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Edited Transcript of 823.HK earnings conference call or presentation 13-Nov-19 7:45am GMT

Half Year 2020 Link Real Estate Investment Trust Earnings Presentation

Central Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Link Real Estate Investment Trust earnings conference call or presentation Wednesday, November 13, 2019 at 7:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kok Siong Ng

Link Real Estate Investment Trust - CFO of Link Asset Management Limited

* Kwok Lung Hongchoy

Link Real Estate Investment Trust - CEO & Executive Director of Link Asset Management Limited

* Siu Kei Yau

Link Real Estate Investment Trust - Chief Strategy Officer of Link Asset Management Limited

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Presentation

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Unidentified Company Representative, [1]

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Good afternoon, ladies and gentlemen. Welcome to Link's interim results briefing for the 6 months ended September 30, 2019. Due to the uncertainties over traffic conditions today, we are conducting our briefing on webcast.

Today, we are glad that we have here with us our Chief Executive Officer, Mr. George Hongchoy; our Chief Financial Officer, Mr. Kok Siong Ng; and our Chief Strategy Officer, Mr. Eric Yau.

Without further ado, let me invite the management to go through our interim updates. Mr. Eric Yau, please.

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Siu Kei Yau, Link Real Estate Investment Trust - Chief Strategy Officer of Link Asset Management Limited [2]

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Good afternoon, everyone. I'm pleased to have K.S. and George on -- with me here today. I will start with some key highlights for the last 6 months and also K.S will cover our operational updates. And finally, George, our CEO, will wrap up with industry outlook and also the strategy going forward.

For the first 6 months, revenue and NPI went up by about 8% on a like-for-like basis, excluding any properties acquired, divested or newly operational. NAV per unit grew by around 6% to around HKD 90.60. Distribution for the period amounted to HKD 1.4147 per unit, representing an increase of, again, about 8% per year, year-on-year. This includes a discretionary distribution of HKD 0.0693 to top-up for the DPU loss arising from the divestment to the extent the shortfall is not yet replaced by earnings from new acquisitions.

Following the last divestment completed in March 2019, we have budgeted a discretionary distribution of about HKD 0.14 per year for the next 3 years. Subject to market conditions and regulations, we will continue our unit buyback program in the second half to return capital to our unitholders.

Valuation of our asset portfolio reached HKD 220 billion. Our portfolio comprises of 131 assets, with 126 properties in Hong Kong and 5 across the 4 Tier 1 cities in Mainland China. Our portfolio mix is roughly the same as last reported, and core portfolio still remains in Hong Kong and only 13% of our assets are in Mainland China.

Our Vision 2025 is -- focuses us on value creation. We continue to invest in quality retail, office and car parks to capitalize their growth potential by applying our key strengths: asset management, portfolio management and capital management. We have updated our value-creation model with our medium-term strategy Vision 2025 announced earlier this year. We aim to deliver portfolio growth, culture of excellence and visionary creativity with clear KPIs. With the various values we create for our stakeholders, we live up to our brand promise: Link People to a Brighter Future.

Under portfolio growth, we aim to achieve high single-digit AUM growth by 2025. In the first half of the 2019-2020 financial year, we delivered good return to our unitholders. Portfolio improved and valuation went up by about 1% as compared to March 2019. DPU growth was maintained at about 8% and credit ratings from our 3 key agencies remained at A level.

Other than our financial KPIs, we also focus on developing our organization culture and excellence among staff. We believe by putting people first and cultivating a learning culture, developing our talent pool and promoting staff satisfaction, we aspire to become the employer of choice.

We continue to innovate and contribute to community through tenant engagement at our own charity program.

Through Tenant Academy, we offer talks and workshops to help our tenants grow to greater success. This year, we earmarked HKD 14.1 million under our flagship Link Together Initiatives for 6 projects and Link University Scholarships, benefiting 190 students. The projects include Inspirational Drama Programme for the Elderly and a publication on aging-friendly community. Going forward, we will continue to roll out innovative place-making initiatives for our stakeholders and to the community.

I will now hand over to K.S to talk about operational updates.

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Kok Siong Ng, Link Real Estate Investment Trust - CFO of Link Asset Management Limited [3]

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Thank you, Eric. Good afternoon to all. For the first half, our Hong Kong retail portfolio performance showed its resilience despite the slowdown in overall Hong Kong market. On a like-for-like basis, excluding the assets disposed, retail revenue recorded about 9% year-on-year growth. Portfolio remains nearly fully occupied, with reversion rent receding slightly to 18% in light of softening retail market. Average unit rent increased by 6% year-on-year to HKD 69.09 per square foot.

