Link Real Estate Investment Trust

HKEX:823

Earnings Call Analysis

Earnings Call Transcript 2023-Q2

[Operator]

Today, we are pleased to have our CEO, Mr. Zou Chong , and our CFO, Mr. Kok Siong Ng, to give us an update on the interim results and also strategy in the future.

Now I will turn over to George, our CEO. George, please.

[Kwok-Lung Hongchoy, executive]

Thank you, Sylvia. And also thank you, everyone, for joining today. With social distancing restrictions further easing we've got that some of you are here in person to this hybrid result briefing. I'm pleased to have K.S. with me as well. I'll start with the market outlook, and then K.S. will go through our operational update across the portfolio and some key items of our financial position and then I'll finish with strategy and priorities. I would like to start just giving you our view of what we see as a very uncertain well. Here in Asia Pacific, we're looking at ongoing geopolitics, interest rate hikes, inflation pressures. So looking at the geopolitics with Russia, Ukraine war, it has led to sustained disruption to global supply chain and volatility in energy and commodity prices and particularly natural gas and oil.

As a result, we have watched energy price soar and along with food prices, manufacturing costs, further supply chain disruption and even disruption on consumption to some extent. Closer to home, we are witnessing the technological, if not economic decoupling between the U.S. and China potentially destabilizing the region. Central Bank across the world, led by the U.S. federal reserves have been raising interest rate during this year and reducing liquidity in an attempt to [indiscernible] inflation. The ongoing global unpredictability continue to drive up both operating and nonoperating costs such as utilities, materials and cost of borrowing. So recover from the pandemic mismatch between talent, demand and available supply is emerging and adding to inflation concerns. We look ahead following the China [ 20 ] of National Congress then critical elements of stability for China in place. There is a clear emphasis on committing to high-quality economic growth.

Central government and the Hong Kong SAR Government have reiterated Hong Kong's continuing positioning as an international financial center, the Hong Kong SAR Government is in a solid position. We think with sufficient reserve to support the various policy initiatives to contribute to the overall economic recovery. So while we expect ongoing interest rate hikes, the U.S. Federal Reserve has signaled a further rate hikes may be less deep. And meanwhile, in China, Mainland China, interest rate remains control and favorable to support growth momentum. And despite economic challenges, China currently faces, we are optimistic with this long-term growth potential. So we want that -- we have put together a number of mitigating measures to lessen the impact. We believe that -- and we're confident in the Asia Pacific region and this ongoing growth potential. We'll continue to explore opportunities for diversification across APAC and at various asset classes.

And we'll do so with added caution. Interest rates continued to rise, and we have committed to maintaining a healthy balance sheet and stable cash flow. Fixing interest rate of 50% to 70% of our existing debt and our distribution reinvestment scheme provides additional funding facility, and we are diversifying our capital source by creating synergy with reputable capital partners to expand together in APAC.

Lastly, on inflation pressures, Link portfolio composition of nondiscretionary retail and logistics should be natural hedge against inflation as over tied to consumption. And we'll prioritize enhancing organic productivity, focusing on creating, capturing further value by enhancing operating margins through placemaking and sustainability initiatives.

So in summary, we'll continue to do what we have always done best as we ride out the current wave of uncertainty. Going into a bit more detail what I've gone through. Let me pass on to K.S.

[Kok Ng, executive]

Thank you, George. Our resilient portfolio continues to deliver consistent growth for the first half, albeit with economic headwinds. With contribution from newly acquired Australian assets, revenue and NPI recorded an increase of 4.6% and 4.5% year-on-year. Rising interest rates pose challenges to all of us in the real estate sector. Excluding the HKD 0.07 discretionary distribution in first half '21/'22 and dampened by rising financing costs. Distribution for the period grew about 2%, amounting to HKD 1.55 per unit. NAV per unit rose about 5% to HKD 80.86, which I will elaborate further. Retail sentiment in Hong Kong improved in the first half as we saw the pandemic impact largely behind us.

