Hi. Good morning, everyone. Welcome to CapitaLand China Trust 1Q 2024 Results Briefing Call. I am Nicole, IR of CLCT. I have with me today, Zhi Wei, CEO, Joanne, CFO, and You Hong, Head of Investment. Our agenda for the next hour will be to begin with a short presentation before proceeding to our Q&A section. We will take questions after the meeting. I would appreciate it if you could raise your hands if you have any questions, and I will direct the time over to you. I would like to pass the time on now to Zhi Wei. Zhi Wei, please.
Thank you, Nicole. Good morning, everyone. Let me just dive straight. I think most of you are very busy, and there are several announcement results coming on. Let me just very quickly walk you through the 1Q 2024 CLCT's business updates. Zooming in at the key highlights, I think for 1Q 2024, our leaner and fitter nine retail malls continue to lead the recovery. As you know, we have ceded operations at Qibao and also divested Shuangjing. But post-AEI, the nine retail malls continue to contribute equally strong revenue versus the 11 of last year. If you look at on a like basis, if we remove the effect of Shuangjing and Qibao, the current nine retail portfolio would have grown in terms of revenue about 5.7% year-on-year.
If you look at the retail metrics of shopper traffic and tenant sales in the first quarter, things are continuing on the gradual up path. I mean, if you look at the shopper traffic, double digit, tenant sales double digit, gradually improving the operations post our AEI. Moving to the net property income level, I think the new economy segments, the logistics, in terms of the revenue and in terms of the business parks, we also did not receive as much of the government's tax incentives for this current quarter. So that sort of bring down in terms of the year-on-year effect of the portfolio. If you look at the three asset classes that we have today in terms of retail, business parks, and logistics, retail is our biggest segment. It continues to be driving at a high level of occupancy. Business parks, stable.
Logistics is the one where we are taking a little bit of asset-specific leasing actions to address some of these current demand-supply challenges. I will talk a little bit more later on. I mentioned if you look at the three segments, occupancy for retail, largely all our assets are back to the healthy level of more than 95%. If you look at our core assets especially, they are closer to the 99%-100%. So I think that gives us a firmer footing, you know, as we approach the year. I already mentioned in terms of the traffic, it is across double digits. You know, Beijing do a little bit better because of some of the efforts that we have put in the last couple of years. You see Beijing malls are almost reaching the pre-COVID levels.
Similar picture, if you look at the sales side post-AEI, things are turning out much better year-on-year and also reaching or exceeding the 2019's effect. Largely, if you look at the business parks and logistics, I think we are all aware that these two segments, in terms of the market, if you look at where the market vacancies are, temporary this year is going to face a little bit of that. More supply coming in, but more business are reviewing their footprint and are very cost-conscious. So I think these have been taken into effect as we balance, you know, the occupancy and also the kind of rental expectations for landlord. If you look at what we have done, I think if you look at the logistics, you know, we have particularly de-risked two of our assets that are more exposed to single tenant.
That has been already completed in terms of our lease renewal, bringing the Kunshan to 90% and Wuhan to almost full capacity. As a result of that, we have to align some of these rentals to keep them. Shuangjing has already been completed. Proceeds have been repatriated back in one quarter. This has been used to pay down our borrowing. You would see later on gearing will improve. That will also have the flow-through effect in managing our cost of debt and interest expense for the year. If you look at where things are, our gearing has come down relative to a quarter ago to a more healthy or level of 40.8%. Renminbi for this period of time are relatively stable for the balance sheet period reporting.
Although at the P&L side, we continue to see year-on-year close to 5% relative weakness compared to a year ago. Due to our active debt management that comprises more of us shifting a little bit of that borrowing mix to RMB, also enjoying the RMB's LPR loan reduction and also because of us actively refinancing of our onshore loans. All these actions have helped us to mitigate the rising interest impact. The proceeds have been used to pay down more expensive debt. Again, you look at the average cost of debt, that has been managed stably and coming down. Moving on to the maturity profile. You can see again, quite consistent. We do not have any refinancing tower that are due for concern. We have completed everything for 2024. Nothing is up until 2025.
As we speak, we are also actively looking to reallocate and rebalance some of our onshore borrowings across several assets. I think we are able to take this opportunity to refinance across our onshore loans to achieve better overall cost of borrowing. I think that effect will start to be seen coming into the second quarter and into the second half of this year. We have pushed all the refinancing of onshore debt to 2029. I think that's an important point for us to take note. The other thing is we have been progressively, as part of that debt mix intent, to shift more. I think last year we were closer to 10%. Now last year end, we are about 20. This quarter, we have continued to move progressively to 23. Our target is to move closer to 30% this year.
I think all these initiatives will help us to manage the overall cost of debt down. In terms of fixing the fixed float, I think we continue to maintain a relatively high 77%, 75%, 80% kind of fixed rate. If you look at what we are trying to shape the portfolio, I think overall you can see that effect playing out. I think over the years we have actively taken back space from the anchors, the lower yielding. I think part of the AEI effect, you can already see now the supermarket anchors for the last three AEIs have been compacted and reduced and therefore you see its income less weighted to it. As a result, the space that we take back, we have been pushing more towards the F&B, which is a trade cat that is increasing in sales and capturing spending.
