滙豐控股 (HSBC) 2023 Q2 法說會逐字稿

Good morning, dear analysts and everyone. Thank you very much for making time today for the results briefing for Mapletree Pan Asia Commercial Trust First Half and Financial Year Ended 30th September 2022.

This is the first set of combined results and also our first results briefing following the completion of the merger with Mapletree North Asia Commercial Trust. I am Li Yeng from Investor Relations. We are very pleased today to have with us Ms. Sharon Lim, Chief Executive Officer of MPACT; Ms. Janica Tan, Chief Financial Officer; Mr. Koh Wee Leong and Mr. Chow Mun Leong, our Co-Heads of Investments and Asset Management.

Without further ado, we will have Janica present our financial results and Wee Leong and Mun Leong will thereafter take us through the portfolio performance. This will be followed by a Q&A session. Just a general reminder that for the best quality and experience, may we request that all participant mute their phones and to avoid taking any incoming calls during the presentation.

With this, I will let Janica take the stage. Thank you.

Good morning, everyone. We are pleased to present the first combined set of the results following completion of the merger with MNACT. Moving forward, we will present the results based on geographies and group of properties within the portfolio.

Okay. Let's start with some of the key highlights for the period. DPU for first half, $0.0494, up 12.5% year-on-year. The $0.0494 comprises MCT's cleanup distribution of $0.0304 for the period 1st April to 20th of July 2022, which was paid on 25th August and the remaining $0.0190 for period due 30th of September 2022 to be paid in December. NAV per unit $1.81, up 4% as compared to 31st March 2022; leverage ratio, slightly above 40%, mainly due to the drawdown of the debt to fund the merger. AUM, $16.9 billion with 18 commercial properties across 5 key gateway markets of Asia. Committed occupancy continued to be high at 96.9% with a WALE of 2.4 years.

Okay. In terms of financial performance, first half gross revenue and NPI both recorded 44.9% year-on-year increase, led by the contribution from the acquisition of MNACT's assets through the merger as well as higher contribution from our core assets, namely VivoCity and MBC. The rest of the Singapore property, namely mTower, Mapletree Anson, and Bank of America HarbourFront posted a lower contribution as compared to last year. That was mainly due to we have a one-off compensation of about $7 million from mTower. So if we were to accrue these one-off compensation, the performance would be better than last year.

During the period, we also launched a $50 billion EMTS program to financing diversity. In terms of portfolio performance, we achieved 96.9% committed occupancy with majority of markets posting higher commitment levels and also posting a positive rental reversion that was secured in most markets as well. Major leases such as Bank of America at BOAHF, and post reporting period at Festival Walk and BMW at Gateway renewed their leases ahead of their expiry. During the quarter, we also completed the electricity tender for Singapore properties and a further 2-year contract was executed. MPACT is about 2% for this year, about 2% of DPU and on a full year basis, about 4%.

Then on our crown jewel, VivoCity, so VivoCity kept its recovery momentum with the second quarter tenant sales continuing to surpass pre-COVID levels. Notwithstanding its solid performance, we continue our proactive effort to strengthen the mall. We are now embarking on an 80,000 square feet AEI that includes converting part of tenant level 1 space into a 56,000 square feet new retail zone, utilizing the escalator not added in 2018 to activate an alternative shoppers discharge channel. More details will be shared by the IAM leaders. On our other retail assets, performance of Festival Walk in Hong Kong continued to be impacted by strict COVID-19 protocol. However, the gradual easing of the health measures and the disbursement of government's consumption vouchers has boosted second Q's footfall and tenant sales.

The next slide is on our first half results, which I more or less covered. We will now move on to the financial position. MPACT's group's total asset, liability, NAV, all increased as compared to March 2022, mainly due to the effect of the merger. The same consideration of about $4.1 billion was funded through the issuance of new units to MPACT unitholder, proceeds from the preferential offerings and borrowings. So consequently, NAV per unit rose from $1.74 as at 31st March 2022 to $1.81 as at 30th September 2022.

Moving onto our key financial indicators, as a result of the merger, the gross debt is now $6.95 billion, of which 72.5% is fixed by way of interest rate swap of fixed rate notes. So at 72.5% hedged, every 50 bps change will impact the DPU by 0.16 cents. Leverage ratio, 40.1% with debt headroom of about $1.5 billion to 45%, and average term to maturity was 3 year. Average all-in cost of debt, 2.44% for the year, and the adjusted ICR was approximately 4.4 times on a 12-month trailing basis. Rating remained at Baa1 with stable outlook. At 30th September, the debt maturity profile remained well distributed with no more than 22% of debt due in any financial year. Financial flex at $1.3 billion. The debt profile by currency also largely mirror the geographic composition of MPACT's AUM with about 50% in Sing dollar and 30% in Hong Kong dollar. To mitigate uncertainties arising from the interest rate and the foreign exchange volatility, we have 72.5% of gross debt with fixed rate and about 88% on a rolling 4-quarter basis of MPACT's distributable income either derived in Singapore dollar or hedged into Singapore dollar.

