Ascendas Real Estate Investment Trust

SGX:A17U

Earnings Call Analysis

CapitaLand Ascendas REIT H1 2023 Performance

CapitaLand Ascendas REIT's H1 2023 report showed a 1% decrease in distribution income to $327.5 million and a 2% decline in distribution per unit (DPU). Gross revenue, however, rose by 7.7% to $718.1 million, largely from acquisitions in Singapore. Net property income also saw a 6.7% increase. The occupancy rate remained stable at 94.4%, with positive rental reversion at 14.2%. The company maintains a healthy leverage of 36.7% and has raised $500 million in equity to sustain its gearing level. With a strong natural hedge of 75%, adverse exchange rate effects are minimized. For interest-sensitive debt, a 100 basis point increase could result in a DPU decrease of 1.8% for distributions. Rental reversion guidance is a positive high single-digit for the year.

Financial Performance and Distribution Decline

Despite facing economic headwinds, the company's financial performance showed resilience with a modest decrease in distribution income for the first half of 2023, which was 1% lower at $327.5 million. This was reflected in a distribution per unit (DPU) that was 2% lower year-on-year, standing at $0.007719. The relatively small decline in distribution income and DPU, despite challenging market conditions, signals a company striving for stability and control over its financial outcomes.

Revenue Growth Amidst Acquisitions

The company managed to boost its gross revenue by 7.7% to $718.1 million, primarily due to strategic acquisitions in Singapore. The acquisitions, which include properties in Toa Payoh and Buroh Lane, significantly contributed to the revenue upswing. Despite an increase in operating expenses, net property income followed the upward trajectory, increasing by 6.7% to $508.8 million. This demonstrates the company's proactive approach in identifying and pursuing accretive growth opportunities.

Rising Interest Rates and Borrowing Costs

An increase in borrowing costs, driven by rising interest rates, has partially offset the financial gains from revenue growth. This led to a 1.7% fall in distribution, directly impacting the DPU, which fell in tandem. The company is navigating this period of adjusted monetary policy cautiously and is mitigating the impact on distributions.

Equity Raising and Debt Management

The company has been actively managing its capital structure, raising $500 million through a private placement in May. The move was aimed at maintaining a healthy gearing level during uncertain economic conditions, resulting in a gearing position of 36.7%. This has also enabled the company to acquire quality properties, enhancing portfolio strength.

Current Debt and Interest Rates

As of June 2023, the company's total debt stood at approximately $6.6 billion, with an interest cost of 3.3%, steady from March 2023 but up from 2.5% in December 2022. The jump in interest rates is attributed to a broader inflationary environment; however, fixed-rate debt constitutes 82% of the total debt, cushioning the company against abrupt interest rate movements. The company retains its Moody's A3 credit rating, showcasing the financial stability and confidence from credit rating agencies.

Portfolio Occupancy and Rental Reversions

Portfolio occupancy remains robust across geographies, with significant improvements in Australia and a stable occupancy rate in Singapore. The company witnessed varying occupancy rates, with the United States seeing a slight decline. The rental reversion averaged an impressive 18%, indicative of the company's ability to renegotiate leases at higher rates, particularly in Singapore with a notable 19.5% reversion. Such robust rental growth reflects the company's strong positioning within its markets.

Outlook and Guidance

The company expects a positive high single-digit range for rental reversions this year, reaffirming confidence in its leasing strategy and market conditions. Bolstered by a healthy gearing ratio and an A3 credit rating, the leadership is optimistic about the company's ability to navigate economic challenges and continue its trajectory of acquiring quality properties to generate good returns.

Earnings Call Transcript 2023-Q2

[Terence Lim, Investor Relations]

Good evening, ladies and gentlemen. My name is Terence from Investor Relations. Welcome to 622 Lorong 1 Toa Payoh, a property that we just recently acquired earlier this year.

Thank you for attending CapitaLand Ascendas REIT Financial Results briefing for the period ending 30 June, 2023. We have management representatives from the CLAR management today. They are Mr. William Tay, CEO; Ms. Koo Lee Sze, CFO; Ms. Yeow Kit Peng, Head of Capital Markets and Investor Relations; and Mr. James Goh, Head of Portfolio Management. Today's briefing will consist of the presentation, followed by a Q&A session. Please note that today's session will be recorded and will be available via webcast.

Before we start, let me brief you those present on the fire evacuation plan. These are the fire evacuation routes for you to take to the assembly area. The next slide shows you the assembly area besides this building.

We will now proceed with the presentation of our financial results for the first half period ended 30 June, 2023. You'll be presented by Ms. Yeow Kit Peng, Head of Capital Markets and Investor Relations. Kit Peng, please.

[Yeow Kit Peng, Head, Capital Markets & Investor Relations]

Good evening, everybody, and welcome to CapitaLand Ascendas REIT first half 2023 results briefing. Key highlights, financial performance, the distribution income for the first half of 2023 is 1% lower at $327.5 million, distribution per unit is $0.007719, 2% lower year-on-year. Investment properties, $17 billion, 2.5% higher than 30 June, 2022. On the asset management side, portfolio occupancy was stable at 94.4%, and a positive rental reversion of 14.2% was achieved. For capital management, leverage was 36.7% and we continue to maintain a high level of natural hedge at 75%.