Our resilient portfolio delivered solid operational performance. Total revenue of our Hong Kong retail portfolio increased by 1.2% year-on-year. Our retail strategy encourages a brand mix balancing local and regional offerings, which [ enriches ] customer experiences. The occupancy rate was close to a record high of 97.5%, and the average monthly unit rent hedged up to HKD 63.20 per square foot. Rental reversion rate has continued to improve in the last 1.5 years, and we achieved 8.5% for this first half year. Despite continuing quarantine measures during the period, leasing sentiment remain buoyant in our malls. We continue to see upside with chain stores migrating into neighborhood shopping centers, such as famous F&B chains from Japan and Taiwan, supplementing our traditional operators.

During the reporting period, our leasing team signed over 400 new leases, demonstrating our malls attractiveness. Our Hong Kong tenant sales have largely recovered to pre-pandemic levels. Overall, tenant gross sales growth continued to outperform the overall market and increased by about 4% with the support of the government's consumption voucher scheme and our marketing initiatives.

Occupancy costs of the overall portfolio returned to a healthy level of 12.6% with improvements in F&B and general retail segments. Gradual relaxation of COVID restricted -- restrictions and a potential increase in minimum wage in 2023 are positive factors for our portfolio. We have been actively managing our portfolio to enhance its productivity and resilience. During the period, we completed 3 fresh market AEIs in Hong Kong with satisfactory returns financially and strategically. In particular, we invested in top-10 market as this is the first AE for the mall. Currently, we have 5 projects underway in Hong Kong, totaling more than HKD 260 million and an estimated CapEx of more than HKD 590 million under plan and approvals.

Total carpark and related business continued its organic growth. Revenue recorded a year-on-year increase of 12.7% due to encouraging improvement in monthly ticket sales and full year period contributions from 2 car service centers. Hourly carpark rental revenue has already surpassed pre-COVID levels. With the secured leaseback arrangement as well as the embedded annual rental escalations, the newly acquired assets will provide steadily growing income. Income per space per month increased 3% year-on-year to slightly over 3,100 as hourly parking continued to record steady growth as well as monthly parking tariffs increases. Average valuation per parking space increased strongly by 15.3% to HKD 700,000 per space compared to March this year from both higher income and cap rate adjustments. In August, we won the tender of parcel commercial use land of Anderson Road Kwun Tong, at about 9% discount to appraised value.

This demonstrates our long-term commitment to Hong Kong and supporting local daily needs. We expect to spend a total of HKD 1.6 billion to turn this site into a community commercial facility with convenient retail, F&B, a fresh market and carpark by 2027. Upon completion, our asset will be well connected to popular estates and our clusters of shopping malls nearby and will bring synergy to our other assets in the [indiscernible] industry. Pandemic waves in first Q impacted our Mainland portfolio. Despite the headwinds in relation to COVID, we managed to achieve a rental reversion of 8.4%. -- occupancy was 92.1%. A contraction and waivers totaling HKD 24 million were granted to our tenants to elevate their short-term pressures. While we expect it will take some time for market confidence to restore, maintaining occupancy will be our immediate priority.

In September, we commenced the first phase of the AEI of Happy Valley in Guangzhou. We are investing HKD 200 million for Phase 1, aiming to refresh the mall image and turning into a community hub. We will work on all floors, including repartitioning the area previously occupied by a departmental store, injecting kids entertainment and new elements attract a more diverse set of shoppers. To remain relevant in the flight to quality trend, we upgraded our office facilities in 2 phases for Link Square in Shanghai. The asset continued to achieve a healthy occupancy rate of 96% attributed to successful lease renewal with our anchor tenant. Our logistics operation is resilient and generate income with steady growth. All our assets are located at proven transportation hubs and 100% fully let with embedded rental escalations. On top of our 2 properties in the Greater Bay area, we agreed to acquire 3 more in Yangtze River Delta in May this year.

We completed acquisition of one of them, Jiaxing property in June, which is immediately accretive. Mainland China logistics continue to offer good entry and rental growth potential, and we believe this sector is robust. The acquisition of 3 retail landmarks at the heart of Sydney CBD was completed in July, occupied by leading local international tenants, these assets provided 3 months rental contribution in the first half. Alongside with reopening last June and our leasing efforts, our Australia retail portfolio was about 96% occupancy. Retail sales in overall Australian market in September recorded an increase of 26.3% compared with pre-COVID in February 2020. This platform is expected to benefit from the recovery with solid consumer spending. The acquisition of our Australian prime office portfolio was completed in June. Occupancy rate was 92% and Will is long at more than 6 years.

