Everyone, thank you for joining us today at CapitaLand China Trust 3Q 2023 business update call. I am Nicole, IR for CLCT. I have with me Tze Wooi, CEO, Joanne, CFO, and You Hong, Head of IPM. Over the next hour, we will begin with a presentation followed by a Q&A segment. We kindly request that you hold your questions until the end of the presentation. When we reach the Q&A portion, please use the raise hand feature, and I will pass the time over to you. Let us kick start the session with a presentation from Tze Wooi. Tze Wooi, please.
Yeah. Thank you, Nicole. Good morning, everyone. Welcome to CLCT's 3Q business update. I know there is many announcements coming today, so let us dive right straight to ours. I think for this 3Q update, I think you can see that for CLCT's portfolio, the retail segment is actually gradually recovering nicely, and that is actually leading the overall portfolio shape. If one looks at the revenue, we are slightly down, primarily because of the newer economy softer in terms of the third quarter in terms of occupancy, and also there are specific one-off kind of a tip-off business closure and a little bit on to that shoring thing. But overall, if you look at where the operating metrics are, I would say that the retail portfolio gradually recovering nicely.
You can see the metrics across our occupancy, our traffic, and our tenant sales are all gradually improving year-on-year, as well as sequentially quarter-on-quarter. Driven by this underlying retail improvement, overall net property income as a portfolio is +1.2%, 5% up roughly by the retail. If you strip out just the two assets I mentioned earlier, the overall retail NPI would have grown by double digit higher. If you break down our retail holdings of 10 assets, essentially the top five assets, especially those that we have already gone through that staggering of the AEI, they have start to contribute much better. These five attributing more than 80% of our NPI, they have demonstrated that double-digit year-on-year growth. If you look at three quarter, Singapore dollar continues to be very strong against our underlying RMB.
When you translate back in terms of Singapore NPI, that reflected that - 8.4%. At the capital management side, I think we are very active in managing the kind of onshore and offshore kind of debt mix, RMB and Singapore , and continuously moving our cash around, and we maintain our cost of debt at 3.55%. Fixed float ratio continues to be high at 75%, while we also increase the proportion of our sustainability-linked financing. Some macro updates, I think all of you are aware, the GDP for third quarter has been published a couple of weeks ago at 4.9%. Coming slightly ahead of the market expectation. If you look at underlying, you can really feel that the consumption recovery is underway. If you look at the retail sales, they have also been a bit more encouraging.
If you look at our October, seven days or eight days of that golden week, it continues to validate that gradual consumption recovery is being observed. Retail sales are improving, and we do see some of this flowing into our own portfolio data point. The other key theme is on the business side of things. I think overall, the business environment continues to be a cautious one, although we are seeing a little bit of that stabilization, in terms of the PMI. Also, you can see the manufacturing data index start to move towards a better zone. All the more in the last few weeks, especially this week, we continue to see the policy stimulus coming in to be more targeted and also to stabilize and shore up confidence.
In this macro, if you look at where our portfolio shape, under the retail side, exactly that is our strategy to continue to look at how we can enhance our retail offerings. Some of these are completed in the third quarter, and with the remaining in the fourth quarter. These are the ones that will continue to drive the underlying recovery. CapitaMall Grand Canyon, third quarter, we have already put into operations portion. The bigger portion will come in towards the end of fourth quarter. If you look at the sequential occupancy, retail now have been moved up to a high of 97.8%. I mentioned a bit of traffic both year-to-date as well as the third quarter. If you look at the third quarter, month-on-month, things are all leading to a better shape, that gradual consumption is flowing in.
New economy side, I think, despite that weaker or more cautious business sentiments, cost-conscious, people are consolidating their footprint. We continue to maintain our occupancy at 90 .8% . At the same time, we have also been working on how we can position some of our parks to be more policy sector-focused that enjoy some of this government's own push. I think in CLCT, we are able to do that because we are attracting a lot of tenants that suit those policy support. As a result, we also receive some of these tax incentive schemes that the government have dished out. At the logistics side, I think we have a few of our assets majority coming at the end of this year. So we are actively negotiating on some of the renewal options, and we are in advance very close to closing the lease in Wuhan.
The rest are coming soon. Just a quick highlight on the capital management side. This period, we also established the sustainably linked financing framework. So what it means is we have put in place this program for future tapping or loans or debt. We are able to be measured on some of our SASB KPI that will help hopefully to save some of our costs. The other key highlight is that we have launched the FTZ offshore bonds, raising close to CNY 600 million . It is the first pilot program done by a Singapore issuer, three-year paper at a 3.8% kind of coupon. So what this will help us, the proceeds can be used offshore, and we will be using it to pay down some of the more expensive Singapore dollar tower debt, arriving about close to 100 basis points kind of financing cost savings through the early refinancing.
I think these are in line with what I have been guiding all of you, that we are continuously looking at options on how we can raise the RMB-denominated part of our debt so that it creates more natural kind of hedging. At the same time, we can take advantage of the more competitive cost of debt to rebalance some of the offshore rising costs that we are seeing. At the REIT level, I think we continue to improve on some of these initiatives that we want to do. More than 30% of our buildings now have been green certified. Last year, I think, based on what we have done, we are also in terms of improving the scores across all the GRESB benchmark, the SGTI, and the public disclosure.