Let's dive in. So this is first half 2023 versus first half 2022, gross revenue is up 7.7% to $718.1 million and this is mainly driven by the three acquisitions in Singapore in the first half of the year. So the three properties are this Toa Payoh property, 1 Buroh Lane, as well as The Shugart that were acquired in the first half.

Net property income increased 6.7% to $508.8 million and its corresponding to the gross revenue, however, offset by slightly higher operating expenses. The total amount for distribution declined 1%, and this is mainly due to the increase in borrowing costs on rising interest rates as well as a higher loan quantum as we buy more properties. DPU fell by 2% to $0.007719. And this takes into account the lower distribution and as well as the enlarged unit base, following the issuance of new units during the private placement in May.

So this is first half 2023 versus second half 2022, same reasons here. So gross revenue is up 4.7% and that is driven by the contribution of the three Singapore properties and for net property income, similarly, also driven by the new acquisitions, as well as partially offset by an increase in the operating expense, so distribution fell by 1.7% mainly due to higher borrowing costs. DPU fell in tandem. And of course, due to the enlarged number of units following the private placement in May. Key distribution for the period of 25 May to 30 f June, we'll be distributing $0.1578 and you'll be getting the distribution on 1 September.

Moving on to investment management. So these are the three properties that were acquired in the first half. They are all in Singapore. The total acquisition cost amounted to almost $515 million. These are very well located and good quality properties and very importantly, they are accretive. So during the same period, we also divested property, KA Place for $35.4 million and at a very high premium of 55% to the valuation Okay. So this is overall in line with our strategy to deploy capital towards value-adding opportunities, thereby improving the quality of our portfolio.

You have seen this. So capital management, okay. As we continue to acquire properties, the total debt increased to about $6.6 million billion as at 30 of June 2023. However, gearing is healthy at 36.7% following the successful equity raising in May, so we raised $500 million. Our emphasis is to ensure a healthy gearing level during this uncertain business environment. Our debt is well spread out. In any one year, we have 15% or less of our total borrowings that will come due for renewal in the next five years.

Okay. The interest cost for -- as at June is 3.3%. So this is the same level as March 2023 during our first quarterly business update, all right? Compared to December 2022, it was 2.5%. So the high level of fixed rate debt that we have, 82% is circled that helped us to maintain and have a gradual increase in the interest cost. For the rest of the financial metrics at very healthy levels, exceeding -- far exceeding the required minimum levels by bank covenants. We continue to enjoy the Moody's A3 credit rating, which is very important. It provides us with a lot of flexibility and also definitely stronger access to capital.

Okay. So we have two sensitivity table here. On the left, is on the percent of fixed, right, 82%. So for the balance 80% that is on favorable rates. So based on 100% -- 100 basis point increase in interest rates on the variable rate debt, then the impact on DPU would be a minus 1.8% for distribution, all right?

And on the right, it is on our refinancing for the second half of this year. So we have about S$668 million that's coming for refi and assuming a 100 basis point increase in interest rates, then the impact would be a minus 1% on the distribution and pro forma basis.

Okay. Natural hedge. So to minimize any impact from adverse exchange rate fluctuations, we have a high level of natural hedge of 75% for our overseas investment, which accounts for about 40% of our investments.

Okay. Portfolio occupancy, very stable at 94.4%. So, if you were to look at all the other countries -- all the countries that we are operating in, they are all above 90%, okay? We have some details here for Singapore, stable at 92.3%, right? United States declined slightly to 92.1% and this is mainly due to movements in Raleigh business parks.

Australia improved by 20 basis points to a high of 99.5%. And this is due to the high occupancy at cargo business park which is a logistics property in Brisbane, okay. UK, Europe, happy to report that all our 38 logistics property and our 11 data centers are very full, right, 99.5%. In terms of new take-up in Singapore, we saw demand from tenants in the logistics, IT and engineering, financial services industry. Most of the leases that were signed are for three to five years, right? Although, we had a lease that was as long as eight, nine years by a bank.

Overseas, new pickup. We saw demand from companies in the IT data center logistics industries. There was a lease in the data center space for as long as 15 years. So all these long leases will certainly provide care with a long-term stable income stream.

Rental reversion. So in 2Q, we achieved an average rental reversion of 18%, so if you were to zoom in on to Singapore, it is 19.5%. And for US, it's 11%, Australia, 12.9%. And with our full year -- half year, half time, 14.2% increase in the rents, we will be guiding for a positive high single-digit range for this year.

Okay. So the EI is 3.9, yes. For the rest of this financial year, we have 6.9% of our gross rental revenue that will be upward renewal. Okay. Then I would come to this ongoing project. So we have -- we are working on almost $800 million worth of projects that's undergoing development, redevelopment, asset enhancements and compare to suit. So this quarter, we have a new addition -- so this is 5 Toh Guan East which is the logistics property.

Here, this property is going to be spending $107.4 million to redevelop 5 Toh Guan Road

East It is very strategically located in the prime Toh Guan LogisPark with double frontage of the PIE and Toh Guan Road. Now we will be maximizing the plot ratio and the GFA will increase by 71% to 50,920 square meters so a sizable logistics property. So the new property will have a -- will be 6 story high with ramp-up facility.

