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Edited Transcript of 1997.HK earnings conference call or presentation 5-Mar-19 9:45am GMT

Full Year 2018 Wharf Real Estate Investment Company Ltd Earnings Presentation

HK Mar 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Wharf Real Estate Investment Company Ltd earnings conference call or presentation Tuesday, March 5, 2019 at 9:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Angela Ng

Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited

* Tin Hoi Ng

Wharf Real Estate Investment Company Limited - Chairman & MD

* Yuk Fong Lee

Wharf Real Estate Investment Company Limited - Vice Chairman of the Board

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Conference Call Participants

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* K.C. Ng

Macquarie Research - Analyst

* Karl Choi

BofA Merrill Lynch, Research Division - Director

* Ken Yeung

Citigroup Inc, Research Division - Director

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Presentation

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [1]

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Good afternoon, everyone. A very warm welcome to Wharf REIC Annual Results' Briefing. I'm Angela Ng, Investor Relations Manager.

Before we start the presentation and Q&A session, may I now introduce our Chairman and Managing Director, Mr. Stephen Ng to deliver opening remarks. Chairman, please.

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [2]

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Thank you, Angela. Good afternoon, ladies and gentlemen, thank you for attending today's briefing session. This picture behind me is a picture you see regularly in association with group's business. It's Harbour City, it's an amazing asset. And once again, in the year 2018, Harbour City delivered an amazing set of results and supported the performance of the group throughout the year. It is amazing in a number of ways. First of all, it accounted for somewhere around 3 quarters of our group's net earnings, and that's excluding investment property revaluation. If we were to include the revaluation surplus, it would be even higher. So in terms of underlying net profit, it already accounts for 75% or so of the groups net earnings in the year 2018. And that performance is supported, primarily by flows. First of all, people flow.

If you have a chance to go visit Harbour City, I don't need to tell you what the people flow is like. You get bumped by people, literally. But more importantly, the people flow turns into cash flow, and there's 3 types of cash flow that I want to talk about. First of all, cash flow that is not directly available to us, i.e. cash flow to our tenants, in particular, our retail tenants in terms of retail sales. That is not directly available to us, but that is the source of the cash flow that is eventually available to us and then from us to our shareholders. So the second cash flow is the rental income that our tenants are able to pay us as a result of their retail sales performance. And the third cash flow, is ultimately what we're able to pay our shareholders in the form of distribution, having netted out operating expenses and so on and so forth. So once again, this year, we've been able to enhance our distribution on the basis of the formula of distribution, which we set at the beginning of this company's going public in November 2017, i.e. our policy is to distribute about 65% of the realized underlying profit from our investment properties and hotels. And that amounted to -- for the year -- last year that amounted to HKD 2.10 a share. The first interim dividend was HKD 1.05, and we're happy that we're able to repeat that for the second interim to make a total of HKD 2.10. So that would come up to somewhere around 3.8% dividend yield on today's closing share price. All of that -- then we go back to cash flow, of course, started with, among other things, the retail sales in our mall because retail is such an important part of our investment properties.

In the year 2018, Harbour City tenants collectively turned over HKD 37 billion of retail sales. In that, there are only 365 days in a year that averages out to over HKD 100 million of retail sales every day. Obviously, there are days when the numbers are higher, and there are days by the numbers are lower. But on average, it is HKD 100 million of retail sales within our complex in Harbour City, in the year 2018. That's a very convenient number. And obviously, we hope that the number will become positively inconvenient in the year 2019, i.e. maybe HKD 108 million, maybe HKD 112 million, maybe HKD 115 million, we don't know yet. It's to early to tell.

What I can say though is that based on what we know about January of this year so far, the trend continues. I'll be happy to talk a little bit more about the post -- the so-called subsequent event, the trend, a little bit. Obviously, what happened beyond December 31 is unaudited. And I need to qualify that right away. But otherwise, we seem to be getting off to a reasonable start for the year 2019, but that's only 1 month. There are 11 more months to go, so it's too early to say what will come out of the year 2019, at the end of the year.