Our portfolio continues to focus on mass market, nondiscretionary traits. Almost 2/3 of our monthly rent come from food-related tenants, which are resilient in nature and offer stability in retail cycles. Quality tenants, especially those in F&B, continue to flourish and grow their presence in our portfolio. Our tenant sales growth has outperformed the overall Hong Kong market as supported by solid performance of nondiscretionary trades. While January retail tenant's performance was largely flat, F&B and supermarket and foodstuff tenant sales performance grew above market at 2.1% and 4.5% year-on-year, respectively.

Rent-to-sales ratio of the overall portfolio was 14.4%, which remains an affordable level. Two projects with total CapEx of HKD 278 million were completed during the period. We have 8 projects underway and over 15 projects under planning. Our asset enhancement pipeline is extending to 2025 and beyond. At Choi Ming, we added new retail and F&B outlets and adopted design concepts from the nearby design school students to increase its attractiveness.

Another completed AE project is Nam Cheong Place. It is located in Sham Shui Po and adjacent to Nam Cheong MTR station. In view of new residences completed in the area, we converted Nam Cheong Place from pure retail to include a fresh market to address local needs. We believe the center will benefit from the growing population and lack of nondiscretionary retail offerings nearby.

This was our first retail-to-market makeover and we are seeing its synergies with the higher-end mall and new MTR station, which are connected by a footbridge. The fresh market also includes a food area, which has been well received by the community.

Hong Kong car park revenue recorded about 8% year-on-year growth on a like-for-like basis, and income per space reached HKD 2,900. Compared to March 2018, average valuation per parking space increased by about 6% to HKD 663,000 per car park lot. Our Hong Kong car park portfolio has been supported by continued supply-and-demand imbalance, though hourly parking was affected by a drop in weekend visits due to ongoing public protests.

Mainland China retail portfolio achieved outstanding results. Our retail properties were almost fully let. The average reversion rent remained at a high level of 31.5%. Our 2 newly acquired properties, Beijing Roosevelt Plaza and Shenzhen CentralWalk, both delivered good reversions of above 40%.

Performance of Link Square, our grade A office in Shanghai, remain in good shape with reversion reaching 13.5%. Occupancy stood at around 95%. We are now establishing our Mainland China headquarters in Link Square to provide centralized management for our expanding portfolio in China.

We have a well-balanced and diverse capital management strategy to address market uncertainties and maintain financial flexibility. Gearing ratio is at a low level of 11.9%. During the reporting period, we closed a HKD 12 billion bank loan facility at an attractive all-in interest cost of 80 basis points over HIBOR. Our Hong Kong dollar debt portfolio, effective interest rate remained low at 3.23%. Fixed to floating percentage reduced slightly to about 65%, with average maturity lengthened to 5.1 years.

HKD 2.2 billion in RMB equivalent bank loan serves as the natural hedge to our investment in Mainland China. All our credit ratings were reaffirmed at A levels, with stable outlook by Moody's, S&P and Fitch ratings.

I'll now pass to George to talk about the outlook and business strategy. Thank you.

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Kwok Lung Hongchoy, Link Real Estate Investment Trust - CEO & Executive Director of Link Asset Management Limited [4]

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Thank you, K.S. We miss seeing you all in front of us, but unusual circumstances today. Looking at the Hong Kong economy, U.S. and China trade tensions and local events in Hong Kong have impacted both the economy and retail industry. We are fortunate that day-to-day operations of our shopping centers were largely stable despite a few closures due to occasional public activities nearby. Recent economic conditions may put pressure on the labor market as well. And we'll monitor the operating environment closely and keep a close dialogue with our tenants.

Our portfolio continued to demonstrate resilience across cycles. Nondiscretionary trades, in particular supermarkets, remained defensive, yet we are cautious over the impact on Link. Certain key indicators of our Hong Kong portfolio have, for the first time, exhibited signs of weakness. Our retail reversion rates have slowed to a high teens from the 20s, and rent to sales ratio increased to 14% compared to 13.5% as at March 31, 2019. These data points reflect weakening sentiment, and we have to remain vigilant and cautious in the second half.

Mainland China has maintained good growth in retail sales as supported by growth in both disposable income and consumer spending in the Tier 1 cities. Regarding the office market in Shanghai, despite a drop in average rent due to increasing supply, Puxi CBD is expected to hold up due to stable demand and limited stock.