Some key features include 82 dedicated loading base, power provision for core storage usage, very large contiguous floor plate with ceiling high of up to 12 meters. So we will also be adopting sustainable construction, green concrete and sustainable products that will be used and it will be targeted to obtain the green mark, gold class or higher certification. So the completion will be in 2025, okay?

So finally, to conclude, our well-diversified and resilient portfolio is generating a steady stream of income, as you can see. We will continue to acquire quality properties with good returns potential. So given our very healthy gearing of 36.7% and our strong A3 credit rating we are confident to ride out this economic uncertainty, right?

So with that, I end my presentation.

[Terence Lim, Investor Relations]

Thank you, Kit Peng. We will now proceed to the Q&A session. For those present, please raise your hand, and my colleague will pass you a microphone. For participants via Zoom webinar, please type in the question in the Q&A function box. Please state your name and organization before your question. I believe, Mervin, you have -- your first question.

[Mervin Song, JPMorgan]

Hi, Mervin from JPMorgan. Congrats on the very strong interrelations and our guidance for the full year. Maybe you can start on Singapore. Can you just touch on what's driving the healthy reversions? Is it very strong demand from relocations expansion. Can we touch on logistics and business parks, which I think has been worried for some investors. Second question is regards to electricity. CDL Hospitality Trust was talking about quite a material drop in electricity costs heading into next year. Maybe you can touch on what rates you can lock in for, let's say, second half this year and next year? And then finally, third question, best concern has been U.S. office maybe you can address those investment concerns given that you've been able to maintain occupancy this far. Thanks.

[William Tay, Chief Executive Officer]

Let me just start. Thanks, Marvin. The Singapore reversions, as you can see, is mainly driven of logistics. 39%, this is really quite a strong number that we have delivered. The supply demand imbalance is still there. There's hardly any supply right now. You can say that even ourselves, we have actually decided to turn down one warehouse and to rebuild into a new ramp-up facility. The reason why we didn't disclose that earlier is because we are talking to our tenants to move them to our own facility. And we have already landed the anchor tenant on to our own facility. It shows that logistics is a movement from just in time to just in case.

And I don't think it is stopping right now. I think it's probably still need and many companies are still planning in terms of just in case. That's actually driving the demand. And the fast coupled with the supply is not turned on that fast. Overall, in the industrial, in logistics and even BP market here in Singapore. This year, another 500,000 square meter space to be available another 1.9 million next year. But if you look at the precommitment are all very high between 60% to 70%. Business part, if you look at the supply and demand for the next 3 years, actually, together with the sponsor, we are probably the one that is driving a lot more supply in Science pub, including our transformation IBP.

So if you see the chart, most of a 0% not occupant occupancy at 0% precommitment is mainly from our own properties, but there are still 3 years away to go. So we are fairly confident that we should be able to picked up from there. And also mentioned previously that the business park space actually has surprised us a little. I guess all of us were concerned over the movement of book from home banks moving up but we are not surprised that they're still downsizing, which is a norm right now. But successfully, first Q, we have brought in on new financial institution into CBP [ph].

And second Q, we also brought another financial institution, new financial institution into CBP. So we see this as VAU [ph] given the fact that there will be relocations, there will be downsizing, but as well as expansion and new pickup in our space. Industrial has been doing very well, which is also driving the [indiscernible].

I would let James touch on maybe anything to add not and the U.S.

[James Goh, Head, Portfolio Management]

Sure. Okay. Thanks, Mervin, for the questions. So first off, on the LED, we see similar trends as well. So our second half rates that were contracted is about 9% lower than what we contracted for the first half. For next year, our formula has been locked in, but we have not locked in the contract. The base components of that formula would include cost of your crude oil, FX, et cetera. So that tends to move. But based on where prices are today, we would see a further decline in next year's elec cost as well. So again, that's just to provide some guidance.

Moving on to US office. I appreciate the concern about the US given all of the negative headlines that you have seen with COVID accelerating the work from home kind of phenomenon. But I'd just like to put things in perspective. If you look at US as a proportion of the entire portfolio, they make up about 14%, of which 2% of that -- this is in AUM terms, but it roughly translates to NPA as well. About 2% goes to logistics. So we're down to about 12%. Then -- this 12%, if we copy that further, about 5% belongs to the SoMa properties. And those SoMa properties, they are very good trade A properties with a fairly long rail.

One is leased for the next 10 years, another -- for another four years. And for the building that is currently has four years to run, that tenant has sublet it one of the largest IT companies and they invested a substantial amount to retrofit the building to their requirements. So we are, again, very confident that, that building will continue to be leased even after the fourth year.

So if I take up SoMa, which is another 5%. We are down to about 7%. And so this 7% would really be the three initial portfolio that we acquired when we went to US. So that would be Raleigh, Portland and San Diego. And if I were to break down the dynamics for these three cities, San Diego stands out, it's high 90 -- well, mid-90s kind of occupancy currently. It's really anchored by your tech -- your defense tech life sciences.

San Diego is one of the top three overall markets in the US for life science companies. So there's a lot going on, a lot of good that's coming out in vehicles. So we are fairly confident with the vehicle. Next, we move on to Portland. So Portland, I think many of you would have been aware that it's been a bit bumpy.