Next is on the distribution detail. Record date for November and payout is expected to be on December 7. Last but not least, moving forward, in next quarter, MCT will adopt a quarterly reporting framework and announce its quarterly financial results commencing from third quarter ending 31st December 2022, and consequently, any distribution to unitholder will be on a quarterly basis with effect from the Q.

Thank you. Over to you, Wee Leong.

Okay. Good morning, everyone. I'll quickly run through the portfolio highlights. Committed occupancy for the portfolio is close to 97%, remains fairly high. Rental reversion is about 1.1% for the leases we have signed to-date. This is about 1 million square feet of space, about 200,000 in the retail side and about 800,000 in the office and BP side. So tenant reentry remains fairly high at 70.4%. VivoCity has continued its improvement over the previous year's performance. Tenant sales are up close to 50% and actually we have recovered to above the pre-COVID period. Shopper traffic is up also about 50%, but this indicator is still below the pre-COVID period. Festival Walk tenant sales are slightly down year-on-year, while shopper traffic was down slightly year-on-year.

Looking at the segmental performance. A large proportion of the improvement in performance year-on-year is due to the acquisition of the North Asia Commercial Trust assets. But if you look at the Singapore assets alone, most of the assets have outperformed the previous year except for the other Singapore assets comprising mTower, Mapletree Anson and Bank of America. That's largely due to a one-off compensation, which was received in the previous financial year of about $7.5 million for the pre-termination of tenant. So obviously we didn't receive any such compensation this year. Stripping out the effect of the one-off compensation, the other Singapore assets will have been up about $2 million on a net property income.

So moving on to some details on the portfolio, committed occupancy. So committed occupancy, like I mentioned at the portfolio level is 97%. All of the assets have committed occupancies above 90%. The retail assets are maintaining occupancies are very close to 100%. Maybe just a few things to note. MBC, while the committed occupancy remains high this quarter, we do have a fairly significant non-renewal coming up. I think this has been flagged for a few quarters already and that's the Unilever space at MBC I. So upon when -- we are still marketing for prospects for that space. Unfortunately, it's been a little bit difficult in the current market with the pullback from majority of the technology tenants.

For the China property, committed occupancy remains at 92.5%, and for the Japan properties, slightly high close to 98%. The Pinnacle Gangnam continues to perform very well; committed occupancy at 98%. The remaining 2% vacancies are largely some retail leases, which have been a little bit difficult to fill due to work from home considerations and not many people coming back to the office.

So moving on to the leasing update. So we have done about 1 million plus square feet of space and that's about half of the space that is expiring in this current financial year. So in terms of leases that have been committed and retention rate, we have about 70% and rental reversion is 1.1. Festival Walk and other Singapore properties are the ones where we have slightly lower rental reversion. Festival Walk is still suffering slightly from the COVID lockdowns and the restrictions that are still in the city over the past year.

So moving on to lease expiry, lease expiry remains about 2.5 years for the portfolio. Retail is slightly shorter at 2.1 and office and business park is at 2.7 years. On the top 10 tenants, maybe just to give an update on 2 leases. So BMW has a -- we have previously disclosed that BMW had signed a one-year extension to their lease. Their lease was previously due to expire in this current financial year, that's been taken out to the end of 2023. Just after the end of the quarter, we managed to sign them for a further 2-year extension. So the lease will now expire in December of 2025. We have also concluded the renewal for Arup at Festival Walk, that's office tenant at Festival Walk. Their lease was supposed to expire in 2024 and we have now extended it for further 6 years.

So I will now hand over to Mun Leong who will walk through the VivoCity and the Festival Walk performance.

Good morning. This is Mun Leong. Yes. Moving to slide 22, yes, I think with Singapore adjusting to living with COVID, I think we are pleased to announce that VivoCity has actually recorded very strong recovery in the second quarter. If you look at slide 22, you see improvement of 49.4% and 48.4% over the last year for the shopper traffic and tenant sales respectively. I think in particularly, if you look at tenant sales, we have actually exceeded the pre-COVID level, and this is a very, very strong recovery achieved by the VivoCity team.

Moving to slide 23, we're also pleased to announce that the team will be embarking a new AEI for VivoCity. Basically this involves the reconfiguration of 80,000 square feet of the TANGS and then convert part of the space into a new retail zone. And at this new retail zone mostly revolves around escalator, which is currently within the (inaudible) space on Level 1. So what we are trying to do here is to create and improve the vertical circulation from B2 where MRT -- where the shoppers come up from MRT can actually easily move on to B1 and to Level 1 through this new created pathway for circulation. And then around this new circulation, we will then create this new retail zone. And then we are expecting this AEI to be completed and opened from mid-2023 almost, and we expect ROI to be achieved in the range of more than 10% on a stabilized basis.

Moving onto slide 24 and 25, I think these are some photos of the new shops that we have seen. I can see the team has been working very hard to bring in new F&B tenants. On B1, we have Cafe Q Classified, a very nicely done theme F&B. And of course we also have a very famous Jelebu Dry Laksa, which was making a lot of news headlines recently on the long queues for their very delicious laksa. So I think the team has been doing a lot of hard work in actually improving the F&B and fashion trade mix in the mall.

