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CNBC Transcript: George Hongchoy, CEO, Link REIT

Below is the transcript of an interview with Link REIT CEO George Hongchoy. The interview will play out in CNBC's latest episode of Managing Asia on 15 February 2019, 6.30PM SG/HK (in APAC) and 11.00PM BST time (in EMEA). If you choose to use anything, please attribute to CNBC and Christine Tan.

Christine Tan (C): You joined Link REIT in 2009 as its Chief Financial Officer. Do you remember the first day on your job?

George Hongchoy (G): That was in the middle of the global financial crisis, if you remember, January 2009. On the first day, I was told we needed to refinance HK$3 billion. I went to the bank and they said they didn't have any money. They didn't even have money for themselves! So it was a memorable start you know. And over the last 10 years, the whole global financial market has really changed. Quantitative easing (QE) has obviously helped and as a result of this, we have an improved financial market that has allowed us to refinance our balance sheet and our debt, and restructure ourselves to have a very strong capital structure for our growth.

C: One year later you were made CEO, the first thing you did was to talk to your Chairman about your 90 day plan. What advice did he give you?

G: There's a lot that we need to do and can really make impact on. But at the end of the day, when we went through that plan, a lot of it was about people – people inside the company and people around us. So one of the things that we did very soon after was to articulate our vision, which is very simple – to be world class real estate investor and manager but to serve and improve the lives of those around us. So this focus on people is even more important than our real estate, because they are what our properties are supposed to serve and have been driving all our decisions.

C: Under your leadership, you actually steered Link's shift from managing just retail spaces in public housing estates to commercial properties like offices and spearheaded its move into Mainland China. Did you see the urgent need right from the start, to really diversify away from a segment that was generating so much public unhappiness and discord?

G: We see opportunities. We see a lot of opportunities around us and how we can take care of those opportunities. But in the first few years, we focused on making sure that we actually did well with our properties that we have had since IPO and how we could improve on them. So we've done a lot of asset enhancement projects. We had a lot of fresh markets and we have changed those markets into something that is quite unique. If you like shopping in fresh markets, you should really come and have a look. The shopping environment is so much better. We have also moved into other asset classes – into offices, and we're starting to develop as well. The whole idea about changing orders is to add more growth drivers. We can then select which ones to push harder on in different times of the property cycle. We also realized that as we started doing that, we delivered lot of good results, from financial and non-financial aspects. And so it has allowed us to deliver the impact and results that we can now see.

C: As you made that shift in your asset strategy, you had to face the question of course of whether you were still servicing Link's mission of helping the local retail community with affordable rents. How did you defend your strategy? How did you handle the concerns and public discourse that followed?

G: Well, the results have spoken for themselves. If you look at how we have built relationships around the community, we have made sure that the occupancy has continued to be very strong. Our rent-to-sales ratio is still below market norms. So there's still room for us to continue to grow. We want to make sure the first thing we do is for our tenants to succeed. If they do well, then obviously as a landlord, we do well. But we have to drive shoppers to come and shop at our shopping centres, to allow our tenants to thrive. We obviously need to find good tenants. As we manage to remix some of the tenants and improve the shopping environment, we then allow them to really thrive.

C: You made your first foray into China in 2015. Since them, you've made four acquisitions, buying shopping malls in Beijing, Guangzhou and a mixed-development commercial property in Shanghai. What exactly is your asset acquisition strategy in China?

G: We believe in China and its growth in the long run, and we see a lot of growth opportunities there. And for real estate, the thing that you would have heard a lot of times is location, location, location. If we find the right assets situated in the right place, we believe that we can manage it a lot better and then create value. So in all the different assets that we have acquired, we are very careful in deciding which area, which district, who are the people who go there and how can we improve and drive continuous return. It is part of the diversification plan that we have, to make sure that we are not just very narrowly focused in one city or one type of asset. And the results have been able to give us confidence to continue on this path.

C: The Chinese property market is cooling down. Great buying opportunities but at the same time you're facing a lot of foreign funds who are also looking to the market to add to their real estate portfolio. How will you fend off the competition to get the assets that you want?

G: Competition is good. It's part of our vision to say we're world class. If we don't compete with some of these great competitors, we can't improve ourselves. So we keep innovating, we keep thinking about ways to do it better, so that we can underwrite some of these, in some ways, challenging opportunities. But if we manage to find the right spot where we feel there is a gap for us to enter, then we will try to grab those opportunities.

C: How many Chinese acquisitions would you like to do this year, 2019?