And the occupancy has come down since our original acquisition. And that's sort of a reflection of where Portland is. It's never been a Tier 1 kind of city. But it has its own chance, and we continue to see deal flow in terms of leasing, but they tend to come from smaller kind of tenants. But we have -- just observed for the last two quarters to three quarters, we have more or less maintained occupancy there. So it's come off, but I'm still fairly okay with Portland

Next, I move on to Raleigh. So Raleigh this year, there was a big chunk of our leases coming up for expiry. And quite a few of them are kind of IT companies, and many of them have downtime, which again is no surprise. So I think for Raleigh, the worst is probably behind us. We are through most of the lease expiries for Raleigh.

So I think overall, the message that I'd like to just pass on is while US definitely isn't positive, as you can see from the headline, but on an overall impact to the portfolio, that's not too bad. I think we are not overly concentrated, and that's where the beauty and the advantages of having a very diversified portfolio is $17 billion worth of AUM, 230 properties across four continents helps because at any point in time, there will be some markets that will be doing better than others, case in point being logistics in Singapore three years ago, rents were coming off quite badly. And today is the darling of the markets, right?

So while I'm not saying that that's going to happen to US in three years' time, but I'm just sharing based on past experience, at least we have gone through cycles like that. And the other thing that we have going for us in US is currently, our rents are still below market, which is why you see that in terms of rental reversion, even for business park space in US, we are still chalking up fairly healthy kind of reversion. So that helps to slightly mitigate some of the losses that we get due to the lower occupancy. So I hope I've answered your question.

[William Tay, Chief Executive Officer]

So in summary, the US office is probably Raleigh out just one day, probably will need to do some work. First quarter, the weak occupancy came down because of Raleigh, second quarter as well as Raleigh. Portland, there is downsizing, but we managed to find new tenants, which is why if you look at our Portland even for second quarter, the occupancy actually climbed up slightly.

So all in all, I think that is a market that we find that the flat from CBD locations to our urban location in Portland is still appealing factor for people to move. Raleigh being a more of a research, it requires, if you like, our state investment into Raleigh, which probably we need some time to work on those vacancies.

[Unidentified Analyst]

Hello, can you hear me?

[William Tay, Chief Executive Officer]

Yes.

[Unidentified Analyst]

Just one question on the acquisition fund, right? Can you update us on the EU acquisitions that you were supposed to be doing duty. Is that going to process or is there a delay? What's the reason for the delay? That's the first question. And also on the acquisition price that your prospective vendors are looking at, have you seen any interesting expansion in cap rates that you could see more deal flows coming through over the next six to 12 months? So my two questions. Thanks.

[William Tay, Chief Executive Officer]

We are still on track. No delay. Just to update the duty has been completed. So we're just finalizing the documents and the rest of the details. We should be making an announcement soon. In relation to cap rates, actually, in terms of various asset classes other than US, which we see some movement in cap rates, Australia, Europe, the cap rate has been quite stable. Even for our own assets, you probably have sometimes to look at the valuation later. Our valuation has been fairly stable, a small movement, 1%, 2% each of the country Singapore, actually, the valuation went up. UK also went up by about 3%.

I don't see any big expansion movement in Europe. We probably will expect more transactions in second half across the countries that we operate in. So that may give an indication to valuers exactly where should, the cap rate be in the next six months. So we will watch that -- watch out for that in our December valuation.

What we hope to see is that, now when the interest rate is more or less, I would say, for some of these countries that we operate in is probably quite peakish. We do see more interest to transact, which is why I think the market is expecting more transactions in the second half.

[Unidentified Analyst]

Right. Thanks.

[William Tay, Chief Executive Officer]

Thank you.

[Unidentified Analyst]

Thanks, William. [indiscernible] Just two questions from me, I think, firstly, with regards to the redevelopment overall, are you able to share what is the expected ROI? I mean, you mentioned about moving off the anchored tenant. And are you saying that you have an anchored tenant there or anchored tenant for building relocated that you have to move to another location.

[William Tay, Chief Executive Officer]

Okay. Okay.

[Unidentified Analyst]

And my second question is on the debt. So you have that 600-plus are expiring this year. I believe they are probably in quite advanced stages of negotiations already. Just wanted to know what should, we be expecting in terms of cost of debt by the year-end? Yeah. Thank you.

[William Tay, Chief Executive Officer]

Yeah. I'll take the second question. For the first question, so there's, the anchored tenants existing there. We have moved them to another location of our property -- of our portfolio.

What is driving that redevelopment is actually a transformation from a cargo leave development to a ramp-up facility. Typically, a cargo leave warehouse at rental right now, probably about 120, 110 -- but a ramp up for City is actually much more easily 25%, 30% higher than cargo leave.

We only have a few family to, in the West, the rest of the cargo leave warehouse in the East. So this is in a very good location. That's untapped plot ratio. So it's not just the rental that is driving the interest for us to redevelop. But the 71% increase in GFA is quite huge for us. You won't be able to -- I mean, you will see 0.5 million square feet building coming up in that location is quite huge.

In terms of EU side, you're asking about NPI EU, we probably looked at 6% to 7%, depending on where we can land in terms of the interest. Possibly higher, if we can lend cold storage which we managed to get higher electricity to be able to feed a cold store if we need to.

So to just close up. We don't have any tenants right now, but there are interests out there. We know there are some RFP that we are working on, and we are able to improve EU, if you can land in a cold store.

