Mapletree Commercial Trust

OTC:MPCMF

Earnings Call Transcript 2018-Q4

[Unknown Executive]

Hello, everyone, a very good evening. And welcome to Mapletree Commercial Trust's fourth quarter and financial year results for period 1st April 2017 to 31st March 2018. For all of you who are here physically or tuning in through the webcast, thank you again for your time.

Without further ado, I would like to introduce MCT's management team with us today. They are Ms. Sharon Lim, Chief Executive Officer for Mapletree Commercial Trust; Ms. Janica Lim , Chief Financial Officer -- Ms. Janica Tan, Chief Financial Officer; and Mr. Koh Wee Leong, our Chief of Investment and Asset Management.

So we shall start with the financial results to be presented by Janica, and Wee Leong will then go through the operational performance of our assets. We'll then have a Q&A session. We'll take questions from the floor as well as questions from our online participants. Again, I would like -- now like to invite Janica to go through with us the financial results.

Janica, please.

[Bee Lian Tan, executive]

Good evening, and welcome to this full year result briefing.

I will go through some key highlights and then, after that, go through some detail of the financials.

We are pleased to report a full year DPU of $0.0904, up 4.9% from last year. Gross revenue and NPI for 4Q grew 1.3% and 1.2%, respectively, from fourth quarter last year, driven by higher contribution from VivoCity, MBC I and MLHF. And the DPU for the quarter is $0.0227, up 0.4% year-on-year. Indeed the valuation to our portfolio and the total value of our investment property rose 5.4% to $6.7 billion. And correspondingly, the NAV per unit was up 8% to $1.49.

On the operating performance, VivoCity achieved record $958.2 million sales in FY '17/'18, up 0.7% from a strong '16/'17 [indiscernible] despite the ongoing -- the downtime from the ongoing AEI work. On the AEI, on the ongoing AEI, at Level 3 to -- at library and at B1 on the extension from the bonus GFA, these are on track and progressing well. The 24,000 square feet of added retail space in B1 has been fully committed. We are also embarking on some review affecting retail consent, such as the upcoming Zara expansion. This upcoming Zara store will be the largest in Singapore, offering full range of men, women and children apparels.

On the capital management, we issue a $120 million 6.5 million -- 6.5-year bond at 3.28%. So this helped to extend the term of maturity to 9.3 years (sic) [ 3.9 years ], gearing low at 34.5% as the result of the upward valuation of our portfolio.

Now we go into some detail of the financial performance.

Fourth quarter versus last year, gross revenue was 1.3% higher at $108.9 million. This was contributed by VivoCity, MBC I and MLHF. Revenue for VivoCity and MBC I was $0.6 million and $0.7 million higher than last year, respectively, mainly due to the effect of step-up rent in the existing leases. The high income for VivoCity was also due to the AEI at Level 1, but this is partially offset by the downtime from the ongoing AEI work at B1, Level 1 and Level 3. Revenue from MLHF is also higher by $0.5 million mainly due to higher occupancy rates.

The other 2 office assets PSAB and Mapletree Anson recorded lower revenues, as compared to last year. This was mainly due to lower occupancy.

NPI increased by 1.2% to $84.3 million for the quarter.

Finance costs, 5.3% higher than last year. This was mainly due to higher SOR, as compared to the actual SOR in fourth quarter last year. And also, we did our refinancing for the [ half 1, full year ] using longer-tenor MTN.

So as a result, income available for distribution for the quarter is $64.8 million, 0.4% higher; and DPU $0.0227, 0.4% higher as well.

On a full year basis, gross revenue was up 14.8% at $433.5 million. This is mainly due to the full year contribution from MBC I for this -- FY '17/'18 as well as step-up -- effect of the step-up rent in the existing leases with MBC I. VivoCity and MLHF also contributed to the higher revenue. Accordingly, NPI was up 15.9% to $338.8 million.

Finance costs, higher by 19% at $63.9 million. The reason is because you had the full year effect on the MBC I, the loan drawn down to finance the acquisition of MBC I, of course also higher SOR and our floating-rate loan as well as the refinancing using MTN [indiscernible]. So the distributable income achieved for the year, $260.4 million, up 14.6%; and DPU for the year $0.0904, up 4.9%.

On this slide. MCT's policy is to value our investment property once a year, so an independent valuation was conducted. And as at 31st March 2018, total portfolio value increased by 5.4% to $6.7 billion, with VivoCity value at $3.02 billion, 10.5% higher than the previous valuation. This is mainly due to cap rate compression and better underlying asset performance.