So with that, I'd like to hand back to Angela, and she will take you through the presentation.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [3]

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Thank you, Chairman. During 2018, the group's core assets consistently demonstrate solid results. The theme this time is robust Harbour City underpins growth momentum and dividend sustainability. The group's 6 core assets comprising Harbour City, Times Square, Plaza Hollywood, Crawford House, Wheelock House and a new hotel in Central, The Murray, Hong Kong, which is also the venue of today's presentation. During the year, total revenue increased by 9.5% to HKD 16 billion, underlying net profit increased by 10% to HKD 9.9 billion, mainly driven by the performance of Harbour City. Above-market performance propelled retail sales at the groups IP portfolio to a new high. Tenant sales achieved a record hit of HKD 49 billion, account for over 10% of total Hong Kong retail sales. Harbour City alone took up 7.7%.

Backed by continuous delivery of strong sales productivity and operating profit margin, Harbour City remained a key driver of the group, contribute over 70% of the group's revenue, underlying net profit and operating profit. Occupancy cost at Harbour City further improved to 18%, and Times Square improved to 20%.

So regarding the revenue splits, as shown in the pie chart, retail took up 73% of the total Hong Kong IP revenue, over 15% was contributed by the retail segment of Harbour City. Valuation of our 5 core Hong Kong IP amount to HKD 258 billion. Retail sales at Harbour City hit a record of HKD 37 billion, surpassing its peak in 2014 while Hong Kong's overall market still lagged behind.

For more than a decade, total retail revenue of Harbour City demonstrates strong resilience and positive growth no matter in good time or bad time. The 12-year CAGR for Harbour City retail revenue growth was 30% versus Hong Kong retail sales growth of 6%.

And then moving on to financial highlights. Group underlying net profit increased by 6% to HKD 10 billion, underlying net profit from IP increased by 12% to HKD 9.7 billion, which account for 97% of the group's total. Profit attributable to shareholders increased by 5% to HKD 18 billion, upon inclusion of a net IP revaluation surplus of HKD 7.9 billion, underlying net profit of Harbour City increased by 16% to HKD 7.6 billion. Valuation of Harbour City reach around HKD 184 billion, and this destination retail landmark generate a net cash flow of around HKD 7.5 billion. A total dividend of HKD 2.10 per share was declared. Payout ratio maintains 65% of realized Hong Kong IP underlying net profits.

In the following slides, we will mainly walk through the performance of Harbour City, Times Square, Central Portfolio, Plaza Hollywood and the financial management.

First, let's begin with Harbour City. Retail sales at Harbour City reached over HKD 100 million per day, amounting to HKD 37 billion for the year. Retail revenue increased by 14% to HKD 7.5 billion. Productivity reached HKD 2,700 per square foot per month or nearly USD 4,200 per square foot per year.

Harbour City is indeed among the most productive malls in the world. Retail sales growth was 24%. This is nearly 15 percentage points higher than Hong Kong total. Solid growth momentum continued in the beginning of the year. The goodwill continue is constant retenanting and AEIs to add excitement and appeal to the customers.

Driven by strong underlying tenant demand across the board, including both retail and office, total revenue grow by 10% to HKD 11.9 billion. Operating profit increased by 12%. Ongoing value-creation investment is one of our key strategies.

During the year, conversion of Hampton Court service apartment is underway. The 3,600 square feet office space is scheduled for completion in July this year. Meanwhile, value-creation investment at Ocean Terminal Extension is successfully drawing shopper traffic and become a new hotspot.

Nine exciting dining outlets were opened during the year. The stunning view and location of Ocean Terminal Extension attracted creative events of different brands, including Tiffany, Nike and BE@RBRICK.

And then moving on to the 3 Marco Polo Hotels in Harbour City. Supported by the robust tourist arrivals and the hotels' improvement programs, the Harbour City hotels enjoyed a fruitful year and recovered with the high-level comparable to 2014.

Total revenue grow by 12% and gross operating profit grow by 21%. Occupancy reached 93%. In addition, Marco Polo Hongkong Hotel was selected as top 10 hotels in Hong Kong by DestinAsian. And then Times Square is another iconic mall in our portfolio. Sitting in the heart of Causeway Bay, constant had a mix refinement. It's creating new experience and appeal to the customers.