Moving to slide 25, you can see these are the some of the events they have held at the VivoCity atrium space. Of course, the point to highlight is really the TANGS Mid-Autumn Fair. I think it actually attracted a record crowd as well, and of course, some of the other usual car shows that we have in the atrium space.

Moving on to slide 26 on Festival Walk. First of all, for Festival Walk, I think it actually maintained its shopper traffic and tenant sales compared to last year. If you look at on slide 26, shopper traffic is down slightly on 0.7%, whereas tenant sales is down slightly on 1.5%. Unfortunately, given the COVID restrictions in Hong Kong, I think we still haven't seen recovery back before the social incidents situation in 2018.

Moving to slide 27, I think this is a chart where we want to show you actually what happened in Hong Kong. I think if I bring your attention to October '21 -- October to December '21, actually that was the time where the COVID was actually -- the situation was recovering and we see a uplift in terms of shopper traffic. However, unfortunately, in the early part of Jan '22, there was the Omicron wave, the fifth wave in Hong Kong, and that resulted in a bit of semi-lockdown and we see some of these shopper traffic nose diving. I think the positive part is that I think we have seen a relaxation of the social -- these restrictions in Hong Kong. I think most remarkably is really the travelers from a 3 plus 4 right now, it has been actually relaxed to zero plus 3. I think this is actually a positive sign. We hope that the Hong Kong government will continue to actually relax the -- these COVID social distancing restrictions so that we will see a recovery in Hong Kong retail market.

Moving to slide 28 and 29. Again, these are some of the photos of some of the new shops that has been introduced into the Festival Walk. I think on the top left, we have a very nice bakery, Lemongrass Bakery. And then, of course, we also have on the bottom left, MasterArt. This is also part of the strategy of the Festival Walk team to reposition that more into a lifestyle hub, creating more activities and services which the customers and shoppers can do while they are in Festival Walk.

And lastly in the slide 29, this is also some photos of the events that they have at the atrium, including the very interesting Omega x Swatch Pop-up Store as well as the Mid-Autumn Festival Weekend Performance.

Thank you, Janica, Wee Leong and Mun Leong. So with that, we shall now open the floor to Q&A. Analysts may raise their hands or type their questions and I can wait for my queue to ask your questions. The public who are attending through the webcast platform can also type in your questions directly and I will raise them for you. So can I kindly request that you state your name and phone while posting your questions? Thank you. So first on the list, we have Terence for JPMorgan.

I'm Terence from JPMorgan. I just had 2 sets of questions. First, I wanted to ask on the proportion of space that was renewed for the 3 renewals, the BMW, Arup, and BoA and also the level of reversions and whether this was included in the reversion number.

Hi Terence, this is Wee Leong. Just our reversion numbers only include leases which expired in this current financial year. So the reversion numbers would only have included BOA's lease. BMW's lease as well as Arup's leases are expiring in the next financial year. So those numbers will come through in the next year, but just to give you a sense, Arup is on a slightly positive rental reversion. BMW's lease is slightly negative from their current lease, but it's still quite a good level above the current market rentals.

In terms of space, I mean, in the top 10 tenant listing, you can see the percentage of our gross rental revenue that gives you a rough indication of how much space that -- each of these tenants take up.

And second question from me. I noticed that the strategy slide, the previous strategy slide where divestments in Japan and reinvestments into Korea and China has not been included in the deck. Can I ask if there is any change in strategy post this merger?

Sharon here. There is no change in terms of how we look at the business. It's just that strategy are merely a start. We don't get rehashing in terms of reproducing the slide, but divestment is still in the works, is still something that we would like to go on for, but we will have to carry in tandem with the market. Yes. So no change to the strategy that we have stated from this time or in the circular.

And just wanted to get a sense with the current interest rate environment, do you see that the timelines for the execution of the strategy could be extended?

I think it will be longer than I like. Generally, I'd say in the current interest rate environment everybody will be a little bit more cautious. I think you have rightfully pointed out that any potential investors will be a little bit more cautious. So definitely your timeline will be a little bit more dragged out than I would have liked.

Congrats again on the merger. That's all I have for now.

Thank you, Terence. Can we have Brandon from Citi next?

Just 2 questions. Can you comment on the reason for the steeper rent reversion in Festival Walk for the 9-month period against the first half? That's my first one.

And secondly, any color on reasoning for the drop in the China properties occupancy on a Q-on-Q basis?

Yes. I think the Festival Walk one is just predominantly due to one fashion tenant, so not very far away from the Q1, but definitely a vast improvement from last year, last year was minus 13, around there, if I didn't remember wrongly. There's still softness. There is no denial, but I would say that the traction is getting better over the months, but it's still highly dependent on the borders in my view opening to China. With that, then we can actually see a better route to recovery. As of now, it is not so clear on that portion.

On the China part, Wee Leong.

Hi, Brandon. For the China assets, what we have been seeing is actually a slight slowdown in leasing activity over the last 3 months or so. There is a little bit of reluctance for a lot of tenants to enter into new leases as they were waiting to see what sort of measures or any changes in policies that will have come off from the (inaudible). We are seeing that there is a bit more improvement in these activities over the last week or so and we hope to catch our occupancy over the next quarter.