The gradual recovery in back to office rate and the prevailing flight to quality trend. We remain positive on best-in-class office buildings with green specs and defensive attributes. Our office portfolio with excellent tenant profile should continue to deliver a stable income stream and fits our diversification strategy. We've tightened credit environment insight, we continue to adhere to a prudent financial management approach to fund our operational and strategic needs. After taking into account the announced acquisitions and coming interim distribution, our gearing will go up to 24.5%. Liquidity remained high at HKD 15 billion, and debt maturities are well staggered. Our average borrowing cost was 2.5% for the first half of this financial year. And we expect borrowing costs to continue to creep up in this environment.

Our debt profile is well diversified across types, maturity and currencies, among which 56% of total debt was at fixed rate, which is within our policy range of 50% to 70%. Rating agency acknowledge our defensive financial fundamentals, and our credit ratings are affirmed at A levels with a stable outlook. Up until our interim blackout period, we utilized HKD 408 million, largely from last round of DRS retention to return to unitholders' capital by repurchasing 6.7 million units. Amid ForEx volatility, we have fully hedged our British pound and Australian dollar assets with respective currencies, and all our non-Hong Kong dollar incomes are hedged annually. Valuation of our investment properties increased by 5% compared to the end of March 2022. Higher valuation on Hong Kong retail was due to a slight increase in overall NPI, and market rent as well as the acquisition of a land parcel at Anderson Road.

The increase in car park tariff and ticket sales contributed positively to the value of Hong Kong car parks. Excluding the translation difference and acquisition of Jiaxing property, the value of our Mainland properties remain unchanged in RMB terms. New assets in Australia drove up the value of the overseas portfolio. A few of our assets experience cap rate adjustments. Hong Kong Car Park experienced a compression of 50 basis points to reflect the liquidity in the current market. Hong Kong office U.K. office cap rates expanded 22 bps, which is in line with the yield expansion shown in the market. I'll now pass to George to present our strategic updates. Thank you.

[Kwok-Lung Hongchoy, executive]

Thank you, K.S. Including the acquisition of the land parcel and Anderson Road, the total value of our asset portfolio has reached HKD 234 billion. So our assets are now diversified across regions and sectors, and with a resilient Hong Kong portfolio remaining at our core at 78% of the total. Mainland at 15% and overseas at 6% by valuation. If you look at this, the organic growth that we have managed to produce. We've been very, I think, quite impressive against a rather challenging market. What you have seen is Hong Kong last year, obviously, was very challenged. And then China was doing well. And then with the start of this financial year, China with the lockdown has been difficult. But then after the fifth wave in Hong Kong with all the reopening, Hong Kong have done well.

So this is exactly what diversification is supposed to do. And with this mix, we hope that it will be able to provide us a steady floor as we grow and then when China reopened will give us another pop in our NPI. So to deliver sustainable return to unitholder through this diversification strategically finding growth opportunities to replenish our portfolio with prime quality assets has been the strategy that we have executed over the last few years. In the first half, we have completed acquisitions in China for logistics assets, commercial land for development in Hong Kong, 50% of our prime office portfolio and retail portfolio in Australia. And obviously, those acquisitions have only started contributing to our portfolio because they just completed about 2, 3 months ago. This will continue to add new income to our unitholders.

Our Australian exposure, both the asset and income are fully hedged. So we together with our U.K. assets. So we're not too concerned about the currency risk there. We'll continue to look for strategic opportunities to reduce the concentration risk of any one location. And we will expand our portfolio across Asia Pacific with discipline and heightened caution at the top of our -- on top of our home market in Hong Kong. We're looking at expanding our investable universe across high-tier cities in China, Australia and Singapore. We are selective and we'll focus on jurisdiction with sound investment qualities, and Hong Kong will continue to be our core market, which has performed well, [indiscernible] post-pandemic upside. We will look at selective cities in the Mainland China as we believe the long-term outlook remains promising, and the sound economic fundamentals for Australia and Singapore give us confidence in these markets as well.

