Hi. Good morning, everyone. Welcome to CapitaLand China Trust 2023 results briefing call. I'm Nicole, IR for CLCT. It's 9:00 A.M. now, so I think we should begin. I have with me today, Tze Wooi, CEO, Joanne, CFO, and You Hong, Head of IPM . Our agenda for the next hour would be to begin with a short presentation before proceeding to our Q and A section. We will take questions after the meeting. Would appreciate if you could raise your hands if you have any questions virtually, and I will direct the time over to you. I'd like to pass the time on to Tze Wooi, please.
Right. Thank you, Nicole, and thank you everyone. Good morning to attend our full-year results briefing. This is the first year since China lifted its COVID, and I think you can see our diversified portfolios attributes are showing up. Let me just walk you through the key highlights, and we can discuss a bit more of the specifics. Hold on. Can you hear? Yeah. Broadly, if you look at where our results are for the full-year, you can see the retail leading the recovery while the new economy is having a little bit of the lag effect. The broader economy taking some time to normalize back. As a portfolio, our occupancy continues to be very healthy at 91% over. Key retail operating metrics, like traffic and for sales, you see that rebound, partly because of last year being a COVID year, so there are disruptions.
This year, more normalized operating conditions. Coupled with the fact that progressively our retail AEIs are also reaching its completion, so that drives a little bit of the occupancy, the trading area, that momentum. At the capital management front, I think we have been actively managing our debt, our cash, both onshore and offshore. That helps us to maintain a relatively stable cost of debt. We continue to be having a high fixed to float ratio at 82% for the year, and we also improve our sustainability-linked component. If you look at both the revenue at the two half, you can see that brought recovery of 5.9%. And if you look at the NPI, you see that being 10.5% for the second half, supporting what I mentioned earlier, the momentum that is driving through in the second half improvement.
Diving down to the distributions level, the DPU level, I think this is what we are seeing in terms of a very strong SGD exchange rate to RMB. If you look at CLCT's listing from 2006 to now, I think this period of that P&L conversion of about SGD 1 to about RMB 5.3637 is RMB's weakest point to SGD throughout our listing history. So if you move that down, I think at the distribution level, you do see a little bit of that erosion to SGD . Key things I want to update you, I think in the milestones of what we have been focusing to do in 2023. First of all is the portfolio. We continue to want to strengthen it by optimizing it and also actively rejuvenating the assets. So I talk about the retail AEIs progressively.
If you followed us, you would know that from 2022, we started with Wangjing and in 2023, first quarter, second quarter, Yuhuating starts to be completed. We move on to Rock Square in the second quarter to third quarter. Finally, Grand Canyon completing the year by having the AEI completed during the third quarter and fourth quarter. I think that is shaping up for our retail portfolio. Over and above that, we continue to look at opportunity to de-risk or unlock value for some of our non-core assets. We managed to divest Shuangjing, achieving, I would say, quite a good exit yield at this current climate. That helps to, again, strengthen our balance sheet and financial capacity for us to pursue our longer-term growth opportunities.
Capital management front, I think we also break through in terms of wanting to shift more weight to RMB-denominated borrowings to level up the natural hedging for asset liability. We are happy that we did the FTZ bond, so that gives us immediate interest cost savings, in the fourth quarter. I already mentioned the active debt and cash management helps us to maintain the cost of debt and also our gearing. Sustainability-linked is something that we are working on. You can see the percentage going up. At the business front, I think sustainability, we have also made some initiatives, and I am happy to say that another four of our assets have already gotten the green certification, so moving towards our 2030 journey. Also at the operations side, we have also incorporated the green leasing clauses across all sectors.
I think we also piloted a few initiatives, not on a big scale, but we just want to experiment some of the pilot, the trials of obtaining a little bit of newer sources of energy. I think some of these sustainability improvement have also been recognized by some of these awards. At the valuation front portfolio, you can see that overall, the valuers have taken a little bit of that outlook assumptions moderating on, and also on rent, market rental, and also the rent growth outlook. I think these are the main parameters that we observe that shift a little bit of valuation downwards across all our asset classes. Specifically, if you look at retail, the smaller and the weaker assets that are slower to recover have more difficulty to compete, take a little bit more of that valuation downwards.
If you speak to the valuers, I think broadly they are still maintaining transaction cap rates because they do not see many transactions happening in China. Because of the natural easing off of the interest rate, we do see a little bit of that discount rate also moving in tandem, as interest rate, risk-free rate in China sort of moderate down. I think this is largely the valuation update. Specifically, if you look at the different asset classes, logistics are having a little bit of more headwind because of the demand, supply, and a little bit of our location, asset-specific characteristics. Moving on to our financials. I think I have mentioned the revenue, the NPI, and also because of the exchange rate and also the rising interest cost. That sort of eaten into our distribution for the second half and also for the year.
On the balance sheet side of things, because of the divestment of Shuangjing, we managed to uplift the last valuation, so that helped us to move the gearing improvement. Notwithstanding, overall, the investment property has come down due to the valuation and also because of weaker RMB year-end translation back to SGD. On NAV, we are about 120. This is something that I want to highlight. I think I mentioned that we continue to be very prudent and being consistent in our debt capital management front. If you look at where the interest cover, the adjusted cover, the gearing cost of debt, I think this second half, the last quarter, we have been actively managing to maintain that. We have moved the hedging and also the fixed float in our funding sources.