[Koo Lee Sze, Chief Financial Officer]

Yeah. So on that $658 million of borrowings coming due, some of it is maybe in August, September and then some of them are in December. So the average cost for these borrowings currently is about two-odd percent, so when they come due for refinancing, I mean assuming the same panel, all right. Obviously, then the cost could go up to around, five-ish percent, right? But put it in perspective, $658 million is 10% of our total borrowings

So for the full year, I think at half time, the average cost is 3.3%. So for the full year, we think it's going to be around this level could be 3.3%, 3.5% thereabouts based on current benchmarks list.

[Terence Lim, Investor Relations]

Thank you for your question. David?

[Unidentified Analyst]

Have you done a study for your end tenants that move from just-in-time to just-in-case, how much more space would they need? Do you have any idea?

[William Tay, Chief Executive Officer]

I don't think we had the idea, yes, but conversations around has been more on meeting of their own tenants or their clients' requirements. And the -- I would say even for COVID, when during on COVID, we do see some of these stocking up of inventory. It has reduced in terms of number of providers to provide all this inventory, but the amount of space that were taken up for all these additional stocking up and just in case has been the same.

So, for example, the number of customers who given the mandate to help the government stock up at that point in time, it was about four to five logistics players who were supposed to help with all these national mandate, the four or five has reduced to one, but the size of inventory is still required is still the same.

So I don't think we could clearly see whether is it a just-in-time or just-in-case, but you do see that a lot more expansion requirements out there. Even like now, Jay were asking about whether it's a tenant, I mentioned, there's RFP out there. We are responding to some of this RFP and 0.5 million square feet is in the location of Toh Guan very attractive. I can't give you an exact number.

[Unidentified Analyst]

Okay. Another question is, can you discuss why the NAV dipped half-on-half? Because it seems like your placement was way above both?

[Koo Lee Sze, Chief Financial Officer]

So you said the adjusted NAV is actually quite similar to [indiscernible].

[Unidentified Analyst]

Yes. I guess my final question is going back to the refi. You did mentioned that you're going to refi from like 2-odd percent to up to 5-ish percent. So when we look at our sensitivity table, we use 300 bps at best indicator for the sensitivity.

[Koo Lee Sze, Chief Financial Officer]

No, that's all things being equal, right? So cannot -- I mean there will be other moving parts, right? Yes. And for that, I think I should also add, some of these headline numbers, right, sometimes we have to consider what currencies are in also Singapore debt is -- will be cheaper, maybe around 4% for five years, okay? And then maybe for the sterling pounds, it would be around five plus, okay. So it depends on what currencies we are talking about, okay and the panel, yes.

[Unidentified Analyst]

Hi. This is Yew Kiang [ph] here. First question is on acquisition, right? I think William you mentioned, you expect second half to see more deal flow. Does that apply to play as well?

[William Tay, Chief Executive Officer]

We've been quite active. I believe we still have enough pipeline to work on, whether we can actually successfully lend them or not, I can't give a clear indication. To hit 40%, we have $1 billion of headroom, which is quite good for us to be able to use when the opportunity to arise.

[Unidentified Analyst]

Thanks. Second question is on the reversion rate. Understand from average on average, but can you give more color other leases is excluded if it's renewed for a separate tenant?

[William Tay, Chief Executive Officer]

Separate tenants…

[Unidentified Analyst]

Or does it include all leases, that's renewed?

[William Tay, Chief Executive Officer]

All leases renewed for multi-tenanted building.

[Unidentified Analyst]

Okay.

[William Tay, Chief Executive Officer]

Yes.

[Unidentified Analyst]

Okay. Got it. Thank you.

[William Tay, Chief Executive Officer]

Yes. So if it's a new tenant, it’s separate. It's considered a new take-up.

[Unidentified Analyst]

Also multi-tenanted building, but to new tenants is excluded.

[William Tay, Chief Executive Officer]

Yes.

[Unidentified Analyst]

If we include that, does the number change materially?

[William Tay, Chief Executive Officer]

In terms of the market rental right now?

[Unidentified Analyst]

The reversion number.

[William Tay, Chief Executive Officer]

Reversion number, it won't be that high, won't be that high.

[James Goh, Head, Portfolio Management]

Yes.

[Unidentified Analyst]

Okay.

[William Tay, Chief Executive Officer]

Yes.

[Unidentified Analyst]

Thank you.

[William Tay, Chief Executive Officer]

So if it's a new tenant who comes in, they be likely given the supply demand right now in Singapore, they're probably quite similar to where we renew, so a new tenant that comes in is probably the same as where we renew. But our existing tenant in compare to the previous lease average, right, and it's three years, so it's last three years have reached. So a new tenant comes in the others looking at a market rate. But in terms of contractual, they are likely to be same as our renewed tenants. You cash that. There was one thing our renewal was stronger than market rent, but now they are more or less the same. Anything to add, James?

[Joy Wang, HSBC]

Joy from HSBC. I have two questions. First of all, on acquisition, would you be explored other new markets on -- to tap into your spreads?

[William Tay, Chief Executive Officer]

I think we are fairly busy in our -- the markets that we are in right now. I think we've been -- I mean, we talked about, for example, other mature markets, which is what we've been more keen on includes, say, Japan, Korea and all this. But we find that it's a very different market from where we are right now, volume we get better use spread, but we want to make sure that we are able to execute them enter at a sizable AUM or acquisition, and then subsequently be able to scale up.

