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Edited Transcript of 1972.HK earnings conference call or presentation 16-Mar-17 9:45am GMT

Thomson Reuters StreetEvents

Full Year 2016 Swire Properties Ltd Earnings Presentation

Hong Kong Mar 16, 2017 (Thomson StreetEvents) -- Edited Transcript of Swire Properties Ltd earnings conference call or presentation Thursday, March 16, 2017 at 9:45:00am GMT

TEXT version of Transcript


Corporate Participants


* Guy Bradley

Swire Properties Ltd - Chief Executive

* Michelle Low

Swire Properties Ltd - Finance Director


Conference Call Participants


* Karl Choi

Merrill Lynch Bank of America - Analyst

* David Ng

Macquarie - Analyst

* Jonas Kan

Daiwa Securities - Analyst




Unidentified Company Representative [1]


Good afternoon, ladies and gentlemen. Welcome to our analyst briefing. Today's briefing will be hosted by Mr. Guy Bradley, Chief Executive of Swire Properties; and Ms. Michelle Low, Finance Director of Swire Properties. Guy and Michelle will walk us through the annual results, followed by a Q&A session.

Before we start the financial review, as in previous year, we'd like to show you a video which showcase our development highlights last year.

(Video playing).


Guy Bradley, Swire Properties Ltd - Chief Executive [2]


Good evening, everybody, and thanks, [Wayne]. Well, same team up here as you've seen for a couple of years, so I guess that's good for consistency of strategy as well.

I'm going to, as usual, take you through the briefing notes, which I think you've probably all got a copy of. I'll go through reasonably quickly. I'm sure that you've had time to have a look at that. Michelle will cover the financial parts of the briefing and then we'll go into Q&A.

The first slide here just shows the key developments. Most of them are familiar to all of you who've been following Swire Properties for some time. But I think the key message here, you've got Brickell City Center opening last year, East Miami as part of that development. You've got the completion of Alassio in the mid-levels, our HKD15 billion development down in Taikoo Place in Hong Kong on the office side, announced last year. And over in Shanghai you've got the in-stage completion of HKRI Taikoo Hui.

The next slide -- the next picture there is the sale of the office building that's as yet uncomplete in Kowloon Bay, which goes to show that Swire Properties, from time to time, does sell assets, especially when they're deemed to be in a non-core part of town. And Brickell City Center, there's a mall opened in November.

I think the main takeaway from just going through this and looking at -- it's not just that these are great projects, but I think it's just to show you all that there is stuff happening in all of our major markets, Shanghai, Brickell City Center in Miami, and over here in Quarry Bay. So the Group, the Company continues to invest in those major markets, and we're doing some really powerful things with these projects.

Just diving into the financial numbers, the bottom line here. I think it's a year -- 2016, I think we'd describe it as a very solid performance, a solid set of results in quite challenging times. The underlying profit grew, as you can see, by 0.5% versus the prior year.

Other key notable pieces of information that are shown on here I think are the bars in red that show there was a slight decline in gross rental income on the retail side for reasons we'll come to a bit later. At the same time, the office side, in gross rental income, grew in spite of some of the changes that we're making in Quarry Bay where we're losing some rent for a while.

Dividends were flat, in the bottom right-hand corner there.

The next few slides really just are different ways of summarizing the overall result, so I won't go through this line by line. It's all there for you to see.

I think perhaps on the earnings reconciliation chart it might be of interest just to point out that the -- what's happened in terms of the water flow of underlying profit between 2015 and 2016. The first drop is on the Hong Kong property investment side. And that's triggered two things.

There's been a little bit of a drop in the retail rent from the Pacific Place sales and also, as I said, the last -- lack of rental income coming out of the former techno center buildings in Quarry Bay as we get ready for the opening of One Taikoo Place and Two Taikoo Place. And that really accounts for the small decrease in profit that we got from the Hong Kong property side, notwithstanding a very, very solid and robust performance on the actual offices that we are leasing out.

I think the other points of note on there really, the HKD189 million drop comes -- stems mainly from the pre-opening costs at Brickell City Center. We've learnt now over the years, these are big animals to open and get going and sometimes they take a little bit longer than we thought they would. But it's actually a great product and it's now up and running and looking very good.