And these are being repriced with freight hikes to allow us to find more attractive transactions. So going forward, we'll continue to look for opportunities in Hong Kong, remain prudent and selective in screening these investments to provide a buffer against volatility [indiscernible] cash flow to deliver a sustainable return. We are aware that the financial and scalability limitation of our up to now wholly owned and managed approach in the current economic environment. So we have embraced growth through co-ownership and partial stake investments since 2020, '21. And for any new investments, we will also consider where appropriate, capital partnerships strategically instead of naturally using 100% of our own capital. So we may plan the use of our balance sheet and also external capital as we go to look at investments. And also in the cases of capital recycling.

So this hybrid of direct management, operating partnership will support profitability and also adding to a fee income stream over time. These capital partnerships enhance our diversification efforts with access to new investment opportunities, pool resources to further grow ourselves in new avenues and sharing risk. So capitalizing on our expertise and prior successes, we wish to optimize our portfolio with an enhanced growth pipeline and diversify to reduce volatility. As our portfolio has expanded geographically and into new sectors, our innovation and creativity initiatives have kept pace. We remain ahead of the [indiscernible] at both strategic and operational levels. We have installed EV chargers in 21 sites in Hong Kong and target to install 3,000 EV charging stations in over 100 properties by '24, '25.

We started to have our tenant signing green leases about 5% across Hong Kong and Mainland China so far as we started this year. HKD 18 million is committed to link together initiatives to contribute to the communities that we serve. And to boost operational efficiency, we leverage artificial intelligence and achieve 5% -- 3% to 5% energy savings among 4 pilot sites that we have started trial in about -- in 2022.

So commitment does start at the top. So ESG-specific KPIs have been incorporated into the balance sheet of a balanced scorecard of all senior executives encouraging individual ownership to this share responsibility. We have also enhanced our talent core competencies in several ways to support our growth and diversification strategy. We have strengthened our management bandwidth with several senior executive hires, a 1-year tailor-made learning program is offered to newly promoted, R&D's manager with the needed skills for their new roles and staff-led clubs and volunteer committees are in place to run a new wide array of activities throughout the year to improve engagement, especially after the relaxation of a lot of the COVID restrictions.

So to summarize, we focused on achieving high occupancy providing a quality offering to our customers, continued asset upgrades, providing shopper experience that will create value to continue to be very prudent and selective in how we deploy our capital. Leaning on our core competencies in asset management, portfolio management and capital management. We'll continue to optimize our portfolio to bring sustainable return to our stakeholders. So here listed the dates for the payment of interim dividend and also script elections for your information. We'll now open the floor for questions.

[Operator]

[Operator Instructions] Cusson Leung from JPMorgan.

[Cusson Leung, analyst]

Several questions. For the first one, we noticed that in your PowerPoint presentation this year or this interim results. There hasn't been any mention of the 2025 -- vision 2025. Has there been any change to that target? Number two, given the stock currently is yielding about 6% right now as compared to the potential asset yield that you're going to acquire for whatever asset. Wouldn't the stock purchase be more attractive instead of doing acquisition? Number three, we noticed from your slide that you mentioned about capital partner potentially for new acquisition and also for existing portfolio doesn't mean that Link is also prepared for your capital partner to take a stick in your existing portfolio?

[Kwok-Lung Hongchoy, executive]

Thank you for the questions. For vision 2025, sorry, I didn't see that we've missed talking about it. Sorry, we should add it back. We haven't abandoned it. Why do we missed it? Anyway, anyway, the target is still there. It's a long-term target. There's -- I think what I should say is, is a direction of travel. We want to get there. The incentive to the team is never about AUM growth anyway. We want to do the right deals. We're still looking at doing those deals. We don't want to just do acquisitions because we have to. We believe that repricing is happening right now.

