I present my report for the Company for the financial year ended 30 June 2021, a year that has proved to be truly challenging in many respects. The difficult circumstances that have confronted all businesses have delayed our exit from our remaining assets, although the sales we have achieved attest to the strength of our strategy and determination.
Our Adjusted Net Asset Value at the period end was 150 pence per share, down 16% from a year earlier, very largely due to Sterling’s strength against the US Dollar, our reporting currency. The Net Asset Value at the period end was 158 cents per share, down 3% from the previous year. The Discount to which our shares trade to the Adjusted NAV has widened to beyond 50%, reflecting the market’s appreciation of the severe difficulties faced by the Company as it pursues its divestment strategy.
During the financial year, Macau demonstrated continued success in managing COVID-19, with low case numbers. At the end of calendar year 2020 and entering 2021, cautious optimism emerged around visitor numbers, and the number of inbound travellers peaked at 866,063 visitors in May, coinciding with China’s Golden Week peak travel period. In H1 2021, Macau welcomed a total of 3.9 million visitors, 20% up on H1 2020, building confidence that the economy would recover.
However, that recovery proved to be erratic, as a range of factors impacted visitation, especially the territory’s continued closure to visitors from Hong Kong and elsewhere. It also became clearer that Macau’s achievements in terms of low COVID numbers had come at a high cost to the economy, with an 85% drop in visitor arrivals year on year (YoY) and 2020 gross domestic product slumping 56.3% YoY.
More recently, it has also become clearer that Macau, like other COVID zero-tolerance jurisdictions, has suffered from slow implementation of an immunisation programme, leaving the population and the economy vulnerable to further pandemic-related shocks. Although the immunisation shortfall is being addressed, with more than 50% of Macau residents having received at least one dose of COVID vaccine, it has nevertheless hampered recovery efforts and slowed the progress that we had anticipated earlier in the year.
Macau is heavily reliant on visitors to drive revenues from gaming and tourism, which feed into confidence in its real estate sector. The return of mainland Chinese visitors has restarted with China itself, the only other jurisdiction with which Macau forms a travel bubble. Macau is the only destination outside mainland China that Chinese can visit, yet Macau’s tourism and gross gaming revenues (GGR) remain far below pre-pandemic levels.
The pandemic, related border control measures and the resulting sluggish economy have had the direct effect of suppressing demand in the luxury segment of the property market to which our remaining assets are exposed. Alongside the economic uncertainty, the shrinkage of the pool of potential investors affected by the restrictions has severely constrained investment activity in the real estate sector and hampered the Company’s efforts to divest its properties on acceptable terms as planned.
It is important to understand that the property market continues to function effectively, although most transactions are in the market for smaller and more affordable dwellings. A combination of travel limitations, mortgage restrictions and capital controls in China, alongside broader uncertainty driven by macroeconomic conditions, has seen our target investor groups persist with a “wait and see” approach, notwithstanding the comparably good value that Macau offers to investors.
Against the backdrop of these market challenges, the Manager has continued to work hard to implement the divestment strategy, and has deployed a variety of tactics aimed at delivering exits from each of our three remaining portfolio assets.
Enhancements made to Penha Heights have been helpful in attracting prospective investors. Reconfiguration work at The Fountainside has been aimed at offering smaller units adapted to current market conditions and allowing sales off-plan. The fact that we have the option to strata-sell individual units at The Waterside provides further opportunities, albeit potentially over a longer timeframe, for the completion of sales.
Being seen as a motivated seller — as opposed to one compelled to sell due to circumstances — has been key to our approach, as has exploring a variety of complementary strategies to achieve our divestment objectives. Sales of the larger units, where much of the value remains, will take time and changes in investor sentiment to complete. Every member of the team is strongly motivated to achieve timely divestments. The market environment has made execution of an en-bloc divestment strategy extremely challenging, but initiatives continue to achieve this outcome, alongside individual asset sales.
Amid that continued focus on divestment, it is pleasing to report the Manager has achieved sales of a unit at One Central Residences at a premium of 4% to the latest valuation, and sales of additional units at The Fountainside. Whilst we have explained the uncertainty attached to market valuations, the prices achieved in these transactions underpin external valuations of our assets.
As at the year-end, 33% of The Waterside’s apartments were occupied at an average monthly rent of US$2.3 per square foot. Lower occupancy has persisted since 2Q 2020, with some apartments becoming vacant as travelling tenants found themselves unable to return to Macau. The leasing team has been relatively successful in maintaining and replacing tenants while also achieving greater tenant diversification. Although most travel restrictions between mainland China and Macau have been lifted, the pre-pandemic ease of travel has not been fully restored, and the pool of potential new tenants remains limited.
The proceeds from our property sales have been used to further reduce debt. The Manager had further success in restructuring and renegotiating the Company’s debt against a backdrop of more stringent borrowing restrictions. A facility of HK$540 million (US$69.7 million) was executed in September 2020 to refinance loan repayments on earlier tranches, and a further facility of HK$250 million was arranged in February 2021 to cover payments due by March 2022. These refinancing facilities have significantly improved the Company’s liquidity, with cash balances remaining adequate for working capital purposes, including for an extension of the Company’s life. With additional cash balances pledged as part of renegotiated debt, such sums can be released upon the sale of assets. We have emphasised the importance of continued success in managing the restructuring of our loan facilities which the Manager has successfully achieved to date. Ongoing engagement suggests that this will continue to be the case, however, some of the facilities expire within 12 months as detailed under going concern.
