Hi, a very good morning to everyone. Thank you for joining us for CapitaLand China Trust first half 2023 results briefing call. I am Nicole, IR of CLCT. We have with us today, Tze Wooi, CEO, Joanne, CFO, and You Hong, Head of IPM. Over the next hour, we will be having a short presentation before we proceed to our Q&A section. We will be taking questions after the meeting, so we appreciate if you could raise your hands and we will direct our time over to you. Let me pass the time on now to Tze Wooi. Tze Wooi, please.
All right. Thank you, Nicole. Good morning, everyone, and welcome to our one-half financial results briefing. I think it is going to be a very heavy reporting season for all of you. Let me just dive in quickly into the results pack. I think for the one-half results, I think our portfolio, in terms of our shape and size, I think it remained fairly constant. I think total assets is about SGD 5.2 billion, the shape that we have, 12 cities, are relatively the same. But what we are happy to update is that in terms of the occupancy, you would see that it has improved relative to the last quarter that we have updated you. In terms of the one-half announced DPU, that translates into a stable and attractive 7.1% distribution yield.
If you look at the one-half financials, I think there is quite a lot of content that went into it. So let us just break it down for you so that you can appreciate it better. I think the macro environment is such that this one-half results, we are translating the renminbi earnings back to SGD. There is close to about 9% of renminbi weakness. I think we look back our last five years of reporting season, this is probably the sharpest reporting period of renminbi weakness. In terms of our revenue and the NPI as a portfolio, we are trending about 0.8% year-on-year versus last year. Largely driven by our retail portfolio, who has improved. You recall in one quarter when we had this discussion, our retail was down versus one quarter last year.
As we roll on to one-half, you start to see it picking up in terms of the revenue at NPI of 2.7% year-on-year improvement. A few things that went through. If you look at our retail portfolio of assets, the key and the dominant ones are doing very well. If you look at Xizhimen and Rock Square, in terms of the occupancy, in terms of the sales, in terms of the traffic, these are reporting very healthy year-on-year growth as well as consecutive quarter growth. Overall, the retail, in terms of footfall and spending, are also able to capture because of our AEI efforts that have been done in the past few periods. So you start to see as people return and people spend, we are capturing that kind of spending and footfall.
On the other side, two of our malls are undergoing AEI, so you would expect a little bit of downtime in this one-half of reporting. Essentially, it is the Grand Canyon and the Rock Square. That leaves us with basically two assets in our retail that is a little bit of a drag for this one-half reporting. Essentially, it is the winding down effect of Qibao, as well as the major tenancy adjustments where we are churning quite a lot of tenancies and giving some kind of rent support to some of our tenants in Xinnan. That gives you a quick sense of six to seven of our major retail malls are doing well, showing year-on-year growth. Two are a drag and another two on a temporal AEI downtime.
Moving to the business parks, you can see that one-half NPI reflects about 2.9% drop versus last year, very much driven by where we started the year. If you look at the first quarter, the effective occupancy had been much lower relative to last year. That is the kind of effect. That said, you can see that the leasing activity and the conversion have improved relative to the last quarter. Out of our five assets, you see that we have been able to convert much better. For reversions, they continue to stay in the positive trajectory. I mentioned that if you look at where our operations are trending, two are already very much into third quarter right now. You are doing Grand Canyon. You can see the supermarket anchor space.
We lost that kind of anchor space revenue in one-half, but you can see they are completing. Level one, they are completing in July, so that should contribute in three quarter, and the basement will start to contribute towards the fourth quarter. For the Rock Square, I think most of the works have already been done. For both the basement and the level three, we are seeing that progressive completion, and they should start to contribute income in the third quarter of this year. On the capital management side, I think we are able to continue to bring down our onshore cost of debt by early refinancing. Both because of the onshore, we are enjoying a little bit of the base rate being reduced. Over and above that, we are also able to refinance some of our passing loans at improved margins.
All in, I think onshore, we are able to extract that opportunity. Overall, if you look at where our debt towers are, I think we have done everything for FY 2023. As we look at 2024, we are essentially already having secured and in advance discussion. Essentially for the next one over year, we have no refinancing kind of worries on our part until 2025. That maturity around 3.8 years, I think we took the opportunity to increase the SASE part of our loan book. ICR continues to be healthy at 3.4 x, way above the regulatory requirement. Hedging policy consistent at about 74% fixed at this period. I think so far we continue to receive, I would say very good support from the debt capital markets as well as the banking community.
On the SASE front, I think also happy to report that we started the year wanting to green some of our portfolio. So, as at one half we have completed what we set out to do, and we are tracking the progress towards our 2030 target. I think I mentioned roughly on this part, if you look at the renminbi weakness, essentially translated back, that resulted in the DPU of about SGD 0.0374. If we were to apply the same renminbi rate, as if it were last year's rate, I think that worked out to be SGD 0.0422. So about a 2.9% improvement, versus last year on constant FX. Balance sheet, I think continue to be healthy. I think we ended a little bit weaker on the translation impact again. So our NAV is SGD 1.33. Gearing-wise, I think reflecting the RMB translation weakness, it has inched up.