With some of the deals that we have looked at in the last up 6 months, maybe even the last 3 months, we continue to see widening price expectation between the seller and the buyer, especially for sellers, they're still reluctant -- they're still reluctant in reducing price, whereas I think most buyers, most bidders in any transactions are looking at reducing the price that they offer. So the price gap become wider which makes it much harder to bring the 2 together to agree deal. So you see very few deals happening in -- across this -- all the geographies that we have looked at. So we are interested. We think deals are still need to be looked at opportunistically. But without repricing, it's very hard to get it done. So there is a desire to achieve those targets. That's the direction we're going. But we need some of the sellers to be more realistic about their pricing. So whether we can achieve exactly that target.

If you look back the last 6 months until the end of September, we have done quite a few deals. The market has obviously changed since the end of September and the gap has indeed widened a lot more than we have expected. So let's see, I'm still hopeful, but it's hard to say. I mean, it depends on the -- a lot of the sellers in all geographies that we've looked at.

As to capital partners, yes, we will -- I think there are several ways of looking at it. We already have some where we have partners, not necessarily capital partners, but certainly partners in deals like those in Australia. We will look at investing in transactions together with our partners, not necessarily using 100% of our capital, but sharing with them because we believe that, that allows us to do more deals, have access to more transactions and also using our balance sheet with higher leverage in not just that but also with their capital. With our existing portfolio, maybe some asset rather than selling 100%, we believe that there are investors who would rather have us managing it rather than selling it to some other manager to manage it. We might just stay on with a stake and continue to manage it, but still a capital recycling process of releasing some capital out of our existing assets.

So that's something that we are certainly considering. But that doesn't rule out selling 100%. So we're looking at both. As to share buyback, it is attractive in terms of [ yield ] today. At the same time though, is once the capital is used to do share buyback, while it helps DPU, NAV per share, et cetera, there's no more growth from it, right. The growth is obviously from our own -- the remaining portfolio. But it's always a difficult choice between investing in some assets versus investing in ourselves as in buyback. But we will continue to look at that. You've seen that we've done some. We will continue to do so at the right point in the market. But if there is opportunity where we see higher growth from investment, then we'll do so as well. But return on capital, if we can't find investment is something that we will definitely consider. It is on our list, but it really depends on opportunities and comparing it as one of the opportunities as you point out.

[Operator]

Mark Leung from UBS.

[Mark Leung, analyst]

I have few questions. I think the first one is related on the China retail. So I look at the announcement and we -- and I think the cash rental collection ratio has dropped to 90% in this first half. Just wanted to check, do you think we need to do any impairment for the remaining 10%? I think that's the first question. And second question is on the rental relief. So do we have a budget guidance on the second half for the China retail? And lastly is on the renminbi debt versus the AUM. I think now the renminbi debt accounting 9% of the total debt profile while our Mainland accounting 14% to 15% of the AUM. Given the renminbi interest cost is trending down, are we seeing -- we are going to increase the renminbi debt portfolio?

[Kok Ng, executive]

Maybe I'll answer both questions. I think you are right. I think China retail went through pretty difficult times. We have announced first half HKD 24 million in a way we call tenant support scheme. And clearly, if you think about the occupancy, you think about the receivables, they are going through a pretty difficult time. The team is having dialogue in order to make sure we keep occupancy as our first priority. And clearly, these receivables have been tested against those who owe us more than 90 days, we don't think that's future, we will take back the SD and we have already cleanup as part of the first half accounting. So this 90% and 10% is difficult because the sort of tenant support scheme negotiations going on.

So if you take my money, you are supposed to stay until the end of the lease. If you take my money for marketing, you're supposed to pay out with me to do certain things in the atrium. So sometimes they will take -- sometimes they will not take. It's not like it's just money on the table, you take and you just don't have a commitment to us. As for second half, we keep our fingers crossed to hope that there's not a lot more tenant support scheme neither should we announce it and every tenant will start asking. But I think we continue to monitor the occupancy, continue to check in with what we think are the ones that is well supporting. But I think given what you have seen from September to now, Guangzhou clearly, they have been going through a tough period.