So on the balance sheet, investment properties $6.7 billion because of the valuation, NAV per unit $1.49. So the balance sheet is strong.

Key financial indicators 31st March 2018. The total debt remained unchanged at $2.3 billion, of which 78.9% is fixed via interest rate swaps and also the fixed-rate bonds. Gearing lowered to 34.5% due to the increase in valuation. [ Okay ], we issued a bond, 6.5-year bond, in March. And also, we extended one of our [ revolvers ] by a further 4 year, so this helps to extended the terms to maturity of 3.9 year, as compared to the 3.6 years [indiscernible]. Weighted average all-in cost, 2.75% per annum, slightly higher than the 2.73% per annum last quarter.

[indiscernible] Okay, next slide shows the debt maturity profile of MCT. Okay, we have a refinancing of $264 million in this current financial year, FY '18/'19. So in March, when we issued this $120 million bond, we actually do a part refinancing of this $264 million. For the balance $144 million, we are actually in advanced negotiation with lender to get this refinanced. [ That $144 million is due ] in August 2018.

The next slide, this is the summary of the results of this financial year versus last year. I've covered most of this in my previous slides, so I shall skip this.

Slide 15, this is the unit price performance. We closed at $1.57 as at [ 30th March 2018 ], 78% increase since IPO. On the total return to unitholder, on Slide 16, if you hold MCT's unit since IPO, the total return will be about 138%. And for this year, the return to unitholder is 8.5%. Okay, finally, the distribution detail: Distribution of $0.0227 for the period 1st January to 31st March will be paid out on 31st May. And the BCD date is 3rd May.

Okay, Wee Leong?

Thank you.

[Wee Leong Koh, executive]

Okay, let me run through the highlights for the portfolio performance for the last financial year.

On gross revenue basis, the large chunk of that 15% increase was actually due to the full year contribution of MBC I to the portfolio against the previous financial year. If you recall, the previous financial year, we acquired MBC I, with effect middle -- towards end of August 2016, so it will be -- that was 7-ish-month effect in the financial year vis-à-vis the stronger effect this year. If you strip out MBC I and look purely at the same-store assets, we were looking at about a 1.5% increase in gross revenue. The majority of that increases actually come through from VivoCity, where we have the impact of AEIs that were done in the previous financial year. We had the -- some rental reversions that were still -- that were positive as well as step-up rental programs within the rent structure. They have contributed to all of that.

If you look at other assets. MLHF is roughly more or less flat against the previous financial year. In the previous financial year, we had the -- we saw Bank of America give up one floor in the building. That was in December 2015 -- sorry, December 2016. And over the course of the year, we have gradually filled up that space. And on a year-on-year basis on revenue, we are about flat because of previous year. You will see the upside in this coming financial year when the building is fully occupied. For the other 2 assets Anson and PSA Building, unfortunately we have -- occupancies were a little bit down on year-on-year basis. We had some tenants that did not renew their spaces. And in the previous financial year, we were more or less fully occupied for both of these assets. So on that basis, we see both assets down a little bit in terms of revenue, for Anson about $700,000. And for PSAB, we are down about $800,000 or so.

There was a little bit of savings in terms of operating expenses. On a same-store basis, they're actually more or less flat, but on net property income we're up about 15.9%. Again, a large chunk of that was actually due to VivoCity. And -- a large chunk of that was due to VivoCity. MLHF is roughly flat. Anson, PSAB were down a little bit on the previous year.

If we look at occupancy numbers, and then more or less tells the story why the portfolio asset is performing that way. I think one thing just to note is that for VivoCity now you see the physical occupancy a lot lower than you -- normally you have seen in the past. And that's due to the fact that we have included the net leasable area for the library here as well. That space is now currently being done now its fit-out, so that's vacant. The other area that is now currently still in fit-out is actually the bonus GFA space that we have just -- that we are creating in Basement 1. So both of that, as well as a number of fits-out that are ongoing within the mall, have contributed to the slightly -- to the lower occupancy for VivoCity that we see here. On the flip side of it is that on a committed basis it's still close to 100%. They've got a few [ ORAs. They're always in ] vacant. And you will see all this space slowly be filled up and revenues starting coming fairly soon. I'll talk a little bit more about AEI in later slides.

So MBC occupancy remains high. In the previous quarter, we reported that occupancy had dropped to 93% for MBC. The tenants, they were undergoing fit-out. A few of them have fully moved in. So I'm sure that, when you came today, you have seen that the place is actually a lot more crowded. The tenants on the lower floors of this building have actually moved in towards early part [ this month ].