A year ago, I think I would have mentioned that if you look at our RMB sources of funding, that is probably in the low single digit of about 10%. But one year on, we have instead moved it upwards and we are about 20% of our loan base now in RMB form. I think continuously we will try to move to take advantage of where we see the interest rate cycles are moving. On a maturity profile, again, you would see that well-stacked profile. As we speak, as we start 2024, we have already refinanced what is due in 2024, so nothing to worry come 2024. Eyes are more towards watching what are the best kind of rates to enter such that we can continue to be prudent and conservative in fixing our interest rate exposure. This is some of the details I will leave with you.
Over at the portfolio side, very quickly, I think this is the shape. Nothing has shifted too much except that if you look at the year-end divestment, overall, the pie is still about 75% in terms of retail and the balance of 25% in the new economy. We have also made the whole geography a little bit more balanced now that with the divestment of the older asset in Beijing. So that moves Beijing exposure to about 36%, 37%. Guangzhou coming up, as well as the other tier two cities, giving that balance. Overall, if you look at our tenant quality in terms of the income, it is very diversified and we are not exposed to any particular concentration risk. If you look at the top 10 or even look at the top tenant contribution, they are not comprising a big weighting.
If you look at the shape of our whole portfolio, 33 % comes from our retail, which are very essential driven, lifestyle driven, and very catchment driven. I think this is going to be steady demand. On the other hand, I think our vehicle is well positioned to where the China's own economic priorities are. I think the growth sectors, the tenants that we are taking in in our new economy sectors, continue to be shaped by China's own development push, in their own self-sustained technology and innovation. So we will continue to stay the course of doing new business around these fronts. This is the wheel, which is pretty consistent over the years.
If I move to retail portfolio, we now have 10, but essentially with the divestment of Shuangjing as well as the closure of Qibao, we have trimmed the assets down to nine. If you look at where the strategy is, it is really to shape the retail, de-risk some of these master lease malls that are no longer having a competitive format. We took the early decision to close off Qibao because of its master lease issue. I think we have trimmed the portfolio such that we start 2024 on a better footing. If you can see all the AEIs now completed, we have been driving the occupancy better. In year end, we have moved the portfolio occupancy to its highest since pre-COVID. Again, this gives you the sequential feel, year-on-year feel of how things are shaping up.
I think broadly, it is consistent with what I have guided already. In the two half, you see the momentum continuing to be better because more of our AEI have started contributing. As a result, the tenant sales will also start contributing. The one to look out for is obviously Grand Canyon. I think we just opened the full basement towards the end of the year. That will start to contribute a full-year effect as we look into 2024. Largely, if you look at retail, after you trim out the weaker assets, we have taken down the valuation of the weaker assets. We are now really shaping the portfolio such that the top five, top six of our key dominant malls essentially are already contributing 80%, 90% of our performance.
I think the idea is to really dilute down some of the weaker ones, look for opportunities to exit such that overall the portfolio can continuously be trimmed to be stronger. If you look at the traffic and sales, I think that is exactly a function of what I mentioned. Improved trading conditions, our own efforts through AEI over the course of the last 18 - 24 months, that is shaping up well. If you look at what are the trade categories doing well, largely, you will see us adding more NLA exposure to the F&B. Beauty and healthcare, I think this is a lifestyle change. You see people more actively wanting to look at it. If you can bring in good brands that resonate at the right price points, you do see spending. Jewelry and watches, we see a little bit of that shift.
During the COVID years, this continues to be an area that attracts our spending. Leisure, entertainment, IT, is obviously because of a little bit of that rebound from a lower base of 2022, and also the lifestyle changes in wanting to have more electronic gadgets, et cetera. From a leasing momentum, because of our AEI, we are signing more leases, injecting a lot of freshness to most of our malls. Overall, as a portfolio, retail reversion is positive. I think the other key leading indicator we are looking at is as tenant sales become better, and also some of the rent that we are accommodating to be more flexible. You do see retailers moving into a more healthy business of cost range. I think that sets the motion for a lease cycle to come in the next one.
Overall, I think we are happy that the efforts that we have done, the strengthening, and also the winning of the weaker assets have helped to move the retail portfolio to a better footing as we start the year. This is a lease expiry profile. Quite usual except for a few assets, I think because of a conscious decision to sign in a little bit of shorter tenant leases as we look at the last one, two years. So some of these are expiring, and hopefully the general sentiments will start to come back, the occupancy cost start to be a bit more healthy. This is expiry profile, and I will leave you to look at some of the new things that we have moved in during this half, some of the experiences that we are participating.
Moving to the business park very quickly, and the logistics, I think if you look combined, they are about 25%, that level of AUM. Reversions at Business Park continue to be at the positive sides. We have five assets. I think each asset are facing quite a different set of leasing kind of strategy and challenges. Hanto continues to be a little bit lagging because of a lot of supply and the smaller enterprises need some time for us to backfill a bit of those. Things are moving slowly, but gradually you can see, we have signed in more. But at the same time, we are also seeing a little bit of the falling away of some of the business models. I think this is going to be a continuous effort to see where are the new demand coming from.
