD 1,044 million. Our DPU dropped 11.1% to 0.1064. Despite the improvement in tenant sales and footfall after the relaxation of social distancing measures in April, the three-month mandatory closure of fitness centers and beauty centers has particularly posed a significant impact on our tenant operations for the reporting period.
On the next page three, looking at the rental income breakdown by property, both Three Garden Road and Langham Place Mall recorded a drop, mainly due to negative rental reversion, with Three Garden Road falling 6.2% and Langham Place Mall dropping 6%. For Langham Place Office, the high average occupancy offsets the impact of negative rental reversion, resulted in an increase of 1.6% in rental income. The total direct portion for the REIT increased to HKD 51 million, mainly due to contribution from Langham Place Beauty. For the financial position of Champion REIT, our financial position remains stable under the challenging market conditions. Total property valuation dropped slightly to HKD 64.8 billion, mainly because of the lower rental rate assumptions.
There's no change in cap rate for all the properties. The NAV per unit decreased to HKD 8.50. The chart on the right-hand side shows the debt maturity profile for the MTN and bank loans maturing next year. Undrawn commercial facilities amounted to HKD 3.7 billion, is available for the refinancing. Average interest rate was 2.4% for the first half of 2022. Fixed rate debt portion was 67.6% at the end of June 2022. The gearing ratio stayed at a comfortable level of 22.3%. Now, Christina will go over the performance breakdown of each of our properties.
Thanks, Amy. For Three Garden Road, the pandemic has been impacting the leasing momentum of Three Garden Road. Many tenants have switched back to the work from home arrangement under the fifth wave of COVID. Demand from financial industry has weakened, along with the tenants' relocation and downsizing, resulted in a drop in occupancy to 83.8%. We observed that the footfall of Three Garden Road has gradually improved since late April and getting close to pre-COVID level. Banking and asset management sectors remain a major component of the property. For the central office supply situation, I think most of you might notice upcoming supply in the district. This has made the leasing market even more challenging, together with abundant existing available space in the market.
Rental has been under pressure in renewals, and the passing rent of the property went down to HKD 103.4 per sq ft. For the lease expiry, there's not a lot to handle in the coming two years. The 28.7 in the pink bar represents tenants under rent review, where their leases will expire in later years. For leases expiring next year and under rent review, the average rent they are paying is higher than the current market rent. For Langham Place Office, even though the fifth wave of the pandemic forced the medical, beauty, and healthcare tenants to suspend their business, rental income of the property was more resilient than others. Beauty occupiers put the expansion and net setup decision on hold, but occupancy rate was not significantly affected, moderately lower to 94.5%.
Regarding tenant profile, lifestyle-related tenants still took up the majority part, representing 69% of the property area. Inquiries and site inspection requests from beauty and medical segments have improved gradually. The office rentals were under pressure amid the market standstill, causing rent slightly drop to HKD 64.3 per sq ft in June. Only a small percentage of tenants will have their leases expired in the second half of this year. The government's temporary protection measures for business tenants, which came into effect on the first of May, allowed some specified tenants to defer their rent. The office rental collection rate has been affected for a short period of time, but we are pleased to see that the situation gradually improved after their businesses resumed in April. About the performance of Langham Place Mall.
We're glad that the mall remained fully occupied despite the challenging retail market. Yet it is not surprising to see retailers, in general, were staying cost-conscious when they make any decision on lease renewal or business expansion. As the pandemic situation becoming more contained, traffic of the mall rebounds, but overall footfall was still 18.8% below that of last year. Retail sales of tenants improved after the relaxation of social distancing measures, yet for the first half, it underperformed in the Hong Kong retail market in the lack of tourist spending. The proportion of tenants paying turnover rent only dropped to 9.9% of the mall area. The average parking rent dropped to HKD 154.5 per sq ft.