We will continue to leverage on our strengths in face of future challenges. We have a track record of asset management and enhancement to further the growth potential of our organic portfolio, our portfolio management expertise via disposal and to recycle capital and investments that yield high returns. And we have strong capital management capabilities to give us low funding costs and most favorable capital structure.

To maintain our growth momentum and reach our medium-term targets, we require active portfolio management efforts. Our current asset management team specializes in maximizing potential of our current Hong Kong and Mainland China portfolio, and we will kick off our first asset enhancement initiative in the Mainland China to extract the potential of CentralWalk in Shenzhen.

We keep targeting quality mass market retail and grade A office properties in Hong Kong, Tier 1 cities in China and the surrounding river deltas. We will also opportunistically explore other markets and properties to seek growth opportunities. We strive to build a collaborative culture and retain our talents to support our Vision 2025. After moving into our new Hong Kong head office at The Quayside in July, we are setting up our Mainland China headquarters in Shanghai. The setup will improve the reporting structures and sourcing of local tenants. We will offer development plans and training to support our staff, long-term growth and development within Link.

Lastly and most importantly, we care about the communities around us and aim to help them flourish through creative initiatives. We are going to rebrand our current Mainland China assets with a new unified identity Link Plaza. We launched place-making initiatives to transform public space into themed gardens and enhance their attractiveness and social cohesion. We will also apply advanced technology -- technological solutions that encourage stakeholder's engagement and improve operational efficiency. With visionary creativity, we aim to transform Link into a better organization for the future.

Finally, the important dates for payment of interim distribution are set out here for your information. And we now open the floor for any questions. Thank you.

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Questions and Answers

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Unidentified Company Representative, [1]

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Thank you, gentlemen. The first question comes from Mark Leung of UBS.

For the first question, in the announcement, which indicated that the discretionary distribution, along with the announced buyback, is funded by the divestment premium of HKD 2.8 billion achieved. Is it accurate for us to conclude Link is only planning to buy back shares in the first half? And is this correct that should we expect the company will not be able to achieve HKD 60 million buyback target within the financial year 2020?

Second question, in the future, in what case will your discretionary DPU scheme extend or terminate?

And the third question from Mark is what is your 2020 second quarter retail sales growth?

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Kok Siong Ng, Link Real Estate Investment Trust - CFO of Link Asset Management Limited [2]

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Yes. So I'll take the first 2 questions. On the buyback, yes, we have announced that we are going to do HKD 60 million, and we intend to complete this amount. Ideally, we want to finish it within the financial year. But in the first half, we've managed only to do HKD 13 million due to all the restrictions, regulations as well as blacked out sensitive information that we hold. So I think we tried our best but we also -- in terms of time and volume.

In terms of price, we also have an intrinsic value, which we decide when is a good time to buy. And then the daily mechanism is there's also a restriction on how much we can buy a day. So all those factors put together, we managed to do HKD 13 million for first half. We would like to finish the HKD 47 million, hopefully, by the end of the second half. If we can't, then we had to announce what is the plan to continue to return the remaining.

As to the other question on the discretionary dividend. I think as of this stage, we have announced that this amount is for 3 years. So I think that is clear. Should there be any more changes to the portfolio, big movements. We will have to relook at it holistically. I think the intent was from the divestment premium, we wanted to return a part in both combination of special dividend as well as buyback. And as far as that amount is concerned, this is where we are as far as the last disposal.

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Kwok Lung Hongchoy, Link Real Estate Investment Trust - CEO & Executive Director of Link Asset Management Limited [3]

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With regard to trading conditions, the second quarter of the year experienced a further slowdown compared to the first quarter. The first part of the year, I think we see some impact from the trade war. And getting into the second quarter, the impact from the protest starting to be reflected in some of the discussion with tenants about the rent -- lease renewal and also how we have attract tenants.

We're very pleased to say that during this half, first half, we still have attracted quite a large number of new tenants opening shops at our -- in our portfolio. But at the same time, obviously, there are challenges given that there are days where we probably have limited the number of trading hours at a small number of our shopping centers.

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Unidentified Company Representative, [4]

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Thank you, George. Second question comes from Ken Yeung of Citi. On rental concession, can we have a percentage of the tenants that are getting rental concession? And what is the range of rent cut and duration for such a concession? And the second question from Ken is on rental reversion. Can you share the rental outlook of the reversion for the second half?