During the year, retail sales increased by 12% to HKD 9 billion, outperforming the market by 3 percentage points. Occupancy cost recovered to 20%. Total revenue in both retail and office was maintained at HKD 2.8 billion.

In the following slides, we will focus on the Central Portfolio, comprising Wheelock House, Crawford House and The Murray. Sitting in prime location, rental reversion at Wheelock House office was 31% with occupancy of 98%. Meanwhile, Crawford House office reached full occupancy with rental reversion of 16%. The Murray, Hong Kong, is the group's latest long-term strategic investment.

Operate under Niccolo brand, this award-winning hotel is under full operation in August last year. Average occupancy reached over 70% in the fourth quarter. The hotel has received multiple global awards with the first ranking among top hotels in Hong Kong and was selected in The Hot List 2018 by Condé Nast Traveller. In addition to remarkable hotel suites and restaurants, the hotel is also a unique event space as we can see from the photos here.

Then switching to Plaza Hollywood. Total retail sales increased by 5% to HKD 2.6 billion, and retail revenue was HKD 570 million. With geographical advantage and constant tenant mix optimization, Plaza Hollywood is set to embrace Kowloon East CBD2's potentials.

Moving on to the financial management. The group maintained a high level of financial discipline and flexibility. Net debt reduced to HKD 39.4 billion, gearing ratio improved to 17.6%, average interest cost was 2%, and interest cover was 16x. It continued to maintain the Moody's A2 issuer rating.

Looking ahead, the group holds a prudent outlook towards the market mainly because of Sino-US conflicts, European political instability and Brexit, global currency and interest rate movements as well as the global economic slowdown.

And then moving on to the corporate social responsibility. Wharf REIC is member in Hang Seng Corporate Sustainability Index. And regarding the Project WeCan, it is a business-in-community initiative to provide opportunities and care to the secondary school students. Our youth development programs also include The Wharf Hong Kong Secondary School Art Competition and the Wharf Art scholarship. And also the Wharf Architectural Design Internship. Star Ferry is a community-care initiative under the group. So that concludes my presentation about the annual results.

Now we will come to the Q&A section. May I invite the Chairman to come on stage and also Ms. Doreen Lee, Vice Chairman, to come on the stage, please.

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [4]

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We're trying this new format this year because of this wonderful LED screen. We thought, we didn't want to block it from view when the presentation was being made. Now that's finished, we can get back on stage. Hope you like it.

Okay, Angela.

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Questions and Answers

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [1]

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So now it's the Q&A session, please raise your hand if you have questions, and please also identify your name and organization.

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Karl Choi, BofA Merrill Lynch, Research Division - Director [2]

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Karl Choi from Merrill Lynch. A couple of questions. Stephen, you mentioned that the retail sales were off to a good start in January, can you give a little bit more color, especially, considering the -- maybe the timing of Chinese New Year could have added some impact? If you could give us some sense about what that was? And second is, can you give us a little bit of your outlook for base rental reversion, both for retail and office, I guess, for the 2 different -- for both Harbour City and Times Square?

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [3]

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Okay. Now let's put things into perspective. When I said we got off to a good start in 2019, that's obviously not in relation to January 2018. In the year 2018, at the beginning of the year, Harbour City was returning year-on-year sales growth of 37% or something. And here, at the beginning of this year, that number was more like the low teens. But that was higher than December of last year. So December of last year, while Hong Kong market as a whole was more or less flat, we did 11% or 12%, and that improved into January of this year. Although, I just saw that Hong Kong's statistic for January was 7%. So it's probably expected of us to have had a stronger January than December anyway because the market as a whole was better, which is not bad news. If Hong Kong overall is good, that would help us as well. Rental reversion for this year, Doreen's team is directly responsible for negotiating that. You want to give it a try?

