Prosperity Real Estate Investment Trust : 2019 Interim Results Announcement

The Securities and Futures Commission of Hong Kong, Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

Prosperity Real Estate Investment Trust

(a Hong Kong collective investment scheme authorised under section 104 of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong))

(Stock Code: 808)

Managed by

ARA Asset Management (Prosperity) Limited 2019 INTERIM RESULTS ANNOUNCEMENT

Prosperity Real Estate Investment Trust ("Prosperity REIT") is a real estate investment trust incorporated by a trust deed entered into on 29 November 2005, as amended, varied and supplemented from time to time (the "Trust Deed") between ARA Asset Management (Prosperity) Limited, as the manager of Prosperity REIT (the "REIT Manager"), and HSBC Institutional Trust Services (Asia) Limited, as the trustee of Prosperity REIT (the "Trustee"). Prosperity REIT was the first private sector real estate investment trust ("REIT") to list on The Stock Exchange of Hong Kong Limited (the "Stock Exchange") on 16 December 2005 (the "Listing Date"). Prosperity REIT currently owns a diverse portfolio of seven high-quality commercial properties in Hong Kong.

The REIT Manager is pleased to announce the unaudited interim results of Prosperity REIT and its subsidiaries for the six months ended 30 June 2019 (the "Reporting Period") together with comparative figures for the corresponding period in 2018 as follows:

Performance Highlights

Six months ended 30 Jun 2019 (unaudited)	Six months ended 30 Jun 2018 (unaudited)	Percentage change Increase/(Decrease)
Distribution per unit ("DPU")	HK$0.0933	HK$0.0920	1.4%

Key financial figures	As at 30 Jun 2019 (unaudited)	As at 31 Dec 2018 (audited)	Percentage change Increase/(Decrease)
Net asset value per unit	HK$5.76	HK$5.74	0.3%
Property valuation	HK$11,110 million	HK$10,990 million	1.1%
Gearing ratio1	20.3%	20.6%	(0.3%)2

Operation data	Six months ended 30 Jun 2019 (unaudited)	Six months ended 30 Jun 2018 (unaudited)	Percentage change Increase/(Decrease)
Revenue	HK$230.2 million	HK$221.1 million	4.1%
Net property income	HK$183.7 million	HK$176.5 million	4.1%
Average effective unit rent	HK$25.06 per sq. ft.	HK$24.58 per sq. ft.	2.0%
Occupancy rate (as at 30 June)	97.4%	96.0%	1.4%2
Cost-to-revenue ratio	20.2%	20.2%	0%2

• 1 This excludes the bank facility origination fees already paid in cash, and is calculated by dividing total borrowings over total assets.

• 2 Absolute change.

MANAGEMENT DISCUSSION AND ANALYSIS

Operations Review

As at 30 June 2019, Prosperity REIT owned a diverse portfolio of seven properties in the decentralized business districts of Hong Kong, comprising all, or a portion of, three Grade A office buildings, one commercial building, two industrial/office buildings and one industrial building. As at 30 June 2019, the total gross rentable area was 1,275,153 sq. ft., with a total of 498 car park spaces.

Information about the properties in the portfolio, as at 30 June 2019, was as follows:

No. of

Gross car rentable park Valuation Occupancy

9 Chong Yip Street Kwun Tong 136,595 68

Commercial

Prosperity Place

Industrial/Office

Trendy Centre Lai Chi Kok 173,764 79

Prosperity Center (portion)

Industrial

New Treasure Centre (portion)

Total

The Metropolis Tower Hung Hom 271,418 98

area spaces	HK$	rate
sq. ft.	million
3,370	98.3%
2,290	98.8%
98.9%
	1,150
1,885	96.2%
1,120	93.2%
935	97.6%
360	100.0%
11,110	97.4%

Location

Grade A Office

Prosperity Millennia Plaza

• North Point 217,955 43

• Kwun Tong 240,000 83

• Kwun Tong 149,253 105

• San Po Kong 86,168 22

1,275,153 498

During the six months ended 30 June 2019, the global market has undergone economic and political uncertainties.