Moving to the capital management side, I think if you look at the gearing for this quarter, due to a slight temporal loan that we draw to fund the distribution, you see that movement essentially attributable to that. Also, if you look at where the RMB and Singapore dollar currency movement, that also explains away about that 1% over in terms of the gearing. Cash has been repatriated from our onshore entities on its way back, and that will be used to retire the short-term loan they used to fund the distribution, and gearing will move down to below 41%. I mentioned earlier on the fixed float, we continue to maintain that consistent policy of maintaining a higher fixed to mitigate. I mentioned through the FTZ bonds, the direction of moving more weight to the RMB-denominated debt also shift to 20%.
Because of this active management, I think the other metrics are well managed. Cost of debt interest cover continues to be healthy at above 3x, and the maturity is 3.5x. If you count forward the refinancing that we have done, we are probably stretching to the high 3.9x. This chart gives you a quick overview that we are done. The short-term 2023, I mentioned, that will be repaid as we speak. 2024, the FTZ bond will be used to refinance early one portion of it, while the other portion that is due in 2024, we have already secured the financing to push it out to 2029. Essentially, we are all done, and no refinancing needs until 2025. Let's move on to the portfolio.
I think this slide, again, is a refresh and reminder of how our portfolio shape have continuously been strengthened to add diversity and add that quality so that no single tenant or big kind of concentration risk. If you look at the whole pie that we are building up, the retail with the AEI, we are continuously putting in a lot more mix towards what we feel the spending can be captured, likes of F&B. We are lightening more of the fashion and also taking back space from the big anchors of supermarket. That's what I have been doing. In return, we have been putting in more towards the services, and I think there is room for us to push a bit more on leisure, on education as the business environment start to normalize.
At this long term wise, I think that is what shopping malls serve the captive catchment in terms of lifestyle and the family. You look at the top 10, I think we continue to move towards more diversification. Also the single tenant, the largest contributes about 2%. Over at the newer economy side, again, you can see where the sectoral push towards are more in line with where the domestic onshoring of all those enterprises that each park and each city and the local government would like to promote. I think that is exactly how we are aligning some of these leasing strategies. WALE continues on the retail business part, continues to quite stable around the two to three years. Logistics, as I mentioned, more leases are due towards the end of this year. That is why you see some of the WALE shortening.
Quickly moving to the retail side, I think if you look at where year to date, I think overall as a portfolio, due to the active AEI, our overall reversions have been able to land at a positive 2.8%. What is very encouraging, if you look at the nine months across, I mentioned these are the five malls that we have gone through that sequential AEI. We started with Xizhimen in 2021, then Wangjing in 2022, Rock Square in 2023. All this staggering of AEI now have come to help. You see all these new fit-outs and where the focus in terms of adding where the mix are, these are doing healthy. If you look at the F&B nine- months effect, they are all showing good growth year-on-year.
If you look at these few malls, especially if you look back at their sales relative to where they were in 2019, some have already been on par, and some have already exceeded. If you flow it down, if you look at where some of the occupancy costs, the measure of the health index for some retailers, these have also moved back down to what I feel a more healthy level. I think if you let this sustain for another six months thereabout, as the tide turns, the more positive sentiments come in. I think we are in a better position to look at raising some of this potential rent. Leasing activities are also gaining a bit more momentum as we move towards the third quarter. I think overall environment for the retail is one that is gradually recovering, and we are very much on track.
This slide gives you the very quick takeaway of what I just mentioned sequentially. If you look at where things are, you can see one quarter, two quarter, and third quarter. In terms of traffic, we are now almost back to pre-COVID level. Each quarter has improved. If you look at sales, that is exactly where I am at as a portfolio. We are now 6% better than 2019. These are some of the examples I mentioned. These are the staggering of the AEI, and now it is bearing fruits. In third quarter, Rock Square, again, some of this completion of the AEI have now helped to contribute and bring some of this traffic back, not just for the zone, but overall. With that much more comprehensive offerings, the whole mall start to see more traffic, and it has that spin-off to all the other retailers.
Some of these new tenants that we have brought in are also showing very good sales in terms of per square meter relative to their peers in average. This momentum hopefully will continue to be very positive. Same thing over at the other side. Similarly, traffic and sales have improved quarter-on-quarter since the Level 1 AEI has been completed. I mentioned earlier, Golden Week, I will not elaborate further. Overall, the occupancy, again, if you can see, I mentioned the Xizhimen , the Rock Square, the Wangjing are now all moving more healthily towards a pre-COVID kind of occupancy. Xinnan, you can also see from where we started the year of in the 80%, now we have moved up to the occupancy of 95%.
Overall, in terms of the lease expiry profile, I think the balance work left for the last quarter is not a lot. I think all eyes are more to complete some of this AEI and position the mall stronger for the year to come. I mentioned earlier, Rock Square, I think I will just leave you with a little bit of this flavor. The hall of Basement 2, we have now taken back some of the space underserved and underutilized because it used to be sublet by the anchor. Now that we take back the space, then now we put in more than 20 over new kind of stores that better attract the younger shoppers of what we are trying to reposition Rock Square towards. At Level 3, I think the whole zone now are also doing much better.