The base rent portion dropped to HKD 253 million, resulting from the dual effects from negative rental reversion and nominal base rent structure of Langham Place. The rental structure also contributes to the growth in turnover rent portion to HKD 51 million. Compared with early 2020 when pandemic began, the rent level itself was more affordable now. The rental concession and support this time around was immaterial. To maintain the attractiveness of the mall, especially in face of the competitive landscape, we continue to diversify our tenant portfolio to attract shoppers. Here are some examples of new tenants ranging from F&B, personal care, confectionery, gadgets to fashion sectors. We are pleased to introduce some new concept stores, such as combining hair salon with café, Hair Corner, and a brand new store of top quality and nutritious food for children, The Nutrition.
In order to boost the mall sales and drive footfall, online and offline marketing promotions were launched. Starting with the e-stock promotion on the top left corner, we partnered with over 30 tenants to provide discounted EQ points and exclusive offerings. The campaign was a success, with products being sold out in a short period of time. To capitalize on the government's consumption voucher scheme in April, we came up with an attractive HKD 200 sales rebate lucky draw. Event-wise, two crossover pop-up stores featuring one of the hottest boy band members, Anson Lo, and rising character, Tamashii Nations, were organized. Both of them drove large crowds and social media buzz, stimulating local consumption and traffic. For Langham Beauty, proactive marketing campaigns were also in place. Beauty brands have invested in dedicated PR events and marketing promotions to boost sales.
To cope with the latest round of consumption voucher scheme, Langham Beauty offered up to 81% discount and exclusive premiums to our shoppers. We are pleased to share that two brands, Pola and Tokyo Lifestyle, joined our Langham Beauty family recently. They have further enhanced the offerings to the customers. For sustainability, while we are making steady progress in achieving our 2030 ESG targets, some particular achievements in social and climate resilience aspects were worth mentioning. On the social side, we addressed our stakeholders' need on wellbeing during this period. The monthly flagship music live concert came back recently to take all participants to the retrospective music journey at Three Garden Road.
Stretching and singing bowl workshops were held earlier to provide an immersive and moving experience for both us and tenants. At the community level, we donate anti-pandemic gift packs to St. James' Settlement during the fifth wave of pandemic for offering immediate assistance. Efforts in governance and carbon reduction initiatives were made to enhance our climate resilience level. Apart from establishing the climate risk and resilience policy, more solar panels and EV charging station will be installed at our properties to amplify the positive environmental impact.
For the outlook, even with the progressive easing of social distancing measures, the geopolitical tension, global inflation, interest rate hikes, and potential global economic recession make the overall recovery path of the economy remain uncertain. For Three Garden Road, we expect the pressure on rental level and occupancy to continue in view of the available existing office space and upcoming supplies in Central. For Langham Place Office, while interest from beauty and healthcare segments has improved, traditional office tenants might opt for lower-cost alternatives.
It also faces challenges in occupancy and market rent. For retail, though we can observe signs of recovery in tenant sales lately, the far below pre-COVID tourism levels and the conservative approach taken by the tenants in lease renewal or new startups due to the fluctuating pandemic situation, would probably keep the rental income in a downward trend. Having said that, to cope with the dynamic market environment, we'll continue to adopt a flexible leasing strategy to maintain our portfolio confidence for retaining our tenants. Overall, the downside on rental income and DPU will remain. About liabilities management, we have undrawn committed credit facilities available for the refinancing next year. Under the rising interest rate environment, we'll closely monitor the market situation. For M&A, we maintain a prudent approach on reviewing the global investment opportunities under the slow macro environment.
We'll end our presentation here, and I'll open the line for Q&A. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one one on your telephone and wait for your name to be announced. We have our first question comes from the line of Jeffrey Mak from Morgan Stanley. Please go ahead.
Hi, management. I have a question on the Three Garden Road. Just wondering how is the inquiry levels recently, following the relaxation of social distancing measures and also the quarantine requirements. Also, will there be any change in your leasing strategy given that the occupancy rate has dropped a bit further, and also two new buildings in Central are coming up in 2023? Thank you.