On the other hand, we also see room for us to do more, and I think you can see services also improving versus a year ago. I think these are all the leasing directions that we are shaping the portfolio. And I think CLCT today continues to be one of the REIT out there to be very well diversified in terms of its revenue streams. I think 70% come from retail, 27% come from business parks and less than 3% from logistics. And if you break it down, top 10, less than 10% exposed, and the largest tenant is only about 1.6%. I think these are all the diversification, the revenue streams that we want to build resilience, and I think this is being shaped accordingly.
Looking at retail, we have now nine retail malls, and if you look through the nine retail malls post our AEI efforts, I think they are doing much better. I think if you look at the leading indicators of traffic, sales in terms of what they have been capturing, footfall and demand in the last one quarter, Chinese New Year, things are trending well. And especially if you look at this quarter, the three malls that we have completed, the AEI contributed more than half of the incremental sales improvement. I think this is a good encouraging sign that what we have done to refresh the mall offerings are capturing the consumer return and spending. Across the trade set, trade categories, we are pushing more F&B. These are doing well. Services I mentioned.
In this quarter, leisure and entertainment are also coming back in the sense that we are able to sign a little bit more tenants along those front. I think generally, environment is, I would say gradually improving to a more normal state that we have seen before. I think if this sales, this traffic, this positive data point continues to play through, I think you start to see a little bit more healthy cycle for us to improve our rental in the next cycle. I mentioned already, look at all our retail malls. Besides the two smallest one, which is CapitaMall Yuhuating and Xinnan, which is trending around that 95%, the rest of the assets are already pushing closer to that kind of 98%, 99% full occupancy.
Typically, for period end reporting, we do see close to 2%, 3% frictional vacancies, as somebody will fall out before someone will come in. During COVID, you would have seen that opening up to maybe 5% or even 7%. I think generally you can see most malls are now back to that 97%, 98% as a whole. As the two that are weaker, we have to do a little bit more to strengthen it. This quarter, if you look at where things are in terms of the churn, I think generally, the retention has improved relative to a year ago. We are closer to 61% in terms of retention. I think that's a sign that things are generally stabilizing. That gives us a little bit more room to control the downtime.
Consistently with the last few quarters, the general occupancy cost that we are tracking are back to industry norms. Looking at where we are capturing the new tenants who are coming into our mall, these are the few sectors I continue to see the F&Bs continue to be the big push. Services, I mentioned earlier, leisure, entertainment. For selected malls, I think fashions are continuing to do well, especially in our lower tier cities, for example, in Harbin and in Nuohemule. I think they are a strong mall in the catchment. They continue to be able to bring in more interesting brands to service the catchment. Just a quick snapshot of how things are. I think I've mentioned quite a lot on this.
Generally, the AEI has improved, and this impact will continue to drive improved positioning and also be able to capture the rental productivity for the coming year. Let me move on to the business park side. If you look at business parks, we have five across the three cities. Again, the different parks have different unique strength and positioning. Across, if you look at where things are, again, if you look at where market vacancies, they are typically trending around 20%- 30% if you look at the market survey. Our parks have continued to maintain a very stable occupancy of above 90%. The two Hangzhou, we have mentioned quite a few times that the demand-supply in the short term will create a little bit of that churn, where businesses are still very, very cost-conscious.
Some of those tenants that have been with us may be attracted away because of them taking on their new real estate themselves or being incentivized because of very low rental into other districts. I think there's a little bit of that churn. That said, I think the first quarter, we do see a little bit of more leasing volume that we sign in, which is a good sign compared to a year ago. Looking at where things are, I mentioned, if you look at Xinsu, which is very steady, we continue to be able to do quite a new leasing volume in the first quarter, 20,000, and at 4% rental reversion. That's a healthy sign. We continue to see MNCs actually expanding in some of our business park footprints. I think that continues to be a good sign.
At the same time, we are also signing in new lessees that are in the trade sectors that we are targeting to diversify the kind of reach. I think this is a good sign. At the CLCT, there are two assets. The smaller one, we don't have a lot of leasing volume for 2024. The bigger one of AIT, I think for the first quarter, we continue to see some new sign-ins. I think more is for the second half of this year, where we have several bigger lease expiry profile coming up. That's something that we are working in advance, to secure or to get replacement as they come due.
For Hangzhou, I mentioned, I think again, quite a healthy 8,000 over square meters of lessees signed from the different trade sectors and we'll continue to work within our own internal and using some of the government agencies and external network, the tenant community, to help us reach out to some of those community of lessees that we can bring in. In terms of business parks, the retention is a little bit more quite typical. I think 75% are being renewed, and we are bringing in about 25%, and we continue to see sectors like electronics, the biomedical areas that we want to target our efforts. Moving to logistics. I think we have four. I mentioned, if you look at general landscape, I think we know that a lot of the logistics of real estate was built because of the expanding e-commerce growth.
