Ascendas Real Estate Investment Trust

SGX:A17U

Earnings Call Analysis

CLAR's Steady Performance in 2024 Despite Challenges

In the first half of 2024, CapitaLand Ascendas REIT reported a 7.2% increase in gross revenue to $770.1 million, bolstered by contributions from properties across multiple regions. Despite a 2.5% decline in Distribution Per Unit (DPU) to $0.07524 due to a larger unit base, the portfolio maintained a high occupancy rate of 93.2% with significant rental reversion of 13.4%. Investment properties remained stable at $16.87 billion while gearing was healthy at 37.8%. The company continues to enhance property value with ongoing asset enhancement initiatives and recorded encouraging pre-commitments and new lease agreements.

Introduction and Key Performance Indicators

CapitaLand Ascendas REIT (CLAR) kicked off the first half of FY 2024 with noteworthy performance metrics. Distributable income saw a modest increase of 1.1% to $313.8 million, although distributions per unit (DPU) decreased 2.5% to $0.07524. The portfolio's investment properties stood steady at $16.87 billion, maintaining a high occupancy rate of 93.2%. Notably, rental reversion—a measure of the difference between previous rent and new leases—was strong at 13.4%, reflecting a healthy demand for the properties. Gearing remained reasonable at 37.8%, with the cost of debt stable at 3.7% .

Revenue and Income Insights

The REIT's gross revenue grew by 7.2% to $770.1 million compared to the same period last year, driven by contributions from recently acquired properties like The Chess Building in the UK and The Shugart in Singapore. Net property income (NPI) followed suit with a 3.9% rise to $528.4 million, although operating expenses somewhat offset these gains. Consequently, despite higher interest expenses, distributable income edged up by 1% to $330.8 million. However, the increased unit base led to a 2.5% decline in DPU .

Occupancy and Rental Reversion

Despite facing some slippage, particularly in the U.S. market, the overall occupancy rate remained strong at 93.2%. The U.S. Business Park segment experienced slight downward trends in occupancy due to downsizing tenants, though positive rental reversion trends persisted in other regions like Singapore and the UK. The leadership reassured that they expect occupancy levels to stabilize between 93% and 94% by year-end, driven by new leases and tenant expansions .

Capital and Debt Management

The REIT was proactive in debt management, terming out $600 million through a seven-year bank loan and a ten-year bond, which increased the weighted average lease expiry (WALE) to 3.7 years from 3.4 years in December. Financial flexibility was maintained with an interest coverage ratio of 3.7x and 83% fixed-rate debt. Furthermore, the REIT retained a comfortable A3 credit rating by Moody’s, ensuring robust access to capital .

Active Asset Management

CLAR continued optimizing its portfolio through various asset enhancement initiatives (AEIs). For instance, the recent AEI at Pacific Tax Center saw occupancy jump to 92.4% from 83.7% in December last year. Upcoming projects include those at Aperia and ONE@Changi City. These initiatives aim to improve tenant experience and enhance property values, with returns on investment expected to be around 7.5% to 8% for these projects .

Future Outlook and Strategic Guidance

Management provided a cautiously optimistic outlook, emphasizing continued positive rental reversions and stable occupancy rates. They highlighted potential acquisition opportunities in the U.S. and Singapore markets but noted less interest in Australia due to the difficult financial environment. The focus will remain on AEIs and redevelopment plans to maximize returns and adapt to evolving market conditions .

Conclusion

In summary, despite headwinds such as higher interest rates and market volatility, CapitaLand Ascendas REIT demonstrated resilience with solid revenue and income growth. Effective capital and debt management combined with strategic asset enhancements position the REIT well for maintaining robust performance and providing stable returns to unit holders in the face of market uncertainties .

Earnings Call Transcript 2024-Q2

[Operator]

All right. Good evening, ladies and gentlemen. Welcome to the first half of 2024 financial results briefing for CapitaLand Ascendas REIT or CLAR for short. So we thank you very much for joining us in person today, as well as online.

This briefing will start with a presentation by management, as well as a question-and-answer segment. So if you are attending this briefing online, you can submit your questions anytime during the briefing via the Q&A function on Zoom. If you are attending the briefing in person, after which you can raise your hand, I will call your name and the microphone will be passed to you.

So before we begin the session proper, let me introduce the management on the panel. So first, we have Mr. William Tay, CEO of CapitaLand Ascendas REIT; second, we have Ms. Koo Lee Sze, CFO of CapitaLand Ascendas REIT; next we have Ms. Yeow Kit Peng, Head of Capital Markets and Investor Relations; and finally, we have Mr. James Goh, Head of Portfolio Management.