But what management has done during this period is also to actively bring back a bit of cash from onshore to reduce some of our temporary lines drawn because in the first quarter end, we actually paid some distributions for last year. At the same time, we also used some of our cash onshore to reduce some of the onshore bank loans. So that helps us maintain our gearing at a healthy level. Cost of debt remains margining up by reflecting a bit of the floating rate side of things that are inching up. I think the rest of it, I think we have mentioned. Good thing to note is, we are enjoying the onshore easing of the interest rate.
So I think we produce a table to guide you, in terms of seeing, every 10, 20 or 50 basis points, movement, what does it translate to the underlying distribution. This is the debt maturity tower. I mentioned earlier, if you look at it, essentially we don't have a lot of debt to come to the market to refinance until 2025. We are very much already finishing everything for 2023 and 2024. This is the distribution dates, just for a quick information. Rolling to the portfolio side, I think, let us zoom in. I think in terms of our portfolio, I think continuously we are fine-tuning the kind of trade categories and the retail mix that we think going forward each of our mall can be a bit more competitive. And you can see we are pushing a bit more on the F&B, the services, leisure, entertainment, the jewelry.
These are the trades that we see, the consumers of today are spending a bit more in the physical space. And progressively you can also see us reducing exposure to the fashion. So today, you look at our whole portfolio in terms of that revenue diversification, I would say is much more healthy. At the new economy side, we continue to push up on sectors that we are seeing local demand, especially in the areas of electronics, engineering, the biomedical, et cetera. Our wheel has stayed, I would say, relatively constant, especially for the kind of asset classes that we are in. And moving to the retail specifics, if you look at where we have shown you earlier. Second quarter, essentially our traffic and sales have really rebounded very well. Last year, this time, our northern portfolio have suffered a bit more.
This time you can see really the northern portfolio, the three Beijing assets, including the Inner Mongolia and the Harbin really helping, the year-on-year improvement. Some of our dominant malls are really capturing the kind of sales and footfall. Overall, if you look at how we have been supporting the tenants and how we have been driving sales, I would say that across our malls, the retailers' occupancy costs have also been trending towards a more healthy level. I think this actually set the stage for us that as more confidence come in, and the retailers' confidence come in, business activities raise, I think then we can look at maybe improving some of the rental discussion, as we end the year.
Occupancy, I mentioned, if you look at a few major assets, I think the Xinnan, it has gone through that difficult time of churning, heavy churning the tenancy. So in terms of commitment, we have brought in quite a lot of new tenants, ending the period. The rest of the key malls, I think they are trending at quite healthy level other than a period and some kind of a transitional vacancy. One thing, there was one or two tenants that dropped off in June, but as we speak today, those space have been filled up. So in terms of the 1%, we are almost back to the 95% level. The rest of it, I think are fairly steady in terms of the kind of asset plan that we are pushing. This is fairly constant for the rest of the year.
These are some of the updates that we want to highlight to you. Overall, if you look at the few assets where you combine the AEI effect, I think we are as a portfolio churning about 4% in terms of uplift, led by the F&B. I think F&B continues to be a good space, where there are a lot of dynamic concepts that we can introduce to our malls, and I think they are capturing. If you look at the kind of activities that were- Looking at the sign, I think we are looking at 2Q entering a much better business window. You look at the volume and the kind of activities, 80% up in terms of leasing activities conversion. These conversions are coming from that broad base of target sectors.
These are some of the updates that I would like to keep you informed about what we are doing. Moving to the new economy. Similarly, if you look at where we ended the year, it was a very difficult period. I was mentioning with the COVID, with a lot of our leasing decisions being delayed. As we roll over to April, May, and June, we start to see that pickup in activity, and that's also reflected in the occupancy that you see through in our assets. The two Hangzhou are still trending a bit below relative to last year. But at least in terms of leasing activity, we do see that healthier pickup. You look at the kind of sectors that we are signing in, the kind of volume that we're signing in, I think this again demonstrate that one quarter was a very low one.
And if you calculate the two quarter is much better. We hope that as more in terms of that opening, in terms of the business environment improving, that will move us into that healthier level to look at some of the occupancy and the kind of target sectors that we want to attract. Overall rental reversion continue to be healthy at about 3%-4%, led by a few key sectors like the electronics and the engineering that we are targeting. These are some activities that we're looking at our park, in terms of moving them together as one. Over at logistics, I think it's a small portfolio that we have moved in. I think relatively to last quarter, Chengdu has come down due to some of the tenancies falling off during the period end.
Two tenants essentially just moved away from us in view, to look for something else that they can plan better for their next two to three years in terms of their business. As we look forward and plan for ourselves, I think our focus continue around. I think you have seen us really extracting value from our organic side of things, our AEI side of things. You saw that happening last year, starting with Sichuan, followed by Wangjing, and then Rock Square, Yuhuating, then Grand Canyon. This is the kind of staggered AEI of value extraction that we have programmed inside. Principally is to ensure, as the economy opens up, as more people come in, as more people want to resonate to new spending patterns, we are able to offer them that kind of space and that kind of experience.