The increase of HKD93 million there is obviously also due to the trading side of the business. And the increase over last year was -- over the year before was driven mostly by Reach and Rise over in the USA, which -- where we booked a lot of the profits in 2016.

But overall, a reasonably small increase on prior year in underlying profit. But that, as I say, that reflects what we think is a very solid performance in fairly challenging conditions.

If we just look at the next slide that details the movement in the investment properties, you can see that the fair value gains on the right-hand side were about HKD8.4 billion increase, driven mostly by the valuation of the office portfolio in Hong Kong.

There's a HKD6 billion decrease in the -- from disposals, which, as I mentioned, is largely the Kowloon Bay office disposal.

If we just focus on the growth rental income for a minute, I think the main story I'd like you to draw attention to on here is Hong Kong office. It's -- there are -- it's enjoying at the moment positive rental reversions in 2016, continuing into this year. Despite those buildings being demolished, the rental income is growing. And I think that's a very positive story.

This whole decentralization theme I think you're going to hear more and more about. It's obviously driven by Taikoo Place. You're obviously seeing a little bit of it in East Kowloon and you're seeing -- starting to see signs of it in places like Wong Chuk Hang. But the biggest cluster of office on Hong Kong Island, outside Central, is clearly in Taikoo Place. And that decentralization is going to become an exciting story as the next couple of years unfold.

Just Hong Kong retail, we're still seeing softness, especially at the luxury end, as I think everybody in the same business is reporting. But I think we're seeing early signs of improvement in that what's been a very tough two or three years on the luxury end of Hong Kong retail.

And there's been a lot of changes. We've reacted very quickly I think as a team in terms of making changes at Pacific Place to adjust to the changing consumer preferences. And I think you can probably see quite visible signs now of some of those changes that have taken place and there's clearly a new buzz about the mall downstairs. And so we're cautiously optimistic that we've seen the worst of those soft retail figures.

The third box down there is about China really, and it's been a very, very solid story indeed in China in terms of growth. We're really happy. We've got four of our five investments in 2016 were up and running and generating good growth in sales. Most of them are retail led, of course. But the retail sales growth was good and the rental reversion track record was also very positive. So we're -- we've got a great story going on there, notwithstanding the renminbi, which obviously, when we translate that story back into Hong Kong, impacts us a little bit.

And I think the key number to draw, although it says 2.4% growth in gross rental income, if you look at the footnote at the bottom, where we add in our 50% joint ventures so you can see an attributable growth, the real number there is 6%. And that's, again, before the conversion back into -- that takes into account the impact of the conversion into -- from renminbi to Hong Kong dollars.

So the -- it's a very good, positive story all round I think in Guangzhou, Beijing, Chengdu, and we hope this year in Shanghai. And I'll get onto that in a minute.

Just focusing a bit on Hong Kong office, I mentioned that it's really exciting to see the whole Taikoo Place development coming out of the ground. I think the key lines on this chart that are noteworthy are the fact that we're pretty close to fully occupied, so that's a very good situation to be in I think at this point. It's obviously showing the resilience of the market and our products within that.

And the reversions that you can see on the second line there, both in Pacific Place, down in Quarry Bay, in Taikoo Place and at Cityplaza, are all very positive.

So I think the real takeaway here is that the office portfolio for us is going well. It's a major part of our rent roll, as you all know. And we have good prospects I think ahead for what we're doing and where we're putting our capital.

Retail figures mention Taikoo -- Pacific Place, sorry, 12.8% down in sales growth, slightly better than prior year. But I'd say that early days in 2017, but just looking at the figures for January and February in Pacific Place, they're better than what you're seeing there. And we are seeing these early signs of more visitation in the car parks, more footfall coming through the mall, better traction on the marketing programs. And so, as I say, it's just -- it's starting to look positive and I think you can feel the change as you go through the mall.

This is a fairly familiar chart. I think we show it -- we've shown it for a long, long time because it continues to be a consistent message and theme for Swire Properties. It really just points to the strength of the -- and the diversity of our tenant base.

