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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you all for joining us online at Hysan Development's 2020 Interim Results announcement session. And let me introduce our panel for this afternoon. Our Chairman, Ms. Irene Lee; our Chief Operating Officer, Mr. Ricky Lui; and our Chief Financial Officer, Mr. Roger Hao.
Now we'll start today's session with a presentation, and we'll follow that with time to take some questions from you all. And I'll now invite Irene to start. Irene, please?
Hello, everyone. Good afternoon. Can you hear me through the mask? Yes. Thank you.
Let's start. The -- a difficult environment, that's a very good title. COVID-19 in the first half 2020 brought many aspects of Hong Kong to a halt. The city already suffered many months of social unrest during the second half of 2019. The macro situation, of course, was exacerbated by the intensifying tension between China, U.S. and its allies.
Hong Kong retail sales dropped 33% in the first half of 2020 when compared with the year before. Office sector saw a negative net absorption of over 1.4 million square feet of office space in Hong Kong during the first half.
Hysan's turnover and recurring underlying profit decreased by 5% and 3.4%, respectively. Our balanced dual engine portfolio helped the company remain resilient in the face of both expected and unexpected impacts. Occupancies of office and retail portfolios were 96% and 94%, respectively.
Just wanted to remind us with this pie chart. This shows our balanced portfolio. The retail contribution is 45% of our turnover, versus office's 47%, with a balance of 8% being residential.
A quick summary of our office sector business. COVID-19 introduced changes to usage of office space, hybrid models with flexi hours and locations plus more work from home. But physical office is here to stay. The physical office needs to function as a gathering place for interaction. Social interaction is important. New office designs, of course, need to emphasize health, safety and wellness.
Disruptions to retail. Pandemic accelerated retail sector changes globally and in Hong Kong. Online disruption, e-commerce growth saw major increases. And interesting to see, food and beverage, click and deliver became -- become very, very popular.
Supply chain disruption, halted production and delayed shipment, that has affected most of our retail tenants. Traveling and tourism, of course, heavily disrupted. There is little to nil traveling. So there have been no tourist spending in the last 6 months.
There's also demographic disruption there has been -- that has been coming. We have seen Gen X, Y and Z turn further to sustainability-minded items. And of course, health and wellness are very important.
Technology enhancement continuing with artificial intelligence and virtual reality.
How Hysan is responding to the challenges. We moved very, very quickly, we have to. As COVID-19 emerged, we put in place appropriate protective measures immediately and comprehensively. We maintained clear communication with our tenants to provide flexible and multifaceted solutions ranging from rental assistance to marketing support.
For the longer term, Hysan has created a dynamic and unique tenant mix. There's more banking and finance tenants, and there's the growth of our co-work or flex space. And of course, retail is putting more emphasis on luxury lifestyle concepts. This is supplemented by a rich program of activities and events for the family and for children, in particular, to build a community with a sense of belonging.
It is further supported by our continued investment and application of business technology and customer relationship management tools.
There are plenty of unknowns with the pandemic conditions and macroeconomic and geopolitical issues affecting Hong Kong's outlook in the second half of this year.
Many factors are changing our lives at faster-than-anticipated pace. Our dynamic and balanced portfolio, supported by a strong financial position and ample liquidity, as well as our strategy to take the longer-term view to provide resilience against crisis and form an essential foundation to realize Hysan's ambitions.
Thank you very much. I'll hand over to Roger now.
Thank you very much, Irene. And good afternoon, everyone. Let me take you through on a very high-level basis, the corporate financial results. On Page 11, as you can see from the screen, our turnover for the first half of 2020 is HKD 1.981 billion, a 5% decrease as compared to the same period last year, whereas the recurring underlying profit and underlying profit, the same at HKD 1.346 billion, a 3.4% drop year-on-year.
On the reported profit, as you can see, which is largely affected by the valuation change of our investment properties and also our affiliate in Shanghai, altogether contribute around HKD 3.9 billion valuation loss, which results into a reported loss of around HKD 2.6 billion.
Our shareholders' fund, which largely reflect the investment properties portfolio is at about HKD 73.7 billion, a 5% decrease from the same period last year.
Next page. That is the segment breakdown. As you can see and also heard from Irene early on, the 2020 first half results is a -- is about 5% drop year-on-year. Comparing to the second half of last year, there is about 4% increase in our turnover.