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Yuk Fong Lee, Wharf Real Estate Investment Company Limited - Vice Chairman of the Board [4]

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For rental reversions, as you can see from figures, our occupancy costs were all -- for our 3 malls have lowered this -- in 2018, which means it's some room for improvement in terms of our rental reversion. At this point of time, we reckon, for certain trade, it's not applicable across all trade. We cannot treat supermarket the same way as a Jewelry tenant, for instance. So I reckon, it's safe to say that -- for Harbour City it's -- for some cases, it's lower double digit or high single digit. And for Times Square, as we are still in the process of refining our trade mix. We reckon for some of these more successful tenants, we should be able to get a lower single-digit type of rentals. But it's -- we cannot say across the board. It's -- we're talking about selectively for several tenants. We reckon we can do that.

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [5]

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I would only add that it's probably not a 100% relevant to look at rental reversion on a tenant-by-tenant basis because there are many situations where we are prepared to accept a lower rental if the tenant is the right tenant in the interest of the entire mall. So it is the overall rental that is important to us, including both the base rent and the turnover rent. We want the mall to do well so that we can benefit from the next cycle, next round.

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Karl Choi, BofA Merrill Lynch, Research Division - Director [6]

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Office.

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Yuk Fong Lee, Wharf Real Estate Investment Company Limited - Vice Chairman of the Board [7]

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Office. I must admit that the office has been relatively -- the office market for the past 2 or 3 months, since the Sino-US tense relationship, has been relatively slow. But we do not foresee any drop in rentals. We reckon they would be stabilized but rent -- on the rent reversion part, we still reckon we should have -- we should be able to achieve like a 5%, in certain cases even up to 8% for offices.

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [8]

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And occupancy was good.

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Yuk Fong Lee, Wharf Real Estate Investment Company Limited - Vice Chairman of the Board [9]

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Yes, but Because of all these leases were signed up, like, 3 years ago.

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Ken Yeung, Citigroup Inc, Research Division - Director [10]

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It's Ken Yeung from Citi's. I've 2 simple questions. Basically, checking again for your debt headroom, couple of the commercial side will be available for this year. Can you -- now you have HKD 40 billion net debt. What kind of net debt headroom that we can expect? What we can tolerate if you're going to buy those sites? So this is the first question. The second question is regarding -- because so many commercial site available for this year. So what if none of the site being acquired by Wharf REIC, then maybe, upcoming, there may not be that many size that you are interested. Will you reconsider your 65% payout ratio?

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [11]

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Okay. Actually, let me start by some kind of net debt projection. The formula's fairly simple. 98% of our underlying net earnings comes from Hong Kong IP and hotels. And we pay 65% of that to shareholders that leaves us 35%. So take a round number of HKD 10 billion a year, that means HKD 3.5 million roughly. And that's how much we're able to pay down our debt on an annual basis assuming an organic state. Now if we get into inorganic situations such as a major acquisition or, not that is in our plans, a major disposal, then it would change the situation. But our current gearing ratio is very comfortable. We're very comfortable with that. And of course, the other element in the gearing ratio is equity. And equity can change as a result of property revaluation. Although, at this level, I don't expect major fluctuation in property revaluation levels. Take last year as an example, the change was about 3%. And it's not going to change the gearing ratio too much. Unless there are wild, either ups or downs in the property revaluation. So to come back to your point about acquisitions, new investments. We have taken a look, we reckon that at least in order to preserve our current Moody's rating, credit rating, we believe, we can comfortably add close to HKD 20 billion of debt -- net debt, maybe even more. So that is one indicator of how much we're able to invest without new equity. If necessary, and I must emphasize again that it is not in our plan, we can look for new equity. But since there is no current investment of that size, I don't think we need to worry about that yet.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [12]

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May we have the next question. Please feel free to raise your hand.

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K.C. Ng, Macquarie Research - Analyst [13]

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It's David Ng from Macquarie. A couple of questions on Times Square since, I think, that's the one that may have even more upside of further improvements. So first of all, I guess, on the second half retail sales like the tenant sales at Times Squares seems to be actually lower than first half. And as you mentioned there is retenant, a reshuffling that's happening, can you share with us a little bit on what's happening on the ground? Are there like -- Maybe like a multiyear plan that you are looking at to further improve the mall? Or is it just like 1 or 2 tenant that has to be changed such that you result in just a very transient negative rental reversion. And if that's the case, what is the rental reversion overall outlook for Times Square in 2019? So that's the first question. Second question is more kind of the housekeeping items. Can you share with us, again, the turnover rents as a percentage of Harbour City and as a percentage of Times Square? And then the third one would be, basically, the occupancy cost, again, like for Harbour City and for Times Square?