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Kwok Lung Hongchoy, Link Real Estate Investment Trust - CEO & Executive Director of Link Asset Management Limited [5]

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We have decided to have the rent waived for the 2 days that Temple Mall was closed. So for tenants in that property, we have refunded the rent for those 2 days that was closed. As to other shopping centers, I think the other one that has been affected more seriously is T.O.P. in Mong Kok, and we're having a different treatment and it's really on a case-by-case basis how we deal with that.

For the wider portfolio, I think the negotiation are no different from what we have done in the past. I guess the range has widened from large negative reversion to high double-digit reversion, the average of which, as we have reported, is 18%. We will continue to see how we can support our tenants, especially since now we do have the data with tenant sales and also implication from the protest in terms of losing footfall and all that. We have to take all that into account. So we don't have a general number. We don't have a general policy. It's really depending on the location and their particular trade.

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Unidentified Company Representative, [6]

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Thank you. Third question comes from David Ng of Macquarie. Can you please share the latest trend of F&B tenants closing or moving out and the expectation of a potential rise of vacancy in the coming quarters? Can you share with us September retail sales decline or comparison versus the overall Hong Kong retail market performance?

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Siu Kei Yau, Link Real Estate Investment Trust - Chief Strategy Officer of Link Asset Management Limited [7]

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We are not seeing substantial F&B tenants moving out. Our occupancy as of September 30 was still quite high at close to 97%. So we don't see, as of now, any worsening in terms of vacancy rates. Regarding the question for -- sorry, the second question was...

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Unidentified Company Representative, [8]

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The September retail sales decline versus whole for Hong Kong.

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Siu Kei Yau, Link Real Estate Investment Trust - Chief Strategy Officer of Link Asset Management Limited [9]

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I think I've always been hesitant to look at just single month tenant sales because it could be quite misleading. September is always a difficult month to gauge because it depends on whether mid-autumn festival happens earlier, later. And there are quite a number of months where these sort of festivities and holidays would affect single month tenant sales.

As George mentioned earlier, as a trend-wise, we do see the second half of our first year, tenant sales growth has softened versus the first half of our interim period. But still, there are some relative bright spots in -- amongst the tenants. Most notably, obviously, is supermarkets. And also, we know the fresh markets are doing quite okay as well because the feedback is there are more people eating at home and then shopping more at the supermarkets.

Other F&B tenants are doing relatively okay with slow growth, but still a relatively okay growth. But general retail then, the behavior is a lot more -- falls within a much wider range, as George described earlier.

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Unidentified Company Representative, [10]

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Thank you. Next question comes from Bryan Wong of Franklin Templeton. Can you please share your view on the China office rental reversion at 13.5%, which is showing a slowing of growth compared to 2019? Understand that the portfolio is resilient, but what is the outlook for the retail rental reversion for the next 6 to 12 months with the ongoing social unrest for Hong Kong?

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Kok Siong Ng, Link Real Estate Investment Trust - CFO of Link Asset Management Limited [11]

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Hong Kong or China?

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Unidentified Company Representative, [12]

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First part on China, second part on Hong Kong.

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Kok Siong Ng, Link Real Estate Investment Trust - CFO of Link Asset Management Limited [13]

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I think, to be fair, the last run of rental reversion was way above market where we clocked above 20% of our rental reversion. I'm pleasantly surprised that we managed to even get above 10% this round, knowing that there is a supply that's coming through. But given where Link Square's location is and the Class A great office in the prime location in Shanghai, I think it will be great if we could manage to hold or at least bring up the rental reversion slightly, keeping occupancy to as high as possible. So we all know that the Shanghai market will see a bit of a supply coming through.

I think for Hong Kong, I think the overall fundamental is that people are taking a whole approach. We have a lot of inquiries, viewings, potentially going through a few more negotiations that we could stitch up soon. But by and large, I think it's been a bit slower than what we planned. But given the huge arbitrage between Central and Kowloon Bay, I think slowly we will still see some demand coming through to this side of the island. So keep fingers crossed, we are still hoping to get this TQS to full occupancy, hopefully, end of this year or early next year.

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Unidentified Company Representative, [14]

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Thank you. Next question comes from Alvin Huang of CLSA. Will there still be discretionary distribution on top of the HKD 0.14 discretionary distribution budgeted for the next few years?

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Kok Siong Ng, Link Real Estate Investment Trust - CFO of Link Asset Management Limited [15]

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I think based on this round, where we say 3 years for the purpose of the last disposal, I think this is where it is now. No plans for more discretionary, unless we see a reason for it.