I think that part of the demand has a little bit moderated, and I think post-COVID, I think there's a lot of supply chain movement. I think this is the macro landscape. If you look at where things are in terms of rental, because of this, the asking rental are softer and, the places that we are in, there will be new supply coming in. I think this is the kind of leasing environment that we have to handle. Looking at where things are, we have solved two of our major leasing focus for last year end. Kunshan and Wuhan, we reached that leasing and now back to 90 with full occupancy. Chengdu, we continue to be able to sign smaller multi-leases into the building because it's more catered for smaller setups.
We continue to see demand coming from logistics players who are servicing the end consumer retail products. I think that is an area of focus. Our location continues to be able to near the airport, and close to where the transport node are. I think this is going to be the focus. For 2Q, I think we have secured the leases. I think this Chengdu should be able to progress from 60s in the last year to 70s this quarter, and we're progressing to the 80s this year. That leaves us with the Shanghai one. With the exit of our last logistics, the 3PL tenant, we are now weighing options of whether we want to do a more short-term, trying to find out similar kind of operators who like that location.
The location is still good because it is near to the ports and is very suitable for players who are playing the sea freight. This area generally service a lot of those car manufacturers, the EV. I think this is an area that we want to spend a bit more time to capture. There is one area of work. The other area of work that we are trying to do is to see whether we can take some time to CapEx the building and suit some of the tenants that can then lease this area for a longer time. I think these are the two leasing options that we are weighing as we look at the opportunity.
To conclude, I think we continue to stay very focused in the current environment, driving asset performance, watching the operations to make sure that we tighten all the controllable expenses, the margins, et cetera. We have unlocked value for many of the mature and some of these non-core. We continue on that path to look at what opportunities we can continue to do that. At the same time, we have completed a series of AEIs, and those assets are now contributing much better to a leaner and fitter retail nine asset. I think this is going to be the strategy and focus going into 2024. I have already mentioned, I think if you look at where things are, 2024 is going to be a very important year for China's economy. First quarter numbers slightly ahead of analyst, I think market expectation.
I think you continue to see the government putting a lot of policy emphasis trying to stabilize the property sector to show up the business confidence and household consumption is going to be a big pillar of that 5% GDP growth. I think you are going to see more policy intention moves to this area. I think we are in the right sectors. In terms of our asset class, we are aligning very favorably to where China's own economic priorities are at. I think for retail, you continue to see us doing that. Business parks, we have to be a bit more local in terms of working through the local government on who they want to base those sectors, those industry names that they would like to house within the catchment. Same thing for logistics.
I think we will continue to push occupancy while being very pragmatic about what we can for in terms of the rent and also the talent quality. I think with that, I will open up for Q&A. Thank you.
Thank you, Zhi Wei, for your presentation. Let's now proceed to the Q&A segment. I see two raised hands on the right. Can I pass the time to Geraldine please?
Hi. Morning, Zhi Wei. Thanks for the opportunity, Nicole. I have a few questions. Maybe I take them one by one. Are you able to share the reversions across the three segments for this quarter?
Logistics, I think we have guided. I think it is very much in line with what we have guided. I think the two major assets that we have secured the leases, the reversions are around the negative 20%. For this quarter, if you look at our business parks, besides Hangzhou, which is going through that churn, so Hangzhou is in a negative. Other than that, the other three business parks are still on the single-digit positive path. Retail is the one where you start to see that divergence. If you look at this quarter, among our nine malls, essentially the bottom three are the ones that continue to exhibit a little bit more negative pressure. That essentially is Xinnan, still going through a bit of negative. But I would say this quarter, the negative overall is less negative compared to a year ago.
I think we are moving towards that path. The second mall that is still under a little bit of more pressure are the smaller ones, right? The Yuhuating and Xinnan. The bigger ones like Xizhimen, we are already in a positive mode. The strong ones I mentioned, like Nuohemule and Xuefu, these are very dominant assets in their local catchment. They continue to exhibit that stability. You look at this quarter, I would say five of our nine are already flattish or slight positive. That gives us that two to three that are main negative. So that gives a more full picture. Yeah.
Okay. For the retail reversions, there should be still some carry from the AEI works that you've done the past one to two years, right? That still helped.
Yeah. In terms of the revenue growth, that will play through into the revenue and the NPI for this coming year. But in terms of inversions, because we have already calculated the numeric in our previous quarter, right? We won't be reporting the same reversion numeric. But what has been signed in terms of those leases I mentioned, like the Grand Canyon, the Rock Square, and the Yuhuating, those improved leases will give us that flow-through effect into 2024. So that is only for the AEI malls. I also want to highlight, if you look at our lease structure today, 90% or 80% of our lease structure is still very much on the higher of the fixed or percentage of GTO, whichever is higher. That's the number one. So as the sales become better, we see more and more chances of us getting that incremental.
I think that's a point to remember. The second point is, we have always been signing, maybe typical lease is about three years. So within the three years, there are also rental escalation, organic step-up. There will, each typical year, let's say 20%-30% is coming up for renewal. The 70% is still steady, but with a bit of escalation. All in, I think if we can push occupancy, we can push sales traffic. I think generally we are moving into a state that is better and is helped by the fact that we have exited, I would say, the weaker performance assets. And we will continue to look for opportunities to do so. Whatever is retained continues to be stronger performer in the typical catchment they are in. I think that is what we are trying to shape the portfolio.