I think that is essentially what we are doing in terms of retail portfolio. At the same time, we are also actively looking to an opportunity to monetize some of this retail. Essentially, they have matured, and in terms of the growth profile, may no longer be there. I think this is something that we are definitely focusing to unlock value. At the same time, I think once you do that, we are constantly looking at improving the portfolio quality in terms of the income and the diversification. We are looking into new accretion kind of acquisition that will help to strengthen our overall portfolio duration, the kind of diversification and geography and asset class and revenue stream. We continue to stay focused to want to do that. I think most of you are very keen to understand how will the C-REIT development help us.
We are definitely studying the policy details into seeing how we can, together with our sponsor, participate in this area. If we can successfully do that, I think that's also another active channel for us to balance our holdings and continue that journey towards our more balanced, that 433 kind of direction that we want. I mentioned already some of these, so you would see this happening very soon in the third quarter, which I'll update you in the next three months. But essentially, the Grand Canyon level one has already been opened, and now we're working on the basement. Once they start open, you can see the income enhancement that will be flowing in at the relevant period. This is Rock Square. Essentially, they are also expected to open in the third quarter.
I think overall, if you look at where China's economy is shaping, I think the one half, I think all of you are very well aware. I think more importantly is to look at some of the policy details. I think the government has come out this year. I think they have a GDP and economy target that it will be very important for them. I think you can also see that combined support, wanting to create back that business confidence and consumer spending. So on our side, I think we are really preparing our portfolio to be able to capitalize once this business confidence return. I think retail, we are definitely looking into a better second half for most of our assets, trending where we are in terms of if you look at the second half.
Business parks, I think there is some softness because of our effective occupancy would be below last year in the second half. So I think we do have some softness in terms of the numbers. But that said, I think 70% of our business are trending up. I think the 30% are having a slight down. So on the net, I think we should be looking towards a better second half. I think with that, I think I will just move over to the FAQ. Right, over to you, Nicole.
Thank you, Tze Wooi. So now, we would like to open the floor to questions, and now we have [Terence] on the line. [Terence], can I ask for the line to you, please?
Thanks, Nicole. Thanks, Tze Wooi. Just a couple of questions from me. Maybe I will start with the first one. Could you share a bit on the tenant sales recovery? It is actually very surprising that you managed to achieve tenant sales at above pre-COVID levels. What is driving it and how should we look at it into the second half?
I think if you look at the first half's tenant sales, the big drivers essentially were our dominant malls and also driven by the northern portfolio. Essentially, Wangjing is the main contributor. If you look back at where Wangjing in this half, all the AEI had already been done. So they are already starting contribution. Whereas last year, part of that area are undergoing the AEI effort. So you have more area and more tenancies in the new space that are contributing towards the improved tenant sales. In terms of sales, I think it continues to be led by the F&Bs, continue to be led by the services, jewelry spending, and some of the beauty and healthcare, and IT spending. I think Wangjing was a big contributor in that area. Similarly, in Xuefu and Nuohemule.
These are two assets that if you look back last year, they were having a little bit more of a restrictive trading period. If you look at this half's environment, they are much able to capture the footfall and the spending. Xizhimen, Yuhuating, I think it is because of the AEI in one half, so you do not see a lot of contribution from there. Net, I think if you look at where our malls were one half because of restrictions, and this half all are put back, and with the AEI in place, I think this is the main driver that moved our one-half sales to be there. Second quarter was especially strong year-on-year. If you look at second quarter, we have also moved slightly ahead of 2019, predominantly driven by services.
There is always these concerns on a very weak China retail recovery. Are you seeing that in your malls? Or your tenant sales, actually not just on a year-on-year because last year we had COVID, but on a versus a pre-COVID level. Why are your malls being able to deliver higher than pre-COVID sales?
Primarily driven by some of the tenancy changes that we have injected. I think once you have that new concept and offerings and new brands that you bring in, coupled with the overall footfall coming back, if you can have certain concepts and certain brands that are able to capture people who want to come back and have that physical, social interaction, I think that is where the spending is being captured. That said, I also want to let you know that increasingly there is this bifurcation, where we see, correct? Those malls that we have AEI, those malls that we are continuing to have that dominant characteristics in its subcatchment are able to do that. But there are certain malls that are weaker. You can see that they are not able to churn as much of that sales despite footfall coming back.
But on the net, I would say six, seven of our dominant assets are doing well. Two of them are under AEI, and the other two are, one is winding down, so that's a drag. And the other one, Xinnan, is really going through a lot of major tenancy adjustments, so that's also a drag. Yeah.
Thanks. Maybe can touch on the logistics parts. We noted that Chengdu, you are seeing occupancies come off over the last two quarters. Is there any timeline that you would look to backfill some of these vacancies? Are you expecting negative reversions coming from logistics?
On a portfolio basis, I think most of our leases would only come into renewal status in December. So we are working definitely hard to look at prospects and also talking with the current tenants. But I think the overall environment this year, especially for the typical logistics, especially the big space users, I think we do feel that their outlook in terms of the business, it's being moderated down. So I think a lot of the tenants are also relooking at their space footprint. So we do feel a little bit of that demand-supply challenge. So I think we are in this state where we are actively looking for alternatives.