So PSAB also has a slight increase in occupancy, but against, compared to the previous year, that's still a little bit lower. Same story for Anson. And MLHF is the only one that has come the other way. A low occupancy has now translated to a higher occupancy towards the end of year and will continue for the next few years [indiscernible].

Rental updates. So for retail we are running at a rental uplift of 1.5% for the leases that were committed -- for the leases for last year. For office and business park, because this year we still had leases that ended at significantly higher rentals than what current market is transacting, therefore, we still see a negative 8.7% rental reversions for the business park. And we had -- if we include the effects of the higher rental for the replacement tenant at the pre-terminated lease here at MBC, [ the effect, that get closer ] significantly. We are looking at rent policy of 0.7% negative rental reversion for the office and business park portfolio.

Okay, so as we say with lease expiry, still fairly healthy. I mean, for business park, we're running at -- office and business park we're at 3.2 years. Retail is up to 2.1 years now.

The next 2 slides just give you a view of what the composition of the portfolio tenants are. I mean top 10 tenants now contribute about 25% of our gross rental revenue. That is down just a little bit from last year. We were just 25%. And the next slide just gives you a view of what the tenant trade mix is. Largest is still F&B, but if we look at it on a VivoCity basis, that's actually just a little bit [ about 30% ] of the mall.

Okay, let's talk a little bit about VivoCity. Looking, this year, at shopper traffic, on a full year basis we're actually down a little bit from what it was last year. And one main contributing factor was that last year we had a fairly strong traffic at the mall in August, September, October period; a little bit into November as well. And you don't see that coming through this year, and that's largely due to [indiscernible] Pokémon is now not really all that popular. And if you look at other aspects, we had a lot more events that had -- that were going on in the mall last year. We spend quite a bit of effort in the most tenured [indiscernible], and last year, we had 1 or 2 slightly larger events. So on a year-on-year basis, we are looking at shopper traffic being down slightly from the year -- down slightly, 1.4%, but I think the good thing is that tenant sales have managed to hold up despite the slight drop in traffic. And strictly speaking, we actually had -- if you've been to the mall over the last few weeks and towards the last -- towards end of last quarter, we have actually had quite a lot of space that was down for either works for AEI or for setup periods for varying tenants. I mean you saw from occupancy that we are down about 93% -- down to 93%, and that was actually for close to about 1.5 months of the last quarter. And that has actually had a big impact on tenant sales, actually had an impact on our tenant sales.

I'll just run through a few other things that we actually completed in this current financial -- in the financial year that just passed.

So in earlier part of the year, we finished an AEI. We have -- took a bit of space from one of the anchor tenants and converted that to specialist -- specialty shops. And I think that, that AEI has done quite well for us, stabilized ROIs rate at about 29%. Most of the tenants are trading quite okay now. Some of the other works we had done to -- at the same time was actually to improve the layout of the kiosks at Basement 2. This is the area, as you come out the MRT station, on the right. In the past, it looked a little bit more cluttered. Now it's a lot more open, and you get a better view of the tenants behind the kiosks. On ongoing basis, we are still working on the AEI to put in the public -- to put in the library. This is one of the reasons why I mentioned that occupancy is down a little bit. The library itself is currently still vacant, expected to only come through towards the end of this calendar year. And the space -- then the bonus GFA that we got from putting in the library, we have -- we are -- we have used to extend Basement 1. Those works are currently ongoing. We expect tenants to open somewhere towards the end of this quarter.

So we have committed all of the tenants for the space. Largely it will be lifestyle- and leisure-type tenants. And we have gotten fairly good rentals with most of these tenants against what the space will be [ tendered on the said ] floor. And on an ROI basis we are looking at about 10%-ish based on the [ cost savings set inside the rentals ] we're getting for these tenants. And mix of tenants is actually quite good, and you will some fairly large concepts in that location.

One of the other things that we managed to do over the course of the year is actually to improve our entertainment offerings. We took in Timezone, who were actually existing tenants on the third floor, to the space unfortunately that had to be tendered for [indiscernible] library. We put them on another location on Level 2. And actually we're able to increase their size about 80%, and it's now the largest shop for this tenant. And actually if any of you have kids and you have been there, you will probably know what damage they can do to your wallet. And that's actually done quite well for us in terms of tenant sales as well. The other area that have actually -- that we are currently working on is to increase some of our tenants. We are looking at increasing the size of the Zara shop at Vivo. Now it's currently about 16,000 square feet. Once the extensions are completed, that will increase to about 33,000 square feet and will be the largest store in Singapore. It should have complete range of all of the men, women and children. And I think this helps to show that VivoCity continues to be a destination for tenants, and they want to invest and want to increase their presence within the mall. Works are ongoing. And this is one of the tenants that have a little bit of an impact on our sales in the fourth quarter. And works will be completed within the next few months.