So China retail, the question is uncertain. We do not know when and how, but we are just trying to make sure that we put our best foot forward to help the tenants keep the teams encouraged and make sure our AEI that's not going to a delay where we get into more issues. On the RMB debt, you are right. I think Aussie dollar is hedged, pound is hedged. RMB historically, we could only do onshore. Offshore was very expensive. Currently, there is a window for us to raise more CNH, and we are looking at it, but it's not a very big pool. It's not like a dollar bond, you can go out and do HKD 1.6 billion. You've got CNH is [ 150, 200 ], even public tranche to do HKD 1 billion, it's a lot for this. And Hong Kong is really the deepest CNH market outside. So I think you are right, we are -- we have the option to bring financing costs down and yet provide a hedge on our RMB exposure. But I think the market is not as deep we are doing some.

It's not going to get us to that HKD 18 billion to be fully hedged up. If we look at the recent refinancing, the credit margin have been very stable. And obviously, interest rate might have trended up the base rate, but credit margin, liquidity so far, there's no issue at least for us. So we feel pretty confident that our debt profile is very healthy. So it should be not a concern at all.

[Operator]

Ken Yeung from Citi.

[Ken Yeung, analyst]

I have 2 questions, 2 different parts. One is on your Hong Kong retail tenant sales. So there are some mixed signals on Hong Kong opening up international border people going out size spending. How is your view on that. And of course, I want to get a view on your outlook on your reversion especially in the second half of the year? And the second question is on your strategy because I noticed that your strategy managed especially saying that you're not pursuing any major acquisition. Can I confirm that you are not proceeding the Singapore deal. So following up on that is, you mentioned you're looking for distressed reprice asset. How cheap will you be interested versus your previous hurdle way?

[Kwok-Lung Hongchoy, executive]

Well, the opening up is important for Hong Kong because there is a rate effect for our property, but it's not a direct effect because we are nondiscretionary retail, people still come. If you look at the numbers, car park tickets have already gone past 2018 peak. So with that, we can see people are already back shopping that those are numbers not just contribute to our car park income, but also it's a good number to tell our tenants that people already bet and to support our discussion and reversion. Reversion rate actually we've been pretty good. You've seen the trend. 8% is this first half, we see -- well, we hope to be even stronger. The other number, which is sort of the first way of looking at how things have turned around.

The number of new shops, new leases that we have signed have dropped compared to last year and why that is a good sign is that new leases. We have very high occupancy. We only have a lot of new leases if there's a lot of new -- a lot of people leaving or closing down. So the number of people closing down have come down. So our new leases doesn't have to be that many. So if I compare last year, we have like 300-odd new ones this year, 200-odd about half of those are new tenants, which are also very encouraging because there are a lot of talents as K.S. mentioned, who have not operated in community neighborhood shopping centers that they are coming from the [indiscernible] type areas. So these new tenants, our leasing team is always very focused on, don't let them open just 1 shop, once they open 1, let's open the 5, the fifth one, the sixth one. So we have a new pool of tenants who are coming. So that's encouraging as well.

And with that, it hopefully push up the reversion rate. On transactions, I didn't say distress, I just said you hopefully seller will start to adjust their price expectation. You can't be selling based on last year's year-end valuation. You have to start adjusting it. And so hopefully, the price gap will narrow. We are not in any active discussion in Singapore. So I think that's enough set.

[Operator]

Raymond from HSBC.

[Wai Ming Liu, analyst]

I got 2 questions. Number one is regarding to the tenants that you mentioned. So they're like as you mentioned, there are a lot of tenants coming into your portfolios. How should we think of the [ refinances ] of your portfolios during the latest economic downturn in Hong Kong compared to the previous downturn like AFC. This is the first question. And the second question is about the cap rate of the portfolio. So if you look at the presentation slide earlier, so we can see that like the cap rate for the car park is now like below 3% sort of below the [indiscernible] rate, how should we think of the trend of the cap rate going forward? Or how should we think of the book value of the company going forward?

[Kwok-Lung Hongchoy, executive]

New tenants say they -- sorry, I missed it.

[Kok Ng, executive]

So if you look at the new tenant pools that we are bringing in from the centralized areas, clearly, they used to enjoy good sales, but also very high rent in centralized shopping district. So when they come in, clearly, we don't charge that in the kind of rent that they have to pay in Percival Street. But in terms of occupancy costs, we have been able to match. And that's why you start to see occupancy cost coming down. And to me, even to benchmark resilience, I think if you look through other than supermarket that has come up slightly because everybody has switched to F&B. And it could be F&B that we never had in our estates like [ Jollibee, Sushiro ] and we think that, that adds resilience.