Next page, please. On this slide, as you can see, and you probably have -- is also aware of the fact that we had actually tapped the on-market in the first half of this year, raising about HKD 1.3 billion -- USD 1.3 billion to capture the low interest rate environment as well as the import market liquidity, so as to shore up our balance sheet. As a result of these actions, our average debt maturity has been further lengthened to 7-plus years with almost 90% of our debt on fixed rate ratios. And we continue to maintain A3 investment-grade credit ratings.
And on cap rate, as you would probably notice here and from our announcement as well, our retail portfolio, when devalue this portfolio, they have adopted a cap rate, which represent, on average, a 25% -- 25 basis points expansion. And while the office cap rate as well as the residential cap rate maintained at the same, which is in the range that you can see from the screen now.
Okay. So that is a very quick summary of the corporate level of results. And next, I would like to invite Ricky to share with you the individual BU performance.
Good afternoon. I'd like to share some highlights of our performance. We'll start with office. Office portfolio turnover declined slightly by 0.2% to HKD 927 million. The occupancy is 96%. We continue to achieve an overall positive rental reversion on renewals, rent review and new lettings.
About our office tenant portfolio, which is still a very balanced one. The top 4 sectors, banking and finance, professional and consulting, co-working, insurance, take up about 60% of our portfolio area.
For retail, the total turnover is HKD 900 million, which is 10% down from last year, contribution from turnover rent is HKD 20 million. Occupancy is 94%. The overall rental reversion is -- has become negative in the first half of 2020.
About the sales -- tenant sales, the pandemic effects apparent from February onwards, the damaging effect compounded by this disruption from the social events. In general, Hysan estimated the sales in most categories, largely on par with overall Hong Kong sales performance, which can be -- which is shown on the table on the right-hand side.
Our residential portfolio, our turnover is HKD 154 million, which is slightly down by 1%. We still enjoy possible rental reversion on renewal. The occupancy is 83%. Our renovation work to enhance the quality is still ongoing, and the lift modernization program will be completed by the end of this year.
For Tai Po, the project's progress is on track. Superstructure works is almost 50% done. We expect the target completion date of construction will be the second half of 2021, subject to the government approval.
As we mentioned before, we continue to invest in technology and under current situation, work, learn and dine at home become the new normal. Our previous investment has really bring the effect to help our tenants. For example, our online/offline spending stimulus campaign called Power Up, it is a fully integrated digital Lee Garden apps program with e-recruitment, e-payment, e-redemption, we provide an easy one-stop platform for this campaign. We also use the data analytics on real-time basis throughout the campaign to fine-tune our offering.
This campaign has created more than 400 -- 40,000 transactions, which is very encouraging to our tenants and office. For food and beverage, our online order and delivery service is very popular. Even for our Kids Club, we have done more digitalization and provide many online classes. We had invested in area WiFi and IoT, which gave further insight into visitor demographic and traffic patterns, which helped our e-commerce quite a lot.
About the traditional -- our famous Club Avenue. We have a new Club Avenue lounge and together with the Garden area just competed, which is a very upmarket one. And our members really love it. And at the same time, our brands also like the place a lot. We -- although we opened only for 2 months without the full service due to the COVID-19, we already have some collaboration with some brands, which have generated very good sales for them.
Sustainability has become a very important element for corporate. Health and wellness and safety all come to top-of-mind issues now. We provide very safe environment for stakeholders. We ensure work-from-home arrangement for staff. We also provide support and sponsor on online health and wellness activities. To uplift the atmosphere, our art program has installed very good modern art, which is bring the environment and the atmosphere much more lively.
This is a highlight, I would like to raise. Thank you.
So thank you all. Now it's time for questions from you guys online. And the first one is, I have one here from Goldman Sachs' Justin. The first question is for the first half of 2020 regarding the tenant relief program, what's the quantum and how much has been expensed during the period versus amortized?
I will let Roger answer that question.
Okay. Justin, thanks for the questions. First of all, in terms of the overall quantums that we helped that is the rental relief or concessions. Overall, the magnitude is, on a ballpark, it's very close to what we offer to the tenant in the second half of last year. As you would probably notice, last year we expensed it off immediately. While this year, we've -- following the guideline from the professional organizations, we start to amortize that. And so we amortized that concessions through the remaining term of the leases. And generally, you would notice that our average lease term from the expiry profile that you can find from the annual report.
Roughly, I think, on average, is about 1.5 years.
Okay. Let me get through 2 other questions from Justin.