[ Okay, so ] I guess we'll take questions, anything that [ your burning questions are ].

[Unknown Executive]

For the benefit of online participations, can I trouble you to actually state your name and where you're from before you ask the questions? Thank you.

[Mervin Song, analyst]

Sharon, Mervin from DBS. A few questions. I guess, in terms of rental reversions coming through this coming financial year in terms of VivoCity, do you expect [indiscernible] stabilize at current levels given just the pickup in the Singapore economy? Likewise, for MBC obviously headline looks negative, but we had the annual step-up, so [indiscernible] for rental [indiscernible].

[Hwee Li Lim, executive]

If you look at, if you go back to the slide on the rental reversion, I think realistically gone are the days of the 20%, 30%. We have come to a little bit of mature phase with still a little bit of -- with still some AEI that we can do. And if you look at where we think the reversions will be, I think Vivo will still have a place in this market. A lot of tenants are still looking at Vivo to set up shop, although the market is not as beautiful as it was. It's still a rough market out there, but I think Vivo definitely has an edge over its peers. So in terms of reversions, obviously I'm pushing the team for definitely still a positive but definitely not in the order of the 20%, 30% kind of range. And if you notice, we have also started changing a little bit in terms of going in for a bit more concept stores and a little bit more lifestyle and entertainment. There was a lot of online e-commerce issues that were raised, and I think one way to combat it is definitely looking at services and entertainment stores and not chase with online purchases. Other thing is we have been doing well with F&B, so we are continuing to do that. So together with some trade mix changes that you'll see along the way, sometimes you may just have to sacrifice a bit of the rent. Give you an example: We used -- this year, we had a big hit on Vivo's reversion numbers because of one playground operator that we have to shake down and convert it to a Vietnamese restaurant. So that might shave the percentage down quite a bit. Playground, we upgraded our playground. So anyway, we also took his business. If you want to say, it's a double digit to us. So he couldn't function as well as we could, before, after we upgraded our playground. So that was one case that we changed the trade for the better, but at the end of the day, it hurt the reversion. So in terms of the office and business park, there will be some ups and downs, okay? If I say asset by asset, you will see that MBC had such a -- there are some negatives this year, but we have to look at it holistically together with the SP lease that we reverted with the preterm. So in essence, MBC itself holistically, the reversion was still positive. Coupled together with step-up and operating savings, we could see NPI growth. Just to take ourselves back into history about 1.5 years ago, when we are proposing acquisitions: I was telling the market that, MBC, we are going to buy at a stabilized view of -- stabilized NPI of [ 100 million ]. I will say quarter -- any quarter that you annualize or year-to-date, we have definitely surpassed that, yes. So -- but definitely there are some leases up, some leases down. Overall, even if you talk about down, we are not going to be looking at double-digit down; if anything, maybe single digits. But when we manage a property, we look at managing on a NPI level because reversions -- like this quarter, we are talking about 15,000-square-feet reversions that went into this number. Is it going to change my whole portfolio? No. Is there going to be some impact on the numbers? Of course, there will be, but it doesn't change my whole story because I manage top line. We also have OpEx that we've managed. So along the way this quarter, we also suffered some numbers from the downtime that we are putting into VivoCity. Because of the changes that we are making together, like all the construction, all my leases are down. I don't get revenue. My sales is down because I shut down the shops that is upstairs on Level 3, getting ready for the library and construction is going on. But when we count total sales, we don't remove the area. We take it as a whole. So I will say that indicators are still holding up. You may see that shopper traffic has gone down, but if you look at our 2015 number, we are previously hovering 53 -- 52 million, 53 million. 2015 and 2016, which is last year, was a big year for us because of the Pokémon effect. We went up to 55.8 million, and this year, we came down to 55 million. So even if I remove the Pokémon, I think we still have a steady state. 2 years ago, we were 53 million. Today, we are 55 million even at a reduced state. So I'm still comforted that it's not that actually I had [ bid too strong ] in terms of number, but as a matter of measure, when we share with the market, we have consistently been recording such numbers hence this way. So I've been talking a little bit more than what you asked, but I think, hopefully, it gives you a overall understanding, better understanding of Vivo. It is a lot of pain that we are going through. It's in a way to future proof a little bit of VivoCity. The library should be a draw. The library should be a complementary and something that will suit our target market very well. We did our survey. Target market shows that we attract families with kids. This will go down well. We get bonus GFA on that, so we don't lose NLA. And we get additional trade. And we are pushing it down to Basement 1, and we have since filled it up. On top of that, there's a lot of other hardware that we put in there, that is no true numbers, but it's a very -- that will improve the overall experience. One, we put a new escalator, the new escalator coming up from the MRT on the right-hand side which you will see holding up outside [indiscernible]. [indiscernible], right? That will connect to the new area B1 and will connect straight up into C.K. Tang. That, I hope will give another boost to C.K. Tang, yes. And it helps for -- helps us in diverting traffic and improving our vertical connection. VivoCity was first built 10-over years ago. 31 million people. Today, we are 50-over million people, so I think we need to put some effort into sort of working the back-end pieces of the hardware.