So if you think about experience in other agent cities including Singapore, [indiscernible] is less relevant for 85% of Singapore. We don't need to go out. We just stay in housing estates and they consume. So I think as you create another layer of resilience through crisis. AFC, we were not really born yet. It was still under housing authority. It's Not really a good comparison. But I think if you look back the last 3 years and you overlay social unrest plus COVID wave 1, 2 to 5, right. If you look at our cash flow beta, actually, it's very low, right? We have [indiscernible] plus car park has proven another layer of resilience plus growth. And so I think there was a lot of surprise when people -- car park NPA has actually gone up a lot in the last 3 years.

[Kwok-Lung Hongchoy, executive]

When Hong Kong has the rental collection moratorium, there were tenants who took advantage of that and defer the rental payment. So the accrual seems to have gone up because of that. But then as soon as that moratorium ended our core action numbers have gone back up to normal because the court has also reopened. There was a period of time when the court were closed. So we -- the rental collection rate has gone back up arrears have gone down back to close to normal. And so I guess that's another proof of the resilience of the tenants that we have. And as you know, we always have 3 months deposit most of our tenants, and we won't watch that very carefully. If accruals get to a month, 1.5 months, then we start chasing and taking actions to make sure that we don't use up the deposits.

And also that what is interesting, I think, in the last few years, we can package it as sustainability. But a lot of tenants are quite willing to take over fitting out of the previous tenant. So we don't have to necessarily force people to go back [ bare shell ] to and then rebuild it again and then the rent-free period, et cetera. So all those things help, not across the board, but I think that those flexibility that certainly help us. Our cap rate, there's no adjustment to cap rate to retail portfolio, except those properties that we have completed as an enhancement, and we have proven that to the values that we can actually achieve improve NPI.

For car park, the car park income actually have continued to grow, gone past our previous peak. So I think the value looked and we had a lot of this discussion about this particular point. While they did their valuation, we did see this number. In this sort of environment, we will question whether it's worth going up. But you look at the per car parks per space valuation is still of HKD 700,000 roughly. And we're not selling them individually or we're not selling those car parks, but we will -- I think the average price in the market has been a lot higher than that. So we take comfort that the adjustment that they have done, not necessarily excessive given that we have continued to be able to grow our car park income even in this environment as people come back. And the number of car parks bases in Hong Kong still haven't really trended up. The government continued to restrict the number of car park being built while number of cars can continue to increase. So I think that trend has not changed.

[Kok Ng, executive]

The number you quoted 2.6 actually pertains to only TQS, the office car park, which, of course, clearly is the highest monthly rent of our portfolio. Otherwise, across the board, like [indiscernible] averaged out -- we are looking at about HKD 700,000 per lot, just above 4% cap rate.

[Operator]

We have received some questions online. This is about the acquisition. How does the company balance between diversification drive and rising interest rate and also FX risk? Would the company narrow its acquisition focus near-term in terms of geography or asset type given this risk. And also, how advanced is the discussion with the capital partners management, please?

[Kwok-Lung Hongchoy, executive]

Yes, it is a balance. That's exactly what we're working on every day is how to work on diversification, currency interest rate going up, hurdle rate for transaction hopefully should trend up. But if there is the right asset to then the question is whether we should buy now, do we have the holding power, even if the valuation might or the acquisitions that we do might go down a little bit or we just wait. Sometimes some assets, good assets, will be unlocked in these uncertain times. So it is a very opportunistic case every time. So we want to do deals that are immediately accretive. But then if our underwriting shows that there could be a year or 2 of more challenging returns, but then it will bounce back because of our asset management plan, we're not worry about doing those, and we've done those deals before.

We are actively looking at whether we should do some capital recycling to shore up the balance sheet further, but it's a process that we need to go through. So clearly, we're aware of the risks that we are dealing with in this market. There is no rush to do announce a deal month. That has never our game plan. But for the right assets, we will -- we have always been not necessarily aggressive, but certainly hard working and trying to find the right price for it. And so we'll continue to do that. But in the last few months, we walked away from quite a lot of deals in different geographies. I think we have to. That's a discipline we have to maintain as a good manager. And we'd rather stay with this discipline and do deals that -- that will hurt us in the near-term. And we'll do it prudently.