So that's why we want to hope to achieve some of these markets may not be able to allow us to scale up that fast. If you look at our track record from Australia to UK to US, once we enter, we are able to scale up each of the market now it's between $1.5 billion to $2.5 billion, which is quite substantial for us to manage, and we hope to be able to deepen ourselves there.

[Joy Wang, HSBC]

And then the second question is to follow-up on Singapore, your redevelopment. Will the land lease be able to extend it on the back of redevelopment?

[William Tay, Chief Executive Officer]

Not at this point of time. It's for power consideration right now.

[Joy Wang, HSBC]

And just to confirm, 6% to 7% is on cost.

[William Tay, Chief Executive Officer]

Yes.

[Joy Wang, HSBC]

Okay. And if I may just follow-up. Just amongst your markets, do you think it is still more higher return to redevelop or would it be more attractive to actually acquire?

[William Tay, Chief Executive Officer]

Actually, I would say the redevelopment allow us if there's opportunity for us to unlock port ratio or change the usage to be able to tap on the higher rental, I think that's probably be more attractive given that construction cost has -- is still high, but it has more or less stabilized.

As well as in the markets that we are in, we have started looking at much more AEIs probably what James can explain also in US because of changes in occupancy. It gives us more comfort to invest into AEI. That also attracts tenants to come back. I mean, tenants and their employees to come back to work. It helps them when there's more amenities. We are doing more quite boxing as in preparing the space to be leased out so that it becomes cheaper for them, easier for them to decide.

Once that is done, I think it's probably easy for us to get it leased up. That's primary reason because construction cost availability contractor has more or less stabilized right now

[Terence Lim, Investor Relations]

Thanks. Any further questions from the floor? In the meantime, I think there were some questions that are posted online, but I believe most of the questions have been addressed. Anybody else have any other questions?

[Unidentified Analyst]

Thanks for the presentation. Just wondering, okay, so there's a large expiry coming up in the US in 2024, I was just wondering what it is and whether you've started negotiating because what is from the first acquisition that you made in those three regions.

And then also in Australia, you've got a couple of expiry other ag passing rent or your NPH rent a lot higher than the market rent because that tends to happen in Australia up to one. I'm just wondering whether those things would impact those expiries?

Then the three properties that you acquired recent said this before. They're only on 20-year leases. So, what you plan to do when last table kicks in. I'm just wondering because there will be some -- will they start to be written with the valuation start to fall?

And did the valuations in USD mix in the middle of the year this year, does that have any impact on your own valuations? Do you think that you should? And also in Australia, there was a large there was a transaction on the property -- the DEXUS one, yes. Does that have any impact on your Australian, I know is it more or less a different asset class?

And then the last question is we aren’t getting when you said that there were -- you had two tables, one on the left side and on the right side, would both of them kick in this year when you renew because you've got some floating rate, right, that you said that will impact. And then your $600 million is going to be renewed at that high level. So, the 100 basis points there'll be an impact like 2% to 3% of GPU there.

[Terence Lim, Investor Relations]

How are you doing?

[Koo Lee Sze, Chief Financial Officer]

Well, okay, it's not meant to guide on BTU, it's really standalone, all things being equal

[William Tay, Chief Executive Officer]

Its pro-forma basis.

[Koo Lee Sze, Chief Financial Officer]

Yeah. It's pro forma FY 2022. Yeah. So what possible impact you might have, yeah. But I think the point is that we want to highlight that because of the high level of fakes that will really help to minimize the volatility of our DPU. Yeah. And although when this $600, $700 million loan borrowings come due, there are many ways how we can save money, right? I mean we're not limited to the same structure for the existing ones. We can always look at alternative options like take on a different currency and then you swap it to another currency that result in a cheaper, more competitive rate, right? But this is just a very ballpark guidance like-for-like the same loan, if it was a five-year loan, then we apply a five-year loan looking forward what the cost might be. Okay? Yeah.

[William Tay, Chief Executive Officer]

So your left-hand right table, I think if you look at the unfixed portion, it's been moving up, right? So in terms of impact, it's not that huge for us even that we have been able to fix now at 82%. The right table, yeah, it seems like I gave away what to look out for, but it's a pro forma basis. And there's no surprise. I mean just what Sanshin asked about, a question about average, these were loans that were signed five years ago. I mean they definitely were much lower refi -- you will know the numbers, what kind of rates that we will be looking at. And then you will know what's the jump in terms of the change in interest rates.

Moving up to your valuation question. If you look at our valuation, our US is negative 2.8%. So what we did is in-house revaluation exercise where we look at operational performance margin, occupancy, the rental rates that we achieved without touching the other variables that value was done, example, cap rate discount rate. This was done by third-party. So this is an in-house valuation just to adjust the performance for the six months, right? With that, US came up to be about 2.8%. We find it as we also have a conversation with our valuers. The indication to us, if we were to do a valuation exercise today, evaluators will guide probably in the market is about 25 bps 30 bps expansion for the assets, the locations that we are in.