Over at the Xi'an, I think the two projects we have been very focused to look at what the local government would like to promote to attract. I think we are working very closely with them, and as we shift some of this tenant profile to those that they want to incubate, we also enjoy some of these government incentives. Xinsu is a steady asset. I think Suzhou, we continue to see that they are very strong, deep in terms of the manufacturing base with the higher tech biomedical. This is an area that will continue to strengthen our leasing. Logistics, I think there is a lot of lease renewals, all bunching because of the wheel effect. We are taking a step approach. We have four assets. We have de-risked primarily two in Wuhan, and also in Kunshan as a step one.
I think the next step would be to look at the Shanghai and also the Chengdu. This is the business parks occupancy. I think we ended the year, I would say healthy at 91%. If you look at the market reports, I think most of the cities that we are located, the vacancy rates are trending at closer to the 20%, 30%. Wheel for business parks, I think is quite consistent through the years, and these are some of the activities that we have run. I mentioned for logistics earlier, I think if you look at where the assets are located, two leases essentially drives Shanghai. During the year-end, I think the tenants are shrinking some of their business demand in terms of the space expectations. So that is where we are in terms of looking at new replacement.
Chengdu, I am a little bit more optimistic in the sense that we do see as the new year, there are a little bit more leasing activities looking at it. Chengdu, generally, we should start to see the occupancy rate driving into the 70s, as we approach January, February, and into the first quarter. I mentioned Kunshan and Wuhan. These two are more exposed, or rather, say, are more single tenant, or two to three tenants. We have started to de-risk, and I think these are the two that we see the renewals. Now the focus is on Shanghai to get the relocation. Broadly to wrap it up, I think our focus, the way that we position the CLCT vehicle is really to look at where the China's own economy, the policies are directed.
I think we are very well aligned in wanting to capture the consumption in terms of capturing the technology space. I think our strategy to create, unlock, and extract, you see us demonstrating that. I think we continue to do that to maintain a strong balance sheet, such that we can continue to pursue new opportunities. Closer to the China market, I think we continue to stay very active to see how we can monitor and also participate in some of this speed. Because then we are going to create another catalyst and channel for us to have more options as we look at opportunities to rebalance some of our portfolio. These are something that I have already mentioned in terms of Grand Canyon, fully open, looking at the full 12-month effect in 2024. This is Shuangjing divestment. I think we have completed it this week.
Overall, if you look at the economy, I think there are going to be a little bit of that challenge, as China address some of these in-house domestic issues. But very clearly you can see the government taking a more active approach and more willing to come up with policies to stabilize and to stimulate the economy. I think that is going to be good because of how we are aligned. And you can see more and more targeted. We hope to see 2024, more of these policies being distilled and implemented that will overall lift the business confidence and consumer confidence. On each of our asset class, our action plan, as I mentioned earlier, is to really focus on our strategy to capture. We strengthen the retail.
We are going to be very asset specific in the business parks and also at the logistic space, to de-risk some of these lease renewals and to move the occupancy higher. I think with that, I will open up to our Q and A.
Thank you, Tze Wooi, for your presentation. We will proceed now to the Q and A segment. There are questions that is being raised on the side. Can I pass the time on to Terence, please?
Hey. Thanks much, Nicole. Congrats Tze Wooi. I just wanted to ask on what is maybe two sets of questions. First is on what is your use of divestment proceeds from Shuangjing. Are you going to use that to repay debt or are you looking at redeployment into newer assets? Or would you consider returning some of that capital back to shareholders, whether through top-ups or share buybacks? Secondly, on retail reversions seems to have moderated into the year-end. Could you share a little bit more about how you see retail reversions into 2024? Yeah.
Okay.
Maybe these two set of things.
Thank you, Terence. I think the use of proceeds, I think first and foremost, we are still completing the transaction, so the proceeds have to be repatriated back. I think the first objective will be to deleverage. I think the first option would be to use it to pay down. We can review whether it makes sense for us to do a little bit of that share buyback, whether the window presents itself. But I think that will be primarily the two usage to strengthen our balance sheet. Looking at acquisition, I think it is always very much dependent on the asset opportunity and the timing. So I think if there is an acquisition that we can deploy immediately, I think it makes sense. But if the timing is not then I think what I mentioned earlier will be the priorities.
On the retail front, I think most of the AEI, because we have accelerated some of these AEI activities, that sort of moved some of these rental reversion in the calculation method. As we approach the year, I think there are several assets having that year-end renewals that are still negative. They are primarily attributed to Xinnan, which we continue to want to reposition the tenancies, and also a little bit due to our smaller assets in Harbin. I think broadly, I would say the AEIs that we have done for the stronger assets continue to be steady. There are a couple of weaker assets that we continue to see a little bit of negative pressure, and that is in Harbin, that is in Xinnan. Quite commensurate with the valuations that I mentioned earlier, if you look through.