We're not wholly dependent on any sector, although the financial institutions, in the blue bar there, at 38.9%, that's a lot lower than certain other property landlords might be showing. And we go out of our way to make sure that we keep that balance and that diversity because I think in good times and bad, diversity is good.

And we keep a balanced lease expiry profile as well, which I think is very important as well. So you get to see that we normally don't like to get out of sync so that we're having to renew too many leases in the same year. That's never normally a good thing, and we've gone out of our way as a team to spread that profile over the forward few years. And I think that's also a sign of consistent health.

If we just look at the property portfolio in Hong Kong generally in terms of GFA, the increase of 18% over the next five years I think is great. It's very exciting. We've talked about that. The large part of the increase is the 2 million square feet going into Taikoo Place.

Supply in Central does remain constrained. Tenants are starting to look increasingly for better specification. They're looking for more space and they're looking increasingly for reduced rents. And we're not seeing that in Central at the moment and I think that's why you're going to see a lot more movement down to Taikoo Place because the quality of what's being built down there in terms of specification is going to be world class and the amount of space and the rents are going to be very attractive.

So you're already seeing signs. I think you've had -- seen some recent announcements of some fairly significant names not just being interested in Taikoo Place, but signing up to make the move. And I think that's the thin end of the wedge really.

I think you're all familiar with this one. This just charts the fact that, in addition to Taikoo Place in Quarry Bay, we are building an extension to Tung Chung. Town Lot 11 is the detailed name of the extension.

We have a 20% share, as you know, in the consortium that owns the Citygate development. We manage it and we're doubling it in size, basically, so it's going to be a real retail expansion. And it's been a very successful, certainly in the last few years, outlet mall, which will continue to grow as and when good things happen in Tung Chung. And I think we have a fairly positive view on that.

And, interestingly, I mentioned Wong Chuk Hang. The opening of the South Island Line has been very good for Pacific Place, but I think it goes both ways. It's also opening up Wong Chuk Hang as an area of potential alternative office location. And we're building 380,000 square feet of office accommodation in Wong Chuk Hang. There's no particular one set of ownership that dominates in Wong Chuk Hang, but 380,000 feet is a -- will be one of the bigger spaces to lease out. And so we're quite optimistic about that.

I'm just going to spend a bit of time here on Mainland China because, as I said, it's been a growing and increasingly solid story for us. The valuation on an attributable basis of what we've got at the moment now is HKD43 billion. That's not a small number. We're very pleased about that and how it's growing.

The retail sales, in the green boxes there, on the four centers that we have got open, year on year have grown at really impressive clips. Obviously the Chengdu 78% is off a smaller base because it's one of the newest malls that we've got. But when you're even seeing malls like Sanlitun and Taikoo Hui growing at 6% and 10% year on year, these are malls that are in their third -- second, third, fourth leasing cycles. And these are great scores.

There's -- and I would say that there are good things still to come in all of those places. We've got plans to continue the re-tenanting. We've got plans to revamp the anchor tenancies in various places, and there's some great plans going on in the malls that we've been open the longest.

I think the other exciting point here to note is Taikoo Hui Shanghai, which is the newest and the fifth investment that we've got, which, as a shopping mall will start to open on a soft opening basis in about May and will continue to open throughout the summer. The leasing situation there is pretty encouraging. We're about late 80%, about 88% let now on the retail side. We're about 64% let on the office side, with another good 10% under serious negotiation. So those are really solid scores I think at this stage.

The mix of tenants in the -- on both the office and the retail is really diverse, which is healthy. Shanghai is a super-competitive market, especially on the retail side at the moment. So bringing a diverse trade mix and a real lifestyle note to Shanghai, to Nanjing West Road and Puxi in general, I think will be the right way to go. It's certainly going to be very exciting for that part of town.

We've actually got over 250 brands in the mall, of which about 45 are going to be F&B. And those of you that know Nanjing West Road will know that there's room for lots of good F&B. And 15 of those tenancies are first time in Shanghai. So we're still able to bring into a place like Shanghai great names in both F&B and just lifestyle generally that the market doesn't have. And that's really exciting.