And with that, I will hand the time over now to Kit Peng, who will begin with the presentation. Thank you.

[Kit Peng Yeow, executive]

Thanks, Andrea. Good evening, everyone. Thank you for taking the time to attend CapitaLand Ascendas REIT's first half FY 2024 results presentation. Let's commence.

The key highlights for the first half of FY 2024, as follows, distributable income increased 1.1% to $313.8 million. DPU declined by 2.5% to $0.07524. Investment properties held steady at $16.87 billion. Our portfolio occupancy remained high at 93.2% and we achieved a high rental reversion of 13.4% for leases renewed in the first half. Gearing is healthy at 37.8% and cost of debt is stable at 3.7%.

Let's take a look at the details. First half '24 versus first half FY '23, gross revenue increased by 7.2% to $770.1 million, mainly due to contribution from The Chess Building in the U.K., The Shugart in Singapore, MQX4 in Australia, 6055 Lusk Boulevard in the U.S., just to name a few. NPI increased by 3.9% to $528.4 million, partially offset by higher operating expenses.

Distributable income increased by 1% to $330.8 million on the back of higher revenue and NPI and despite higher interest expense resulting from the high interest rate environment and higher borrowings as we acquired more properties. DPU declined 2.5% to $0.07524 in first half FY '24 because of a larger unit base.

When we compare first half FY '24 to second half of FY '23, gross revenue increased by 1.1%, mainly attributable to The Chess Building in the U.K. and the completion of the convert-to-suit from office to Life Sciences at 6055 Lusk Boulevard in the U.S.

NPI increased by a higher 2.7% to $528.4 million, partially due to the lower operating expenses. DI increased 1.2% to $330.8 million, in line with the higher NPI and partially offset by higher interest expense. DPU increased in tandem with DI, i.e., 1.1% to $0.07524.

Distribution details. So we adopt a semiannual distribution frequency. So for the period of 1st January to 30th of June, we will be distributing $0.07524, and you'll be receiving dividends on 2nd of September.

We continue to optimize returns from our existing portfolio by upgrading our properties. So in July, an AEI at Pacific Tax Center was completed. This is a 10-story industrial property located in the Jalan Bukit Merah vicinity in Singapore. So to enhance tenant experience, the main lobby and the common corridor were upgraded. Occupancy has increased to 92.4% currently versus 83.7% in December last year. Okay.

Moving on to capital management. Gearing remains healthy at 37.8%. In first half, we termed out some debt, about $600 million worth. This comprised of a 7-year bank loan and a 10-year bond. So as a result, the will has increased to 3.7 years versus 3.4 years in December.

So this is a summary of our financial ratios. I will just highlight a few. ICR is healthy at 3.7x. Fixed rate debt remains high at 83% and the weighted borrowing cost is stable at 3.7%. So compare that with December 3.5% and then in the first quarter, March this year, it was 3.8%. Okay.

A3 credit rating by Moody's is maintained and this provides us with a lot of financial flexibility and strong access to capital. Okay.

Natural hedge. Yes. So to minimize any adverse exchange rate fluctuations, we have been maintaining a high level of natural hedge. So currently, it is at 76% stable. Okay.

Asset management. As at 30th June, the occupancy rate for the portfolio remains healthy at 93.1%. You can see that the occupancy rates here for Singapore, Australia, U.K., Europe, they are overall stable at 92%, 96.8% and 99.3% respectively. Occupancy in U.S. is lower at 87.7%. So we have some color in the next couple of slides. So in Singapore, the occupancy rate is stable at 92% and this is higher than JTC's island-wide occupancy rate of about 89%.

In the U.S., it declined to 87.7% and this is mainly due to the expiration of leases at 2 single tenant properties in Kansas City and Portland. So in Australia, we improved further to 96.8% from the 96.6% in March and the improvement is driven mainly by higher occupancy rates in 2 business space properties in Melbourne and in Sydney. The new tenants have signed 5 to 6 year leases. Okay.

So in the U.K., Europe, it maintained a high level of 99.3%. So where are the sources of new demand? So in Singapore, they were from the engineering, the government agencies, and the IT and datacenter sectors. As for the overseas markets, the financial and professional services, government agencies, and biomedical were the largest sources of demand in first half.

Rental reversion. A positive rental reversion of 11.7%, the first column, was a key for leases. Both Singapore and the U.S. recorded positive, almost 12%, rental reversion while Australia, U.K., Europe, average of about 7.7% and 10% respectively. So for the first half, the average rental reversion is 13.4%. So looking ahead, we will be revising upwards our guidance from mid to positive high single-digit range, will stable at 3.8 years.