Our feel is that once the traffic comes back, the tenants do better sales, they are trending to a healthier occupancy cost. I think we are moving closer to a leasing cycle that is more appropriate to look at. I think that is where we are in terms of retail. By and large, the two smaller and weaker assets as we move into 2024, they are going to have lesser and lesser weighting in terms of overall portfolio performance. I think if you just do a quick math, the two weaker assets contribute less than 10% of our own retail portfolio. If you extrapolate it to our bigger portfolio, the weighting is even less. I think that is how we intend to take a step approach, strengthen the one, the dominant ones, and de-weight the weaker ones and look for opportunistic exit.
Okay, thanks. Maybe I will leave it to some of the rest ask questions. Thank you.
Thank you, Terence. Can I pass the time on to Geraldine, please?
Hi. Morning, Tze Wooi and team. Thank you for the opportunity. Maybe just two questions. What are the factors that you look at to see that the share buyback window is open? What are the factors that you need to align? On second, post Shuangjing divestment, you have de-risked one of the tenants in arrears. Are there any other tenants that may fall under arrears or are currently in arrears within the portfolio now? If you are able to share. Thank you.
Yeah, I think in terms of arrears, I think we have already actively de-risked predominantly most of them. I think if you look back at our top 10 tenants, the one that we de-risked used to occupy the single largest. So I think we have effectively de-risked what we feel is a weaker operator. So I think that part of the equation is solved. Overall portfolio in terms of arrears collections definitely have moved back to a normal state. For the year-end, I think we are looking at very little arrears and whatever risks we have already taken, that provision. So I think that part is essentially much stronger footing as we end the year. Your earlier question on the share buyback, I think we have that mandate from the AGM, from the unitholders.
I think the primary objective for the use of proceeds predominantly is still to deleverage. On the opportunity window, I think it depends a function of where our share price are traded and also whether we have alternative use of funds, just now you mentioned on acquisition. Also because of certain more technical constraints, just to share with you, as a REIT, we have our sponsor stakes and so on and so forth. So there are certain kind of technical parameters that we also have to watch out for that, at certain window, there's only so much we can do. So I just want to share that it's an option for us to do it, but because of the mandate, because of the technical constraints, it's not going to be a very big portion of our proceeds will be channeled for that use.
More so of opportunistically, if our share price don't trade well, and there's no better alternate use of the proceeds, that's something we can consider. That's where we are. I think more importantly is to de-gear and strengthen the balance sheet.
Okay, thanks, Tze Wooi. I think I will wrap back towards the end.
Thank you, Geraldine. I would like to pass the time on to Joy, please.
Hey. Yeah, thanks. Tze Wooi, just to get your thoughts on asset allocation. If you look at portfolio performance, what has actually been dragging is now the new economy. I think when we did the shift, it was probably the time when new economy are still growing. Do you think from looking forward, how would you think about the asset allocation across new economy assets and also the traditional retail and integrated? That is one. Two, on asset valuation. As you start to look at acquisitions, how do you decide what is the right valuation? Because market is in a flux. There are people quoting different discounts. How would you think about pricing? Thank you.
Yeah. I think these are very good questions, Joy. I think when we started to want to build a more sector diversified portfolio, that is really because we want to shape the vehicle to take opportunities and to align long-term to China because of the different asset classes emerging. I think that strategy continues to stay the course. In terms of how fast we can execute is always very much dependent on the portfolio or dependent on asset quality and our own balance sheet strength. You can see us already doing that to move us into a stronger position. The overall approach to rebalance, essentially unlocking value for the mature assets, I think you have seen us progressively doing that over the last few years. We will continue to do that front. I would say new economy helps to give that diversification.
It helps to strengthen our overall income diversification and quality. You saw in our portfolio, I think that is the direction that we want to do. Notwithstanding short-term headwinds, I would say the headwinds are more directed at location specific, certain asset specific. By and large, this is the cycle. I think we have to ride through a little bit. We have to be a bit more agile and have to be a bit more flexible in how we lease the place and how we then cooperate and collaborate with the government to achieve that aim. As a portfolio, business parks, I would say is still stable year-on-year. It is still giving us that higher yield as a portfolio. So I think this continues to be sitting well. Logistics happened at lease cycle, bunching of the wheel.
I think this is something that we are conscious and actively trying to apply some kind of, de-risk that strategy dependent on the asset. I mentioned that we have de-risked the Wuhan and we have de-risked a little bit of the Kunshan, so that essentially solve two assets. I think focus is to drive out Chengdu in the first quarter. I think among the four, the Shanghai is probably going to see a little bit of that occupancy downtime a bit longer, as we deliberate what are the new tenants that we want to bring in that is more suitable for that catchment. As we look into the new acquisition, I think you are right. I think the valuation, for the right assets, the right valuation becomes very key. I think we want to be very careful, the due diligence and also the income side of the wheel.
I think these are things that we have learned along the way. Market is very challenging and sometimes can be very disrupting, so I think we want to ensure the income side is well safeguarded. So I think these are some of the thoughts that we are looking at as you want to structure new deals. I think that is, in summary, some of the things over and above the usual. Yeah.
Thank you.
Thank you, Joy. Can we have Paul, please?