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [14]

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I think the last 2 questions, Angela, you've got the data. And then we will come back to you.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [15]

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Firstly, regarding the turnover rents, we have the total figure on hand, which is 12% to retail revenue.

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [16]

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And occupancy cost? Sorry, you didn't say.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [17]

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And occupancy cost at Harbour City improved to 18%, Times Square 20%.

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Yuk Fong Lee, Wharf Real Estate Investment Company Limited - Vice Chairman of the Board [18]

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It's the overall, Times Square and Harbour City together.

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [19]

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Yes. Oh, you mean the turnover rent -- ratio.

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Yuk Fong Lee, Wharf Real Estate Investment Company Limited - Vice Chairman of the Board [20]

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The turnover -- ratio.

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [21]

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Yes. The occupancy cost is 18% at Harbour City.

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Yuk Fong Lee, Wharf Real Estate Investment Company Limited - Vice Chairman of the Board [22]

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18%...

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [23]

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20% for Times Square.

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Yuk Fong Lee, Wharf Real Estate Investment Company Limited - Vice Chairman of the Board [24]

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Regarding the work in progress for Times Square, we have been introducing some new tenants to the luxury zone on the second, third and fourth floor. We've introduced Balenciaga, Rimowa, a couple of others. And we opened new faces on the fourth floor, hoping to drive more traffic to the -- instead of pure fashion, want to bring some cosmetics up to the fourth floor. You've already seen that. The rest are ongoing, and we are talking to a couple of -- we believe, self-driving tenants, which do not open shops in every shopping center. I think that's what we're targeting. There are certain area that we cannot compete with the other operators in Causeway Bay, in terms of, sort of, the cash offer or rebates. So the one of the way, we compete is to bring in tenants that will not -- will be quite exclusive to us in the Causeway Bay area. So we are working very hard towards that direction. And we have -- like last year, we got the LEGO in on the ninth floor, we're now opening a game center on the 10th floor, is it like -- it's with augmented reality and all that is a lot of interesting stuff, they told me. I haven't tried it myself. I'm very much interested to try it myself in the coming weeks to see how good it is. So we're trying to bring in more experiential elements into Times Square. Apart from adding more lux, it's because at the end of the day, luxury items help to increase our sales turnover, so we're in the process of doing that. We're talking to a couple of players. And then, of course, we need to do a bit of facelift to our property as well. So all that are in the pipeline within 2019. And there's no stopping to it. Every year, we need to review what we need to do next to stay competitive.

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [25]

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Got one clarification, not that we cannot compete with our competitors in terms of subsidizing sales, we are not prepared to do it. That is not a business we want to engage in. Financially, yes, we are very capable of subsidizing.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [26]

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May we have the next question?

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [27]

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While waiting for the next question, maybe I can -- I should provide a clarification. And that's about -- in particular, about Harbour City, the way numbers are reported. You would note that Harbour City, there are 2 parts of Harbour City there is what we call the IP portion, investment properties, and there are hotels in Harbour City as well. According to accounting standards, IP and hotels are reported as separate segments. So in the past, we've tended to stick strictly and solely with the accounting standards. When we reported Harbour City, we typically left out the hotels altogether. And we found, yes, that is one way of looking at it, technically. But commercially, Harbour City is one asset, and there's no reason why we should not be looking at the hotels together with the offices and the mall and the apartments. So when you are reading this year's report, it may be confusing because there are some areas, some places where we have included hotels in the numbers. We've tried to annotate them as clearly as possible. But I wanted to flag this in case some of you may be caught by surprise. It is not doctoring the numbers at all. It is a commercial view of what the asset really is because you can't take away part of it and say this is Harbour City. Harbour City is 2 parts combined, not 2 different part -- not 2 different Harbour Cities. So while you're read -- going through the reports just bear that in mind. Of course, we will still stick strictly to the accounting standards where necessary. But when it comes to the more qualitative parts of the reporting, we often put the 2 together, but we tried to annotate them as clearly as possible. If we miss anything, let us know.