So it's very hard for us to give a precise number, but I think given where the supply-demand imbalance and looking at where some of these big space users are consolidating, I do feel that if you want to fill up occupancy, I think rent is something that you have to be willing to go lower than passing. I think that's where the market trend is right now.
Thanks, Tze Wooi. Final question from me, in terms of, let's say, divestments and maybe even asset recycling, would you still be looking at new economy assets? I know that you are probably looking at divesting some of your older malls, but given the current weakness in let's say even logistics and the slower backfilling for Hangzhou, are new economy assets still as stable or resilient as they should be?
Yeah. In terms of that monetization, I think for the mature assets, I think it's quite obvious that there are some of these assets that we have been holding since IPO days. They've been with us for almost close to 20 year journey. I think that is something I would say quite prime for us to look at avenues to monetize if we can. If we can successfully monetize some of these, I think the first way to look at where we want to deploy, I think it'll still be in the new economy space. Between the new economy space, I would prefer the more mature business parts that's already having that track record and knowing that they are able to command in that city, that kind of stability.
This will also play into the entry costs and the entry view that we are looking. All in, I think we continue to stay on that track in order to want to reconstitute our retail, bring in new economy that will enable us to have that NPI new pickup. All said, I think that space will continue to help strengthen our overall revenue diversification and streams. I think that's something that we are definitely focusing to pursue. Logistics, I would say because of where we are as a group and also looking at where third-party opportunities are, I think we will keep that lookout, but I think we'll be a bit more circumspect in some of these underwriting assumptions because I think logistics is going through a little bit of that demand supply imbalance for a period of time.
I think we need some things to settle down with that.
Thanks very much.
Thank you, [Terence]. I would like to pass the time on now to [Geraldine]. [Geraldine], please.
Hi. Thanks, Nicole. Morning, Tze Wooi and everyone. Are you able to hear me?
Yes.
Okay. My first question will be regarding the retail reversion they set, 4%. Would you say that this number is boosted by Yuhua ting's AEI completion, and if so, what would it be if we look at the malls that was on a same-store basis? Yeah, personally.
Yeah. 4% is with the AEI. Yeah, correct. If you were to remove it, I think individually each malls would behave differently, but on a portfolio basis, if you were to just look at the organic side of things, we are probably negative, single digit as well.
Okay. Given that you have another two AEI to see completion in this second half, will this 4% be sustainable or even stronger, if we look at it in a second half basis?
I would say our first half because of the volume of leases that we have already secured, that played into a large part that +4%. The number of leftover balance that we can record in the second half, I think in terms of the volume is slightly lesser than one half. But on the net full year, we should be in that positive territory. We still have a bit of leases to be secured for some of the AEI spaces like in Grand Canyon. That will come in the second half. But I think on a total basis, I think the +4% have factored in more of the AEI effect, rather than the second half. The second half will have less of that volume.
Okay. Understand. With regards to tenant sales second half, do you see this sustaining or even exceeding pre-COVID levels? Yeah, because taking into account travel related items and bigger ticket items, as we go into winter for China.
I think the retail sales is really going to be a function of how things shape up in the second half in terms of overall business and consumer confidence. I think you already see one quarter was a very slow one. Second quarter improved a lot. I think it depends a lot on how people view the outlook as they approach the second half. On our part, I would say that more of our malls are rolling into a position to be able to open up and do business. I hope that by the extension, more of our spaces are able to attract footfall and sales, help us in that number.
Yeah. I think from the retailer standpoint, they are definitely moving into an environment where today the rent structure to sales, that kind of level of occupancy cost have moved into a much healthier territory, relative to the last three years of very uncertain COVID period. So we just ended one half of so-called no COVID disruptions. So I think as we move to a second half, as retailers' confidence come back, as consumers' confidence come back, that will really help to move that business. I think by the end of the year, we are in a much better position to discuss rental growth. I think this year is going to be a little bit of that, us repositioning ourselves . Retailers resetting some of their outlook expectation.
I think as we let this environment improve and recover, everyone would then move back towards the more pre-COVID kind of mentality, because the metrics are now moving more towards that level.
Okay. Thanks, Tze Wooi. If I can just ask some more on the business part. I see that the e-commerce and Infocomm research looks a bit slower this quarter, and I am just wondering if it is a function of shifts in business dynamics in the Hangzhou sub-market. Yeah.
Yeah.
Are you able to give us some-
Yeah.
Understanding of what is happening there?
Yeah, you are right.
Okay.
Because our Hangzhou business parks have always been more exposed to the e-commerce community, big space users and also multiple small enterprises who are supporting the online e-commerce, the kind of very interactive kind of consumer and business. I think that part of it, a lot had gone through the last COVID period. I mentioned to you in the one quarter, a lot of the business model are being reviewed. Some of the smaller players are not able to continue. You do see a bit of that leases being churned. As we look at the next phase of where we want to target, I think we are moving slightly away from the exposure. I think that is a reflection of that passing, which is very heavy towards this space. As they drop down, where are the others that we are capturing?