It's nice to see steady interim DPS. What's the guidance for full year regarding the policy?
Well, we are very happy to report that we have been able to pay HKD 0.27 for this half, which is flat from last half -- last year. The situation is very volatile. We don't know what will happen during the second half. And moreover, as you know, we do not make dividend projections. So we will monitor it closely. We'll do our best to make sure our business stays healthy.
Okay. Now let me take one from Ken Yeung from Citi.
What is the rental reversion rate achieved for office and retail in the first half of 2020? And how is the reversion outlook for the full year of 2020?
Right. Maybe, Irene, let me take this. Ken, thanks for the questions. For rental reversions, office, up to date, is a positive low-teens. And for retail, is a negative mid-teens. That is for the deal we have done so far, which, by the way, for both office and retail is more than 50%, half of the expiry that we need to deal with in 2020.
And the forecast for the remainder and therefore, for the whole year. I think office, we are -- we expect to see the current low-teen positive reversions to be significantly narrowing down, given the trend of the spot rents and all that, as we mentioned in the 2019 final results briefing.
Overall, for the annual year, we are projecting a kind of like a flattish situation, but it really depends on the progress of the remaining negotiations.
For retail, it's much harder to give you a number and partly, as Irene mentioned earlier, the situation is quite volatile. So what we are dealing with on a day-to-day basis is really the discussion with our tenants. We will continue to discuss with each and every one of the retail tenant to see how the operation goes. One reference information, though, that might give you some ideas about the occupancy cost because you will probably recall back in the first half of 2019, our overall occupancy cost ratio is quite healthy at a high-teen to early 20 level. And then throughout the event in the second half of last year, the OCR gradually increased to mid-20 -- early 20s to mid-20s in second half of last year and then further going up to around 30-something percent. That is the OCR before our rental help of relief. The help from us will help them to lower the OCR for a few to mid-single-digit percentage point. So it really depends on the retail -- overall retail market.
And I think one of the last remark I'd like to make is, from our point of view, it's very important to maintain a healthy trade mix in our retail premises. So that you still see a very good choice of products when you come. And we will work very hard to balance this against the operating pressure.
Okay. Now there's one from UBS' Mark Leung. What is the company's internal target of net gearing level?
Well, I guess you guys would have noted that for the past few years, we maintained a very no-net gearing. Which is still the case. And I guess we don't have a very scientific one, but I guess comparing to the -- what the market alone will see in our peers and similar-industry companies in the market. I think a net gearing of about 15% to 25% would be within a reasonable range that we can accept.
Okay. Now I have a couple here from Bonnie from Haitong. How many tenants, I guess, by proportion, need to renew in the second half of 2020? And what's your expected occupancy rate at the end of the full year of 2020?
Right. In terms of occupant -- in terms of the expiry and the occupancy, overall, as we also explained when we announced the final result for 2019, we had about 1/4, 25% of our area coming to expiry or review for our retail portfolio. We have done over half of it already, and with a few key large tenants in the final stage of negotiations. But as I mentioned earlier, the overall rental reversion up to now is a negative mid-teens and really depends on the final discussion with them.
But again, while this is one of the resulting metrics, our really real focus is really on the overall ability for our tenants to be able to operate. And I think in Hysan, it is a long-held tradition that we want to have a long-term working relationship with our tenants. So that is also one of the key principles we will consider when we discuss with them about the renewal.
Maybe can I add here is, we try to maintain the fine balance of defending occupancy, of defending our rent, of attracting new tenants because the mix really should be changing on a regular basis as we curate for, be it new requirements due to COVID or -- I mean, the world changes, right? So we would be balancing all of that to make sure that we have a good cluster of tenants. Now that could mean that we have some shorter roles. We'll have more pop ups.
But interestingly, we see continued interest from retail and also office tenants. For retail, we see those who either are purely online, and they would like to try an offline presence, or those who would like to actually come to our Lee Gardens area to try out our style of curation, our style of management. So happily, we are seeing interesting and good demand. So that is reassuring.
Okay. Bonnie actually still has a second question on Tai Po. Completion of Tai Po project, it's likely to be second half of 2021, as we mentioned. Is that for the whole project? Or is it for the first phase? And if so, what's the split launch schedule for the rest?
I think for Tai Po, what we had just mentioned is about the construction program. The construction program, not necessarily be same as the application of OP, which can be spread into phrases. And also, it is also different from the application of PCL's consent. So we are still working on the -- whether we will go for phrase OP but for the PCL's concern, probably it will be like a third or fourth quarter next year, we will get the PCL's consent.