Is it correct to say that occupancy for China properties have like the bottom here?

I would say that is close to the bottom. I think our occupancy rate for all our assets stood at respectable levels. I think they are all either higher than 90s or close to 90.

Yes. Is it possible to share the split of the occupancy between Gateway and Sandhill?

So Gateway is slightly higher. We are running at about 93, 94 now -- sorry, Sandhill is slightly higher at 93, 94 at the current and Gateway is a little bit lower running at what 91, 92. So Sandhill is a bit higher; Gateway's a little bit lower than the average number you see there.

Thank you, Brandon. Next, we can have Rachel from DBS.

Just a few questions from me. I think to follow up, could you give us some color on the Bank of America lease. How long has it been renewed and reversion?

So the Bank of America lease is for a further 5 years. They have renewed all of the space, which they currently occupy at BOAHF and the rent revisions, maybe a bit of background. The previous lease which they had signed was, to be fair, slightly higher than market in terms of rental rates. That's because they actually renewed the lease one year before the end of their previous term and they gave up one floor space at a time. So the current rental reversion is just a little bit negative, 1% or so, but the market rentals are fairly compared to the leases we see in the current location for this space.

Okay. Maybe just next question is on mTower. Any progress on mTower leasing?

So mTower is actually seeing fairly good leasing progress. The tenants that we're seeing tend to be on the smaller side, but there is a lot of interest in the occupancy before end of the financial year. We are now currently running at about 85%, 86% in those occupancy.

In terms of the committed occupancy, it's close to 88% committed.

Just one more question on the interest costs. I am just wondering whether the loan for the merger, has it been fixed already? And what's your view on the hedging ratio moving forward?

Fixed rate debt ratio?

Yes.

Okay. First question, whether the merger that has been fixed already, I do not just look at one piece of debt and then try to fix it. I look at overall portfolio. So overall portfolio for my SG loan and Hong Kong dollar loan is more or less about 70%-odd fixed. If you really want to go specific, yes, some of them has been fixed.

Then the next question is on the fixed rate debt. We are now at 72.5%. One can say it's too low or one can say it's too high. We know the interest rate is going up, regardless we do risk management. So anytime we will make sure that our percentage of fixed is above 70%. At certain point in time, the rate might be lower or the rate might be higher. It depends on how fast we do our interest rate swap to replace those that is expiring, but on a policy wise, above 70%.

Can I just squeeze in my last question, just on divestments. I may have noticed one of your slides that in Beijing market, some companies are looking to buy their own buildings. Any possibility that, that could happen to your assets?

I think our asset is slightly on a bigger scale. So in terms of the catchment, it's got to be a investor base. Of course, there will be some owner-occupiers who are potentially can be suitable, but as of this market sentiment, I think the China side is a little bit more jittery, so where investors are a little bit more cautious. So I think I'm rethinking in terms of the timeline as to how well the timing of which because at this time, I may not get the best value out of it because people are waiting for a little bit more certainty after the Congress meeting. What I think I need to add is it's not a must that we need to sell. I think I did share that. It's good if we can recycle and make a gain and move on and do something else. If not, I think if you look at our occupancy and our sustainability of our leases, it is there. So I'm okay to keep. I'll be very delighted if I can make a profit and move on. So it doesn't 100% derail my plan, but I think we have to be a bit more mindful about the investor sentiments in some of the markets.

Rachel, do you have more questions?

I am good. I'll move back to the queue.

Next we can have Tan Xuan from Goldman Sachs, please.

My first question is on China office assets. We are seeing some assets selling at 30% below book. How worried are you on the China asset valuation?

The 30% discount asset, I think, was a bank auction. So it's quite unusual in the market. Most of what we are seeing now in our discussions with the valuer is that our cap rates and the discount rates should hold for the China market. Currently for Shanghai, it looks like the market rentals will still be fairly firm. We are hoping to see a little bit of improvement for the market rentals in the Beijing market over the next 6 months before our next valuation.

So I think the question you have raised, we can actually take it further to talk about what's our view or in terms of asset valuation and all. We have done our checks. I mean, we just check around with all the valuer in all the markets that we are in to see whether there is any potential changes in the cap rates in the coming months. I think what we are confident is there's not going to be major shifts in terms of the cap rate. So in terms of the asset valuation like what you are asking, are we very worried, I would say no, yes, because in any valuation, the 2 key components are the passing rent, MPI and the cap rates. So the biggest component in any valuation is always the cap rates. So if the cap rates are kept constant, big shifts in valuation is very, very unlikely.

My second question is, can you give us a sense of what you're thinking on reversions in Hong Kong and also China?

I'll touch on Festival Walk first, okay? I think in Festival Walk, it cannot just turn over miraculously from what it is overnight. I think we just have to be very realistic. It has done a minus 30. It's done a minus 20. We are narrowing it to about a minus 10. As I understand, in comparison to the Hong Kong retail market, this is not a bad number. Now, when are we going to see positive? It's very hard for me to give you a certainty, but what I'm saying is when borders open, my confidence level will shoot up very, very high because the percentage of our shoppers, which is the bonus part is definitely the Chinese shoppers rather than the foreign tourists. So from that -- if that opens, then I'll be more optimistic and our target, like I said, will be closer to the 2018 number, which we are currently shy in terms of sales of about 20% over. So right now I'm very hard-pressed to answer you as to when we will be seeing a very, very clear turnaround is because the borders need to open. When the borders open, I would say you give me a bit of time, we should be able to get there.