One of those names of course is Starbucks. And there's lots of Starbucks's in Shanghai, but there's no roastery. And the Starbucks' roastery is just about the most special thing that they do. They've got one in their hometown of Seattle, and the second one in the world will be open in Shanghai in Taikoo Hui. And that will be really special, and go and see it. I'm not going to ruin the excitement, but it's going to be a real fantastic anchor for the mall when it opens.

The City Super supermarket will be the largest in China. There'll be a Tesla flagship store. There's some great products and great brands going into the retail space there. And we've actually got -- just to show how big it is, we have actually got over 13 areas set aside for special events and activities in that mall.

So it's going to be just absolutely fantastically well located. It's going to be really convenient, connected on the metro. And we're going to be able to provide a whole range of activities, which is what we think a good lifestyle mall requires. And this is in the heart of Puxi. So we're really excited about what's going on in Shanghai as that unfolds this year. Sales story done I think on that one.

This next chart just shows the growth of our property portfolio in terms of gross rental income. I think the impressive figure there in the last five years is that we've almost doubled the gross rental income. It wasn't that long ago -- when I went up to China in 2010/2011 we didn't have many of these centers open. And to be able to double our GRI to just close to HKD3 billion, it will hit HKD3 billion very quickly, in five years is a fantastic result for the China team. I think they've done really well to achieve that. It's a real proven track record of execution I would say.

And the other point of note on here is just on currency. As I said earlier, the 6% growth on attributable rental belies a real 12% growth in performance. It's only when we lose that in exchange rate that we get back to 6%.

And also, we opened Shanghai. That's the five investments open. We continue to want to do more, and we do have a potential pipeline of projects and we've framework agreements in place to do more in China. So there is clearly an appetite as and when we find something suitable to continue to invest.

Just bear with me again on Taikoo Place. This really is game-changing stuff. I just wanted to show the plan here just to demonstrate that we're not just in the business of putting on extra office space. We're also creating lots of open space.

The area of Taikoo Square, when it opens, which is the green area in the middle of that chart, will be equivalent to the same area of Statue Square in Central. It's about 70,000 square feet. It will be huge.

It's easy just to sit here and say we want to squeeze every square foot out of the office portfolio, and we do. But actually providing a quality environment like this is what it takes to build a real transformational change and a game-changing change in a market like Hong Kong because open space like this is in really short supply and it's not easy to do. And I think it's really well valued by residents, tenants and staff.

Just to finish off on this, this whole decentralization theme, I think you can see -- get a flavor from the pictures here that we mean what we say we're going to do. We do all this with very close cooperation with the District Government.

We think about culture, ArtisTree which has been there a long time is now going to be reprovided as an arts center and exhibition space. And they put on a lot of great cultural events and Zaha Hadid's event's going to be coming up shortly. These all add to the kind of quality and the worth of the neighborhood.

And I've mentioned the open space. I think it's good for the residents as well. So we're really excited about what's going on in Taikoo Place.

It will open -- the OP is in mid-2018. Before you ask questions, it's too early for us to announce any specific leasing details about One Taikoo Place which will be the first of the buildings. But we've been inundated with interest on that ever since the -- well we've been -- we had a lot of interest for a while. But ever since the -- some of these big names have started committing to Taikoo Place generally, the level of enquiries has gone up exponentially. And so we're dealing with a huge amount of very serious interest in One Taikoo Place right now.

Switching across to the other side of the world, you're all aware that we opened in Miami. The shopping mall is 91% leased. It's about half open at the moment in terms of what's trading.

Saks Fifth Avenue looks absolutely fantastic. The next big event in a couple of weeks will be opening of probably the sexiest cinema in Miami which will be great. It's going to be a real high end affair where you can eat inside, luxury food and just a really special addition to what doesn't exist currently in Brickell.

And then there'll be an Apple store opening thereafter. So we've got some really good traffic draws coming into Miami.

The office side, which is relatively small in the whole piece for now because we've only got two towers at called Two and Three BCC offices and they're largely full in a tightening office market.

And why is that good? Well it's tightening because everybody's been building residential. So there's been a lack of supply on office. And that kind of leads me on to the second chart here which actually shows that we've got more to come in Brickell.