So you do have a bit of that, lease in and lease out effect as at June.
Okay. Thanks, Tze Wooi. That's all from me.
Thank you, [Geraldine]. Can I pass the count now to [Joel], please?
Yeah. Thanks, Nicole. Hi, Tze Wooi. Thanks for the presentation. My first question is regarding the properties under AEI. I understand there are, I think, two retail malls. Could you share the pre-commitment levels for these two malls, and perhaps what sectors are these tenants from?
Yeah. We have a slide over here. If you look at Rock Square, essentially from level three, we are reconfiguring the F&B. Basically, the commitment is 100%, and as we speak, they are already preparing for opening into this quarter. Over at the basement, this is where we took back some space. Originally, it was leased out to the anchor, so we recovered some of this, and then we reconfigure it into about 20 over units. I think we are injecting a little bit more of those variety of offerings, focusing on specialty F&Bs, a little bit on the gifts and toys, so that this is going to be the basement where people come in through the MRT. I think this is something that we have already done. In terms of expected commitment rate is around 98%.
I think over at Grand Canyon, again, if you look at where things are, again, we are taking opportunity to reset the whole basement area. It used to be filled up by one big anchor supermarket. That supermarket no longer competitive. Now we are recutting the space. We are only reoffering a more modern, smaller format supermarket to service the catchment. The net balance of the area, again, we are injecting a little bit more variety, looking at some of these retail offerings as well as F&B. 72% has already been secured. I think we are close to 80% in terms of some of the advanced negotiations still within the process of being approved. I think we expect to complete everything by the fourth quarter of the year. Yeah.
All right. Hey, thanks so much. My second question is regarding the, understand there's lower interest rate environment in China as seen from your 85 basis point savings. I'm just wondering also, is there positive carry on, say, acquisitions in the market, or is there something you're looking at before you make a move?
Sorry, I missed the second part of your question, as in the positive carry? As in acquisition?
Yeah. Positive carry on acquisitions in the market.
Oh, yes, definitely. If you look at where the cost of debt is trending, in China's side of things, we have always been taking loans that is pegged to the LPR, and you would have seen that the LPR has progressively come down. I think the LPR today is about 4.2%. Looking at where our assets and credit are, we are able, at times, to do better than 4.2%. That means, how the banks quote is a function of that. Maybe they can give us how many percent below your LPR. We are on this side of the equation where we can negotiate. I think the banks are comfortable with our name, with the kind of business, with the kind of credit. We are looking at 4%, and sometimes we can even look at slightly below 4%.
Definitely it will help us as we plan for new acquisitions in terms of the kind of funding mix and the kind of debt mix, onshore and offshore. In the past, we take offshore debt because it is cheaper. Today, I think we are structuring more towards the onshore debt. If we look at acquisition that we can structure around that.
Hey, thanks. My last question is regarding shopper traffic. I understand you showed that shoppers, the sales are actually above pre-COVID in the second quarter. How does shopper traffic look like?
Shopper traffic, if you were to compare year-on-year, again, there is a big increase in the second quarter. I think you see 50%-over improvement in the second quarter. If you look at the full one half, I think we reported that number is like 32%-over improvement over last year. But relative to pre-COVID, we are probably depending on where your portfolio and assets sit. On a net basis, we are inching towards the 85%-90% level. Some of the better ones are closing in at 90%-over . I think that is where we are in terms of the traffic. It is quite consistent with our data point elsewhere. I think in terms of footfall, we may not be back to pre-COVID level, but in terms of sales, I think we are closer.
Sales is always being able to pick up slightly better than traffic if you compare to pre-COVID times.
I see. Actually the shoppers at your malls are spending more, similar to Xinnan.
I would say in a way that people who come out to the mall are now more purpose oriented. I think so long as your malls are oriented towards the kind of concepts that are able to attract them in, and you do have fresh offerings, brands, concepts that interact with them well, I think you do see that spending coming back. That said, not all trade categories are enjoying it, which is why there is a lot of work to be done for individual assets as you reposition yourself. Where do you want to lighten? Where do you want to increase? The kind of new brands that are mushrooming in the market. I think these are really details on site that you need to be able to catch and bring them in.
Hopefully you bring them in the first wave, and therefore it has a novelty effect. I think that's exactly what we are trying to do to AEI and reposition ourselves as we look towards capturing the second half recovery.
Yeah, maybe I can add on to what-
Thank you.
Recently we went to our malls. We visited our malls, and at Grand Canyon, we did the AEI. When we visited, a lot of the stores are actually very interactive. There's even horse riding, then there's also a lot of this area where you can interact with animals. So there were guinea pigs, fishes, hamsters, and there were so many parents that were just crowding there and putting their kids there. I even saw a parent falling asleep beside the child as they play with the hamster. So, all these different concepts are actually good in the sense that it's actually a place where you can leave your kids there, and then they just sit around, and they just talk to one another, and there's a huge arcade as well.