Just one last question on the all-in cost of debt. Can you give us a sense what's the weighted average cost of debt just for the merged entity and not for the first half?

Not publicly available information. Can I give her? About 2.43.

Next we can have Yew Kiang from CLSA.

2 questions. First one is on the utilities you recontracted. Can you let us know what was the outgoing rates versus the incoming rates that you are renewing? And how long are you renewing this for? Is it a 2-year or is it one-year or 3-year contract?

And then the second question is on capital. I think we've seen some of the peers doing DRPs, retaining cash and also even special capital distribution. So in terms of on debt run rate, are you thinking about anything about on that front in terms of top-up or retaining capital given that your gearing is also somewhere in the middle of the pack? So how should we think about in terms of your use of capital? So share buyback, DRP, or do you think that it's okay to pay out more capital top-ups there?

Okay. I take your second part first. I am not in favor of borrowing to pay out non-cash item as a principle. I think that answers your question. I'm not going to borrow money and give you (inaudible). Yes. So that is my first principle. There is no such thing as borrowing to pay out non-cash item, provided, I know that the non-cash item is going to realize to become cash in a very, very short period. Then maybe I consider, but to me, good news can always come together when the deal is done. So as a matter of principle, I think I kind of answered your question on the second part.

In terms of the utilities part, our utility contract ends in end October. We will have slightly higher over $0.10. We have locked in for 2 years, usually contracts are typically 2 years, closer to the mid $0.35. We have a 5-month impact. Maybe I make your life simpler in terms of calculation. It's about $89 million, 1 year impact is about $20 million, our OpEx is $200 million on an annual basis. So that's a 2% -- ballpark a 2% impact on the DPU on utilities and that is only pertaining to our Singapore site. Certain things that we can do. Not the entire portfolio is actually affected by utilities, it's majority the Singapore portfolio.

Some countries like Japan, we have already started to increase our service charges, but there's a little bit more limitation. So that's why we are unable to claw back all these increases in totality. So I think that gives you a context in terms of numbers and our thoughts in terms of service charge recovery. I think the market in Singapore, you have seen that all the retail big boys and all have made their stand that they are -- although they are increasing service charge, they are not going to be increasing the total gross rent I think in respect of the code of conduct that is going to be implemented soon.

Yes. Can I slide you one last one because looking at your NAV uplift and you're trading slightly below program, is share buyback something that you would consider?

No.

We can have Terence from Credit Suisse.

Can I ask MBC, Unilever space, you mentioned that it is difficult to fill, but I wanted to get Wee Leong's comments on -- I think the earlier comment about mTower and also how the other peer office REITs seem to be painting a strong picture for the office market?

So in general, the office market in the CBD has been extremely strong although we have been seeing vacancies come down and rentals go up over the last few quarters. In the suburban office market, we are seeing spillover from that. So as rental rates go up in the CBD, people start to look at potentially relocating out of the CBD so that they can achieve what I'll call it 10%, 20%, 25% savings in rentals. So on that note, like I mentioned during the presentation, mTower is benefiting from this. So we are seeing small tenants; 1,000, 5,000, 10,000 square feet tenants moving out of the CBD into locations like mTower. The business park spaces is a slightly different market and that's actually very dependent on a certain class of tenants. In the past MBC was very dependent on technology tenants as well as financial institutions.

As you're well aware, the majority of the financial institutions are not expanding. So we have actually been quite lucky in being able to retain the majority of our -- majority not all of our FI tenants. On the technology side, our tenants have so far retained their spaces so we updated earlier that Google had already renewed their lease at NBC. But getting new tenants has been a little bit more challenging. Your large tech tenants like Seiko and all those people have not been expanding out the CBD. So getting large format spaces have been little bit more challenging in the last few months, but same with mTower. We are seeing smaller BP tenants come through so you're 5,000, 10,000 square feet, 15,000, 20 square feet of space; that's actually been quite okay. But the Unilever space is not small, right? It's 90,000 square feet of space remaining.

Okay. I think if we put into context MBC, we are talking about 1 million square feet plus another 1.7 million square feet. We're talking about 2.7 million square feet of space. Unilever, we have done a portion of it. No doubt there's still about 90,000 square feet, but in a whole context it's not that a big thing. But we have always been tempered in a way of 100% so now currently seeing like 90% something, we get a little bit uncomfortable. But please do not read too much into it. Long term definitely, I would say, MBC has its spot in the market. The other thing is for MBC, we typically try to refrain from cutting into very, very small lots because we like a certain type of tenant to fit the requirement. MBC, you don't see very, very small lots. I think there's beauty in keeping to a certain size. For example like Vivo -- give you an example.