So once we've finished this first phase, there's a very large amount of area that we can build across on Brickell Avenue there which will be probably about half office at this stage. We haven't finalized the exact GFA mix. But there's an opportunity in a tightening office market to add to supply there as and when. We've bought the land already. We just need to decide when to push the button on that. But more to come in what's a very exciting story going on in Miami.

Those of you that have been there will realize what's happening. But it's -- the picture shows it really. That's pretty much all of Brickell City Center. It occupies five city blocks and it's transforming. It's moving the CBD south of the river slowly and it's also moving people off the beach into the urban downtown. And I think that's -- that's just because it's convenient. And this is something that I think the city of Miami is getting really excited about.

Just a word on trading. This year in 2017 we're expecting to book the profits on Allasio which we sold which was our last mid- levels project last year sold -- fully sold out, 197 units at a good average price of over HKD30,000 per square foot. And that will hit profits in 2017.

And that -- all that remains in our trading portfolio for Hong Kong at that point will be the unsold units of Whitesands which is 26 houses that we have in South Lantau. We're not sure yet when we'll put those on the market but that could be a 2017 event. We're studying conditions pretty carefully on that.

And we, back in Brickell City Center, we're about two-thirds sold in the combined towers of Reach and Rise. You can see the figures on there. Reach was the first product. We sold 90% of that at mid-$600 prices per square foot. Rise came next. We've sold almost half of that at high $600.

So I would say sales' momentum in Miami has been slowing down for the last 12 months for sure, driven by a strong dollar. A lot of the buyers come from non-dollar economies and therefore, it has gone a bit slower. But we are pretty much the only guys in that area with products.

We haven't got too much left to sell, just about a third of the building or 200 units. And we expect to sell that more slowly, but certainly at some sort of pace over the next 12 to 24 months.

I'm just going to take a pause there and hand over to Michelle just to cover the finance side of the house and then I'll come back and talk about the prospects.


Michelle Low, Swire Properties Ltd - Finance Director [3]


In the year of 2016 our gearing has increased marginally from 15.3% to 15.6% driven by an increase in the net debt of HKD2 billion and also some profit retaining and also revaluation surplus.

And worth noting as Guy mentioned our rental income continued to be very strong. And also on the trading front as out of the HKD4 billion a substantial portion relating to Miami. And for the CapEx, we continue to invest heavily in Taikoo Place and also in fact that's also including our investments in Miami as well. The development costs relating to Miami mostly and also some Allasio developments.

And also, or if you just look at the interest cover, in fact this is the highest over the -- since we got listed. We are in a pretty good position in terms of the interest cover. We have good earnings and at the same time in fact as the interest expense has reduced partly because of the interest rate impact in the year has been helping us.

Lower interest rate on one hand and on the other hand in fact in China we continue to pay off debts for Taikoo Hui and also Sanlitun from their strong operating cash flows.

In terms of our maturity profile you note that in fact this is pretty well spread and in the year of 2017, in fact the total number of HKD7 billion that we have already lined up activities for the refinancing. In fact the green section of HKD2.3 billion is the perpetual bond which in fact we will be redeeming which is the expensive interest rate -- close to 8% interest rate. And we have already raised some money which is at 3.5% to replace this bond repayment.

And USA, well, we have already lined up the refinancing of the Brickell City Centre project financing loan.

And overall in the 2016 in fact we raised close to HKD11 billion debts and at a good interest rate for the HKD1.2 billion Hong Kong private placement. The average rate is around 2.9%, or short of 3% in short.

And for the HKD500 million medium-term notes of 10 years that we raised that below 3.5%. And this is important for us. In terms of the fixed to floating ratio, we right now at 63% fixed versus 37% floating. But this includes the renminbi floating in China. Excluding the renminbi, we are close to 70% fixed which I would say would be quite healthy.

Of course if we look at the liquidity headroom which are on a floating basis of close to HKD10 billion, had we continued to draw down those revolving facilities, then even for the fixed to floating that would be 50% plus versus 40% something range. So still following our guidelines of 50/50 fixed to floating.