Thanks so much for the presentation. Just a few questions from me. The first one is, we had this post-pandemic bump in tenant sales. I just wonder, what do you think is the trend line growth for tenant sales in your malls the next, I know, one or two years? Thanks.
Very good question. I think we continue to see a strengthening of trade categories that are more appealing to the catchment and to the lifestyle spending. You see an emphasis more on F&B. You see a de-emphasis on fashion services. This is beauty and healthcare. These are the ones that I think you will see the trade, the sales, year-on-year improvement because of injection of new space. We inject more stores because we take back space from an anchor. That whole churn will help the overall mall to pull in the traffic and pull in the spending. I think if you look at the essential sectors and the lifestyle trade categories, I think this will continue to do well, especially for our stronger, post-AEI assets. This year, obviously, you see this very stepped rebound, primarily on two factors. Last year was a low-base disruption.
On top of that, this year, we have that progressive AEI effect. I think rolling forward, I would say we continue to be positive. I think things are trending well. The brand's doing well, can be growing at about 5% organic. I think that's something that we are seeing as a marker, as we talk to the retailers. That gradual improvement around the 5% level is something that we see healthy. Yeah.
Okay, thanks. So around 5%, roughly, kind of organic.
Yeah. But just be mindful that because retail, we have so many categories and so many leases, we have so many brands. Sometimes you are going to have people who outperform that 5% because of certain brands, and the other end, you will see brands that are declining in their appeal. It is always that very active management.
Yeah. Dynamics. Okay.
Yeah.
But sorry. Is this faster or slower than pre-pandemic group tenant sales? Yeah.
I think generally, if you are focusing on the slope, then I would say 2024 over 2023, that kicker, if you extrapolate forward, I don't think that is the right trajectory, given where the general sentiments are. I think you have to look at the mood of the people. I think the economy is on the mind, jobs, income. These are all very important elements that will drive traffic and drive tenant sales, especially spending. When the overall mood of the people feel that they are wealthy, they're positive, they spend more. I think now in China, because of the COVID the last few years and because of where the economy potential challenges, I think people are a little bit more cautious. I would want to say that we don't expect that very aggressive slope that we are seeing.
If you roll back the years between, let's say 2013 - 2023, if you use that year, I think our portfolio were trending at high single digits. If you look forward, if we can grow above the 5% level, I think it's very healthy.
Oh, sorry. Thanks so much. Just one quick question on this slide alone. What's your view on supermarkets in the malls? Is this category facing many challenges? Just your thoughts. Thank you.
Depending on the mall catchment that we are servicing, I think supermarket continues to be, I would say, an important ingredient as basic necessities that most household catchment would require. But what we are seeing over the years is that the old supermarket format and the operators need to upgrade themselves to newer business model. And the kind of space requirement has also been reducing. So it works to our benefit that most of these long anchor leases are in the right window for us to take back space. So you already see us doing that for the Walmart. You already see us doing that for the Carrefour and the BHG. So I think this presents an area where our retail malls, we continue to able to extract upside as these bigger anchor spaces are coming up for renewal.
We want to compact the supermarket into key essentials that service the catchment, release space for us, such that we can add other types of retail offerings that, as a landlord, we can better manage as a whole mall. We do not want to lease big spaces supermarket for them to in turn do sub-leases. I think the trend is moving towards that way, and we have already done many of such executions. There are a couple more that we can execute as these leases reach the endpoint. To conclude, supermarket continues to be important element of essentials, servicing the retail catchment of our mall positioning. But we want to reduce the size. We want to improve the quality of the operator and making sure that their goods and their services match the price my expectation on the catchment.
Yeah. Thanks. Just one last one for me. The logistics tenants, they are strong. I just wonder, what is the reason? Because e-commerce in China is still growing. Just some reasons. Yeah. Thank you.
I think the main reason is that the demand end is softening. I think if you look back, logistics, the high exponential growth of, let us say, 2015- 2022 COVID. A lot of those were driven by very aggressive assumptions. But I think post-COVID, I think some of these assumptions start to be a little bit more realistic. I think you would know. In terms of overexpansion, overcapacity, people are now consolidating. We are now into that cycle. A lot of the third-party logistics are also having less orders, less demand on that tail end of the business. I think all this coupled with the fact that of more supply and more choices, you do see a little bit of that short-term challenge over the demand-supply kind of balance. I think that is where we are in terms of logistics.
In terms of the tenant usage of space and expansion plans.
Okay, great. Thank you so much.
Thank you, Paul. Can I pass the time on to Michael, please?
Thank you. Good morning, Tze Wooi.
Hey, Michael.
Good morning. I just wanted to follow on this, the logistic tenant. So occupancies dropped from 98% to 60%. Was it one particular tenant or a couple that left?
Okay, let me just pull out the. Essentially, if you look at the logistics occupancy, if you are looking at the two, I think Chengdu continues to be around that level. I think you will know that earlier on, there is a little bit of the market noise over that whole zone. I think the government has been a little bit more quiet on whether they are going forward with it. So I think the leasing activities have started. So I think this is the one I feel that in the first quarter of 2024, you should start to see the improvement. This is a multi-tenant logistics. We have more than 30 over leases. So this one should continue to go up, not particularly for any single reason. The one that you see the shrink is the Shanghai. The Shanghai is primarily driven by two leases.