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Unidentified Analyst, [28]

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So my question is related to hotels in that case, I saw the numbers, we're very strong this year. Overall hotel business growth is much higher in the operating profit side. So just want to get more granular where that growth is coming from compared to last couple of years. And then, as far as Murray is concern, we understand the startup losses. First of all, is there any way to quantify that? And -- but the second question is, how should we think about next '19 or '20? When do we really get to the profit level?

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [29]

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Okay. Within this group, there are a total of 4 hotels in operation: 3 of them in Canton Road, Harbour City; and the fourth one being where we sit today. I'll start with The Murray. The Murray didn't start full operation until August of last year. And even when we caught full operation, it was not 100% full. It was nearly full operation. But to put things into context, when we -- once we started a soft opening in January of last year, we started to depreciate land and building cost over the remaining life of the original lease of 50 years. And that means we started to depreciate land and building over the remaining 46 years. That amounted to somewhere around HKD 165 million to HKD 170 million of depreciation per year. So unless we can generate at least that amount of operating profit before depreciation, there is no net profit to report. And typically for a hotel of this caliber, it would take at least 3 years to build up to stabilization. So we're expecting to continue to report an accounting loss for the current year, next year and, quite possibly, into 2021, the third full year of operations. On the other, in Canton Road, the 3 hotels, had one of their best years. The previous peak year was 2014. And last year in terms of GOP, we came to the same level or very close to the same level as we did in 2014. That was primarily due to a high occupancy rate. Occupancy rate was generally 2 or 3 points at least higher than in the year 2014. Although, as typical of the hotel industry as a whole, average room rate was lower than 2014. So combining a higher occupancy and a lower average room rate, total revenue was similar. And through active cost management, we're able to deliver a very similar GOP line for the 3 hotels in Canton Road. The market continues to be firm, so far this year. But there are clouds of uncertainty still. The most important of which, for the purpose of the hotel trade, would be currency movements. If the renminbi significantly weakens, that may hurt the whole hospitality industry and with it, the retail industry as well.

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Karl Choi, BofA Merrill Lynch, Research Division - Director [30]

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Karl Choi from Merrill Lynch. A couple of follow-up questions. First is, can you talk a little bit about the expected rental upside from the conversion of one block of Gateway Apartments into retail and office uses? And what's the preleasing progress there? And second, regarding the debt. You -- I assume it's all unhedged at this point, and if there's any hedging strategy or you expect to keep it floating for the rest of this year?

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [31]

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Okay, I'll deal with the second question first, and I'll leave Doreen to deal with the first. We don't have a -- or rather, let me start again. In terms of interest rate risk, yes, we are taking the floating rate risk. That is our basic interest rate position. We don't particularly worry about interest rate hike. Yes, it may go up, but we think the interest rate upside and, therefore, the cost downside to us is very affordable rather than paying a premium to convert it into fixed rate. If we can convert it into fixed rate without a premium, that's different. But as you know better than I do, that is not the case. So we're quite happy to stay in floating as our main position.

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Yuk Fong Lee, Wharf Real Estate Investment Company Limited - Vice Chairman of the Board [32]

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Regarding the 15 floors available for leasing other than the conversion of Gateway Apartments into offices, these spaces will be available for handover in around July. And I'm happy to say that out of the 15 floors, 7 floors are either signed or under offer. In fact, I was just told that 6 floors is actually signed but awaiting the deposit money. So once I receive the deposit money, we will announce who this particular tenant will be, not at this moment, I'm sorry, I can't disclose.

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [33]

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But in taking that decision, actually, when we took the decision to convert service apartments into offices, we obviously looked at the return from the investment. And it's not rental alone. It's service apartments. There are certain operating costs, which we will be able to avoid for office use. So the net income to the landlord in the form of offices will be higher than service apartments to the extent that the payback formula is quite easy to work out.