Okay. Thanks, Zhi Wei. For the Fengxian logistic asset, the strategy is to either continue to look for a tenant within the 3PL or potentially CapEx to suit another tenant, right? When we are talking about CapEx, what kind of, say CapEx are you thinking about? Is it a cold storage or other kinds of use?
When we say CapEx, generally it means that the tenant profile that we would like to bring in, sometimes they may have certain needs to suit their own business model. Take for example, certain zones, they may need a certain special lift because this building has a first floor and second floor. They may need certain ceiling height at certain places. When I meant CapEx, it includes all this. If it's a cold storage kind of tenant, typically, they will also require a little bit of more, the M&E, the health, the refrigeration area. I think this is something that we are open-minded. And at the end of the day, it's about us putting in a CapEx such that we can work through the tenant that we want, and we can build in a longer wheel, and how we can rentalize some of this CapEx.
I think this is something that we are working on, one part. The other way, obviously, is to see whether there are other 3PLs that can come in and take the space for its use.
Okay, understood. Yeah. So wait, I think I will go back to the end of the queue. Yeah. Thank you.
Thank you.
Thank you. Thank you, Sheridan. Can I pass the time to Terence, please?
Hey, thanks for the presentation today. Yeah, I just wanted to ask again, maybe follow on the function. How long do you expect the downtime to be? When should we expect this to recover?
It's a very good question. I think we are on various paths. I think things can be quick if there are good indication of people who can commit. I think we are still narrowing down on a few options. I think if anything, we probably need to have a three to six months of a period for us to commit and be able to bring it up. I think it's something that we have to look at. If it's a new tenant that we need to CapEx, I think the duration will probably be longer because it involves a little bit more work to be done. But if someone who can come in and take the space faster, I think a good indication would be probably three to six months is something that we are working, yeah.
Thank you. In terms of, you said that you are actually looking at increasing the proportion of RMB debt. In terms of financing costs, how do you see your financing cost trending? What should be the expected rate for this year?
Generally, I mentioned we have two buckets, the SGD bucket and the RMB bucket. The RMB bucket today, you see us, our weight is closer to 20% to 25%, big number. That bucket will start to see reduced interest expense as we go into 2024 because of the LPR reduction that we already enjoy. That's the number one point. The number two point is we are consolidating all our RMB borrowings to refinance, to not only enjoy that lower LPR, plus improved credit margin. I think that is a big initiative that we will do such that we manage down. Because the RMB loans today are 4% and below. We have already divested Shuangjing, and the proceeds have been used now to pay down our more expensive SGD bucket.
If you look at this chart, you can see today the big portion that we have so-called reduced our borrowings are coming from the SGD, the MML bucket.
Okay.
And also the SGD floating bucket. So this now, in terms of the dollar value, has come down, and this is also another big area that we are managing down our interest expense. I think these few moves will help to neutralize some of those fixed rate hedging contracts that will be coming up for renewal this year. But as we speak, majority of those fixed rate are only up for renewal towards the last quarter of the year. On the net basis, I would say we can manage broadly our average cost of debt, not higher than what we have done for last year. Yeah.
Okay, so we should expect sort of like a flattish for the full year.
I think all things constant, looking at where the market is thinking about the second half, the interest rate level, based on what I have just mentioned earlier, we should be able to control within that 3.5, 3.6 level that we have shown last year. Yeah.
Okay. And final question from me. In terms of asset monetization, do you have any updates on, for asset monetization this year?
Well, this is obviously being looked at all the time. Such things is very hard for us to pre-commit, not to compromise some of this business that we are trying to do. Obviously, our philosophy is always to monetize smaller assets, more mature assets that are harder to compete, and they are not going to be a big contributor towards the overall portfolio. So that gives you a sense on where we are focusing our efforts. In today's landscape, more likely than not, we are courting local buyers. You saw us do that last year, with Shuangjing, so I think we will continue to use our local network to seek out such opportunities as we look at monetization for those more mature assets that we hold.
Is it only limited to retail malls, or would you consider divesting some of your logistics, given that there's some headwinds there?
We will consider. Definitely, nothing is no when we talk about business. I think the key here is to how we can, first of all, operate the business. Second, if there's a better use of our capital. If someone can come in and strike a deal with us that makes sense, we can use the proceeds that will be cycled to improve our financial strength. That involves reducing the gearing. That would be accretive. If we have proceeds coming in, a combination of reducing gearing and doing share buyback, these are things that will be much, much more accretive. So we are definitely seeking out opportunities on these fronts.
Sorry, I know I said last question, but you just mentioned share buyback. I noticed that you didn't put that in as in the proposed use of proceeds for the divestment, the Shuangjing sale. Would you consider doing a buyback now, given especially how the share price is actually quite low right now?
I think in our announcement, we did put that in the use of proceeds. When the first quarter came in, because we had to balance a little bit of that distribution payment, right? Because in March, we have to pay distribution and also to watch our gearing, looking at where the RMB against Sing is, I think we wanted to be a bit more prudent to at least reduce the gearing as our first objective. But definitely, we will look out for opportunity, which is why I mentioned earlier, if we can monetize some of our existing holdings, it makes sense for us to do that. We are open to the assets. We are not shut to any, you mentioned specifically logistics.