[Mervin Song, analyst]

In terms of, I guess, more strategic question. [indiscernible] have been traveling overseas, be that to Europe or U.S. or Japan. So -- and your gearing now has fallen to about 34.5%. I'm just wondering whether you will also be tempted to go to overseas markets...

[Hwee Li Lim, executive]

Nothing stops us in the trustees, but there is no big push at the moment. I think, if the right portfolio comes onboard, nothing stops us from evaluating it, but to say that tomorrow I'm going to country A, B or C, I will say that it's not burning -- it's not a burning issue on my table today. A lot of investors feedback that they do like our Singapore centric, our [ Singapore U ], our Singapore risk and our single currency. So I think that is one of the beauty of MCT at the moment. Which country do you think I should go?

[Unknown Executive]

I'm thinking [indiscernible].

[Wee Leong Koh, executive]

That [ will be a big thing in ] Singapore.

[Hwee Li Lim, executive]

I'll take that feedback to my board.

[Mervin Song, analyst]

Anyway, you still have some good options in Singapore.

[Hwee Li Lim, executive]

Okay, you see, if you look at our [indiscernible] list, down the road there's still MBC II. That is part of the [indiscernible]. There are some of the assets around HarbourFront. It's also part of our [indiscernible] list. As and when the sponsor is ready to sell, we will do the due -- we'll go through the due process to assess it, yes. So nothing is on the books to say, yes, I'm going to buy something, we have to go through the due process.

[Unknown Executive]

So we have 2 questions from Tan Xuan from CLSA. So the first question is, if we strip out the retail stores that were affected doing AEI, what will be the tenant sales change on a same-store basis?

[Hwee Li Lim, executive]

I will say over 1%. From 0.7%, it will shift to over 1%, yes. You should add another maybe $5 million-plus. So from all the stores that we were down a few months is about $5-over million of sales.

[Unknown Executive]

And [indiscernible] second question: What is the likely trend for NPI margins? And where would be the major cost pressures coming from?

[Hwee Li Lim, executive]

If you look at our margin for retail -- yes, I think we need to [ strip ] the different sectors. Every sector is slightly different. Retail is about 77%, 78%. We have been maintaining that. The comp -- the wide -- we improved the margin over the last couple of years. It was predominantly due to utilities. And if you look at office, office margins are in order about [ 80 ]. And MBC is slightly more because it's newer, lesser -- newer and lesser operating expense. If you talk about margins-wise, rest of it is quite stable. It's always pushing -- you need to push the top line for it to improve because OpEx is only like 20, 20-over percent. But if you ask me, amongst all the operating items -- or the OpEx items, which is the one that is a little bit out of my control but has a lot more impact, that will be utilities, yes. If you look at where oil prices are the last couple of years, it used to hit $100 per barrel. Today, it's half of that. So I think that's something to watch out for but is a portion of the OpEx but -- yes. So the top line items, usually if you look at OpEx -- the highest, [ OpEx ]. I can't control that. Let's call IRAS, okay? Then next one is O&M, including utilities. That will be another big item. So what are -- what we are doing in terms of utilities, we buy as a group. We take it -- like interest rate, we hedge it where we can. We look at a portion fixed, a portion [ dropped ] in a way as a discount off. So there's different ways to skin a cat, depending on our outlook to where the oil price is and where we think the cost will be. We structure it accordingly as a group, so we tend to get some benefit out of it. If you noticed, our utility costs over the last, what, 4 years, have been on a down trend. But that's something that it -- when hit, you will not only hit MCT. You will hit everybody, yes, because utilities is usually one of the biggest components after OpEx.

[David Lum, analyst]

It's David Lum from Daiwa. In terms of like some of the trends you have seen in the last quarter or last 2 quarters, do you think there's any evidence that discretionary spending is coming back?