It used to be occupied by two leases, and both leases have shrunk.
Thank you. If we look at, earlier you mentioned that rent reversions for business part was positive. How does that look for logistics?
Logistics will be harder. I think logistics, given our Let me just pull. I think we have a slide on that. If you look at logistics, in retaining—
Okay.
—the key tenant for the two, I mentioned the Wuhan and Kunshan, I think we have to lower the rent in where the market now is trending. This is likely around negative 15%-20% are what we are seeing.
Is this across all the four logistic parks? Or were there any bright spots?
I would say the facilities that you are leasing out to more like a single one to two tenants, I think that's the one you will see the reversions exhibiting that higher negative. Because you are trying to balance the retention versus alternative use if we do not lease it out to the current. Also a function of whether the current tenant is, in our view, a strong one in the locality. I would say in terms of the Chengdu one, I don't foresee across the board we need to revert at that level. It's probably lower, probably in the lower side of the 10% kind of range. But largely because of the sentiments, because of the demand softening, I think we have to be a bit more circumspect that the market rental have softened. I think this is not just us.
I think if you look at some of these landlords and even some of our S-REIT competitors who have launched their logistics assets, they have also been guiding that the market rental have come down. This is where we are in terms of the leasing renewal cycle.
Okay. That is very clear. Thank you. I have got one or two other questions. If I look at the RMB to SGD, the rolling hedges that you have when you distribute from RMB to SGD, what is the current number?
Just give me a minute. You are referring to the—
I want to get a sense of the RMB impact on your distributions when that would get flushed out, because clearly there is still a drag.
In a way, I would say the RMB—
Yeah, I think, Michael, we did our hedges in batches. So it matures around every three, six, nine, 12 months. So progressively the effects of the hedges gain will actually be effected into the financials every quarter, but it will not be as substantial as you would think that it is entirely on the underlying distribution income. Because the policy is for us to hedge 50% of every half yearly distribution. So that half yearly effects. So in a way, the 50% that we hedge in terms of the settlement of the hedges will be progressively over the quarters.
Okay. Do you have a number? Just what the blended number is?
Blended number as to the absolute amount that we are hedging in?
The SGD to RMB hedge rate. Is this what you are looking?
Yes.
The number, how much we hedge.
Yeah. We will come back to you, for example—
Okay
—of second half of 2023, what are the weighted average of hedge that you are looking for?
Yes.
Yeah.
Yes, that would be helpful.
Yeah.
I will give others a chance to ask questions.
Michael, I have the number. You mean the FX rate or the amount?
The hedge rate.
The hedge rate.
1: 5.1.
The average is about 5.3.
5.3.
Yeah. There are a lot of — Some are actually at a lower, more favorable rates than some are at 5.1, 5.3. On average about 5.3.
Because we are consistently rolling it over the course of the policy, right? So we do not expect it to be very outlier type because we do it as a matter of every half year we hedge at least 50%, and the hedge we put in place typically will be three to six months or up to 12 months. So because of the rolling thing, it is going to be very outlier kind of rates that you are potentially expecting. Yeah.
All right. Thank you. Thanks very much.
Thank you, Michael. Can I pass the time to Tan Xuan, please?
Hi. Morning, Tze Wooi.
Hi. Morning.
Can you share a bit more about divestment in terms of which asset class do you think is more realistic to actually being transacted in 2024? Also at current book valuation, are you prepared to divest asset at a loss? If yes, what's a reasonable level?
If you look at this slide, I think it gives you a sense of where our valuations currently are. I think if you follow our valuation in the last two to three years, you would have seen us taking the valuation down for what we perceive to be weaker assets consistently. I think Xinnan comes to mind, Aidemengdun comes to mind. So these are the smaller ones that we have already, I would say, value it closer and closer to the market. So these are the ones that are weaker. So it's like a drag to the entire portfolio. If we can monetize these assets, I think we are very open to it. Whether we can divest, whether at this book value, it really depends on opportunity and how we negotiate.
I think we stand ready that so long as this asset is non-core, we can recycle the proceeds to better use. If the passing yield is something that is even lower than the cost of debt, for example, I think it makes sense for us to divest even below our last carry. I think this is something that from a strategy standpoint, I think we'll look out for what's the best value to monetize, such that we can strengthen the balance sheet to redeploy. Because of how we want to shape the portfolio and most of the retail assets have been more mature because of our legacy, the retail assets are there since day one. So you see us now have already monetized, I would say, six out of our initial IPO seven assets.
That is actually a very consistent and disciplined approach to really reconstitute the portfolio so that we have younger assets that have longer runway. I think that approach is going to drive the divestment thinking, depending on the value as well. The new economy is something that we have moved in the last three years. Depending on whether by divesting, we have better use of the recycling proceeds, again, we stand open to look at it. I think key is to continuously strengthen the portfolio of assets. The asset quality and income quality drives our decision.
For the two assets that you mentioned, can you share the passing yield?