It used to be two very dated F&Bs that we inherited. It is a long lease, and we managed to take back upon renewal. I think these are some of the active efforts that will help to continue to strengthen the mall. I will just leave you with a bit of this preview, some of these mall openings and the trends that we are seeing, some of these activities that we continue to anchor ourselves with our community. Over at the new economy side. Overall, year to date, as a portfolio, still churning about a +2.9 healthy reversions. We also see much better leasing activities this last three to six months relative to the first quarter, and the first quarter was very quiet. I think I previewed along that.
I think most of the leases that we are looking at towards the fourth quarter, I think most of them have already been secured as we speak. We continue to want to bring in tenants from the sectors that we are seeing more sustainable growth and something that the onshore are promoting, and we see a little bit more push towards the electronics, more of the professional services, and Infocomm. At the same time, I think we are also doing a lot of activities to upgrade such that we continue to better attract and serve the tenants that we bring in. In terms of occupancy, I think Suzhou continues to be very, very stable. Market vacancy continues to be relatively high, especially in Xi'an and in Hangzhou.
I think that's where some of these lease renewals are taking a bit of time to balance some of this retention and also some of the new leasing directions that we want to move towards. Hangzhou, I mentioned we are still quite exposed and concentration towards the e-commerce, especially the smaller enterprises. Some of their business models operations are facing difficulty. We're also going through that period of churn. There will be a little bit of that lease renewals and backfilling to do. I think in terms of the occupancy, we are still doing better than the market, but it's going to be a very competitive landscape because of the short-term demand softening. A lot of the enterprises consolidating their footprint as more supply also come in. I think landlords are giving a little bit more incentive.
I think we are in that situation where we have to judge and position the asset on a longer term. How are we trading a little bit of occupancy with the kind of tenant sectors that we want and the kind of rent that we can achieve. These are some of the examples that we have brought in across our portfolio. Just some examples of, we continue to be able to attract, I think, in our Ascendas Xinsu Portfolio, Suzhou, very strong for attracting MNC. We continue to be able to do that. 6,000 electronic sector. In Ascendas Xinsu Portfolio, we continue also to retain a large portion of the tenants. I think this project is very stable and very solid in the catchment. DIT, Xi'an, edge in Xi'an, I mentioned competitive landscape, a lot of new supply, lowering of rent.
I think that's where we are in terms of balancing a little bit of the retention and also focusing on the sector that can continue, that is in line with the local government to incubate and enjoy some of these tax incentives. Hangzhou I mentioned already. I do see a little bit of softening in terms of the asking rent, especially for our phase one. These are some of the activities. Logistics, I think I'll just highlight that some of these leases will be coming off at the end of the year. Again, I think there will be a little bit of that softening outlook in terms of that rent because, again, if you look at the users of logistics, very much are predicated on the growth of a lot of e-commerce, a lot of trade, a lot of 3PL.
I think some of the business have softened. As a result, some of the players are going through that consolidation. There will be a little bit of footprint consolidation. I think we are entering that cycle where I think we have to probably balance out a little bit of the retention and also thinking a bit longer term, how can we position the logistics facilities, probably with a bit of CapEx, so that we can bring in some tenants that can last a little bit longer. I think these are some of the leasing options on the ground that we're deliberating. I think I will just discuss along the way later. I think just to end off quickly, I think our focus continues to be along the three tenets of creating, unlocking, extracting.
I think overall, we continue to want to shape the portfolio into one that is more sector diversified to be able to capture the different cycles and the different values of where we see the real estate opportunities are happening. At the same time, I think some of you will have known that the local government are pushing, promoting the C-REIT. Some of the first batch of applicants are there, and we are also studying the fine details on how, as a foreign player, we can participate, and that is going to create additional catalyst or additional recycling channel, potentially for some of our assets that are suitable. I will leave you that. This is the basement one that we are still working towards the year-end opening. As we close the quarter, we have already secured 92.6%, but as we speak, we have already secured 100% moving into October.
All eyes are on us, accelerating some of this fit-out, making sure that all conditions are ready for us to open. I think this mall will then start to contribute much more as we approach 2024. On the outlook side, I think all of you have been aware of the GDP, the retail sales, and the series of policy announcements and stimulus. I think all in, we are feeling that the government is paying more and more attention to the economy, and hopefully, some of this focus of those measures will start to filter down and to be more targeted to support and bring back that overall confidence. From our part, you can see we are continuously strengthening our retail such that consumption comes back. Our malls are in much stronger position to capture business parks that I mentioned.
Certain asset-level-specific leasing strategies have to be rolled out. The logistics side, I think we will soften a little bit and see where the balance should be in terms of tenant retention and also striking at occupancy with a stronger tenant that can last longer. With that, I think I will hand back the time to Nicole.
Thank you. Thank you, Tze Wooi, for your presentation. Now let us move on to the Q&A segment. I would like to pass the time on to Terence. Terence, please.
Hey, thanks. Thanks so much for the opportunity. Thanks, Tze Wooi. Just wanted to ask on logistics. That is clearly going to be a challenge going forward. Could you give us a sense of how bad the occupancies could get, and in terms of the reversions, what should we expect? Thanks.