There have been signs of improvement in Macau’s economy this year compared to the second half of calendar 2020, when it shrank 64% YoY in Q3 and 46% in Q4. Over full-year 2020, GDP contracted 56.3% YoY. In Q1 2021, the contraction narrowed to 0.9% YoY resulting from increasing visitor numbers and growing GGR. GDP growth of 69.5% YoY was recorded in Q2 2021.
For full-year 2021, the International Monetary Fund has forecast growth of 61% YoY, followed by 43% YoY growth in 2022. However, the disruption to Macau’s economy caused by recent COVID-19 outbreaks in Guangdong Province and other parts of mainland China, as well as a two-week hiatus caused by local cases in Macau in August and the latest outbreaks in the territory, these numbers may be revised downwards.
The outlook for recovery is likely to be closely linked to the easing of travel restrictions between mainland China and Macau. However, the cautious approach adopted by the Macau government will most likely persist, especially if immunisation rates remain comparably slow and the travel bubble has not been extended to Hong Kong despite ongoing discussions.
More recently, further uncertainty has been introduced, with long-expected announcements concerning the government’s proposals on renewals of casino licences. Details are still emerging, and it is too early to say exactly how confidence will be affected, although casino stocks have been downgraded — particularly due to a proposed requirement to approve the upstreaming of dividends. Although this seems to have been driven by sentiment around capital adequacy, underlying concerns among external investors centre on the effects of the increasing influence of the Chinese government. Developments will be closely monitored, although the Manager believes the eventual outcome may be more positive than some of the market rumours would have it as the facts become clearer.
Turning to the Company’s operations, in this report we have explained our approach to ESG, and the development and operation of our properties is covered in detail.
Governance remains an important aspect of the Company’s operations, and the Board and Committee meetings, alongside interaction with the Manager, have all been virtual as a consequence of travel restrictions in Macau, Hong Kong and Guernsey in particular. Meetings have been more regular, although it is clear to us that remote arrangements are no substitute for physical meetings, which we hope eventually to resume, at least in part. The Company’s share price and discount to Adjusted Net Asset Value is closely monitored together with share volumes which remain comparably low on a daily basis. Our focus on returning capital is key to closing the current discount level.
Our shareholder engagement has been achieved through virtual media because of the travel and other restrictions prevailing during the Financial Year. Both the Manager and the Board remain committed to ongoing shareholder communication as we navigate our way through the divestment phase especially given the proposed extension of the life of the Company. The constructive feedback and approaches towards divestment feed into our ongoing tactics to achieve this objective.
The board has functioned well, and we have a balance of experience and ethnic diversity that has seen us through this difficult period. Wilfred Woo has indicated that he will not seek re-election at the upcoming AGM. Our search for a candidate to replace Wilfred is targeting an individual who meets various criteria, including our continued recognition of the desire for ethnic and gender diversity. The key requirement, however, is relevant experience — especially in the context of this late stage of the Company’s life. There are a limited number of individuals with the background and expertise we require, and our search has been complicated by travel restrictions. Moreover, the probable short tenure of any appointment is a disincentive to some candidates under consideration.
Following a formal, competitive tender process, the Company has appointed Deloitte LLP as its external auditor, replacing Ernst & Young LLP, which had served as its external auditor for 10 years.
In previous years and to conserve cashflow, a change in the management fee structure was agreed that reduced the fee from 2% of adjusted NAV to a fixed rate of US$100,000 per month for 2021. A tiered structure of fees and incentives for the Manager was also agreed if realised values exceeded pre-set thresholds and were concluded within specified timeframes.
However, COVID-19 travel restrictions continue to severely affect the Manager’s efforts to divest the portfolio properties. The Board and Manager are in discussions in respect of the fee arrangements for one further year as conditions have continued to adversely affect the Manager’s ability to wind down its activities in relation to the Company.
Pursuant to resolutions passed at MPO’s AGM in 2016, the Company is subject to annual continuation votes. The first, second and third Continuation Resolutions were passed at General Meetings held on 5 July 2018, 29 November 2019 and 30 November 2020, respectively. The next Continuation Resolution will be put to shareholders no later than 31 December 2021. As detailed in the Director’s Report and Note 1, although the Financial Statements are prepared on a going concern basis there is a material uncertainty in relation to the going concern of the Company.
A forced sale of assets under current market conditions would see significantly lower gains than a continued, measured disposal of our remaining assets. The Board will be recommending the continuation of the Company at the AGM.
However, the magnitude of the challenges COVID-19 travel restrictions have posed to the Manager’s ability to execute the divestment strategy cannot be overstated. Given the impact of such external factors, it cannot be assumed that all of the Company’s assets will be divested on acceptable terms by the end of 2021. The Manager and the Board will continue to keep investors well informed of progress in this respect.