I think a lot of our concepts that we have done in 2019 feels they might actually pull them in. We have been very active in terms of our pulling of the tenant and trying to bring in all these different things that will attract the children into the mall, and therefore the parents have to be there, take care of them, buy a drink, and that whole entire ecosystem is sort of set up in place.
This one, if you look at our trade category shifts over time. I think we acknowledge that people go to the mall nowadays is to have that kind of experience, and Nicole just now elaborated, and less just moving from shop to shop and buy physical goods, clothes, et cetera. I think we've got to really think harder on how to use the space well, and alongside that, drive really the productivity of space and being able to connect with the shoppers. I think that's exactly what we are trying to do. The core dominant ones we will hold and do all this AEI and all this repositioning.
For those that are weaker or it's very hard for them to compete because of certain constraints, I think it's within our planning to look for options to exit, so that overall, the whole retail portfolio become a stronger one to capture that consumer spending.
Okay. Thank you, Tze Wooi and Nicole. That's all from me.
Thank you, [Joel]. Hi, [Derek]. Would you like to share a question, please? Oh, I think there is something wrong with your microphone because we cannot hear you, but I can see that you unmuted yourself.
Hello. Good morning. Can you hear me?
Yes. Now we can. Thank you.
Very wrong headset. Sorry. I just have two questions for me. Tze Wooi, I want to hear your thoughts again on the interest cost. On slide 13, I think you did mention before you wanted to pivot towards more RMB. There is some interest savings. But here, based on what I see, it assumes that you are doing just a like for like SGD kind of replacement. Is that the case? And where should we expect your interest costs to land by end of this year?
Let me just - Sorry. You are looking at our debt maturity tower slide, is it?
Correct. Yeah.
Yeah. This one, if you look at it is SGD 150 million is a offshore SGD loan that we have refinanced out. You are right. The balance SGD 120 million, we kept it there. We are exploring some opportunities to see whether we can refinance it using alternative that is not a direct thing. That is something that we are exploring. On how we intend to shift our loan books, right? If you look at where things are, today our onshore loans are about 13%. If we can refinance something using alternatives to replace the SGD. I think that will push us towards closer to 20%. If we were to be able to do some portfolio reconstitution when we do acquisition, we look a little bit more on the onshore side of things, I think potentially that will move us closer to the 25%.
That is our planning for the year. If you look at our June, we are at 3.54 % in terms of average cost of debt. I think all things constant as we roll into the second half, I do not think that number will materially change because most of our 2023 refinancing have already been completed. So it is going to be very marginal if there is any movement. I think the new refinancing that we have done early, that benefit of cost savings would start to contribute in the second half of 2023 . So that one is not factored into this cost of debt yet.
I see. Okay. Just to follow up on this, does it make sense for you to tap the CNH market, the offshore RMB? Is it effective or no?
I think we are exploring with various banks to see-
Okay.
On that basis whether it is cost effective for us. From our point of view, I think we would like to have a little bit of that natural hedging-
Where we can. I think onshore is a more natural way. So whenever we are able to reconstitute our portfolio through acquisition, we take on a little bit more onshore so that it moves us towards what I mentioned, that 20%-25% loan book ratio. Offshore, whether we can do a bit of all this synthetic, whether we can raise CNY or we can raise SGD, but convert to renminbi kind of interest, I think these are all potential hedging kind of instruments that we are all working on. Yeah.
Okay. Sorry. Thanks for that. Just one more follow-up question from me is your retail performance. I sense some optimism for you and we are quite excited about the second half outlook. But just wondering also, your tenants also endured a number of quarters of either very low or no profitability. So do you think that we should be expecting, say, a few more quarters of very strong, say, tenant sales, and then before you start to push the rents? Just wondering, trying to get a sense around how would a lag between your reversions versus tenant sales would be if we were just to want to project next six to nine months. Any guidance on that? Yeah.
Very good question, and I think I mentioned earlier. A lot depends on the second half, that feel-good confidence factor coming back. What is good today is, I think, the rent structure to the sales are at more healthy levels. As an average, during COVID period, we are trending like 30%, which is on average, it is not that healthy.
But today we are trending more towards like 20%, which is at a more healthy level. So I think if you let this run its course for the next two quarters, thereabout, and if the sales can continue at this level, because rent side, I think we have already restructured and support them for the year. So I think if the sales are there, when the next cycle comes in, I think we are able to talk a bit more on the rent. So 2024, I think potentially it is where the stronger malls can see better outcome on two fronts. Most of our so-called existing leases that you may have signed with the tenants during the COVID period, let's say give them that three-year cycle, they will be coming out from a lower base as we approach 2024.
Mm. Okay. So 2024, much brighter prospects. Okay. Can. No problem. Thank you very much.
Yeah.
Thank you, [Derek]. I would like to pass the time to [Sanchan], please.
Hi. Morning. My first question is on potential divestment, right? I assume you are referring to retail malls. Can you comment a bit about how does transaction value and cap rate compare versus book?
I think if you look at some of our existing retail assets, I think there are some, I would say, the easier fruits to harvest. I mentioned earlier, there is certain assets that were held through since IPO days. Those are actually still held relatively low to our books. So that is potentially one that we are working, focusing. If we can monetize that one, I think it would be good in terms of the value to recycle.