If you look across our four assets, I think each asset does come with its own specific kind of leasing kind of options and things that we are thinking of. Straight off, I think we have two assets that are big space, single-tenant kind. I think for those that we are embarking more on the retention strategy. I think we are in the midst of closing so as not to really disrupt what we are going to negotiate, but I do feel that the asking rent and what the market is calling right now potentially will be a double-digit kind of a rental reversion down. Chengdu, less of an immediate issue because it has always been having a little bit of that multi-tenants, and the staggering effect is such that not everything will be coming at the end of the year.
I do see a little bit more of the negative reversions pressure coming in our Wuhan and also in our Kunshan, because of exposure to bigger tenants and who are, I would say big space occupiers in this market. I think in terms of negotiating, we do have to lower a bit of that rent asking in order to move some of the occupancy discussion. I think two of these we do guide to negative reversions or double digit. Shanghai, I think we have also received indication that some of the users may want to return some space. We are at a stage where deliberate on newer options on whether we want to capex a little bit to bring in a tenant that suit them. This is where things are. Yeah.
Thanks so much. Could you make the sense of when you say "double digit down"? Is it like the teens or could it be even more than that?
Really depends on who we are negotiating with. I think today if you just ask anybody in the marketplace, especially dominant space users who are consolidating footprint, I think they will probably ask you to consider 20% down.
Okay, thanks. That leads into the question on year-end revals. I suspect new economy should take a hit. Do you think that retail could help to offset that?
Overall, I think as a portfolio, because of our sector diversifying. As a portfolio, I think year- end, in terms of valuation down, we are probably expecting not too big a percentage move. I think it probably would be like a 1.5%, thereabout as a whole portfolio. Where the downward pressure is going to be more asset specific and not so much of a general cut across. I think China, in terms of the cap rates, if you talk to the valuers, there's not much of a clear expansion as yet. What it's moving some of this valuation, obviously, would be the market rent and growth outlook. I think that part is also back to where your leases are signing in. I think for some of the retail that you have seen, I would say that the stronger ones, we don't expect much movement.
The weaker ones, I will single out, like for your CapitaMall Xinnan, those are going through occupancy and rental reversions challenge for a while. I do expect that to come down a little bit. Smaller assets, more dated formats, I do see a little bit down. So maybe Aidemengdun , potentially maybe CapitaMall Grand Canyon because of the slower recovery. The rest of them, I would think, more or less they are relatively stable because of where we think the tenant sales are coming, and the outlook are stable. On the newer economy side, I think there'll be some downward reval happening in the Hangzhou for obvious reasons I mentioned because of the occupancy and the market rent outlook. But again, I don't think there's going to be a very big kind of percentage point. So it's probably like 2%-3%. Logistics are small by nature in our portfolio.
Market rent weakness is where the evaluators will probably shift some of the parameters. Overall, I would say that logistics depending on the asset, potentially maybe around that 3%-5%. All in, you look at where things are because of our weighting. I think valuation should relatively don't have a lot of downside. I would think that it's 1 over percent.
Thank you. And final question from me. I guess, given that gearing is somewhat elevated and you're seeing portfolio could take a little bit of a dip, would you be more open to doing divestments more just to bring a gearing down to that 40% kind of level? Thanks.
Yeah. I mean, as a strategy, the focus I mentioned earlier has always been looking in the three areas, right? I think divestment of some identified assets is definitely something that we are moving towards. I think there are a couple of assets I would say that we are moving closer. I think we hope to be able to say something when things are a little bit more firm. But definitely divestment of more mature assets, that has always been part of the strategy that we want, such that we can improve our balance sheet strength and being able to be in a position to reconstitute faster. I think that's something that we're focusing to do.
Okay. I'll pass the time on to others. Thanks.
Thank you.
Thank you. Terence, can I pass the time to Geraldine, please?
Hi. Morning Tze Wooi . Are you able to hear me?
Yes.
Okay. I have a few questions. I calculated the revals for this quarter to be quite sluggish, but still in a positive range for both business part and retail. Is it correct to say?
Yes. As a portfolio overall, that's correct. You read through the stronger assets are better, the weaker assets of the repositioning, they are going through that cycle of work. I think overall they are sluggish.
Okay. For the retail reversions, there was a boost from AEI, but organically, are you still in the same negative stage? If so, when do you expect it to turn positive? Your sales and footfall seems to be tracking nicely.
Yes. I mentioned, if you look aside from the AEI, some of the negative are actually elevated primarily because of the repositioning exercise that we're going through, especially in Singapore. That one, it's a lot of lease renewal work being done and reposition, and we are also changing a lot of the tenant mix. That one is primarily the main one that actually backed down. If you look at the stronger, more stable assets that we have already gone through, like CapitaMall Xizhimen, like your CapitaMall Nuohemule, like your CapitaMall Xuefu, like your CapitaMall Yuhuating, I think this one organically they are able to hold. We don't have to go negative. Negative at times is because of that requirement or rather the purpose of wanting to attract stronger brands such that we can roll leasing strategies around.
That's part and parcel of our longer-term business. We won't be too specific on one tenant or one quarter kind of metric, but more to look at how to strengthen the overall business, and the asset competitiveness in the longer run. That's exactly why we are continuously focusing different asset strategies, leasing strategies at different point in time. What we've done for the top five and top six in the last to three years has us to a level that now we are only attracting the better asset category, simply because the profitability overall for the net and asset. I think that's how we are approaching the whole angle.