[Hwee Li Lim, executive]

For us, the fourth quarter, the biggest jumps were entertainment, health and beauty. And let me see. I'll make sure I don't quote you the wrong one. [indiscernible], okay, I think, because of the Chinese New Year quarter and because of our Timezone. Our Timezone pushed up our entertainment and leisure segment quite a bit. Then gifts, also next highest-growth area, then comes health and beauty for us. But at full year, the health and beauty was still a plus for us. Leisure was a plus for us. And [indiscernible] was a plus, plus for us. So I think, for the down, maybe just for better understanding, our cinema was a down. I think it's because of no blockbusters for GV. That's where his ticket sales did come down. So it's not just -- I think you have seen the retail sales numbers. Across-the-board, cinemas operators in Singapore were down high single digits, so we are very similar in terms of trend. So I think that gives you a sense of last quarter and the full year.

[Audio Gap]

Coming down [indiscernible]

[Audio Gap]

You will notice our -- all things that leisure should go up. [indiscernible] the -- in terms of fashion, I think there's a slight change, maybe a slight down we did -- saw a little. We won't be changing very much. For me to say I'm going to change 5 percentage points for any category, this is actually entire portfolio, this including office and business park leases. So this is not a reference of the trade categories for VivoCity, yes. So whatever they're flashing here. So what I'm saying is we are not going to change big -- we're going to have big trade mix changes, but in terms of, let's say, fashion, we are going a little bit more concept stores, okay? But the total quantity is about that. F&B, we are looking at maybe changing some of the restaurants over, but we're adding new cuisines possibly. But we are not going to add or subtract big numbers in terms of area.

[Audio Gap]

It all goes down to the reversions, okay? I think for Zara we will find, yes, at the end of the day, Zara's move is a combination of Zara, MANGO, Pull&Bear, Forever New. You name it. It's a whole string of movements that we did. I don't think we [indiscernible]. And if you look at -- it will be sell for us because it's going to be a flagship A store for them. I think it's a good direction that we are taking. And if you'll -- if you want more fashion retailers in today's context to open up in Singapore, I think it's tough call, okay? And I'm quite glad at times that they want to put themselves as a concept store with Vivo. There are not many new players, I will say. New fashion players, they are saying, "I'm putting up my hand. I want to come into Singapore." No. A lot of them are downsizing, but some of them are going bigger within the fewer stores that they have.

[Derek Tan, analyst]

Derek from DBS. I'm just curious. If we look at these tenants, Timezone and Zara, all right, they expanded. They commit to VivoCity. I'm just wondering whether what kind of metrics are they looking for, let's say, in the medium term in terms of their sales performance. I mean Zara commit by almost doubling the size." Are they expecting their sales to double in the near term?

[Hwee Li Lim, executive]

They have a projection, but it's hard for me to share the [indiscernible] and the total sales projection. They are not new to Vivo, so they know the traffic. They know our pattern. They know how much sales that they are doing today, and I will say that they are quite confident that they should do well. My view is Zara, at the end of the day, is a better call than a lot of other fashion retailers. If you are talking about quick fashion, moving fashion, I think Zara has an edge, okay? So I think Zara is a smart, very smart group that does a whole lot of exercise at numbers. Okay, I'm going around in circles because I can't divulge these sales numbers to you, so -- but in short, they had done their [ sums ]. They want to have a flagship store in Vivo, and I think I'm quite comforted with that.

[Derek Tan, analyst]

Is this kind of on the longer lease and...

[Hwee Li Lim, executive]

We -- usually for any leases, we try -- we always have a break. For example, it could be a 4 plus 4. It could -- you -- they will never -- any of these big retailers coming in, they will never sign a 3-year lease because they are bumping into much CapEx that 3 years doesn't work out for them. They need to amortize over a certain period of time. So usually it could be 4 plus 4. It could be 5-plus-3 kind of combination. So there is no fixed formula, but it's usually more than 3 years.

[Derek Tan, analyst]

Are they closing down -- are they consolidating, or expanding, in terms of...

[Hwee Li Lim, executive]

Without saying more about Zara's plans but generally: Most of that group of retailers are talking about lesser stores but 1 or 2 bigger.

[Audio Gap]

[Derek Tan, analyst]

[indiscernible]. I mean there are actually pickups for VivoCity. It's 25...

[Hwee Li Lim, executive]

About 20%.

[Derek Tan, analyst]

Okay. And in terms of the office side, I think how you're seeing leasing demand and your strategy in terms of...