Dexus came out -- okay that's for Australia. So Manulife came out much higher. I think in terms of the numbers about 75 bps, which I think the themselves will say that is a surprise with the valuation. So we are quite different in terms of the locations that we are in. Occupancy has been fairly stable, while there's movement, but yet rental rate has been strong for US. For Australia, the movement is about 1.2%, down which also adjusting for occupancy, margin, the rest of the operational numbers. If we talk to our -- when we talk to our valuers for in Australia properties, they also guided, if there's any movement in cap rate, it's probably about 25 to 30 bps Dexus has moved between 31 to 32 bps, I think that's quite in line, so no surprise there. And Australia is also as well as that we have a very strong logistics offsetting the numbers that came down from office. So I think we are fairly aligned in terms of where we see the numbers are even without adjustments of revaluation exercise by third-party.

Maybe I'll touch on the 20-year lease. We are in a building that we bought at 2021. I don't think there is -- we looked at various factors what it was used before this, it was also a Philips factory. This is brand new. They review this. If you look forward, I think the land use has still been in industrial, the likelihood, obviously, may convert to residential, but it is when we look at how the industrial landscape has been executed here in Singapore. There will always requirement for employment in the residential estate, so they will not take out every single industrial site in the residential estate to convert to residential and simply put on employment facilities out into the West or the East.

So every residential estate, there will be employment requirements. If you look at -- I think I was talking to David just now, if you look at where there's a hint of any change in the land use is when you are a change and industrial -- a site to reserve, our site, right. So chances are you know there will be a change in time to come, in concept plan of five, 10, 15 years. This has still been an industrial site and has been here for the past 30 years, 40 years.

So we believe there's a good chance that we will be able to talk to JDC when the lease do expire to extend this space. But bear in mind that while there is opportunity to extend, JDC today for all and new leases is 30 years. So it will be a norm. I think it's probably at a stage where we are able to buy in the past 30-plus years, because the lease was 30 plus 30 as new leases now is allocated at 30 years, you will then be able to buy maximum 27 years. Why? Sorry, 23 years. Why? Because there's five years moratorium and two years construction. So seven years is taken out of the lease. So maximum is 23 years.

So that will be a norm. I think we've got to get familiar with that. We definitely want to be able to continue, hopefully, owning this site beyond 20 years, but if there is an opportunity for us, whether the risk does shows up that we can't renew or they can't extend, obviously, we look at divestment.

And in Singapore, short leases, also has a life of its own. 10 years plus/minus there is still a buyer pool, small, medium enterprises who are not able to find themselves qualify for direct land allocation. They will look at secondary market, and it probably will be a cheaper source to buy a short lease, so that they can continue operation for seven, 10 years, even at 10 years, actually, is a few cycle of tenancy. Every three years, so at least you'll be three years of tenancy. So even there is -- there will be a good use for even a short lease.

[James Goh, Head, Portfolio Management]

Yes. Okay. I think the first question is the US expiries in '24, so next year, there will be another chunk of rolling leases coming up for expiry next year. And typically, we engage our tenants about six months in advance. So substantially, we haven't really part debt negotiation process for leases expiring in '24, we have much clearer visibility in terms of what's going to happen in the second half. Besides Raleigh, there's also quite a few leases coming up from the other legacy cities which is San Diego and Portland.

If I move on to the second question, which is on Australian expiries and where would they stand versus market? And what kind of reversions we're going to get, it's true in the past, say, five years back, right, typically in Australian lease contract, there will be in place annual increments anywhere between 3% to 4% on average. And if you talk about a five-year lease after that period of compounding increases, it will typically be higher than market. But what has happened over the last three years, particularly accelerated by COVID is that with the very tight supply and vacancy is almost at 0% in most of the major metro cities that we are in, which is Sydney, Melbourne and Brisbane. We've seen record high rentals being signed and that is prevalent in our portfolio as well.

So, while the in-place rents are no doubt high, but market rents have actually caught up. The other thing to note is the way we calculate our reversions is typically an average. So we don't take the ending rents versus the starting rate. So the ending range from the previous lease and stocking rent. So we look -- if you look at average to average, there would still be positive rental reversion for Australia.

[Unidentified Analyst]

I just want to follow up on my electricity question. I appreciate that you haven't locked it in, but what can you lock in if you decide to lock in for 2024 in terms of [indiscernible].

[James Goh, Head, Portfolio Management]

I can't give you more precise -- because until we lock it in, that number will move every day depending on the FX and the crude price.

Q - Unidentified Analyst

Would it be below 13% at least?

[William Tay, Chief Executive Officer]

We can’t guide you on that. Historical, given historical 2021, we probably was less than $0.20, 2022, $0.29, less than $0.30. Now, it's above $0.30 right now. So we are looking at lowering these numbers from 2022 to 2021, it was about 60% jump based on our utility. I think you know the numbers. '23, I mentioned we probably look at between 30% to 50%. First half is probably 40-plus% increase. Second half as what James mentioned is lower than first half. So we expect full year maybe 30%, 40% compared to 2022. Then -- sorry, by 2022. So '24, we do expect the numbers to come down further, but we have not locked in. So, we hope to be able to catch that window, which we have done so for our second half as well as our first half.

[Unidentified Analyst]

Just a follow-up question on the US portfolio. Can you talk about TIs? Are they starting to stabilize, or is still increasing? And in terms of the new leases signed, are you still getting into escalations of that 3%-ish or is it flat line, or what's happening to escalations?