Tze Wooi, if I can, just ask one question. In terms of looking at divestments, has the investment market actually softened because you are seeing a lot of Chinese buyers in the local market? In the past you are able to divest even, say, low-hanging, how you say, weaker assets within your portfolio like CapitaMall Minzhongleyuan. Do you think there's a chance that you are still able to execute something like that?
I wouldn't say no. Yes, that's exactly our plan. For each of the asset, we have to be very mindful that potential interest comes from where and why. I think that's where having an understanding on the local market and the kind of reach helps us. I think different assets you have to reach out to different profile. People may look at certain assets, with their own business mind on what they potentially want to do. I think this is how we are tackling some of these divestment opportunities. Largely, I think we have to go more local, and that's exactly what we have done. You mentioned rightly the CapitaMall Minzhongleyuan. You still remember CapitaMall Wuhu, Zhengzhou.
All these are also divested to the local players who have a view of how this asset can be synergized with the overall business that they already have in the city. I think this is where we are moving the divestment discussion along and hoping, and we are negotiating with some of these prospects right now.
Okay. Good to hear it's a discussion ongoing. Thanks, Tze Wooi.
Thank you.
Thank you, Geraldine. Hi, Derek.
Hello. Hi. Morning. Can you hear me?
Yes.
Hey. Hi, Tze Wooi. Hi.
Hi, Derek.
Just a follow-up question on your, this FTZ bonds, right? I think you tapped the CNH market. Just could you give a sense whether you think you still can tap this particular part of the capital market? Is there liquidity enough for you to do a second bond? I am just curious.
Your curiosity is mine too.
Okay.
We started embarking on this exercise. I think we are really pushing boundary by being the first to want to pilot this.
Yeah.
I think we are fortunate that we had that, I would say, small window that we are able to push this out. It is difficult for me to answer whether how big this market is. Will it be deeper as time goes by? It is very policy-driven. It is sometimes policy sensitive. Hard to say, but the good thing is that we are going through that cycle of work. We [audio distortion] know the process, what it entails, who are the stakeholders involved. That is going to help us to better prepare for future issuance if there is the window. As to how this market, how deep, how much more really, I think it is very difficult for us to give you a good answer as well. Yeah.
Okay. But the investors are largely onshore, is it all or offshore?
The profile of people who pick this up would typically be the banks.
I see.
The banking arms.
Okay.
All banking arms who have the investment desk on such products.
Got it. Then on that front, how should we expect your interest rates to trend? I am sorry I missed it. You probably have said it. So next year with this lower interest rate, your cost of debt should come down, right?
Well, it's always a balancing act, right?
Yeah.
Because obviously this CNY 600 million would help to bring down.
But same time, you will know that some of your debt towers will also need to be repriced, right?
Some of this repricing will happen in a staggered manner in the next few years because we also fix our debt profile over the duration. So there will always be a little bit of debt that will be coming up for refinancing. But the good thing is I look at 2024, my bigger portion will only come towards the tail end. So in terms of weighting, it's not going to come in all at the same time.
This early refinancing would really help to neutralize some of this rising debt cost that we need to reprice.
The cost of the floating side of things is now only about 25%. Potentially, if there is any refinancing or, sorry, any recycling proceeds that can come in to pay down some of this. I think we are watching the capital management very carefully, which is why you see us very actively wanting to take advantage of the lower RMB-denominated cost of debt. Watch very carefully the Singapore side, how can we better hedge, and also some of these options that we have.
Mm, okay. Got it. Last one from me. If you can share what are your so-called limits in terms of, say, ICR or gearing that you would not want to see. I.e., are the banks watching this even closely, given that the versus the market? I am just curious.
Yes.
Yeah.
Yes. I think we all know, in terms of the ICR, MAS has a guidance on 2x - 2.5 x if you want to bring the more than 45%. But also the bank covenants today, we are well, well buffered. Most of the bank covenants are about 1.5 x.
Oh, okay.
In terms of sensitivity, we have a lot of buffer room. I'm not watching as closely as some of the issuers. For us, relatively, we are in good hands in the sense that we continue to have access to a lot of financing liquidity. We are able to tap both onshore and offshore. The fact that we've done this is to demonstrate that there are options for us as we rebalance offshore, maybe the cost of debt is going up. We have this option to tap this that can help to neutralize. As we speak, our onshore debt has also been enjoying that lowering of the LPR, and we are also taking opportunity. Some of these onshore loans, typically, their financing period is longer, let's say seven years, 10 years. We also would take opportune time to seek refinancing.
I think in the last quarter, I did share with you that we've taken positions to certain loans that are at a certain level, and we're financing it at below LPR. These are some of the active steps we will take such that it will help to mitigate the rising interest side that the Singapore side would go through.
Mm. Okay.
I did guide you earlier. You wanted to know what is my cost of that guidance, is it?
Yeah. If you can, it should come down. You said balance, right, by repricing of the loans.
I think it will not go too far for the year.
Yeah.
We will land the year around that 3.55%, 3.6%, thereabouts. I think we won't move too much because if you look at our debt tower, nothing is left exposed for 2023 thereabout. It is more 2024, right?
Yeah.