Thank you for the question. Indeed, the ripple effect of the fifth wave continued, and the overall office market is quite quiet recently. Not only for Central but the overall. In Q2, there is an overall negative take-up in the whole Hong Kong market portfolio. The border to China also still remains closed, so it is very difficult for new tenants to travel to Hong Kong to visit the premises to make their decision. We do see the situation may continue for a while. In terms of the leasing strategy, we have been emphasize that we will be very flexible on the leasing terms and try to retain our existing tenants as far as possible while to grab new tenants into Three Garden Road. Thank you.
Thank you for the question. Once again, to ask question, please press star one one and wait for your name to be announced. Our next question comes from the line of Mark Leung from UBS. Please ask your question.
Yep. Hi, management. Can you hear me?
Yes.
Yes, we can hear you.
Oh, yeah. Yeah, sure. Actually, thanks for taking my question. My question will be regarding the footfall at Langham Place Mall, because I think you mentioned the footfall recovery, which was down by maybe like 19% below 2021 levels. What was the reason behind that from your partner perspective? From a tenant mix reshuffle perspective, do you think we need to further localize some more to fight for a better recovery for foot traffic? I think that's the first question. Second question is, not sure can you give us the margin guidance outlook going forward? Because I think we have a kind of like overall flat to sharp on half margin outlook.
How should we look on the NPI margin in the second half this year? Thank you.
Hi, Mark. It's Amy here. Maybe answer your question about the margin first. If you are basically looking in the past results margin, usually the second half is usually a bit more expenses incur. We'll expect that comparing to next year because of the operation expense of Langham Place, that will be lower than last year.
Okay. On the footfall of the mall, recently, we did see very good rebound in July and August. The 90% drop is mainly due to the first wave. Q1 is the worst. Then the footfall gradually picked up since April up till now. Regarding the tenant mix of the mall, we do see some of the brands, indeed they have some expansion plans or there are new brands coming in Hong Kong that will try to grab those good tenants to the mall. It's a good time although the rent to sales ratio now becoming more reasonable. It's a good time to capture those opportunities to grab quality tenants to the mall, which has more potential in at the upside.
Although this is a downtime for the whole retail market in Hong Kong, we do see there's a good chance to reshuffle and improve our tenant mix overall. That's why in the first half, we have introduced more gadgets like Sony into the mall, and we replaced the McDonald's by the Hair Corner with a hair salon plus a café concept. We'll continue to refine our retail portfolio. Thanks.
Thank you.
Thank you for the question. Our next question comes from the line of Percy Leung from DBS. Please ask your question.
Hi, management. Thank you for taking my question. I have two questions. Could you comment on the recent spot rent in Three Garden Road, and how does it compare to six months ago? Secondly, regarding your hedging ratio, is there any expiry in the coming one-two years? How should we expect the ratio going forward? Thank you.
Hi, Percy. For the hedging ratio, we are now 67.6%. For the maturity of that next year, part of it is fixed rate debt. After that refinancing, maybe there will be a little bit decline in the fixed rate debt ratio. Overall, we monitor the market situation very closely and we will be looking for opportunities, say, to have a more balanced fixed and a floating rate ratio for the debt profile. Regarding the spot rent of Three Garden Road, basically, it is pretty much quite similar to like six months ago. It has been staying at the 90s level per sq ft for a while. Overall market has been quiet, as Christina mentioned.
The rental rate that we are achieving has been quite stable at the 90s level. Thanks.
Thank you.
Thank you for the questions. We'll now take the next questions from Wei Chu of CIMB. Please ask your question.
Hi, management. Can you hear me?
Yes, we can hear you.
All right. Thanks. I have two questions. First is regarding your M&A strategy. It seems that you have slowed a bit of our overseas M&A expansion. Mainly if there is any change in your preference in your location and the property type and also the size of your ongoing M&A. This is the first question. Second question is about your investment portfolio. I remember that last year you made some impairment provisions on some of your holdings in some Chinese developers' bonds. As based on your latest numbers, you still hold some investment in these bonds. Do you think there would be any need to make further provisions on your investment portfolio? Thanks.