And just to clarify, this is on your current book value, right? Not the IPO price.
That is right, because we have been revaluing it. Yeah.
Okay. Got you. Second question, if you were to take a RMB loan, I assume you use it to repay the offshore loan, right? But is there any issue repatriating money out of China?
Yeah, the borrowing that I mentioned earlier is more the offshore kind of borrowing structure. I think you potentially may know about all these FTZ bonds. These are some of the areas that we are exploring. The thing that we want to do is such that the proceeds can be used to pay down our more expensive SGD debt tower. I think that's the purpose why we want to do it. The onshore one is more for slashing onshore needs. I cannot raise onshore RMB and repatriate out. That contributes to that. Yeah.
Okay. Got it. That's all from me. Thank you.
Thank you.
Okay, if you have any questions, feel free to just raise your hands. I would like to pass the time to [Gloria], please.
Oh, hello. Can you hear me? Hi. Thanks.
Hi, [Gloria].
I just have one question. Yeah. Hi. Hi, Tze Wooi. The retail malls sounds that they're doing a lot more better than the last time we spoke. But I'm just wondering which ones you plan to sell, I mean, to divest. And which ones are sort of, well, non-negotiable, which ones you would not divest at all on any terms, if you could, on those. And are all your retail malls are all the retail malls you plan to divest, are they financed by the offshore loans? And how does the mechanics of it work? Because when you divest the mall and the loan is offshore, you won't be repatriating the money offshore, will you? Because you want to buy another asset and finance it with onshore debt.
Okay. I got your questions. I think first and foremost, I think we want to keep the strong dominant malls that continue to be competitive in the catchment that we operate our business. I think that fundamentals continue to shape how we look at things. If today our biggest contributors are Xizhimen, Rock Square, Wangjing, Xuefu, Nuohemule that we've just opened, Yuhuating and just AEI, these potentially would be assets that I want to hold on to. It doesn't mean that this identification would mean that if there's a good offer for us to monetize, I may not consider. I'm not saying that. But today, I don't think people have given us any attractive enough offer to make that move, right? Then another category of retail assets are the more, I would say, performing at a level that's below the line from our own expectation.
This would include, let's say Xinnan and the small ones like Aidemengdun. In terms of view, Grand Canyon is also on its way up but still below the line. I mean, from a reconstitution perspective, if you want to strengthen the overall quality of the portfolio, if there are good exit opportunities, I think these would be some of the priorities. One that we have been holding since IPO days, like Shuangjing.
It has given us that very constant bond-like kind of view from IPO till today. But it has also reached a point where we have to really think through that if you want to continue, you potentially may need to re-CapEx and redevelop. So between whether we want to take it down to redevelop vis-a-vis if there's an offer for us, whether it makes sense for us to just exit. I think these are some of the deliberations that we'll look at it. I hope that gives you a bit of sensing on how we look at our projects, what to hold and what to sell, and at what price to sell that makes sense.
Thank you.
On your second question on the borrowing side, I think like all of our divestment, subsequently, if we were to divest because of our offshore structure, the proceeds will flow out after you settle all your relevant taxes. How we then intend to flow back in, again, depends on the acquisition structure. I think we can explore setting up a new onshore vehicle to do onshore transactions. I think that is one way to look at it. When you have an onshore transaction and onshore entity that you set up, you can then bring the money in through both equity channel and also being able to take onshore loan. I think these are ways that we can look at.
Some of the cash flow if we have an existing onshore shareholder loan, I think that loan potentially we can see how long we can keep it onshore to fund some of our other AEI needs. I think these have been the two ways we have been looking at how we want to rebalance our capital structure. But because of our offshore nature, the proceeds will need to come back before going back in again.
Okay.
I'm not sure that you-
Yes. You've answered that. Okay. The next question- Can I just ask one more question? You said that- Okay. Actually, now there are two questions. Because of what you said about Shuangjing, because you mentioned that it could be redeveloped. But would you partner with your sponsor if you decided to I mean, you haven't decided. If you decided to, could you partner with your sponsor on that one? That's question one. The second one is, you said that you and your sponsor are studying, I'm not quite sure, studying what in terms of the C-REITs. Are you studying to do some sort of a second dream listing or what would you be studying?
Yeah. So essentially, the first point, whether we will consider jointly redevelop with our sponsor, that I think is always part of a possibility. I think you have seen some of these REITs and sponsor, how they would swap certain assets, et cetera. So I think these conversations will continue in-house on all those front if the feasibility and the economics work for both sides. Ourselves, I think we must be convinced that to redevelop means I have to take the asset down for construction redevelopment planning for the next, let's say, three years, and whether this move, at the end of the day, whether it's economic beneficial to us or not. Or do we then monetize it and then we discuss later whether after someone else finish the development, then we buy them back.