The US-China trade negotiations and Brexit concerns resulted in the capital market volatility. Under this backdrop, China GDP slowed to 6.2% in the second quarter of 2019 from 6.4% in the first quarter, albeit still in line with the market expectation. Economic data from US has been mixed, but overall economic activities have remained steady. The Federal Reserve has halted the interest rate hikes in the first half of 2019 and announced a cut of 0.25%, on 31 July 2019, for the first time in more than a decade.

In Hong Kong, the overall economy was impacted by the US-China trade negotiations and the local social movement. GDP recorded a 0.6% growth in the second quarter of 2019. In the office leasing market, the leasing momentum has waned in general. Rental growth in Central has been flat. Tenants become more cautious in business outlook and in making a leasing decision. Nevertheless, trend of decentralization has continued. Our portfolio has benefited from this trend and achieved positive overall performance.

During the Reporting Period, Prosperity REIT achieved a rental reversion rate of 8.8%, complemented with a stable occupancy rate of 97.4%. The average effective unit rent of Prosperity REIT's portfolio increased 2.0% to HK$25.06 per sq. ft.. This solid performance was attributable to our proactive leasing strategies, premium quality of our properties, as well as our attentive property management services.

Meanwhile, the REIT Manager has implemented effective measures to increase its operational efficiency, enabling Prosperity REIT to keep the cost-to-revenue ratio at a relatively low level of 20.2% for the Reporting Period.

As at 30 June 2019, Prosperity REIT's gearing ratio remained at a healthy level of 20.3% (31 December 2018: 20.6%), providing us with a strong balance sheet to take advantage of future growth opportunities.

Investment Review

The REIT Manager will continue to seek out potential acquisition opportunities. We will assess every acquisition target prudently in accordance with our established investment criteria, including the enhancement potential of asset value, organic growth prospects and synergies with existing properties in the portfolio.

Asset Enhancement

Asset enhancement is a key growth driver for Prosperity REIT. Apart from keeping up with keen competition, upgrading our properties is another way to ensure sustainable growth in rental level and capital appreciation. During the Reporting Period, a number of asset enhancement works were carried out at The Metropolis Tower, Prosperity Place and 9 Chong Yip Street.

The Metropolis Tower

The Metropolis Tower is located in commercial hub of Hung Hom, features a spectacular sea view of the Victoria Harbour. In order to match with the security standard of an anchor banking institution tenant, lift card access system has been installed in all passenger and cargo lifts. Additional surveillance cameras were installed as well.

Prosperity Place

Prosperity Place is located in the Kwun Tong district of Kowloon East. The district has recently experienced tremendous growth as a new commercial hub. A projected type outdoor light box has been installed on the lower portion of building façade in order to capture the high traffic flow on Hoi Yuen Road and also generate more revenue.

9 Chong Yip Street

9 Chong Yip Street is located in the Kwun Tong district of Kowloon East, which is a maturing decentralized business district with many new high specifications office developments. Considering higher running and maintenance costs of the existing aging variable refrigerant volume split type air conditioning system, we have replaced the whole system with new one in order to upkeep a reliable and efficient air-conditioning provision for the common lobbies and corridors.

Outlook

Global economy has been overshadowed by the US-China trade negotiations, Brexit and geopolitical tensions in the first half of 2019. According to the estimate of the International Monetary Fund, the global economic growth will slow down to 3.2% this year from the earlier estimate of 3.5%.

China and US have recently agreed to restart negotiations, but the progress is still clouded with uncertainty. The Fed's interest rate policy had pivoted from the previous stance of hiking interest rates to a more 'patient' stance, with recent rate cut of 0.25%. The geopolitical uncertainties and economic volatility have made the economic outlook wavered.

Looking ahead, Hong Kong faces multiple challenges and external difficulties. Yet, there are business opportunities on the back of China-Hong Kong infrastructure development.

Prosperity REIT has demonstrated the ability to capture market opportunities and to effectively manage the operation throughout different economic cycles. With a strong presence in the Kowloon East district, Prosperity REIT is well-positioned to gain further benefits from the Kowloon East transformation. Under the diligent and professional support of Goodwell-Prosperity Property Services Limited, the property manager of Prosperity REIT, we will continue to implement effective asset management strategies.