Okay. For the question on the investment portfolio, basically last year we had already made some provisions for the investment in Chinese property bonds and this year a little bit more. Right now, majority of the bond portfolio is investment grade. But you're right, we're still holding a little bit of say non-investment grade bonds. Whether there will be further allowance for credit loss to be made, it depends on the market situation. We keep monitoring the market updates in the sector. Regarding the M&A, we did not change our strategy. We are still looking for the prime location, a good project in gateway cities. Basically, we are still looking. We know the market is quiet.
Some quality projects were not available for sale at this moment. We are very open and we study if opportunities arises.
Thank you.
Thank you for questions. Once again, if you would like to ask question, please press star one one on your telephone and wait for your name to be announced. Our next question comes from the line of Peter Yang of Goldman Sachs. Please ask your question.
Hi, management. This is Peter Yang from Goldman Sachs. I have three questions. The first is regarding the dividend payout. Could you guide because last year, second half, we kind of lowered the payout ratio. Could you guide for this year, second half, how should we think about the payout? The second question is regarding the rental relief at the Langham Place Mall. Could you share how much you've given in the first half, and whether that's amortized or expensed? Finally, for Three Garden Road, could you share when we could expect the rental reversion to turn positive? Perhaps maybe next year or 2024. Yeah, that's all of my questions. Thank you.
Hi, Peter. Regarding the dividend payout, in the interim, we used to pay 90% in half. For the second half of the year, or for full year dividend or distribution payout, it will be like depending on the board's final decision when it come with the final results announcement. I'm sorry that we cannot really give you an answer at this moment. Regarding the rent concession granting to our tenants, for this year, we do see there is improvement in rent-to-sales ratio over the past years. This year the amount of rental concession we're giving to our tenants are very minimal. It's a very low single digit, so it did not affect overall our total rental income.
We do support tenants in other forms, such as marketing, payment by installment. For example, the office tenants that were affected by the closure. We did some arrangement on that. Regarding the Three Garden Road outlook, we do not have a crystal ball. It really depends on the market, the overall economic situation in Hong Kong, when the borders will be opened, when people can move around and more investors coming to Hong Kong. Honestly, we don't have this crystal ball, and we do also want to know. Thanks.
Okay, thank you.
Thank you for the question. We have our next question from the line of Fan Tso from Bank of America. Please go ahead with your question.
My name is Dina. Amy, thanks for taking my question. I just wanted to ask the expiring rent for Three Garden Road next year, 'cause I remember the spot rent three years ago, probably as high as HKD 110-HKD 120 or could be even higher. Just wanted to get a sense if the expiring rent next year is close to that level. Thank you.
Hi, Fan. Yes, you are correct. It is signed at relatively higher in comparison to the market rent right now. For expiring rent in 2023, it's about HKD 120.
Got it. Thank you.
Thank you for the question. As a reminder, if you'd like to ask question, please press star one one and wait for your name to be announced. We have a new question from the line of Jeff Yau from DBS. Please ask your question.
Hi, management. Can you hear me?
Yes.
Okay, I just have question, the question on the office demand. To your understanding, any of your top five tenant at Three Garden Road planning to have any in-house expansion or already expressed their interest to take up more space in the foreseeable future? This is first question. The second question is if government reopen the border for the international traveler so the foreigner can come to Hong Kong for site inspection, do you expect some release of the pent-up demand among the multinational companies or China-based company?
The overall economic outlook is quite uncertain. Our top five, I would say, the major key tenants apart from the one that we've done this year don't have expansion plans in this recent year. Regarding the open border or the relaxation of the quarantine on international travelers, it really depends on the overall because if the MNCs need to expand in Hong Kong and we need to see how is the connection with the Mainland China. You know, now the Mainland China is still closed their borders and so business travels has been difficult.
Therefore, we do see then there is a time lapse and it needs more time to absorb and attract those MNC coming back to Hong Kong. It's not only the localized issue in Hong Kong, it's also a global issue because of the war, the economic slowdown that we've seen everywhere, high inflation rate. All these factors are affecting the Hong Kong office market as well. Thank you.
Thank you.
Thank you. We have no further questions on the line. I would like to conclude today's conference call. Thank you for participating. You may now disconnect.
Thank you for joining.