If someone we can do a deal with, I think we are open-minded about it, and I think that proceeds can be used to reduce gearing and to do share buyback, which will be accretive. That's something that we'll definitely consider. In our AGM just two days ago, we have also sought the investors' mandate, and we have actually enlarged the mandate to 5%. So I think we are actually preparing that capital management tool and flexibility when opportunity arises. Yeah.
Thanks. That's all I have for now.
Thank you.
Thank you, Terence. Can we have Joy, please?
Yeah. Thank you. Morning, Zhi Wei. Two questions from me. First, on retail, could you share a bit about your OpEx and also in terms of your income, what percentage of GTO you are getting now versus maybe in pre-COVID?
Yeah. The first question, let me see. In terms of OpEx, generally, it has stayed quite constant with what we had indicated in the last quarter. Most of the malls are trending in the teens to maybe about 20%. So I think this is what I feel is a more industry healthy state, in the days where if you continue to maintain this level of OpEx when the next lease cycle comes up, I think everyone will be in a better position to look at what is a more realistic rent range. Last few years have been particularly difficult, as we all know. Retailers are still going through that recovery mode. General sentiments are still cautious, I would say, in terms of expanding. So I think you need to give them a bit of time to do that.
But I think in terms of what we have done to the specific malls, the sales, the OpEx, I think we are moving closer to a more healthy state. The second question is in relation to the GTO.
I think broadly, the spread of our GTO component still lies between about the 3%-5% range, depending on various malls. But this particular quarter, I do see improved GTO incremental coming in from our stronger malls. You start to see a little bit more of that in our Xizhimen, in our Harbin Xuefu, in our Nuohemule. I think these are exactly what I meant, that as you rebase some of these fixed rent, and because of our lease structure having that higher of the two, we start to see a little bit more flow in from that GTO. But by and large, because of the way we structure the lease, it's not going to be very, very different from It's not going to be very, very all the time.
What was a little bit more during the COVID years, if you recall, we moved maybe from 3%-5% to maybe 5%-7% because we were signing a little bit more short-term pure GTO lease structures. But now, I think we are a little bit going through that cycle where we don't have to renew on a pure GTO basis. We'll rebase them to be a fixed or a percentage GTO, whichever is higher. For this quarter, it is still within the 3%-5% range.
I see. I guess you have quite a bit of reversion coming up this year, right. So in terms of how aggressive you're going to push rent, or you're still going to be more measured, even though the sales are already actually trending above pre-COVID, rents are actually below pre-COVID. So actually retailers are doing pretty well. Is that fair to say?
It's a fair statement to say that the malls are gradually doing better. But as we look at total sales, as we look at specifically filtering down to the various trade categories and the specific tenants, we need to go down to that granular because part of the OpEx cost, part of the total sales are also because of a very active shift in the NLA mix and the trade category. We are pushing more F&B today because F&B today's ability to take on that OpEx cost has improved relative to 10 years ago because of the different formats of F&B. We are no longer doing very big format F&B that have a lot of CapEx, therefore their OpEx ability is much lower.
Today, if you look at the average rent of some of the smaller format, like the 50 sq m up to 100 sq m kind of food format, their passing rental are not too different from a similar, let's say, 100 sq m of fashion. You do see that shift over time. I think that is what I meant by the rent OpEx will move in relation to the trade cat mix that we have in the mall. I think we are looking at individual trade cats to see whether we are in the right cycle to improve rent. I think definitely as we move towards the next cycle, things should shape up better. Yeah.
Okay. Got it. My second part of question is on Fengxian. Based on your conversation, if we were to find a tenant today, would your sign-up rent be equivalent to a 20% negative rental reversion, or you need to give more incentives?
I think ballpark, what the market now is looking at, I would say ballpark. Generally, the 30% asking below is something that is quite prevalent. I think we should stand ready to be able to do something that is between 20%-30%, depending the kind of tenant quality we want and also the kind of creditworthiness that we think we want to bring in. I think this is the part where I say there's a little bit of deliberation whether we want to find someone who can take up the space or take up half the space. We CapEx a little bit, the remaining zones. I think these are some of the things that we are working through currently as we speak. But rental will be lower than what was passing. Yeah.
How do you think that will affect that valuation?
Good question. I think it really look at the market demand, supply, and what is the outlook. I think for this temporal one, two year, if the market rental is going at that 20%, 30%, we do expect a little bit of that contracted rent period to have that effect in terms of the valuation. But as for how that valuation plays out, I think we will continue to take market data and the valuations feedback. But I do feel that if the whole demand supply continues, market rental is being pegged down. There should be a bit of downward pressure to our portfolio. We took a little bit of early revaluation at the year-end last year to, I think, move down closer, was it 3% or around 4% down?
I think we stand ready potentially, that if the market don't turn up positively soon, there might be a little bit of this negative that we have to look at.
Okay. Thank you.
Thank you, Troy. Derek?
Hi. Good morning. Zhi Wei, can you hear me?
Yes.
Yes.