We have already also guided you that I have refinanced 100 basis points at lower. The balance, obviously, will be higher.
More fixed come up for repricing. There will be a little bit of edging up, but it won't edge up so quickly because it is weighted more towards the end. I think all in, I do not know, cost of debt, maybe at best, another 25 basis points up next year towards the end.
Okay. All right. Sounds good. I think we all can sleep well at night. All right. Okay. Thanks.
Thank you. Thank you, Derek. Good to know that we'll all be sleeping well. No worries on that. Next, over to Miaomiao , please.
Hi, morning. Thanks for taking my question. I'm Miaomiao from Phillip's. Just two from me. First one, which segment is still underperforming compared to pre-COVID level? What government policy is helping the consumption? Do you expect more stimulative policy coming up? Thank you.
Yes, I think there are policy measures that have consistently been rolled out to stabilize the overall confidence and sentiments. From a consumption point of view, I think the key metric to really look is actually the employment and people's view of their household income, whether it is growing or not, and their overall wealth effect. I think these are the metrics that we continue to look at. Also, when people feel a bit less confident, I think the savings rates have gone up. I think these are where we are watching from a macro, but I think the government is definitely doing a lot to filter down such that this consumption can play out.
Because they know structurally, they are trying to move the economy away from their old model into one that is more consumption-led, more of the higher technology service-led kind of economy structure that they are trying to move towards. So they're very aware that they need to have these elements in order for that to take place. I think we just need to watch this space, give them time, and see it out. I would say in the last one over month, things have taken a little bit of more; t he tone and the signal of that support have come out stronger, I would say. I think a lot of this feedback, they probably are aware. A lot of the central government's work now is to assist the provincial and the district government, because some of these issues got to be grappled with at that local level.
I think this is what we are watching. You mentioned what are the business that have performed well and maybe not as well pre-COVID. I think I shared earlier, retail, because of our active churn, most of our leading malls, I would say the first five and six leading malls, in terms of three quarter versus last year, they are doing much better. The three-quarter traffic and three-quarter sales compared to 2019, traffic, we are moving there. Sales, we have exceeded. We have a couple of malls, the smaller ones, they are weaker. They are not as well as 2019 yet, and that is why we are taking steps to deal with some of these tenancies. There is a bit of a short-term churn that we have to undertake in order for 2024 to become better. And some of these assets, they are no longer competitive.
I think we take an active approach to seek out exit opportunities. I think by and large, that strategy is what we are trying to do to move. The business parks and logistics, I would say, have been impacted by the demand softening. And I think, depending on the users, some of their business model have gone through a little bit of difficulty, quite a bit of challenge, because their whole model was predicated to support a lot of the e-commerce, a lot of those high- growth, exponential assumptions in the past. So they may have overextended, and therefore now is the time for them to reconsolidate their business model. Some may fall away.
Therefore, in terms of space needs, I think they are doing that consolidation, and we are in that stage to see how we can present ourselves as a better landlord as they shift some of their footprint around. I think there will be a little bit of that backfilling for some of these spaces. There will be a little bit of that tenant selection, sector selection, and also the kind of asking rent. I think I would say this is the kind of business environment, very competitive. A lot of landlords are having empty buildings, hanging carrots, incentives. So we need to navigate properly in this very competitive environment, and also working very closely with the government to see what kind of sector enterprises they want to attract, and how can we combine efforts with the government in playing that bigger role.
I think these are some of the business on- the- ground issues that challenges that we have to continue to operate. And the good thing is our logistics portfolio is relatively small. So I don't think that in terms of the contribution and weighting, in terms of any of this backfilling downtime, is going to hit in a material aspect. More focus will be actually to accelerate some of this retail recovery, because 70 % of business is there. And if this do well, it should mitigate and more than compensate some of this business that will need a little bit longer time to bring it back to a more steady footing.
Thank you. Very clear. Thanks.
Thank you. Thank you, Miaomiao. I would just like to invite more people to raise their hands if they have any questions. Next we have David. David, please.
Yeah. Hi. Good morning, Tze Wooi.
Hi, David.
Yeah, a few questions. First, what happened to CapitaMall Shuangjing? What is a rental provision?
You are aware that Shuangjing, we have an anchor lease, master lease to a tenant, and I think the tenant is having some kind of business difficulty. Based on what we have observed, there are some dated arrears. We took this opportunity to be a bit more prudent in setting aside some of these provisions in case some of these arrears collection to protect some of this income impact. Essentially, that is what we have done in this quarter. It is also to, in a way, from a business standpoint, we are in the period where we need to so-called pay the property tax. I think this move will help us to optimize a little bit of the tax planning. That drives some of these financial impacts, yeah.
Okay. It is a little surprising because I would think that the business should be okay, right? If it is a master lease and it is a stable retail asset, the underlying business is okay. So why is the tenant behind in rent?
Well, the master lessee's own business model has also been going through a lot of changes, and they may not be in a financial position to pay up the existing master lease rent. I think that is where, as a landlord, we are coming in to protect some of this potential rent collectability issue.
Okay. Next question. The Hangzhou business park. You mentioned that you have a high concentration in e-commerce, and then you have some smaller tenants there. If e-commerce is not a policy sector the government is supporting, what are the sectors that the government is supporting, and what would be your ideal tenants to take up some of the spaces there?