And credit rating, of course, we are keen. That's the investment grade A rating will continue to be maintained. And I think given our situation -- our own situation -- the financial metrics are in pretty good shape.

And subsequent to 2016, in fact we raised also some good monies in the medium-term notes of close to 3.1% on average.

This is the capital commitment which is we had HKD18 billion capital commitment, a substantial part of which relates to the Taikoo Place redevelopment and also our attributable share of the Wong Chuk Hang and also the Tung Chung development.

Mainland China has just continued to spend for our Dazhongli project or in Shanghai -- USA for the Brickell City Centre. So we are expecting that we will be spending some HKD7 billion in 2017 with the remainder over the course of the coming seven years.

If I just pass back to Guy.


Guy Bradley, Swire Properties Ltd - Chief Executive [4]


Thanks Michelle. So just in terms of prospects I think and to sum up before we take Q&A, I think you've seen a good project pipeline that's coming to fruition over the next couple of years nicely spread across the major markets, Shanghai, Quarry Bay, Taikoo Place and Miami.

So those will really kick in, those three big projects, when they start generating rental income and that will be really positive when that happens in terms of pipeline. Meanwhile you've got an increasingly strong Hong Kong office play I think. Again based around this decentralization theme.

Good growth continuing from China and to add to which will obviously be the Shanghai project. But the existing four are showing signs of continuing to grow from strength to strength and we're very excited about that. And an appetite to do more in China.

And meanwhile I think you can say -- we can say that the Hong Kong retail decline is certainly stabilizing as far as we are concerned. We've invested very heavily in the trade mix changes both at Cityplaza and in Pacific Place. And we're investing in Citygate in terms of capital.

And so I think we're starting to see -- as usual when we make these big investments we're starting to see some really exciting new changes to the retail scene. So it will be great to watch that unfold over the next couple of years and certainly Pacific Place is starting to feel a lot more lively,

With that let's -- happy to take some questions.


Questions and Answers


Unidentified Company Representative [1]


Thank you Guy and Michelle. So let's open the floor for questions. Just a reminder that today's Q&A session will be webcast, so please wait for a microphone and state your name and organization name. And then please keep no more than two questions at a time.

So may we take the first question? The gentlemen on the third row.


Karl Choi, Merrill Lynch Bank of America - Analyst [2]


Hi, Karl Choi from Merrill Lynch, a couple of questions. First can you give us a better sense about how the -- for the Hong Kong office rental income. If you try to adjust for the withdrawal of stock in (inaudible) is, what the growth rate would have been instead of just flattish.

And second Guy you mentioned that you saw some better retails sales' performance from Pacific Place in these first couple of months of this year. Can you give a little more color? Is it still down, or it's just the decline narrowing


Michelle Low, Swire Properties Ltd - Finance Director [3]


For the Taikoo Place redevelopment impact, we have been locking down Cornwall and also Warwick and also we have exchanged the Government's tenth floor for the CP3. So the overall impact would be -- I would say a few percentage points. It's HKD150 million versus 2015.

Question is about the retail sales and more colors about the retail sales.

(Multiple speakers)


Guy Bradley, Swire Properties Ltd - Chief Executive [4]


Well Karl, actually we don't -- we do issue sales figures on a quarterly basis. As I mentioned in the presentation ahead of that the January, without giving you any figures, the January and February combined figures for Pacific Place were encouraging. They were better than what we'd seen last year. So we're hopeful that those will continue into March and thereafter for the rest of the year.


Michelle Low, Swire Properties Ltd - Finance Director [5]


Perhaps what's worth noting is for the retail reduction for 2016, there are also lots of tenant mix changes. So for a like-for-like basis in fact we are at mid-single digit number drop for last year. Sorry?

For Pacific Place, yes. So in fact you have been seeing quite a lot of the hoardings around the center and this year in fact will be more stable -- 2017.


Unidentified Company Representative [6]


So can we take the second question? The gentleman on the third row.


Unidentified Audience Member [7]


Thank you I'm Eugene from UBS. Two questions. First on the office side. Very clearly Swire is very well positioned on this decentralization trend with the redevelopment in Taikoo Place. What's your view on Pacific Place office in this trend and how do you see that impacting the reversions for Pacific Place office for this year?