If you look at the NPI that we have disclosed, I think they are probably around that three handle. I think that's probably where we are for 2023.
Okay. Got it. Thank you. That's all from me.
Thank you. Thank you, Tan Xuan. Can I pass the time to Joel, please?
Hi, Tze Wooi and team. Thanks for the presentation. I just had two questions. The first is with reference to page 24. I would like to ask about your retail portfolio lease. I understand it looks quite concentrated in 2024. Just wondering, what are the current length of contracts you are hoping to sign? Is it a typical three years? Are you looking at maybe more opportunistic, shortened tenures? The second question I would like to ask is on page six. I noted that Shuangjing and logistic properties are not managed by or not operated by CLI . Is this operated by a third-party operator? Is there some advantage or some reason for that? Thanks.
I think maybe the first point on the lease expiry is, I think during the COVID era, both landlords and tenants are having more difficulty in arriving at a common convergence where things are. I think we tend to sign shorter leases with a little bit of more flexible upfront terms. But as we go into 2024, if we are entering an environment cycle where things normalize, our typical lease structure for smaller tenants, depending, is the two to three-year type. I think this is very market driven. If you are leasing to some of the bigger anchors or mini anchors like F&B, who then spend a lot to CapEx, the typical lease contract would run about five years. I think this is probably where the market practices are. We were a little bit shorter in the last one to two years.
That is why you see a little bit more leases are up for renewal, precisely because we want to space out and we want to have that step approach. I think this is where we are today. I do not think it is going to be very different, in terms of length, the lease contract tenure. What we can potentially be a bit more flexible is to maybe structure something within the first six months, within the first year, et cetera, such that it is easier for us to do business when a little bit more uncertainty involves CapEx, et cetera. I think that is where we are in terms of being more flexible in structuring our leases. Your earlier question is on the operator. I think it is because Shuangjing essentially are master leased out and one of the anchor master lease is running the mall essentially.
So that is why we said that it is not operated by us, as if like those other multi-tenant malls. What is the other asset that we mentioned?
Logistics.
Logistics, essentially again, because we have single tenants, so we outsource the day-to-day. It is like a single building on site, so we do not do a lot of real property management, so to speak. These are leases that are outsourced to the tenant and also some of the facilities management.
I see. So as you move towards de-risking it, you would be more hands-on, I guess?
I think it is a function of what the building and the tenants meant to use for the building. I would say in the market space, if it is predominantly handled by all these operators, I think that is something that we want to see whether it is more efficient for them to carry on or it is better for us to come in, provided we can value add a lot of things. But I think generally the logistics space, a little bit different, like retail, where we have our own platform of people to do the value-adding activities. Yeah.
Sure. Got it. Thank you. That is all from me.
Thank you, Joel. We do still have another 10 minutes, so if you have any questions, feel free to pop it in. Can I pass the time on to Miao Miao, please?
Hi, thanks for taking my question. It is regarding the FTZ bonds slide. On slide six, you mentioned there is 100 basis points saving. Can I check what is the advantage of the FTZ? Is there a lower cost for lenders?
What is your last question?
Is there a lower cost?
Yeah. Is it lower cost for lenders? For lending.
For us, we were able to get the FTZ bond. It is a three-year tenor at 3.8%. It is denominated in RMB. The use of proceeds can be flexible to be used to pay down. In essence, we have the proceeds to pay down some of our SGD debt that is going at about 4.8%. That is how we managed to save some of the interest savings. Not sure, did I answer your question?
Yeah. Got it. Very clear. Thank you.
Okay. Thank you, Miao Miao. Do we have any other questions? Oh, Michael. Hi, I'd like to pass the time to you, please.
Michael, you have something to round up, Michael?
Yes, sorry. Just going back on the retail rent reversion. Going into 2024, can you give us a sense of what the trend is likely to run at?
I think I would largely segment our retail portfolio. If you look at our retail portfolio, I would say the top half, like Xizhimen, like Xuefu, like Nuohemule. I would say these are steady assets that have really gone through a lot of the repositioning, and because of the improved trading environment, I think these are the ones that potentially you will see that slight positive range of things to happen. There will always be a little bit of tactical things that you want to bring in for certain brands, such that they are still over. By and large, I think these are the strong assets that will stay in the flat to slight positive range. The one that I foresee having a little bit more downside continues to be around Xinnan because of that churn of that lease cycle.
I think I mentioned to you earlier, Xinnan used to be very fashion-oriented, very heavily oriented towards that. I think it took us that two, three-year cycle to slowly churn all this to de-rate fashion and bring in others. I think we are still into that cycle. I think this is probably the 1 and a half years. I foresee 2024, we may still have a little bit of those. Aidemengdun being very small, I think in terms of rent negotiation, I think the rent asking power is probably not going to be there. I would largely say that, and I think for Rock Square, quite stable. Wangjing, I think, will be generally quite stable, except for a few tactical trade mix changes that we want to see.
I think I would maybe guide you that maybe -3% to +3% spread around all our retail assets. I think that's probably where we're looking at things.
Great. Thank you.
Thank you, Michael. Hi, Geraldine.