Yeah, this is a very good question, which is exactly what we have been actively discussing together with our local JV partner. Also because our JV partner is actually part of the state-owned district bank. I think while we appreciate when we say e-commerce is not supported, I don't think we should paint it that way, but it's just that over the last few years, there's this over, what's the right word? There's a lot of that activities, that wrap around all this very high growth, high assumption. I think that part of the thing is now being moderated down. The demand is softening. The whole ecosystem of people who feed into all this have faced certain business operations difficulty, the number of orders, the number of the revenues. So they are a little bit in that stage where they are fading off.
What we intend to do is to take back some of this area and potentially lease out to someone that are stronger, that can have more holding power. In terms of sector focus, I think Hangzhou is still very much into techie stuff. Professional services is one that we have added, as we move down on e-commerce. We've also added a bit of the Infocomm, and we are trying to do a bit of biomedical. But biomedical, I would say that Suzhou is much stronger, Hangzhou is less. So I think these are some of the shifts that we are capturing. E-commerce, I wouldn't say that we won't do, but we just want to say that we want to do with people with more holding power and people potentially, whose business model is stronger.
Thank you.
For the Hangzhou Phase II, some of the tenants that we're looking at is in the biomedical and engineering spaces. Also looking at professional service, which Tze Wooi mentioned. In Phase I, we are focused more on professional services and also biomedical sciences because these two parts are actually very closely located.
To universities and other things.
Yeah. I think basically the tenant sectors are really more in the biomedical space that we are looking at, as well as engineering.
Okay. Just to confirm, these are multi-tenanted properties?
Yeah.
Yes.
Like, what is a typical size of a space?
You mean the?
A typical floor plate or a typical size.
I think they take from 300 sq m, 500 sq m . Some are 500 sq m , 800 sq m . The bigger ones will be closer to 1,000 sq m .
Square meters?
Square meters, yes.
Okay.
Yeah.
Okay. My final question, with regard to the FTZ bonds, the offshore bonds, is there any limit on how much you could tap in this market? Can you eventually refinance all of your offshore Singapore loans with this facility?
Well, it is a good question. I think Derek earlier also mentioned. I think it is a function of where we feel the investor appetite would land, and this is really like a process where we do that discovery of the demand. It is very hard for us to say whether the limit can be higher. It is also a function of the policy window, the cost of funding, and what coupon rate you are willing to accept. I think there are quite a lot of variables to look into. The fact we have raised like SGD 600 potentially indicate to you that the liquidity at this window is not a lot. I think we have to really watch this space, how it develops. In terms of refinancing, I think it is just for SGD 100-ish kind of amount. I do not think that is going to be a big problem in three years' time.
Let's see how things go in this space.
Okay, and a final one. Are the FTZ bonds consistent with the capital structure of a C-REIT? If, let's say, the sponsor you want to transform into a C-REIT, are these bonds consistent with that capital structure?
I see them as quite different. This FTZ bond is issued by a foreign issuer. The proceeds can be used offshore. I think that is what we like about this product. We also like the fact that the coupon is obviously lower than where we can do a Singapore straight-bond . As to how this capital structure and C-REIT, I don't see a direct connection. I mean, the C-REITs' capital structure is more domestic play. It's more a local ABS structure that hold the underlying project company, with the C-REIT holding the ABS. So it's still a very domestic- level kind of securitization kind of layering. The FTZ bond is really just us as a foreign issuer tapping the FTZ, bringing proceeds offshore. So I don't see a direct connection with that.
But if you want to understand a bit further, I think we can take it offline just to make sure that I understand what you're trying to figure out. Yeah.
No problem. Yeah.
Yeah.
Thanks.
Yeah.
Thank you, David. Hi, Joel.
Hi. Thanks Tze Wooi and Nicole, for the opportunity. I just wanted to ask one question. Are there any seasonality in the packet? That is my first question. The second question is, are you noticing any changes in consumer patterns or behaviors? Yeah.
Your first question is on seasonality of our business, isn't it?
Yep. That is right.
I think if you look across our footprint, the northern portfolio typically would enter into the core period, sometime around this time. The October period where you need to have higher utilities depending on your mode of supplying that. Relative to the southern area, the northern area will take up a little bit more utilities, for example, the heating, whether is it state provision of the heating or do you have on-site heating? I think in terms of that, utilities, north and south do have a little bit of that seasonality differences. If you look at the other underlying expense of running our business, I do not think there are a lot of seasonality, but more of our own tenants.
Their best. Typically, we talk to the fashion people. The month of autumn, the period of autumn, is probably the best time where they can jack up a lot of sales, because that is where the change of their weather, they can push a bit more sales. F&Bs, different periods of time, they push out different menu. I think that is about it in terms of broadly describing our footprint. I think more geography related, and each geography is its own catchment- related. I do not think the behavior of consumers change a lot through the months that are quite different. Consumer spend, is a function of exactly what we are trying to actively pursue. The dated formats of department store are over, so you see us exiting that.
The big- format F&B are less and less attractive, and that is why we are taking back a lot of spaces to use the same space but inject more variety. The kind of menu you also see, has got a bit more lifestyle influence, Instagramable influence. These are some of the shifts. Where are people spending the money in the shopping mall? F&B, I mentioned. I think beauty and healthcare, sporting apparel. In the last few years, jewelry-
IT.