G: Acquisition is a funny thing. It takes two parties – the buyer and the seller. So I have never been able to control exactly how much we manage to invest in a particular year. But we work very hard and we want to make sure we don't miss any opportunities, so the team is running around those few cities all the time.

C: I understand you want to increase your mainland holdings from the current 12 percent to about 20 percent of the total portfolio. What are your returns like in China? Are they significantly better than your properties in Hong Kong?

G: The growth in China has been much better than those in Hong Kong. And what we can see is especially in the retail segment, the growing middle class has produced a lot of opportunities for us, as long as we provide a good shopping environment. We have people talking about e-commerce and all these challenges. At the end of the day, if we manage to provide the right retail offering, people will come.

C: What are your returns like in China? Do you have a number for me?

G: The return for investment has far exceeded our cost of funding. For some of the investments, we will have produced a yield on cost of over five percent.

C: There are concerns among rating agencies that these China acquisitions that you are making will actually raise the risk profile of the REIT you're managing. What are you doing within the company to mitigate that risk?

G: Across a lot of these opportunities that we look at, obviously they come with risk. And some of them, for example, currency risk, financing risk, and all that, we are very careful in making sure that we have a strong balance sheet. We have a very high fixed rate component in our debt profile and we manage the currency by making sure we have some local borrowing as well.

C: As an investor in China, are you watching the headline news of this US-China trade war spat and what's happening on that front? Do you think that is having any impact on the market that you're investing in?

G: In general, macro environment will have impact on the economy. But for us who look at the individual assets, it's still very location-based. The asset characteristics have to be right for us. So we are very focus in making sure that where we invest in is the growth area and for various reasons – sometimes it's because it's a thriving, growing suburb for one of the cities, some areas because there are increasingly more subway lines and so connectivity is much better. So we study in enormous detail in order to understand each of these assets. And then the macro environment is an over-layer on top that we need to understand. But the impact is probably not as significant.

C: The Chinese economy is slowing down. Are you worried?

G: The Chinese economy is going to have volatility and I think one of the strains for us is to build a portfolio that is resilient so that we can absorb any volatility over a period of time and our diversification allows us to spread that risk.

C: You are managing the largest REIT listed here in Hong Kong. Over the last few years, you've been carrying out asset enhancements in many of your retail spaces located here in the city. What exactly does that involve?

G: A lot of details.

C: What details?

G: Retail is detail, so looking at how people react when they come into a newly renovated mall - whether they will say "wow" or "ugh".

C: Which one will they usually say?

G: Oh, I hope, and for me in a lot of cases, I say, "wow, how did we manage to do such a good job," - that will be the best response I can get from people. And I'm a shopper. I like going to fresh markets to buy food and vegetables, and I like to shop and cook for myself. So I go in sometimes not as a CEO, but as a shopper. What do I like to see? And what are the things that would be great that this particular shopping centre can offer? We tailor-make it because no shopping centre is alike and each shopping centre serves a different catchment. So it's really important to understand the catchment very well so that we can have the right mix. If you have a formula, it's wrong. And so, the team works very hard to try and understand the locals.

C: So we're at the TKO market here in one of the suburbs here in Hong Kong. You've done some asset enhancement to this particular market. What exactly did it involve?

G: What we have done is really transform and revitalize the market which has been operating for a long time. The market used to have the old-style high walls so you can't see through the market. We created a lot of these low stalls with beautiful displays of fruits and vegetables, so when you come here, it's enticing and it will attract you to stop.

C: All the vegetables and fruits, they are all neatly arranged in boxes. Did you teach them how to present what they are selling as well?

G: Yeah, we try to motivate them and get them to adapt to more colorful displays and make sure that they mix and match the colors to attract people to come and try and touch the fruits and all that. In the old days we used to have these boxes and cartons all stacked up and now that they have to compete with supermarkets – with those online and all that, this is an experience.

C: And you've also gone electronic as well.

G: Electronic payment is something we are introducing, even to markets. People don't want to touch their bank notes and all that after you buy the fresh fish and meat. And so electronic payment is the in thing and it takes time. It's a habit change.

C: So it's all part of the cleanliness, trying to keep things clean and making it easier for people to shop.

G: Yeah, we've just seen people with wheelchairs and families coming in to shop. There are younger people coming so the average age of shoppers really coming down and they are also occupied with sustainability. Second generations are operating some of these stalls taken over from their parents, and that's something we haven't seen before.

C: So I assume that rentals have also gone up as a result of this.

G: Oh their business has gone up a lot more. So they're all very happy.

C: Asset enhancements usually requires investments, investments ultimately translates into higher rentals. A lot of your retail tenants are small businesses. How do you handle the sensitive issue of raising rents in these poorer housing estates?