At the start of VivoCity, everybody will say Oh, Vivo's got very huge lots; they're going to be in trouble. And everybody say that cutting PSF smaller spaces, you get a higher PSF. I don't deny that. But if you see over the cycle of things, VivoCity have emerged much better. It's because we never go down to the route of going into micro tenancies. So that's where we can actually attract brand that wants to have a flagship store. So kind of similar to with regards to MBC and the nature of the market that we're in for the type of tenants that we are gunning for. So now may not be a little bit best time, but it's not catastrophe. Our properties are still doing very, very well at 90%-odd. It's just that we have always been 100% and we're getting a little -- and it's a little bit discomfort. But it's small out of the whole context. MBC is 2.7 million square feet and we are talking about a shy of 100,000 square feet.

Okay. Got it. And can I check also why is the gearing currently higher than I believe it was 39% that was guided initially in the merger presentation?

Yes. In the merger assumption, we assume that we will be issuing $200 million of perps to fund the merger, but that did not happen because of where the market are. So we also have a footnote there to say that we are actually put in place a loan facility and we can actually totally take these off using a loan. So we have funded the merger entirely using borrowing hence the higher gearing.

The point of taking on the acquisition debt, whether it's perps or otherwise, the perp market shot off the roof which we thought that it was not within our expectations and the prices were just way too high for us to look like our gearing is a few percentage -- a few bps down while cost is way too high. So we took -- we went on a cost basis and of course the gearing itself actually do show up slightly at 40.1% as opposed to the 39%-ish.

Next on the line we have Celine from Daiwa.

I'm just looking at Festival Walk revenue of $42.6 million. If we were to analyze it and Festival always just seems to recover almost back to pre-pandemic level. Can you actually provide us colors on any rental reversions that you -- rental waivers that you've given out as well as for other assets?

Rental waivers have predominantly stopped. I think if you're talking about interchangeably the term rebate, only Singapore assets especially Vivo especially. A little bit is left for the Arup and MBC retail, which is very, very small because not 100% of the office occupants are back. But they are very small sums. We're talking about like $20,000, $30,000 kind of issue. So the millions and millions that we were dishing out during the COVID period for VivoCity is totally off, no more. If you're talking about Festival Walk, I think the Festival Walk took a different strategy, which is according to the market. So if you talk about is there any help that we are giving in terms of the rebate? No. That's why they are showing more in terms of the negative reversion. So it's a different strategy of Vivo versus Festival Walk. So I would say no. As of now, there is nil that I know of in terms of rebates given to the tenant.

Is there any update on the Seiko lease?

Okay. Seiko lease is still there as a master tenant and that is 2024. I think it's always open in the market that they may be leaving. So that's where we started talking. There's also subtenants of them -- not subtenants, other parts of their business that still want to stay. Between 20% to 30% of the building -- of different parts of Seiko that still want to stay. So the lease is up to 2024.

Okay. And also just going back to the gearing question where you choose not to issue perps. Will you go back to issuing perps when the costs go down for the perps market?

We are always open for all options, yes. I think bottom line is when we look at debt: cost is one, maturity is another and diversity is the other factor. Sometimes bonds may be better, sometimes bank loans may be better. But we're in a very interesting period now. The good old days of as long as you want is the better strategy. Everybody tried to push the cost and go on as long as possible. Right now will be a very interesting period. It's your read on the market as to how long you want to -- when do you think that interest will taper off and how much do you -- how long do you want to lock it for? Do you dare to lock it 6 years, 10 years at this rate. So I think that is a burning question for most of the CFOs on the ground now. They know interest rate is going up. How long is it going to go and how far up is it going to go and the decision is how long do you want to lock? So I think that is still up in the air and the tenure will be a very, very valid question for most of the CFOs to go ponder over as to how long they want to lock their debt. I don't think any CFO has an answer today.

So before moving on to questions from the web, can we pass the mic back to Terence from JPMorgan again.

Going back to Festival Walk and thank you for sharing the tenant sales data. I wanted to ask with tenant sales down like so much from pre-COVID or pre-2019 levels, what proportion of Festival Walk leases are still from the era that means from the pre-2019 era? And how should we look at the recovery of tenants? Let's say if the borders were to reopen, will we reset back to 90% or would we go above pre-COVID levels?

This is Mun. I think it's a difficult question to answer because like what Sharon has mentioned earlier, a lot is actually predicated on the COVID situation in Hong Kong right now, whether the borders will be open or whether the social distancing measures will be relaxed. We were in Hong Kong a couple of weeks ago. Everywhere we go, we need to actually scan. It's quite similar to Singapore a few months back. We have to scan a safe entry before we go into a mall, before going to a hotel. So it's the same situation right now. So things is a bit challenging. As to how much it will recover, I think we do really hope that it can recover back to pre-COVID level in 2018. But as to the timing as to where it can happen, it really depends on where there can be more relaxation on the social distancing restrictions as well as the border opening.

And also on my earlier question, what proportion of leases are still on pre-COVID rents?