Hi, Tze Wooi. I just wanted to understand how should we look at DPU for this year, given that logistics we are probably going to lock in more negative reversions. The other two segments to remain stable. Will most of the upside come from interest rate as well as Forex?
I think to understand the DPU profile, I would say that we will start 2024 retail. You look at the shape. Generally, because of the progressive AEI completion, you will start to enjoy the full 12 months upside relative to two to three. That is also countered by a little bit of the loss in contribution from Shuangjing. Generally, I would say 2024 should look brighter as a retail portfolio because we have already de-risked and stopped the operations of the weaker assets, and we have moved down the weighting of these weaker assets. Post-AEI, the stronger assets are starting to perform for a full 12 months. So I think the outlook for retail, it is going to be a better one.
Much depends on, I would think, the business parks performance, because some of the business parks entering into 2024, I think very much depends on the government, whether we can continue to be able to collaborate very closely with them, and also to enjoy some of these government tax incentives. We know that the local government may not sometimes have a lot of kitty in their wallet. So I think it all depends on things. Hopefully, the government stabilizing the economy, stimulus improve, we can catch a bit of that. Logistics, as you mentioned, I think we are guiding for a lower year-on-year because of the occupancy downtime, because of the negative rental reversion. I would say as a portfolio, that is where the shape comes in. I think the logistics is going to take less than, I would say, 4%-5% of our entire portfolio.
The upside that we actively manage the retail is going to outweigh the downside of the logistics. I think DPU is the one that we are watching very closely. If we can neutralize it year-on-year and continue to enjoy some of these tax incentives, that would be good. FX, I think I mentioned we are at the lowest RMB point against SGD. Hopefully, that is going to plateau off, in terms of the FX front. Although I feel that if you look at where the spot are, I think in 2024 first half against 2023 first half, you are still going to see a bit of that lag effect of the weakening of RMB. So much depends on second half. Hopefully, a lot of calls on the rate cuts.
I think we stand to benefit as most of our fixed hedges are rolling off towards the second half of 2024. Hopefully, with more volume coming at the second half of 2024 and interest rates start to trend down, we hope to be able to catch that positive cycle. Over and above that, I think you'll see us shifting the RMB borrowings weighting. Again, if you look at where the RMB interest rate cycle are easing, I think we stand to be able to enjoy some of their LPR rate reduction. I think all in, we're going to be, again, being very active to balance their onshore-offshore debt, active cash management, looking at new financial instruments, potentially to convert some of the SGD into RMB borrowings through the hedging instruments.
I think all in, these are the few things that we are focusing on the portfolio side and also on the capital management side. Hopefully at the DPU, give you a sense of where we are seeing the business. Yeah.
Okay. Thanks, Tze Wooi. Hopefully, the Forex headwind will turn into a tailwind this year. Yeah. If I can just ask one more question on the retail sales. Last year, most the borders has not opened much and most of the traveling is still done domestically. So have you actually seen some form of increase in domestic spend?
I think for our malls, the positioning, I would say we are less impacted by the so-called external borders opening up. Ours has been very driven by our catchment. Overall, I think our tenant sales behavior is very much driven by our own active refresh and being relevant to the catchment that we service. During the course of the last one, two years, you do see, so long as we inject certain new brands that matches up with their lifestyle preferences, you do see. I think I shared with you a little bit on the F&B in terms of the jewelry, in terms of the IT gadgets, electronic lifestyle. These are the ones that you see the domestic spending being oriented towards. I think it is a function of us having the means to keep refreshing and inject new offerings and connect with the catchment.
So long as you do that, I think for the stronger malls, you do see the spending coming back, which is reflected in some of this year-on-year sales. Yeah.
Okay, sounds good. Thanks, Tze Wooi.
Okay. Is there any last questions? We could take one last question before we conclude the session. Yes. Hi, Ada.
Hi, Tze Wooi and team. Thanks so much for the presentation. I think there is one last question for me is that, in terms of the retail portfolio occupancy cost, you mentioned that it is ranging between the high teens to low 20%. I just wanted to check, how does this compare with the pre-COVID performance?
Yes. I think the rent occupancy cost is also always a function of the kind of trade mix within the mall. I would say that where we are now, we are moving closer. In fact, some malls are exhibiting slightly lower occupancy cost range relative to pre 2019. I think the read-through is that over the years, I think we have moderated some of these rent terms. Over the years, you see sales picking up better, and I think the efforts that we have put in have moved it to a healthier range. I think this will then allow the retailers to build up their confidence so that we will enter the next lease cycle in a better position to look at some of these rental renewals. I think the leading indicator are good. Traffic and sales are building up. The rent has moderated.
I think this is the cycle that we are moving towards more positive. If the overall market sentiments becomes a better one, I think the outlook becomes stronger, and I think that is what we are trying to say. Strengthen your mall, strengthen your offerings. As the market becomes more positive, it moves us into a better leasing cycle to talk about rent.
Okay. Thank you.
Okay. Thank you everyone for your questions. We hope that the discussion has been very fruitful for you. Just feel free to reach out to me if you have further questions. We hope that you have a good day. Thank you, Tze Wooi, for your insights. Thank you.
Thank you, everybody.