Okay. Here's one from Fan from Bank of America. Can you share some colors on the retail sales and footfall trend in May and June before the third wave of COVID outbreak?
I will give an overall comment, and Roger will have more firm numbers. In May and June, when the second wave died down and the third wave had not happened, the malls were full. We actually saw traffic come back very, very robustly. The beneficiaries of the footfall were, in particular, the F&B tenants. You wouldn't be able to get a seat without a booking. So that was actually very heartwarming to see that the traffic had come back.
Now in terms of the shopping, yes, they were there, but it was too short a time for us to really gauge the spending power. But F&B was certainly very, very well patronaged.
Roger, do you have any footfall -- any numbers for May or June?
Yes. Thanks, Irene, and I think before I get into details, I just want to refer Fan back to Page 18 of our presentation earlier on. I wonder, Mark, whether you will be able to put this slide on, that is on Page 18.
Yes. You can see that, as Ricky also introduced -- highlighted to you. So these are some of the key industries or trades within our portfolio. We want to compare that with the overall Hong Kong.
One thing I want to highlight to you, though, is of these 5 trades, the sales from all of them added together, account for over 80%, 8-0% of our retail tenant sales, whereas for the Hong Kong, overall, these 5 category, according to my understanding, it accounts for around half of it. Obviously, in our portfolio, we don't have some of these long discretionary things like the daily vet market purchases and all that. So I think that is the special characteristics, especially when you compare ours with the overall Hong Kong.
And among the Hong Kong, I mean, among the Hysan numbers, you will see that there are different percentage of performance. And in most of the cases, we actually bode well or better than the overall Hong Kong with one of the exception being the medicine and cosmetics, which, in our view, is really due to the business model for some of our tenants who primarily benefited from the visitors from overseas and mainland in the past.
Having said that, and echo back to what Irene just shared with you, before the third wave come in, we actually see a very clear pattern of bouncing back basically across all of the trade. And so we believe that also represent the underlying resilience and attractiveness of our portfolio.
Okay. And now here's a question from Hildy from Morgan Stanley. How do you see the work-from-home disruption to office market in the medium term in terms of office demand? Will you consider expanding more co-work exposure? Or will you consider running flexible workspace on your own?
I think Ricky will answer this question.
I think the -- as we see work from home become quite a new normal. And this we think will change the office use to a certain extent. So we expect the new office design, and we've been more focused on interactions, meetings and also they will focus on wellness and health and wellness for the staff. So that's part of it.
And the second part of it is the demand for flex. We do see the demand for flex with this work-from-home model may generate new demands. So as you know that in our portfolio, 10% is flex, which we also see even in this difficult time, their occupancy actually has picked up. And we also see the flex serve as an ecosystem within our office portfolio is quite obvious. And we believe the office tenant, the interaction or their distribution area between flex and their own leases, will have a kind of balance. And we also see with the flex in our portfolio to be -- does become an attraction to people coming to our communities.
Now here's one from Jeff Yau from DBS. How will the company deploy the cash other than bidding for Caroline Hill road site?
I think you might be referring to our very active fundraising program since 2019, in particular, during the first half. A couple of points to make there. Number one is, it is very important and prudent to build a strong balance sheet. Especially while the market is liquid and the rates are low. So you can see from Roger's numbers, we have stretched out our maturity, and we have lowered our cost of funding. So that is just a prudent thing to do in -- while times are good.
The other factor, of course, is we -- it's, again, prudent to have ammunition available. It's not just Caroline Hill. Of course, Caroline Hill will be coming to market very likely before the end of the year. So Caroline Hill is certainly a project that we should look at and there will be other opportunities. As we always answer this way, whether in Hong Kong or in China or overseas, we are always open to look at accretive opportunities and opportunities to help with our diversification plans.
Okay. Now a related question from Andy from Haitong. We're having quite sizable cash on-hand again and also trading heavily below book like the rest of Hong Kong peers. May I know if management would have any plans to do more share buyback in the second half of the year?
This is part of our dynamic capital management. The answer is, we will look at that. We have the ability to do so.
Okay. I think that's pretty much -- we've gone through all the questions. So thank you, everyone. Thanks, everyone, for joining. And again, let's hope to see you guys in real life, in person next year.
Thank you. Thank you very much.
Thank you.
Thank you.