[Operator]

Since time is running short, this will be the last question from online. So this is about the capital management. What are the key credit metrics, for example, gearing interest coverage ratio, debt maturity, et cetera, need to maintain in order to keep your credit rating? And what is your target gearing? And also, when you do acquisition, what are the key considerations in terms of financing management, please?

[Kok Ng, executive]

I think we have been doing pretty much what you have been asking. If you say credit metrics, clearly, there's a bond market that looks at credit ratings and credit ratings generally drive towards LTV, debt over EBITDA. And our guess is when you look at where the credit ratings exchange with us is that as we cross past the 30% LTV. They generally get a bit more edgy about our current ratings. And if you look at banks, banks tend to just say as far as LTVs within SFC, we are fine. But you need to make sure your ICR is above 2. If you go to asset level, you see about 1.7 coverage. So I think when we look at how to manage the balance sheet is that you can put all these parameters, but again, we need to stress test it through crisis why evaluation starts to weaken, why interest rates continue to go up to 5, 6 or 7.

So we do have our parameters on how to look at it. But if you ask me today, we are very comfortable ICR is about 6% based on today's numbers. Even extrapolate, we are going to be high falls. LTV-wise, if we look at capital partnership, most likely, we can do a bit with capital partnership and keep LTV below 30% for the right reasons. Target gearing, like I said, we are not looking at any big deals at the moment. We are happy to keep between 25% plus/minus coupled with [ DIS ], like Josh mentioned in the beginning. There's a good chance that by second half, this number goes even lower. And if we can still bring valuation up, which we think we can in certain cash flow in terms of rental then against valuation change.

So I think plus/minus keeping ourselves below 30 conservatively, sitting still about 25%. It's a comfortable position. And if you think through interest rate having come up so fast. And if you look at a sudden awakening the last few weeks that everybody said, "Oh, a lot of the REITs cannot fund their financing costs if you're across 35, right? Whether you're SIBOR based, whether you're HIBOR based. And of course, Australian was the fastest [ BBS reacted ] share price. So I think we put all this together, capital management, there needs to be a lot more dynamic managing all this. Then the last one we do look at is average maturity.

Looking at our size balance sheet of HKD 230 billion, and how do we stagger out a debt book of HKD 60 billion, HKD 70 billion such that over time, there's nothing that is going to shop the credit market or shop ourselves, right? So if you look at our average maturity, we are looking at about HKD 12 billion, HKD 15 billion a year, which is pretty much one club loan, right, of our sites. It means everyone just got one club loan, you can get it done. You're going to be sexier, you do a bit of bonds, you do a bit CNH, make sure that you diversify, we're pretty comfortable in that sense. So quite a few of these things put together. And all the numbers you see there in the Slide 19 is basically all the metrics that we monitor quite closely.

[Kwok-Lung Hongchoy, executive]

So K.S. has answered this question after doing rounds and rounds of stress testing. In the last few months, I think we've tested interest rate going up a lot, EBITDA dropping valuation drop, and we might still do some deals and stress the balance sheet even more all these different tests with across every measure. So we have enough buffer. And so Obviously, we are all hopeful that the world doesn't get to that stage. But through all the stress tests that we've done, we are in a good position, which allow us to be quite robust and continuing to look for opportunities.

So when it comes to debt funding, pretty simple to the extent that it is in a foreign country then try to raise local currency debt, trying to balance between long-term versus short-term funding, keeping the fixed rate between the 50% to 70% target and disciplined about liability maturity profile and then all the cash flow measures. So the team has been very disciplined as we look at all those and to the extent that we have partners working with us, then obviously, we need to work with them about their ratios as well to make sure that we can satisfy all the different stakeholders. So I think we'll -- is there another question from the floor before we end?

[Operator]

Okay. This brings us to the end of today's analyst briefing. Thank you very much for joining us today. Wish you have a good evening.

[Kwok-Lung Hongchoy, executive]

Thank you very much.