Hey. Hi. Good morning. I just ask one question. I'm just focusing on your business park assets, right? I'm just looking at both Suzhou and Hangzhou, right? The market occupancy is around the similar levels of 70% over. While you can hold your occupancy for now for Suzhou, I'm just wondering whether should we keep a closer look on whether your occupancy levels should be able to be hold at about 80%, 90%? Just wanting to get a sense on whether there's downside risk to that.
For Suzhou, I think generally we have two components, I would say. One is more like the suburban R&D office nature. The other component is more of the industrial nature. I think the industrial nature is one where we feel that the demand outstrips supply, and we continue to see healthy demand. So I believe that part of the segment continues to be highly committed. I think that's the first point. The second point for the R&D part, I would say that there will always be a little bit of the ins and outs. Tenants' profile, business model, not able to do as well, they may be attracted. Generally, business are very cost-conscious now. Corporate footprint are consolidating. So for the R&D, the business area, there may be temporal, that kind of frictional vacancy.
Overall, I think our park in Suzhou continues to be very well-regarded, and I don't think there will be a big swing. So that's for Suzhou. The one that I'm watching a little bit more, it's the Xi'an. I mentioned earlier Xi'an in the second half of this year, potentially there might be certain consolidation of some of the tenants because currently the tenants, due to previous years expansion, they have footprint around different places. So they might be doing a bit of consolidation. So I think for Ascendas Innovation Towers, I think second half is where we want to do very early work. That one potentially has a bit of in and out. The smaller part, I think, is more or less there. I think the big tenants have renewed last year, two years. That will carry us through to 2025.
Hangzhou is the one where I mentioned, more supply. I think if you look at the vacancy, we are actually already being pragmatic about our rent to make sure that occupancy can be driven up. I think for Hangzhou, things should stabilize around this level. We seek improvement as we balance a little bit of the asking rent.
Got it. Sorry, if I can just follow up. Your Hangzhou phase I, phase II, the difference in occupancy is also a function of the type of industries that is located there, or just a function of the expiry profile?
I think it's more a function of the tenant types that we have signed earlier on.
Yep.
I think earlier on, the phase I carries more e-commerce, and some of them are our sub-tenants a space from us, and then they do their small sub-lease behind. But I think some of these business model are shifting and reshaping. So I think phase I, we do feel a little bit more of those churn that we need to do.
Got it. Sorry. Last one is, you look at this business park, right? Logistics, we understand things are a little bit tough. But for business park, do you think the strategy, let's say, to retain tenants, is there a risk that you have to also offer fairly good rents for keep the tenants? I.e., do you see a 20% drop in rents in business park side, or no?
Business parks, I don't think the rental landscape is as, how to say, this is not as likely.
Not as zaogao . That's what somebody told me.
Generally, the business parks is still a more controlled kind of asset class. Logistics, a little bit more different landlords, different behaviors are quite different. I think our business parks is not any kind of business parks. I think our business parks have really been curated and positioned with local government as our JV partner. So I think continue to want to use what we say our own leasing network, that is the CapitaLand platform, and also riding on external network, which comes from our government partners and some of our existing tenants, their downstream, upstream tenant network. So I think this is something that we continue to do. So to answer your question, the Hangzhou I mentioned this year, to balance occupancy, I do feel that the reversion, we have to be realistic. So negative, but not to the extent of that logistics gap.
Okay. Sounds really good. Okay. Thanks very much. Thank you.
Thank you, Derek. Morning, Vijay. Can we have your questions, please?
Hi. Morning, Zhi Wei and Nicole. A couple of questions. My first question is, generally in terms of business parks and logistics, the businesses still seems to be struggling a bit. Can you give some color in terms of the rental defaults or the rental arrears for these spaces in the last one, two quarters, especially some of the business has gone down? Have you seen rent defaults increasing in your portfolio, especially in business parks and the logistics space?
Generally, as part of our lease management, we typically would have that security deposit that we hold. So we don't have a lot of all these arrears or those default happening. They are kept to relatively a small percentage of our total portfolio. If you look at the year that just passed in the last three months, I would say arrears tend to fluctuate around that 2%-3% level of our revenue. But that is against having security deposit that we hold. And actually part of that leasing strategy is sometimes we have to exit these tenants, and that's why the occupancy reflects that decision that we have already exited a tenant who are no longer healthy. So part of the big decision to de-risk, you see that playing through in logistics already, right? Some of the tenants are having difficulty.
So by continuing to let them be there, it serves no purpose. That is why I think in the Shanghai, we have struck a deal that they leave. We have given them some rebate for the last few months. But overall, when they leave, we manage to then use a security deposit to offset. I think these are some of the groundwork that we are always looking out for. Overall, I would say it is managed to that level of 2%-3% arrears, not too alarming, and we always take early actions to manage that exposure.
Got it. So basically, security deposits have helped cover some of this-
And if the tenants are seeing arrears and through negotiation, through working out installment plans, through understanding their business profile, if we see that it is not working out, then we have to arrive at the decision to part ways. Then that is when the occupancy may be reflected a little bit of that friction, and then we look for new ones. I think this is what is playing through in this market, at this more challenging time. Generally, we have to appreciate that the economy is not chiming as quickly as in the past. There is a bit of business consolidation, very corporate cost-conscious in terms of where they want to footprint their resources. These are going through the marketplace currently.