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Karl Choi, BofA Merrill Lynch, Research Division - Director [34]

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So can you share any update on the divestment plan of the Suzhou IFS and Zhengzhou, Marco Polo?

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [35]

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You're referring to these assets, which are held by our listed subsidiary, Harbour Center Development Limited. Zhengzhou, Marco Polo, no, no progress right now. Suzhou IFS, in fact, we started to sell Suzhou IFS on this charter basis. And we've -- rather presell because the building is not completed yet. And the presale, so far, has been quite good. So when the building is completed, the presold portions will be completed. The sale will be completed. So that part is progressing quite well.

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Karl Choi, BofA Merrill Lynch, Research Division - Director [36]

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Is that the office and residential...

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [37]

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Both, residential and office.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [38]

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Please raise your hand if you have questions?

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K.C. Ng, Macquarie Research - Analyst [39]

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Maybe just 2 follow-up questions for me. It's David, Macquarie. I think there's recent news talking about, in the Hong Kong areas, there's new office building, and then some of the major tenants is moving into the areas. I think one of the tenant is -- one of your (inaudible) tenant. Can you -- maybe not on that specific tenant, but in terms of the increasing of newer supply in not just (inaudible) but in kind of the greater [southern] Kowloon area, how do you foresee that trend? Will that put some pressure on the rental upside for office? And do you need to do something to counter that? That's another question, I guess. A major shopping mall opening up, which is actually also in your fourth floor. Totally different position, as they have indicated, their rental level is very, very different from Harbour City. But in terms of traffic, especially domestic, Hong Kong shoppers, I guess, they don't mind patronizing out there more. So even though the tenants, I'm pretty confident that you can continue to secure the most attractive tenants in Harbour City. But in terms of the traffic in terms of the retail sales, how do you foresee that impact with the newer opening in the area?

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Yuk Fong Lee, Wharf Real Estate Investment Company Limited - Vice Chairman of the Board [40]

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Regarding your second question. The -- as always some mall's opening somewhere. Even though there's been very close proximity, we reckon, in a way, enhance the attractiveness of Tsim Sha Tsui as a shopping district. As you know Hong Kong is very territorial when it comes to shopping, Hong Kong people doesn't come across to Kowloon. Kowloon people don't necessarily go across to Hong Kong. So If there's more offerings with -- I reckon, it opened up the district to more people with the novelty and everything. And then we are still the biggest in the area. We have the critical mass 2 million-something square feet, not that small. And then, I think we offer a variety and vitality that are not easily be taken away. So we're quite confident that we should be okay. Because as far as we know the -- all the international brands across all price points, not necessarily the highest price point, they're all very keen to expand their flagship store with us. So I guess, we just have to work very hard, extra diligently to retain, not our tenants, but to enhance the traffic. We believe that with more traffic, more sales will be generated in Chinese, (foreign language), so we'll be working very hard on that. Competition is competition, and what is the first question?

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K.C. Ng, Macquarie Research - Analyst [41]

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Office supply.

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Yuk Fong Lee, Wharf Real Estate Investment Company Limited - Vice Chairman of the Board [42]

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Office supply, right. I think throughout the many cycles that we've witnessed in Hong Kong for the past 40 years or so, there is always supply -- new supply somewhere. And it's not the first time we've seen new supplies popping up, and then there are people moving out, there are people moving in. But the new -- there are certain trades that prefer a more centralized location. And I guess when we compare ourselves with buildings in Central, we are still, like, slightly -- these view as more affordable. So there are people moving from Central or (inaudible) to us. And there are -- and there will be people moving out from us to Kowloon East who -- or I think we have to keep our property in top-notch quality, and in -- something that is difficult to duplicate is the vitality of being -- the location being the center of everything. I think that would maintain the competitive edge of Harbour City offices.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [43]

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May we have the next question?

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [44]

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I hope that means you're happy and not unhappy.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [45]

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Yes. So we hope you're happy with the results. And I think this is the end of our presentation. Thank you very much for joining us today. Thank you.

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Tin Hoi Ng, Wharf Real Estate Investment Company Limited - Chairman & MD [46]

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Thank you and have a good evening.