G: Well, the results show that our occupancy continues to increase. The rent to sales ratio continues to be at a level that is comfortable for each of the particular trade. So we want to make sure that they do well. For the smaller tenants, we do help them in designing their product mix and in trying to make sure that they continue to evolve. And so the conversation that we have is very important to make sure that it's not just about rent. It's about the whole experience that they can bring as part of the whole offering that the shopping centre can bring.

C: Do they always understand what you're trying to do?

G: A lot of our small retail shops in the shopping centre are actually a core part of our offering, and they are key for our neighborhood centres. So we actually are very focused in making sure that they continue to be adaptable to the requirement, not of us, but of the shoppers. The shoppers are voting with their wallets, whether they come to that particular shop to buy things, so rent is secondary. At the end of the day it's about how to drive a shopper to come to your shop. And sometimes, for instance, maybe today we like Thai food but tomorrow we want Taiwanese food and it's whether you could change. The color scheme also changes all the time. One of the simplest requests to our tenant is to adapt to the consumers' changing needs.

C: Do they understand your ultimate objective? How do you handle their short term unhappiness?

G: A lot of our tenants have produced very successful results. And I think one of the best advocates for us is these tenants – they are spreading it to other people and they're sharing it with other tenants. And so one of the easiest things for me to do is introduce them to a few tenants who have done well and let them share their ideas. There's no point for me to tell them because we have one perspective, but the successful small tenants that are in our markets, they are so excited to see how the renovations has attracted younger shoppers. The renovations we have done – include making the aisles wider, drier and cleaner, providing them with electronic payments and all that. We can now see people in wheelchairs coming to our markets. These are things that you have never seen in Hong Kong before so we believe that has attracted more business for the operators and they've been very happy.

C: Link started out with something like 180 properties as a result of the government's privatization process. But over the last few years, you've been making divestments, selling off shopping malls, fresh markets and parking lots. The property market in Hong Kong is expected to cool down further this year. Are you planning to do more asset sales?

G: The disposals that we have done have attracted a lot of interest from Hong Kong and global investors, so we do review our portfolio on a regular basis. This is really just part of our capital recycling to allow us to improve the overall quality of our portfolio. Every time as we look at it we ask ourselves, can we offload some of the non-core assets and then add some attractive assets - some of which are larger assets? Not necessarily in China alone – we have acquired opportunities in Hong Kong which we believe we can add to our growth drivers

C: Any plans to do more asset sales in Hong Kong this year? How much would you like to reduce your Hong Kong portfolio by?

G: Hong Kong is our core market so we would love to be in Hong Kong and continue to expand in Hong Kong. So maybe if we can see the opportunity to continue that recycling, we might consider if we need further disposal. But there's no immediate plan to do more right at this moment.

C: Where do you see the Hong Kong property market? It is cooling down, what is the outlook?

G: The commercial assets have continued to attract a lot of interest. We see some concerns in the residential markets and affordability has always been a question. That might have some flow through to commercial sector but by and large, the commercial sector is still undersupplied and so we see a lot of interest.

C: Apart from asset management, you've also gone into a big wave – asset development. Your East Kowloon joint-venture office tower project called Quayside is going to open its doors this year. How much revenue will it generate for the REIT as a result?

G: That is a fabulous project, and Christine I have to invite you to go and have a look. It is a project where we have put a lot of environmentally friendly parts into in order to make sure is LEED platinum and it is a great place for people to work in. We're still building it and we have already leased out majority of the space, including to a leading global bank. And we believe that it is well situated. It is right in the middle of what is now called "CBD 2" for Hong Kong. And so as more and more people move to this new area, it will become a thriving business centre for Hong Kong.

C: How much revenue will it generate for the REIT?

G: It will be a significant return and is good return for us. Obviously, we're still leasing out.

C: Can unit holders expect a bigger dividend payout as a result?

G: Our unit holders have been enjoying a growing dividend payout year after year. And that has been one of the attractions drawing so many people to come and invest with Link REIT. The total unit return has far exceeded a lot of people's expectations. The CAGR over the last couple of years has been 12 percent growth every year. So we believe that this will continue if we work as hard as we have over the last few years.

C: When it comes to asset development, what other projects are you eyeing? What else do you have in the pipeline?

G: There's a shift in population in Hong Kong and there's a lot of growth in the Western part of Hong Kong so we've done a lot of asset enhancement project towards that side. There are a lot of assets where we have managed very well but we haven't really touched up as much as we would like to. Some of them require repositioning. So each year we're probably working on a dozen projects at the same time. We're completing about seven or eight every year.