Got it. My last question. In terms of tenant sales, tenant sales in Beijing malls seems to be lower despite higher foot traffic compared to tenant sales in non-Beijing malls, which are higher despite lower foot traffic. Is there a difference between Tier 1 and Tier 2 city spendings? The general narrative out there is Tier 1 and Tier 2 cities are doing well in terms of consumer spending and economy. But in your portfolio, it seems to be the other way around. Is there some difference?
Let me just figure that out. You are looking at this slide, am I right?
Yeah. The foot traffic in Beijing malls is up 21%, but the tenant sales is up 9%. Whereas non-Beijing malls, the foot traffic is about 15%, but the sales is more than 15%. What is this difference?
I think these numbers, we just have to be cognizant. We should not take a one snapshot view and just extrapolate. I think generally, for traffic, we are seeing quite a return to our malls in Beijing for this particular quarter year-on-year. You can see actually the footfall improvement coming through to Xizhimen especially, and also Grand Canyon. Grand Canyon obviously is because post-reopening of our AEI basement, we start to see more people coming in, which is to be expected for this period of time. The year-on-year increase for Beijing sales, I would say that typically these are our big assets, so the base is already at a relatively high level. The incremental sales as a percentage of a big lot potentially is not going to be that much.
That said, if you look at Beijing, out of that 9%, I think that you are looking at Grand Canyon is the one that is contributing the most towards that 9% because of AEI efforts. Grand Canyon in particular for this quarter is growing at about 20-over percent. That gives you a sense, right? Looking at the non-Beijing malls, again, primarily driven by the two AEI malls of Rock Square. Again, Rock Square, we show double digits quite in line with the 15-over percent. Also for Yuhuating, which also grow double digit like 20-over percent. I think that this gives you a sense that it is more driven by our AEI incremental impact.
Got it. Just to get a broad view, is the consumer spending picking up more in Tier 1 cities compared to Tier 2 cities, or how is the pattern and how would it impact your rental reversions as an effect?
Yeah. I think it's a good question, but it's very hard for us to just use a very limited data point and just generalize this way. I would say that across our Tier 1 and 2 cities that we operate, it's more asset specific driven. If you look at F&Bs, for example, I would say so long as you bring a good F&B that is relevant to our mall, it grows very well. Same for services. I find that based on our own data point, it's harder to just imply that Tier 1 is better than Tier 2 or the other way around. It's more driven by what are the actions that we have done to the mall in particular. If we have the right mix, the right brands, you do see that influx of traffic and sales in that.
Got it. Thank you, Zhi Wei. That's all.
Thank you, Vijay. Can I pass time to Joel, please?
Hi. Good morning. Can you hear me?
Yes.
Yes.
Yeah. Thanks, Zhi Wei, for the presentation. I just had two questions. The first is regarding the financing environment. I'm just wondering how receptive are banks currently in China and perhaps, versus Singapore in providing the loans or refinancing your loans. Has this improved from the past?
Generally, I would say that, I think due to our parentage, CapitaLand branding in China, I think we are still accorded very well support. Second, I think for most of the banks onshore, the Chinese banks you are referring to, they are also reviewing their own loan book and who they want to extend lending to. I think on both grounds, we stand on a good state because of our parentage names, the CapitaLand branding, and also the REIT business as a whole. The banks are very comfortable lending against us because we are primarily a very cash flow-driven kind of business. So they are very assured that we are not like those developer sector that we are seeing through a lot of that challenge. So we are able to continuously refinance our onshore borrowings.
In fact, we are able to get better terms, which is exactly what I was trying to highlight earlier on. If you look at across our onshore books as what this picture shows, right? If you look at just the green bars. So we have different term to maturity. We are now trying to consolidate and refinance early for these different terms and just push everything out to 2029 to capture improved credit margins at this point in time. So I would say generally, our ability to tap local bank is still very strong. I think that is our clear competitive advantage. At the Singapore side, I think it is quite business as normal. We are well-supported. We are able to tap different sources of funding.
Increasingly, you see banks knowing what we want, and that is exactly why we see a bit of that products, the hedging instrument, different types that we are entering. Last day you saw us, we are the first issuer of the FTZ bond, the first Singapore entity to do that. Again, I think this gives that emphasis that our name, our business can tap this wider source of funding and help improve our cost of debt, yeah.
Good to hear. Just wondering, for the Chinese banks, are you spread across a few Chinese banks or just-
Yeah. Very much like in Singapore, we are well spread among all the local banks. In China, we are similarly also well spread among the Chinese local banks. Yeah.
Yeah. Okay. Got it. My next question is regarding any upcoming supply. I understand that in Rock Square in Guangzhou, there is significant supply coming to the market, meaning Taikoo Li and MixC Mall. This comes in 2025, 2026. Just wondering, any concerns from your end? What is your strategy? Because I know it is quite a significant increase in the retail supply, like nearly 200% in that whole area. Just wondering what are your thoughts.