So about 10% of those is still before the pre-COVID. But then again is that I think what we need to be mindful is that I think Hong Kong has gone through a very prolonged period of challenges. From 2018 there was the social incidence and then immediately it was followed by COVID for a few years and then there was of course the heat wave that was happening in the beginning of this year. So it was a very prolonged period and then tenants is also feeling a bit of the fatigue. So back to your question, whether how many proportion of the tenants is pre-2018? I think it is a reference point, but I think it might be difficult to actually use that as a construction to decide where the reversion will go going forward.

Okay. And maybe on a more positive note, could you share a bit more on the AEI for VivoCity in terms of the CapEx and the timeline?

Maybe if I can just add to the Festival Walk one. Just a few markers. We are about 30% from the pre-COVID sales level of 2018. So that's 1 target. There's another 10% to go. How long? When the borders open, you got to give us some lead time -- you got to give us some breather because we have to -- the balance of leases have to go before the malls will start coming up. But we remain very confident and we put it as a core asset for good reason. I think it suffered for deco issues. But fundamentally as a mall itself, it still has its presence and its (inaudible).

That's why it still remains as a core asset for us in side-by-side together with Vivo and MBC. So it's not all doomsday. And the other comfort that you can take is you look at the sense of the third party which is the valuers outlook, for us we may start -- because we are at the operating level. They are the ones that have a macro outlook as to where they see the whole entire Hong Kong are going. I take one comfort off them, which is the maintenance of the cap rate. From what I see in the cap rate, there are unlikely to be major changes. So that is a positive view in my term when I read third-parties experts applying valuation cap rates on assets, which is actually a reflection on the view of the market going forward.

On the Vivo, I think if you go to Vivo today, I think the times has really been hard. I think we are starting and commencing on this AEI. We are expecting to complete it by mid-2023. The total CapEx we have estimated is about $13 million.

So this is one of the large pieces that is part of our continuous exercise to serve the mall. I think if you remember long time ago, a couple of years ago, we forced in and constructed the escalator and I think we did guide the market is as a prep in case I need to do -- we need to deal with the big anchor spaces. I think the time is due that we exercise this portion and I think it's a very, very good addition. We have signed up close to about 50% of the tenancy even though it's in a COVID period. I think that's a good testament of the standard of the mall, Vivo City. It will be quite interesting because it will be a mix of department store, F&B and very nice 2 higher luxury not fashion, but I'm talking about makeup brands cornering the -- fronting the 2 key lots, yes. So we have started. By next year after Chinese New Year, I think you should be able to see something. You'll be on it.

Looking forward to the new shops in Vivo. Also just to share, we were actually at the -- 2 weeks ago. So it seems like food court can do better. But yes, I think we could do with more foot traffic from China too. But yes, looking forward to seeing improvements in Festival Walk and hopefully there will be better news to come going forward. Just one last question from me.

Terence, just the question, you said that the food court can be better. Do you mean that the food court is not good enough or the food court is doing okay? What is not good?

It is not good enough.

Actually we are doing very well on this. When I look at the food court, it's unfortunate that the structural, there is some capping in our ability to expand the space. The operations of the food court and the numbers that they are pulling in is very, very good. It's very, very good. It's a reverse from your observation.

Okay. Actually come to think of it, there was very good traffic there. I was not allowed to eat in as you may well know so I was just standing out and eating. But I noticed that actually some of the restaurants, F&B outlets did have not so great traffic so it was less than 50% at dinner time.

Okay. It depends. If you go to the food court -- the place that is next to the food court, that is more a breakfast and lunch place. So if you were near the food court and you look at it and you say hey, it's not 100% full. That restaurant is more breakfast and lunch. If you go at 9 a.m., you will see the difference and you will say that hey, at 9 a.m. is so full compared to downstairs which is empty. So in and itself if they're very near the food court and a huge tenant, he is doing the daytime business.

I just have to visit Festival Walk more often. Just one last question maybe for Janica. I wanted to ask on the perps. Could you share -- I understand that the interest costs have been swapped to Japanese yen. Could you share what's the sort of like interest cost for the perps because I noticed that it does move?

You mean existing perps?

The MPACT parks.

Okay. I think in Sing dollar, it's 3.5% and if you hedge that into Japanese yen, it's about 100 basis points lower.

We shall now move on to the questions that have been posted on the web. First, can you comment on the expected lease period in months and the level of lease incentives for China office properties and the other office properties?

Okay. So let's take Singapore first. For Singapore, the only incentives which we are generally giving is a fit-out period for new tenants. So rental rates aside from that are fairly marked. For the office tenants in China, so Sandhill and Gateway are little bit different cities and different market dynamics. For Sandhill, the incentives are fairly minimal. For 24-month or 36-month lease, we may not even give any incentives. The Beijing market is a little bit more shaky and recovery is a little bit slower there. What we are seeing is generally for a 24-month or a 36-month lease aside from fit-out periods, we may have to give between about 1 to 2 months, maybe as much as 3 months rent free as an incentive to tenants. So we are talking about say about 10% of the lease period.

The rental reversion has been pretty strong. Can we expect the same going forward?

The Seoul office market right now is there's no supply, very limited supply and then that's why we can see such positive rental reversion. So for TPG, most of the office component is actually fully occupied, right? And then most of the lease has been actually renewed. I think for next year there's only a small proportion of lease to be renewed. But yes, we do still believe to see a very strong reversion going forward given that there's no clear supply coming on board in Seoul office market especially in Gangnam.