I think these are potential business structures that we can think of vis-a-vis, let's say, a clean exit to someone else if it makes sense to us quite fast. I think the options are there, but I'm not saying that we won't consider. But I think we'll land on something that's best for ourselves. Your second point on the C-REIT, like most people who are active in China and who have exposure and platform, I think the good news is that it started off with very infrastructure-related assets. Toll roads or water, and then business parks went in, logistics went in. Now they have opened up to include retail, what they call consumer infrastructure. Essentially is the mass retail servicing the middle income, the common people.
I think because of CapitaLand's platform, I think we stand in a good position to be able to work out with the regulators, to study how do we become part of C-REIT participation. When I say participation, like what you say, it includes how we can set it up, how we can partner with the existing structure. We can think about originating some assets. And also these are being studied because the C-REIT regime and the policy details are not like the current S-REIT regime that all of us are very aware. There are very policy fine print that we need to discuss with the regulators. So I think that's where we are in terms of studying the policy details to see how we can participate in that area.
For CLCT perspective, I think if that thing can substantially take off, I think it just creates another engine and catalyst for us potentially to recycle. Yeah.
Okay. Thanks. Thank you.
Thank you. Thank you, [Paula]. Now I will pass the time to [audio distortion] .
Hi. Can you guys hear me?
Yes.
Yes.
Two simple questions. First one is on FX income hedging. Can you remind us on the policy? As of this point, is it fair to say that the magnitude of the RMB weakness has probably been fully captured as of first half?
For the first half, you have seen that the RMB weakness of close to 9%. Our hedging policy has always been to hedge at least 50% of our distributable income. I think we have consistently been rolling that policy along. For this round of distribution, because of some of our hedging contracts there, it has also helped us to cushion a level of that close to 9% weakness. We are not 100% kind of hedging policy. We are hedging 50% of our semi-annual distribution. We will review along the way to see whether it makes sense for us to consider other hedging instruments, or we can potentially increase some of this hedging ratio, taking into account the cost of entering. I think this is something that we have always been applying consistently.
How things would shape up in the second half of RMB, the P&L will always have a bit of lag effect relative to the spot, right? I think that is where things are today. Spot is probably around 5.3% plus 5.4%. If you look at the average rate of where we have translated back P&L, it is about 5.2%. I think directionally, we may be still seeing a little bit of that softening of the RMB entering into two half. I think that is where I see things currently. Yeah.
Okay. For logistics, should we be expecting negative reversions, based on your earlier comments? I think in the very first few questions, if you could quote to us, what is the magnitude we should think about? Because some of your peers are expecting China logistic reversions could be to the tune of - 10%. Just wondering whether it is something similar for your case.
Yeah. Just now, I think I mentioned briefly that if you were to talk to any of the logistics tenants today, the landlord asking and the tenants request back, I think there indeed is a double-digit kind of rent gap. I think that is fair to say that, especially if you talk to the more dominant with end users, I think that is potentially the double digits rent gap is there.
It is very difficult for us to prescribe a number to you because our negotiations are still ongoing, and are we looking at alternatives. But I think it is fair to say that the existing passing in today's market, it is harder to get takers. So I think if you want the occupancy, I think you have to let go of the rent. I think for guidance, I think double digits, it is potentially something that we should be aware. Yeah.
Okay. Got it. Thank you very much.
Thank you, [Karim]. I am mindful that we have reached an hour, but I will be happy to take in any further questions that you might have. Perhaps we can wait another 10 seconds, 15 seconds to see if there is any further hands raised. Okay. Otherwise, I would like to pass the time on to Tze Wooi to share some concluding remarks with regards to our results as well.
Yeah. Okay. I think to wrap up, I think I mentioned for one half, I think the picture is that we started the year on a slow first quarter. You would have seen that most of our assets are reflecting on lower occupancy. As you roll over to one half, I think things are shaping up better, especially in the retail portfolio. You can see the leasing activities, the conversions are there, the occupancies are better. As we look forward to the second half, I think the AEI spaces will also start to contribute. So on a net portfolio basis, I think we are looking into a better retail performance in the second half versus the first. So that takes care of almost 70% of our portfolio business.
On the New Economy side, I think given where, again, we started off the year slower in terms of occupancy, some of our assets, especially the Hangzhou ones, in terms of occupancy backfilling we are not back to where we started the year. I do expect that vacancy gap that we continue must work. As a result, I think the rental reversions are also getting softer, arising from that kind of space needs that we are pursuing. New Economy, and also looking at logistics. I think on the New Economy side, I think we are expecting a softer second half relative to last year's second half. I think that's where things are from a business standpoint.
On the capital management side, I think I mentioned that a couple of things that we are doing that will help us rebalance some of our debt profile and capture more of that onshore cost savings. From a reconstitution point of view, I think we are looking to unlock value for some of our mature assets. Alongside that, we'll concentrate and focus on bringing in some of this inorganic, new accretive acquisitions that can help us strengthen the overall portfolio. When the window is there, when the market is more conducive, I think these are something that we're preparing as we enter the second half.
Thank you. Thank you, Tze Wooi, for the concluding remarks. It's been a very fruitful discussion, and we hope that you managed to have a better color on our operations as well as outlook. Thank you all for joining us for our call. Thank you. Have a good afternoon.
Thank you.