[Hwee Li Lim, executive]

Leasing for office feels better than previous quarters, but I don't think we are out of the woods at the moment. If you dive into the prospects or the leases being signed for the whole of last year, you will see that a big chunk in the market comes from coworking space, but -- so that was the one that was driving a lot of the demand. But if you ask me do we feel that there are more prospects today than 6 months ago, I will say yes, but are we out of the woods, I don't think so at the moment. But if I look at where the supply is, I think that supply is quite well contained for the next couple of years. There should be quite a good support -- strong level for the office sector.

[Derek Tan, analyst]

In terms of your strategy, obviously your buildings are quite full already, so [indiscernible]...

[Hwee Li Lim, executive]

Yes. So when we look at our occupancy, Anson is 100% even though it shows less than 100% because WeWork's is coming in. [ He's doing setting up ], okay? PSA is already north of -- is 98%. So actually for us, because we are operating at a very high occupancy rate, any little shift, even a downtime, you will see it through the numbers, okay? Because when I'm 100%, I should -- there's a setup period. Or I have a vacant for 2 months. You will see the numbers change, year-on-year comparison. So for us, I think, office, we're a little bit more pragmatic. If you can keep the tenant, we will try to keep the tenant. Because the downtime and the fit-out period sometimes doesn't warrant that $0.50 more, if you count. It doesn't warrant. If they sign you a 3-year lease and you'll keep vacant for 2 months, 3 months but fit out 3, 4 months, you're out of your pocket 4, 5 months or 5, 6 months. It doesn't make sense. So realistically for office, when I look at marketing, very clearly, with cash flow. I count on a cash flow basis regardless of -- of course, we look at the reversions and so on but tucking a reversion effect. If I detect a slight negative -- or I get a positive cash flow, overall I'm still better off in total quantum to all that I put in my pocket, I will say I will take that. So the approach to office is a little bit more cash flow.

[Unknown Executive]

Brandon from JPMorgan has a follow-up question...

[Hwee Li Lim, executive]

He's not here.

[Unknown Executive]

Yes. [ Between for ] Zara and the Timezone concept stores in VivoCity, he would like to know if we could share any rental uplifts; and if any, any changes to the rental structure in terms of fixed-to-variable components.

[Hwee Li Lim, executive]

Fixed-to-variable, not much changes. I will say that, if there's any changes, it's predominantly more the F&B. That is bigger plus percentage, especially those who have signed, let's say, 8, 10 years ago, when the mall was just starting, when it was easier to entice people with lower base and higher variables. Not much variation in terms of rental structure for the last 1, 2 years, I will say. In terms of the rent itself, if you -- we are not worst off on Timezone moving from upstairs or downstairs. And I think that is a huge plus even though he has gone from 6,000 to 12,000 -- 6,000-over to 12,000 square feet. So I hope that answers his question.

[Unknown Executive]

Donald Chua from Merrill Lynch has a question online. So it pertains more on a long-term basis. So he'd like to find out whether -- how we see MCT in next 5 years in terms of asset mix. And given the retail industry trends, is it still worthwhile to build a retail portfolio, or to just keep it to VivoCity [indiscernible]? And what is the standing benefit of being in a mixed lease with exposure in retail and business [indiscernible]?

[Hwee Li Lim, executive]

Okay, I think for us we don't have a fixed percentage of asset allocation or what we need to go into. There is no huge KPI behind to say I need to grow the asset size by acquisition. I think that's the beauty of it, but that doesn't mean that we'll sit back and not evaluate deals. We will be -- if it makes sense, we will do it. If it doesn't make sense, we don't do it. So there is not a fixed target AUM that we need to hit. So in essence what I'm saying is, if -- is there a target of as to whether I want to do more retail or not, it will have to be depending on case-by-case basis. But if you look at where Singapore retail transactions are or the availability of good retail assets, it's very nominal, okay? Let's be very realistic. So VivoCity today consisting about 40%, 50% of the NPI. Where it's easier to buy on a general basis is definitely office or commercial space, better than retail. Retail Singapore is very limited. So over time, I will say, if you ask me to draw on that and project in 10 years’ time will that -- if I acquire anything, it's likely that I will acquire not retail because of the lack of availability of retail deals.

[Bee Lian Tan, executive]

I may add on I -- and we are not going to buy any more business park asset in MBC II.

[Hwee Li Lim, executive]

Yes. I think, if you look at the original IPO documents, the buffer for business park is only for -- is only specific to MBC I and II for MCT, for us, because the low entry is more office. We do not cross over to other business park, so I think that is -- that has been set. That stage has been set since the inception of MCT.