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Unidentified Company Representative, [16]

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Thank you. I would like to extend the invitation to the full Q&As on the webcast. If you do have any questions, please do. There is a button at the bottom.

One more question coming from Goldman -- from Justin Kwok of Goldman. In view of the current marketing environment, what's the likelihood or intention to conduct more asset disposals? And the second question is for the portfolio valuation cap rates. Have you seen any early signs that might potentially lead to expansion of cap rates in Hong Kong?

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Kwok Lung Hongchoy, Link Real Estate Investment Trust - CEO & Executive Director of Link Asset Management Limited [17]

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For Vision 2025, we are very focused on growing our portfolio value. So while divestment may be one of the driver for the group in the next few years, I think we are seeking at how to actually find good assets. That has been our key focus and we don't have any imminent plan to further diversify assets at this moment. Cap rate?

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Kok Siong Ng, Link Real Estate Investment Trust - CFO of Link Asset Management Limited [18]

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I think there are 2 sets of tensions pulling the cap rate. I think generally, sitting where we are, there's a bit of a gloom. But overall, if you look at where interest rates have been moving globally, there's a trend that interest rates continue to lower. So I think there's both forces. I think as far as where the valuers are, they are comfortable to keep the cap rates as it is.

No evidence that there's a market panic where people are selling things at a fire sale to reset a new cap rate. So I think we are still good. I think, generally, most of the real estate players or investors in Hong Kong are pretty deep pockets, strong holders as we've seen in the past. So at this stage, we don't think there will be any decompression.

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Unidentified Company Representative, [19]

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Next question comes from Patrick Wong of Bloomberg.

What is the latest occupancy rate of The Quayside? And is there any update on the initial yield on cost for this project?

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Siu Kei Yau, Link Real Estate Investment Trust - Chief Strategy Officer of Link Asset Management Limited [20]

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The current occupancy of Quayside for the office portion, it's as per our last disclosure, which is slightly below 70% occupancy for the office. As for retail, then -- because we're actually seeing -- we're very happy about it because we are headquartered in this building ourselves, so we're happy to see more and more tenants moving in, in particular the F&B tenants and some of the services tenants as well. So that occupancy is increasing as we speak, and we expect the occupancy to be close to about, I think, 80% by the end of this year. So the leasing, well, I'd say the occupancy momentum for Quayside, apart from the office portion, the retail volume is still pretty relatively stable.

As for the yield on cost, because, indeed, with the slower let-out of the office podium -- office portion, it is lower. But then we still need to go into the -- until year-end to see what the final numbers are. Because as we speak, the leasing team is still actually very actively engaging with a number of potential office tenants. Hopefully, they will -- despite them being moving a bit more slowly than before, we still hope to get, as K.S has earlier said, to get them to sign on as soon as possible. So you'll probably have a clearer picture on the final yield on cost for the current year, closer to the end of this financial year.

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Unidentified Company Representative, [21]

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In -- for the interest of time, we'll take 2 more questions from the webcast. The next question comes from Cusson Leung of JPMorgan. What is the funding cost of the RMB debt that we have on our books?

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Kok Siong Ng, Link Real Estate Investment Trust - CFO of Link Asset Management Limited [22]

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The funding cost is about PBOC plus -- times 1.1. So you're looking at about 5 to 5.25 thereabout.

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Unidentified Company Representative, [23]

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And the last question is coming from John Lam of UBS. What is your China retail sales growth in the first half of the year? And as well as if we can share what is the retail sales growth in October 2019.

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Kwok Lung Hongchoy, Link Real Estate Investment Trust - CEO & Executive Director of Link Asset Management Limited [24]

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Well, we share in our slides on Page 22, the retail sales growth for the first 3 quarters, calendar year 3 quarter. And Beijing has a slightly slower growth of 4.8% increase. Guangzhou has been pretty strong and reflected in Metropolitan Plaza leasing result as well. And Shenzhen has 6.8% increase compared to the first 3 quarters last year.

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Unidentified Company Representative, [25]

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Okay. Thank you, gentlemen. And thank you, everyone, who's joining our webcast today. If you do have any further questions, please feel free to contact any one of our Investor Relations teams or send us an e-mail at ir@linkreit.com.

Thank you, and we hope to see you next time.

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Kwok Lung Hongchoy, Link Real Estate Investment Trust - CEO & Executive Director of Link Asset Management Limited [26]

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Thank you.

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Siu Kei Yau, Link Real Estate Investment Trust - Chief Strategy Officer of Link Asset Management Limited [27]

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Thank you, bye-bye.