The next question relates to our divestment strategy. Does the management have a divestment target in dollar terms and are the China properties considered core or noncore?

Okay. There is no dollar terms in terms of the target. When we assess, we look at whether we should keep it, where is the sustainability of the numbers before we decide if it should deserve to be in the bucket that we keep or the bucket that we divest. So that's a matter of principle. So I take the question in another way is what is our core asset. Our core assets are VivoCity, MBC, 1 and 2 and Festival Walk. The rest are not within the core list. So if it is worth keeping, we will continue keeping. If it's not worth keeping, we will look at -- we will consider recycling at relevant times.

Continuing on the asset divestment strategy. With a drop in the valuation of Japanese yen, how will our recycling strategy change?

I think we should look at this in 2 ways, right? I think currently there's still high investors' interest in the Japan market because of the low currency and as well as the low interest rate. So I guess it is actually a very conducive and positive environment for our rebalancing strategy in Japan. I think for our Japan assets we also have a natural hedging. We have actually borrowing. So I think that will help to mitigate some of this FX impact from the recycling strategy in Japan.

Yes. I think the only downside if we were to divest Japan is we are moving up from the lower so-called net regime if the market is ultra-low interest rate. But of course when we recycle, we will be -- we might be recycling into Japan again.

So Japan is funny. I would say that it's a market that currently looks interesting by virtue of the interest rate not in terms of market dynamics. So if you talk about pure fundamental market dynamics, it's always been a very, very flattish kind of market, which a lot of investors in the good old times when there are better growth rates elsewhere, Japan stacks up very badly. But in today's context, Japan stacks up well because of the positive interest, positive yield spread. So I would say that Japan looks good in today's negative macro environment and it's the only market that has got a positive yield spread. While the rest of the markets although back then was a good market has gone on a reverse, so each market will have it's good and bad times. So Japan now for us as such -- like I said, our strategy move for Japan is to deconcentrate certain areas where we can and to improve the quality where we can. So that has always been a medium to longer-term target for us.

So what would be the all-in financing cost for the quarter and what would be the cost of borrowing now for 3 to 5 years?

For the quarter, I think I answered it just now, it's about 2.43%. Financing cost for 3 and 5 years, I can only say that based on what we have seen or based on what I've seen or received from the bank, OE margin is expanding in a region of about 10 bps to 20 bps across all currency except for Japan.

There's another follow-up question from Xavier, Morningstar. What is expected? What period you see for China office properties and Singapore office properties?

I assume that you're asking about downtime between leases and so for the nonrenewal leases. So it really depends on the spaces that we are talking about and the sort of demand that we are seeing. So let's build it up a little bit. For Singapore for the smaller spaces, we are probably seeing downtimes of between 3 to 6 months. For the larger spaces, unfortunately we have been seeing downtimes as long as between 9 to 12 months. China: China can be a little bit volatile. We have a lot of spaces that practically have no downtime between leases, but we do have some units which because the configurations are a little bit different and the spaces are configured differently from the rest of the properties within -- rest of the units within the property, those units we have seen a little bit longer downtime.

But the more regular units, your smaller sized units especially at Gateway or the tower units at Sandhill, those downtime can be very short back to back 1 to 2 months, 3 months for the unusual units, the single block units at Sandhill as well as the loft units as well as one of the units which have unusual configuration at Gateway and downtime is a little bit longer, maybe 4 to 5 months, 6 months.

We have another question regards to capital management. Is Janica able to give a breakdown of fixed rate debt by currency?

Fixed rate by currency, okay? I think we have a chart there, right? Yes. On the floating 27%; 14% is unfixed is SGD, Hong Kong is 11%. If you want me to read out; it's about 70% Hong Kong, 70% Singapore.

One more question. So if we do the pro rata preop distribution of MCT pre 20th July versus the incremental distribution that accrued post-merger, can you comment on the amount between these on a per day basis?

Okay. I think conceptually what I can share is operations-wise, we are better. If we talk about the Singapore assets wise, it's performed better than previous quarters. So what has shifted the number slightly down? If you come on a per day basis, it's definitely financing cost from last period over this period. Financing cost is the biggest hit in terms of the variance resulting in the period, the slight variance.

If I may add on. Be it now with a merger or without the merger, MCT will be hit by the interest rate hike.

The last question actually is for myself. What are our plans to invite institutional investors to invest in MPEC shares?

So I think whether or not the market regardless of how it moves, we are always doing very proactive engagement with investors across the world not just in Singapore. So with the lifting of the COVID restrictions in Singapore, we are actually planning to actually participate in a lot more of these conferences and to reach out more actively to institutional investors.

So looking at the time now, I think we also do not have much more questions. Can I just do a final round for the analysts who are online now? Do you have last questions before we close the session? So if not, we thank you very much for your time for dialing in and for your continued support in MPACT. If you have further questions, feel free to just drop us a line and we'll definitely get back to you thereafter. Take care and have a great weekend ahead.

Thank you. Bye.