[James Goh, Head, Portfolio Management]

Yeah. Okay. I'll take that question. I think generally, TIs have remained stable, even though I think that increasingly, tenants are asking for more. So I think it comes down to the process of negotiation, how attractive your assets are, how much supplies they are out in the market. So to cut the answer short, it's stable, but it's increasing. Sorry, you had a second question in -- all right.

All right. Okay. So the annual escalations, they are more or less there still. So we are typically looking at about 3%. I think maybe just to run out on US is -- and William mentioned this earlier, I think to keep our assets competitive. So ,even in Portland, which is, like I mentioned, not a Tier 1 city we are trying to get the best bang for our part. So we do very selective AEIs. One example is in Portland that this building we call Atrium, which is multi-tenanted and we are putting in a new amenity center inside there. So you're going to get gym, there is going to be a cafe, there's like breakout rooms, meeting rooms and all that. So that's going to serve as an anchor for all of the buildings, which is around their part. We're going to spend about SGD 1.5 million on debt alone in US dollars.

And in Raleigh, the parameter part where our properties are -- we're going to spend about S$900,000 to pay outdoor tariffs amenity for our tenants, again. So there will be landscaping, there will be barbecue and will be bringing like food trucks during the day to encourage people to come and make use of that outdoor amenity space. Separately, we are looking at spending up to about US$2 million on white boxing. So what white boxing means is, in the US, typically in the lease, there's no reinstatement requirement for the tenant. They leave, when they leave is as is condition, they don't have to turn down the walls, they don't have to remove their stuffs.

So in the past, what would typically happen is we'll try to lease it as is -- maybe just shampoo the cup boards, maybe bringing some new partitions, but typically keep it the same configuration. And in the past, tenants are quite happy to take those. But - has changed and tenants are a bit more demanding in terms of wanting more brand new specs. That's where we are putting in this kind of CapEx to white box the space, carry it down, put in like new carpets, new lights and all that refresh the whole place so that when people come in, it would be a lot more enticing for them. So those are the kind of things that we have been doing on the site as well to try and improve and make ourselves more competitive.

[Terence Lim, Investor Relations]

Okay. We have a question from Derek from Derrick on DDS. Will you be able to -- why you be keeping your current interest rate hedging strategy given that interest rates have likely pick up?

[Yeow Kit Peng, Head, Capital Markets & Investor Relations]

So yes, we will have to be very nimble on this right, while you see keeping, right? So now we are at 82%. So given the high level, we do have the flexibility to have it at a lower level. So we will have to watch closely and be flexible. Yeah.

[James Goh, Head, Portfolio Management]

And whilst speaking, but we also see that the longer-term rates are more favorable.

[Yeow Kit Peng, Head, Capital Markets & Investor Relations]

[indiscernible] then short float in one…

[James Goh, Head, Portfolio Management]

And we also -- I mean getting a cheaper loan -- shipment rates right now despite being a 5 years or 6 years up also allow us to catch up in terms of revenue, rental growth, reposition of assets so that we can actually be able to sustain the higher rates for long kind of scenario

[Yeow Kit Peng, Head, Capital Markets & Investor Relations]

Okay?

[James Goh, Head, Portfolio Management]

Maybe also

[Terence Lim, Investor Relations]

Okay. We have a question from Gary from Morgan Stanley.

Regarding interest in the SEC filing. As you mentioned about our pretermination of the lease. So have we been in dialogue with them?

[James Goh, Head, Portfolio Management]

I can't take that [indiscernible].

[William Tay, Chief Executive Officer]

So yes, this is actually not a new development. This filing has been out for many months now. In the initial period when this notice first came up, we got in touch with interest as well to find out exactly what's happening. And it's very clear that they intend to honor all of the applications that they have, which is why I'm very confident when I say that there's a 10-year lease left on that building, I'm going to collect every single cent of their 10-year lease. They did -- so there were preliminary talks between our site and interest but that didn't really go very far in terms of even coming to like some numbers in terms of, if they were to predominate what kind of compensation would they be offering. So we didn't even get to that stage. And as of right now, they continue to honor their applications, and they continue to pay their rent on time. So our understanding is this is more of accounting kind of, treatment that they have because they need to put that out in order to do some write-offs on their accounts. But legally, they are still down, and they continue to pay their -- so we don't think that that's a problem for us.

[Unidentified Analyst]

So there's no pre-termination rights. And they mentioned in their filing, they will honor that lease, including potentially looking at subleasing or then mentioned about pre-termination is to raise as a request to us, but we didn't have anything further to have on that.

[Terence Lim, Investor Relations]

Any last questions from the floor

[William Tay, Chief Executive Officer]

Acquisition, divestment outlook Okay. I think acquisition, I've answered divestment, we're probably still opportunistic for us as we have -- you have seen, we have divested one property here in Singapore. I think when there's opportunity to look at divestment, we will look at that. But at least in Singapore, we find that the question about redevelopment acquisition. I think in Singapore, there's still more opportunity for us to redevelop. We believe the location that we are sitting on are very good locations. And if we can find the right usage to be able to get a higher rental that will help us to reposition our assets.

[Terence Lim, Investor Relations]

Any further questions? If not, I think that concludes today's briefing for our first half 30 June numbers. Thank you for coming, and have a good evening.

[William Tay, Chief Executive Officer]

Thank you.