C: When you say Quayside, it has become a big drive, a big sustainability drive for Link REIT as a result. Are you trying to make an impact in this area and trying to appeal to more socially conscious shareholders?

G: Sustainability is a big part of Link's business model. We believe that if we do well in the long run, we will do good to not just to community, but to the environment as well since real estate is one of the biggest producers of carbon. If we are one of the main players in this sector and we don't focus on it, then in the long run, that's not going to be great for the environment. So one of the things that we do is to save energy. We have saved more than 30 percent of energy used over the last 10 years. We've been looking at how we can recycle food waste – we donate surplus food to the people in need. But we don't just want to do well so we participate in a lot of organizations to become an advocate as well. We want to draw other players in the real estate sector to join us because this is so important for us and for the world in the long run.

C: You're the CEO of Link Asset Management, responsible for managing the largest REIT listed here in Hong Kong. The organization itself has stirred controversy and public scrutiny just by the nature of its formation. How do you stay focused amidst all the politics that surrounds the business?

G: Well, Link is a rarity. We are very unusual in the sense that we are the only entity where we have the complete privatization of government assets. The government sold 100% on day one. And we have no controlling shareholders or a family behind us. So it is a team of professional managers who manage the assets for the good of all the stakeholders, the unit holders and all the people that we serve. And what we need to do is really think of how we can build relationships and how we can develop conversations so that they can understand our vision. And as a result, hopefully we can achieve all these common goals.

C: How do you develop that conversation, because the government is always constantly reminding you about your corporate social responsibility? How do you strike a balance as a CEO between your unitholders and your stakeholders? Or do you simply tell yourself I'm solely responsible to my shareholders?

G: That's a question that we ask ourselves all the time at board meetings and at management meetings, so it's not a question about balance. We have to do both at the same time. Our stakeholders need to see we are doing good. Our unitholders obviously are very focused on the returns. But returns sometimes are secondary if you don't do well for the properties and for the community. So we are very focused on doing all that at the same time. The challenge here is to think of every incident - how we actually can look at it from different angles. Sometimes it's also about timing. You come up with a great or a great initiative, but is it better to launch it now or give a longer notice period and launch it later? We have to think about how to get buy in. So all these are just skills we have to apply constantly and there's obviously the role of explaining, the rationale of why we are doing it. I think over time, as we look at the results, and different measures – for example, in the acceptance of our renovation of the markets and all that, they have been very well-received by shoppers. So I think we have now created a momentum and we have created enough of a critical mass, of positive impact so that those are the right stories to tell.

C: Do you think this pressure, this public scrutiny, all these criticisms will ever go away? What is the long term solution you see?

G: Well, Hong Kong is a very diverse society and there are a lot of different views. I love to hear all these diverse views partly because sometimes we might miss something as a management team of a very big portfolio. So it's okay to have these views coming to us and then we can see how we can continue to innovate, continue to challenge ourselves to do better. The needs and the requirements for us keep going higher and higher as we try to reach a world class standard for what we want to do on a daily basis. We just have to push ourselves. So the noise is fine. It is part of what we want - to just bring in this diversity of views.

C: Even if it's bad noise?

G: Well, one of the things that we say is, when there's no news, we don't even know is going on. So whatever that they are, we are very happy to take them on and so this has really allowed the team managing the business to look at various perspectives at the same time. One of our board members used to tell us, we operate in a glass house – everyone is looking at us and we just need to make sure that we cover all perspectives and this allows us to go further than a lot of our peers.

C: Do you ever miss anything?

G: Oh we do, and then you know what we want to do is learn from that. The best thing about growing is that you learn from your challenges and make sure that every time you're better than where you were yesterday.

C: You're 57 years old, graduated with a commerce degree from New Zealand. You have an MBA from the Wharton Business School. You started out your career in management consulting, and then moved on to investment banking before joining Link REIT in 2009. How would you describe your leadership and management style?

G: Well, I believe I'm someone who leads with a passion. I'm pretty decisive and focused on making sure that we drive and deliver that vision that we articulate and we continue to repeat that to make sure that people are very focused on that. We hope that as we build that team – and I'm very lucky to have a great team with me – we can continue to drive the results, deliver to the people and communicate what we have tried to achieve and been successful in delivering.

C: Link is now focused in Hong Kong and China. Any plans to venture beyond these two markets elsewhere into the region?

G: We will be opportunistic to look in a lot of places. But at the end of the day, we are very focused. Greater China at the moment provides a lot of opportunities for us. And our team will continue to try and get the best opportunities within this area.

C: Thank you, George.

G: Thank you.


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D: +65 6326 1123
M: +65 9852 8630

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