I think when we look at supply, we probably need to distill it to the direct catchment, the direct district that we are in. I think for Rock Square, we are relatively in a very mature catchment. Our mall is actually linked to the residential catchment. We are on top of an MRT station that has two lines on that node. I think we are in a fairly steady state in terms of that mature catchment. The one that you mentioned, I need to maybe take a look at how far it is to our mall, whether it is in the same district. At the end of the day, we are doing very captive business around our 3-km- 5-km radius, and those kind of trains that connect to our mall. But I think that is something that we will continue to look at.
So far, I don't see a direct thing that is very near us, that is something new. If you look at China, the Tier 1 cities, typically they have new supply. For those cities that are better planned, they are typically new supply that is further a little bit to support a new residential catchment that they are trying to form. Ours is more of a mature area.
Okay, got it. I think that's all from me. Thank you.
Thank you, Joel. Can we have Miaomiao, please?
Hi, morning, Zhi Wei and team. Thanks for taking my questions. Just two from me. First is, what is supporting the health of Chinese consumer to push your tenant sales up to more than 13%? And how sustainable is the tenant sales?
I think what we feel, what we see is that our malls' positioning is still very much targeted at the household family spending. And I think that segment continues to be driven by essentials and continue to be driven by their lifestyle improvement. So we are not really pitched at a segment that is very volatile and driven by mood and exuberance. We are less exposed to that. And I think year-on-year, if you look at that sales improvement, a large part is people are now normalizing back. That's the first point. People are normalizing back. People still need to come out to a social place to spend time and to gain experiences, and also to meet their consumer spending needs. So what we have done is we are remixing our content in the mall.
We can see F&B, we can see less fashion, you can see more services, more leisure, more beauty and healthcare, et cetera. So, it is a combination of us having new mixed brands that then now, as people normalize back, they will want to experience new things. And I think it's a combination of that you see for the current quarter, year-on-year, we see that improved sales. I saw in one queue, I think the market general sales is probably around the 5% level, that one quarter, 4.7% level. So I think our portfolio data supports that level. Of course, I say this quarter is because of us post-AEI had a lot of new content, new experiences, people come in. So I think it has a bit of effect. That's why our portfolio sales is trending above that market.
Generally, if we can continue to grow at above that 5% level, I think that's a very healthy step for everybody doing this business.
Yeah. Thank you. That is very clear. My second question is, what government incentives have you seen supporting the property market or consumer spending?
You are referring to general government policy?
Yeah, general government policies.
I think the government policies have been quite active in terms of stabilizing the property sector. I think you already see them rolling out quite a few measures on the residential side. I think the government's focus is primarily to make sure the end resi buyers are made whole, projects that should be completed to deliver. I think they are making sure that they are funneling in the access to funding to the right projects. I think that part is quite clear as to, and I think they have also removed quite a lot of those earlier property measures. I think that is quite an important area for them to stabilize the sentiments around the property sector. For the commercial real estate, I think it has to be a little bit more thoughtful.
I think they are also targeting a little bit more on the small enterprises ahead of time. People who are smaller, they may consider some kind of tax incentives for the smaller enterprises. I think these are something that the government is going through. Household side, I think
Yeah, pushing through the equipment upgrades and trade-in of consumer goods. I think they're trying to push on the domestic consumption front. I think recently they just also announced that they will be doing and encouraging more trade-ins and consumption of bulk items like home appliances, automobiles. This will encourage the likelihood of reaching its growth target without relying too much on the property market.
Yeah, but as we speak, I think we all feel, and we all hope that the government can have a little bit more direct and targeted measure to go to the household because ultimately this year's GDP is going to be driven a lot by consumption. As we know, the external environment is not that conducive for China's certain exports and those kind of intention. I think domestic consumption is going to be key, and that's why the property sentiments have to be stabilized, household income got to be stabilized, and if they can get a boost, I think the consumption will pick up. Generally cautious mode, but when things are a bit better, people still need to spend. The key is when people need to spend, are we able to capture that frontal wave of where they spend?
We have to keep refreshing our malls to ensure that so long as we are in the top quartile of the catchment, the business that we want to do, I think we should be able to catch it, when people gravitate back to normal. Ultimately, people still need to spend on the essentials and lifestyle choices.
Thank you. Very clear. That is all for me. Thanks for all the answers.
Thank you, Miaomiao. We have reached the hour. I was just wondering if there is any last questions that anybody might have. Then, thank you very much everyone for joining. Thank you, Zhi Wei, for your presentation insights. Would you like to share any last words that you might have that you would like us to take away?
I think 2024 is going to be a very important year for China. I think as a China-focused business, we are all watching the data point very closely. What you see us being able to manage more actively, you continue to see us driving asset performance and operations. We look for opportunities to really shape our portfolio quality. I mentioned looking at opportunities to monetize some of those assets along the way, really enhancing our financial strength so that we can have that financial capacity, to do actions that would improve the kind of DPU and the share price. I think that is something that we are totally focused on for 2024. Thank you.
Thank you, Zhi Wei. We hope this has been a fruitful discussion and that you have managed to obtain a better color on our operations and outlook. Thank you all for joining us for the call and have a good day.