[Audio Gap]

[Unknown Analyst]

Yes. Just in terms of the library and, I guess, the [indiscernible]. So can you maybe help us quantify the expected improvement in the traffic or things like that?

[Hwee Li Lim, executive]

Whatever number I give you is going to be joining -- it's hard for me to project, but quite clearly you'll be a flat, but flat how much, I don't know. Whatever number I throw to you, I will say go to 57, go to 59, I won't have basis to back it up [ yet ].

[Audio Gap]

[indiscernible] from [indiscernible]. [ This year, it's clear what's ] kind of

[Audio Gap]

[Bee Lian Tan, executive]

Won't share any margin

[Audio Gap]

there is. We are doing refinancing now on this $144 million using a term loan, and I can see the margin tightening.

[Audio Gap]

And this $144 million is one -- is a 2-year tranche in our loan -- a 2 year -- the loan that we acquired, that we obtained to acquire MBC II, so this is a 2-year term loan. Whatever tenor that I'm refinancing it, the margin should be higher than the 2-year

[Audio Gap]

We do see margin tightening.

[Audio Gap]

[Unknown Analyst]

In terms of, like, coworking space operators, if they want space in your portfolio, do you treat them any different than any, like, mid- to large-size tenants?

[Hwee Li Lim, executive]

The terms are similar. I would say rent-wise they are not treated -- and there is no preferential; only certain things I may have to give consideration, like don't bring in that coworking space in the building that we have. I think that's a fair trade for them because they're going to invest quite a bit, and for us to bring in a non-operator [ doesn't explore ] to them. I don't think that is something that we may give them as a condition. But if you talk about commercially anything else that is different, no. We treat them like any other tenant.

[Audio Gap]

We have any last questions from the floor?

[Hwee Li Lim, executive]

Okay, I think this -- to sum it up, I think, Vivo, for the last couple of years, they've done well. They have grown 6%, 5%, this year about 4% NPI growth. That's very -- quite remarkable even though we have done quite a bit of work that suffered some the revenue here and there. End of this year, we're definitely looking for the library to open. Then next quarter, the B1 will open. That should give it another chase and a nice view. Over the last 1 year, we have also upgraded quite a bit of the common areas, from the towers -- you will notice. Maybe you will notice a little bit here and there, from the towers to the playground, to the [indiscernible] and all those that called for changes. Those are the things that we don't talk about, but as a manager, when -- we upkeep the property. We reinvest every time so that we try to keep ourselves relevant, but in terms of numbers, at least the positive thing is the library will be a new trade, positive numbers for us and improve our flow. All this has got a positive impact. How to quantify? I think, beyond leases, it's very hard for me to quantify the other prospects that we are bringing here [indiscernible]. It's difficult, not easy to do, but I think it's the right direction to take, going in for more entertainment, going for concept stores, reworking and banging on our -- tightening our F&B offering. I think that should crystalize and anchor down Vivo again for the next couple of years.

So when we plan Vivo, it is never for 1-year DPU up, 1-year NPI up. It's a couple of years. So whatever that we are doing is definitely charting for another 3 to 5 years. So I think that's the mindset, what we have, in running a shopping mall.

For office, it's slightly different. Cash flow is important. Downtime is very important and very painful as a manager. So when we calculate, we have to -- we always look at the cash flow that we put in the pocket for ourselves. So in terms of what do we look forward next few years, we'll watch over things like utilities. That's where we don't buy. We try to contain the cost. Interest expense, we try to contain as much as we can. We enjoy very good interest expense. If you notice and compare ourselves for the last couple of years, MCT has one of the lowest interest expense. So it means that we have got it right for at least a good 5 years. So now the question is, next 5 years, what do we do? Good thing is we've got it right for the last 5 years. So as -- so [indiscernible] to maintain that. We did it right for the last 5 years. If you look at our costs, we are not the tightest, we think, yes, because we are not the biggest, but our interest expense is not the highest. So we have put our all-in cost around 2.0%. I think that's quite respectable for the last couple of years, so -- but going forward, the environment may change. So that's why we are lengthening some of the tenures. It may come with a bit of pain. If you look at our numbers, some of the interest cost is slightly going more than the previous year, but I think, when we run a -- it for long term, we had to do it. We have to do it. So when we can lengthen, we lengthen. I think that is the stand that we are making.

[Unknown Executive]

With that, I would like to thank everyone again for the time and for coming by.

So if you have any other questions after this, feel free to reach out to

[Audio Gap]

very much.

[Hwee Li Lim, executive]

Thank you.