And my second question is last -- I think end -- towards the end of last year, the Government rejected one redevelopment planned on the retail -- I think you expanded the retail portion of the Taikoo Place. Would that -- would the Company consider resubmitting such approvals and would that impact the schedule of the Taikoo Place redevelopment?


Guy Bradley, Swire Properties Ltd - Chief Executive [8]


I'll take those in reverse order because -- while I remember the detail on the last one. We will resubmit the plans. It was a very minor reversal I think in terms of the decision and it affects Two Taikoo Place not One Taikoo Place, which is the building that's not due to even come on until 2022.

And really the dispute is over about 5 square meters of floor really. So it's quite minor in the whole thing. We were trying to provide -- ironically, we were trying to provide public space in the podium. So we wanted a bit more height and there's a ridge line and I won't go into all the details.

But we will resubmit because we think it's -- there's a genuine case for public good and public interest. And maybe we need to explain that a bit better. So we will try and do that. But it's five or six years out. So the impact will -- whichever way it goes, will be relatively small.

And now I've forgotten your first question.


Michelle Low, Swire Properties Ltd - Finance Director [9]




Guy Bradley, Swire Properties Ltd - Chief Executive [10]


Yes, Pacific Place office. The -- look, it's having a good year. We're seeing positive rental reversions this year and last year. And we think it also benefits actually from the fact that central is pretty highly occupied.

Central and Pacific Place rents do vary a little bit and, in as much as that happens, we tend to benefit when central rents stay high both in Pacific Place and Taikoo Place. So we're really positive about the future of both. And Pacific Place remains a fantastic place to do business and to have an office. And we're seeing -- we've seen the market see it the same way.


Unidentified Company Representative [11]


The gentleman at the back.


Unidentified Audience Member [12]


Hi. Nelson from Goldman Sachs. I guess I have two questions. The first one is regarding the Miami project. So, can you give us some color on the retail market environment in Miami going forward you are seeing? And also in view of the macro environment in USA and are you going to commit more investment in the US?

And my second question is regarding the dividend policy. So there is no dividend hike this year. So just wondering can you remind us the dividend policy and also are we going to save the cash for more investment? And if yes, what is the asset class and the geography mix on that? Thank you.


Guy Bradley, Swire Properties Ltd - Chief Executive [13]


Okay, I'll do the first one and I'll let Michelle think about the dividend answer.

In terms of the retail environment in Miami, it's tough. I think it's tough everywhere in the States at the moment. It's -- the retailers are pretty cautious. Department stores are -- I wouldn't say they're all struggling, but it's a difficult environment for all retailers and particularly department stores.

We have a fantastic Saks Fifth Avenue in Brickell City Centre. We're confident actually though that because Brickell doesn't have such retail scale, that adding to that scale like we have done and then combining it with the mixed use of office, hotel, serviced department, residential condominiums and just connecting it all together. Even though generally speaking the Miami retail market is subdued, I think we're pretty confident that we'll come out on top of that because we've created such a fantastic space. So I think the prospects for Brickell City Centre within the US are very positive.

I would actually though say in answer your second question that we don't have any intention at this point to go beyond Miami and Brickell in the US. We don't know anywhere else to be honest. We've been in Miami a long, long time so we know Miami really well. We don't know any other places and any other markets and that would be really dangerous for us to jump into another place.

But as I said in the presentation we do have more to come in Brickell and we've got plenty of land bank there which I think is really exciting both on the investment side and on the trading side to keep the team there busy for another 5 to 10 years at least.

Do you want to do the dividend questions there and then we can come back?


Michelle Low, Swire Properties Ltd - Finance Director [14]


And so we haven't changed our dividend policy. It continues to be 50% of our underlying profit over an economic cycle. And even in the past few years and including this year we have been paying more than 50% and that is taking into consideration of our projected earnings and also our projected CapEx. And we are not seeing that this policy will change in the short term.


Unidentified Company Representative [15]


So more questions?


Guy Bradley, Swire Properties Ltd - Chief Executive [16]


I think Sara had a question at the front.