-IT spending have been good. Experiences with it have been good. Leisure and entertainment have gone through a very tough time in the last few years of COVID. I do see them improving and picking up more films. People now go back and watch movies. Education, I would say, coming back from a very low point. I do feel longer term shopping mall should have that enrichment of classes, which is not the key focus of the education ban. But more hobbies, more arts and crafts, music, dance, sports. I do see it having that element. Healthy lifestyle, healthy food. I think these are things that are happening around us all the time, and I think, you have the Chinese equivalent, the Chinese characteristics of brands that will also want to capture some of these younger people, where they like to be seen, where they like to spend, et cetera.
Fashion, clearly, I think it is harder and harder to capture spend, especially in a big way, taking up big spaces in shopping malls. So that is why you see that area productivity being churned in some of the malls that we are managing.
Just a follow-up question. Would you say sales changes during the cold periods? Are people spending less during then?
You mean during winter period, people spend less?
Yeah, for example.
I wouldn't directly attribute that. Because at different months, different seasons, the retailers, the tenants would adjust some of their merchandise to suit the different periods of time. Like what I mentioned, autumn to winter, fall typically is the period where they can push more sales. Yeah.
I see. Understand.
Yeah.
Okay. Thank you so much. That is all from me.
Thank you.
Thank you, Joel. I would like to take the last question from Joy. Joy, please.
Hey, thanks, Nicole. Hey Tze Wooi, just want to check for the anchor tenant at Shuangjing. Are they also tenant for your other malls? Are they current on their payment?
This anchor tenant is the only one left in our portfolio. They used to be more with us, but over time, they've already exited in CapitaMall Qibao because we have to wind down. In CapitaMall Grand Canyon, we have taken back the whole of the basement. The whole area now is being put to AEI, and you already see some of these effects coming in, where we chop it up, bringing a new anchor tenant and releasing the space for others. This is the only one left within our portfolio.
I see. Just on that provision topic, do you see risk of other tenants needing to provide towards year-end?
This is the major one that I have made that provision. The rest, I don't foresee so big, because this one is an anchor tenant. In terms of the dollar value, it has a little bit more impact. The rest of them, if you look at our tenancy profile, no single tenant contributes close to anywhere around the 1-plus percent. I don't think that's a big issue.
Okay, got it. Thank you.
Terence, please.
Hey, sorry. Just on the Shuangjing anchor tenant again. Sorry, I may have missed it, but what was the value of the provision? Also, Joy had asked about are they current on the rent for this anchor tenant?
Yeah. The fact that we have made provision is because they are late with their current rent. That's the whole-
Okay.
-reason why we have been wanting to make this provision.
What is the value of the provision, sorry?
The value is actually, if we look at the second half of where they are with us, I think we are just taking a three- months kind of value.
Is there a dollar value you can share?
Is that necessary?
Okay. So maybe, I understand that for the leases for Shuangjing, the leases are due in 2024, next year. So let's say, when the anchor lease rolls off, would there be an opportunity to either divest or how are you looking at this mall? Yeah.
Yeah. So it's exactly with that in mind, that we are managing some of these anchor master leases that have been there for almost 20 years. So we are actually in that stage of negotiation, and I think as part of that potential to monetize, I think this asset is one of them that we are working towards. So I think this is where we are. It depends on how we want to monetize it, and the interested buyer, how they look at things. I think that's the kind of business decisions that we'll make. It's very hard for us to share a little bit more in order not to jeopardize any of the negotiation. But I think the fact is we are trying to monetize. It comes with certain master anchor leases, and therefore we have to address some of these balancing issues.
Okay, that's helpful. Thank you. That's all I have.
I think the conclusion is that Qibao's contribution is actually quite minimal to us. That's one. And number two, actually, Shuangjing as an asset itself is actually very well located. So in terms of divestment opportunities, we are always actively looking out for it. At the same time, in terms of attractiveness to people in the real estate and looking at the asset itself, I think it does have some strategic location sort of attributes. So at least for this asset, I think we are actively, as Tze Wooi mentioned, looking out for possibilities as well. Yeah.
Okay, thank you, everyone. Tze Wooi , would you like to round up the session today?
I think I mentioned quite a lot already. I think this quarter is really about the retail's recovery shaping the overall portfolio, and that's where the staggering of the AEIs would help. I think the effort put in in the last few years in addressing and strengthening the key leading malls, they will help to shape the trajectory forward. At the same time, I think the newer economy, in terms of the business, I think that's where we are in that cycle. When we ride it through, I think that's how we are looking at it, such that the diversity of the entire portfolio can continue to bring that earnings resilience. At the capital management side of things, you already see us actively working, such that we continue to actively manage our cost of debt.
At the same time, we are working on some of the divestment opportunities, such that we can strengthen the balance sheet. As we look forward to reconstitute through that portfolio quality enhancements that I mentioned many times. Yeah.
Thank you. Thank you, Tze Wooi, for your time. We hope the discussion has been very fruitful and that it provided clearer insights into our operation and our future outlook. Thank you all for joining us for the call. See you next quarter. Thank you.
Thank you, everyone. Thank you.
Have a good afternoon.