Unidentified Audience Member [17]


Hi. Thanks. Nothing too difficult. I know you don't want to talk about specific pre-leasing for the office, but I thought there was a really interesting article in the paper this morning with Jones Lang saying that the office leasing demand they had on their books in the first two months was equivalent to 40% of the total leasing that was done last year coming from mainland Chinese. I just wondered if you could give us a sense if that's kind of seeing -- whether that that's appetite for central or whether you're actually seeing a lot of that Chinese appetite push through it all?


Guy Bradley, Swire Properties Ltd - Chief Executive [18]


A good question. I think at the moment, we're not seeing it go further east at this point. I think what -- the phenomenon we're all watching is existing tenants in central are going down to Taikoo Place and that space is largely getting backfilled by new demand from the mainland. So it's largely coming in to Central. But I would include Pacific Place in that.

So we are seeing an increase in PRC tenancies at Pacific Place. Although they don't go -- as I say, far -- as far as Taikoo Place at this point.

I think it's the biggest source of demand over the last 12 to 18 months has been interest from the -- China and my view is that that's going to continue. Obviously there will be ups and downs, but I think there's more accommodation demand to come from up north I would say into Hong Kong.


Unidentified Company Representative [19]


The gentleman in the second row.


David Ng, Macquarie - Analyst [20]


Thank you. It's David from Macquarie. I guess two questions. First on the disposal of the Kowloon office. I think in the Swire Pacific briefing just now they did mention one of the concerns was to get more cash. And that particular building being sold does help the overall Group in a cash position. So with that in the context would we see more such office disposal including for example the Wong Chuk Hang building?

And I guess along the same line of reasoning, would the cash requirement from Swire Pacific impact your investment decisions whether in acquiring land projects in Hong Kong and China? So I kind of consider that one question.

Secondly I think for -- the interesting thing the island south as you mentioned does open up the island south to the rest of Hong Kong. But is there any particular risk that you do see the residents from island south actually go via the subway line and head right away into Kowloon?

And with the opening further -- with the Sha Tin central link people basically just skip MLT and go to other parts of Hong Kong. Would that turn out to be maybe a small negative for PP?


Guy Bradley, Swire Properties Ltd - Chief Executive [21]


Well the quick one on that is that will only happen if we can't attract them upstairs into Pacific Place. But I think -- I mean seriously the -- what Admiralty and Pacific -- what we've seen in Admiralty ever since Pacific Place began was that it's just a really popular place as a transport hub. And Pacific Place has been a huge beneficiary of that.

And I actually think Admiralty as a location is the new -- the gravity is shifting. With government moving into Admiralty, there's more and more opportunities I think around Admiralty for traffic, for footfall and for sales in retail. So I think it's all going to play to Pacific Place's strengths to be honest.

I see -- I don't worry so much about the through -- missing the traffic. I think well have enough opportunity to tempt everybody upstairs and into the mall. I think we're already starting to see that.

On the first question with Kowloon is, really, I think as the Chairman John Slosar said in the press conference, really the idea there was just to recycle some capital from a non-core area into Quarry Bay essentially.

We've talked about the projects. We're putting HKD15 billion into just these two buildings now and we'll continue to try and grow Quarry Bay, as we will Admiralty from time to time. So it was really nothing more at that point than an opportunistic sale on our part to therefore take some money off the table and put it into use in a more core part of town.


Unidentified Company Representative [22]


I think we have time for one more question.


Jonas Kan, Daiwa Securities - Analyst [23]


From Daiwa, yes. Is it possible to have an update on the current status of the [Shantun] and the [Valley] project?


Guy Bradley, Swire Properties Ltd - Chief Executive [24]


Hi Jonas. Yes, there's not too much I can say at this stage other than we've got teams on the ground that are working really hard to make those deals materialize or not. I mean we've had a framework agreement in place on them both and we'd like to convert those into deals if we can.

And obviously there are a bunch of things that we need to get done on the infrastructure side in those areas. And if we don't get those done we can't do it. But there's really nothing to be able to tell you at this point. But as and when we get some movement on that we'll certainly be able to announce something.


Operator [25]


So any more questions? If no, that concludes our briefing today. Thank you for joining us today.