So on a portfolio level, we have about 6.8% left to go for rental -- for renewals in the second half. So in Singapore, it's 7.2% number. In U.S., 9%. Australia, 7.5% of gross rental revenue due for renewal for the remaining FY '24. And then U.K., Euro, less than 1%. Okay.

So in the second quarter, we kick-started 2 new AEIs to optimize the returns and to improve the value of the properties. The 2 AEIs are at Aperia and ONE@Changi City. So all together, we are working on 6 projects here, totaling $573 million, and they are scheduled to complete in 3Q this year and right up to like first quarter in 2026.

So some information on the AEI at Aperia here. So $23 million will be utilized to upgrade the drop-off point and entrance to enhance the tenants and the visitor arrival experience. Importantly, we are also redoing the layout of the retail mall and tenant mix to increase the footfall even further. Okay. So AEI is expected to complete in 4Q 2025. OCC, $1.5 million, some refurbishment here for the lobby and the waiting area. Okay. And it will complete in 3Q, soon this year.

So in terms of the last slide, we are still faced with uncertainty surrounding the inflation trend, the geopolitical tensions, and possible changes in administration, right? So, however, we are confident to adapt to any of these potential changes and will continue to provide best possible returns to unit holders amidst these uncertainties.

So thank you very much.

[Operator]

Thank you, Kit Peng. Now we will move to the question-and-answer segment of this briefing. And may I have the first question from the floor, please? Okay. We will have Mervin from JPM.

[Mervin Song, analyst]

And congrats on the quite incredible performance given the significant interest rate headwinds. Maybe we can start with the occupancy question. Some slippages. I think James is such an A-star, A-plus student. He's got an inevitable task of maintaining such high levels. But any thoughts of what we will expect for the slippages in Singapore or U.S. going forward?

Second question, I guess, William, you've given me a background, probably best person to answer. Any threat from Malaysia with the SEZ in terms of any of the tenants perhaps moving there, giving a lower cost of operations?

[Wee Tay, executive]

James can add on. I'll just start off first. We have actually performed fairly well, I must say. Overall portfolio occupancy now about 93-plus. And this is first and second quarter. To be honest, prior to this year, we had 7 quarters of above 94%. It was very bullish. If you remember, at a point in time, logistics was full almost everywhere, every country. But we now start to see normalization of this logistic demand.

It takes some time for us to backfill, not because there is no demand, but I think customers are being more selective in where to choose their expansion. Take U.S., for example, we had customers who left us not because they are downsizing, but they're expanding. It's just that we don't have enough space for them, they're expanding and they have to move down, right? That is the trend for logistics in the U.S.

If you're asking about occupancy across, I would generally say that overall, on a portfolio level, we should still be very stable. 93%, 94% by year-end is probably what we are looking at. That is probably what we can achieve. It's probably difficult for us to move back to that. I think we had 94.5%, 94.7% level. I think it's quite tough for us to move back to that level.

Where the pressure is, it's likely to be from U.S., as you pointed out, U.S. Business Park. Today, we are still seeing negative absorption. While we lose some tenants downsizing, we managed to backfill, but you do see that the occupancy for U.S. office is slightly trending downwards. And it's likely to continue the case for next 2 quarters.

Singapore will hold up well. You probably heard some of the announcement by some of our clients who actually announced they are coming in into CBP way before we can make the announcement. This will bring up some of our business park occupancy. Industrial and logistics will continue to do well here in Singapore. If you look at U.K., Europe, we have hardly any expiry for the next half, so it will be quite stable. I think I mentioned about Australia, some vacancies, but we have to backfill them.

To your second question, we'll just take on that first before James, if you have anything to add. SEZ, I think the key thing is, it's a few more years to go. The key thing, I think your interest is probably how it affects more towards our logistics. If there are free flow of cargo between the 2 countries, how will 3PLs look at this network to be able to service their customers in terms of supply chain?

We do see that it's possible that there may be some flow of cargo to SEZ. But we believe that if it's time sensitive and critical, they will still hold here in Singapore than to risk crossing the border. Other than that, perhaps where it will be interesting for us, is whether there will be further growth in industrial, say in the northern part of Singapore, if that will drive the growth of industrial movement from Singapore to Malaysia, and as well as growing the Singapore pie in the north. Business part, I don't think there'll be huge impact from the SEZ.

[Operator]

We'll move on to the next question. Okay.

[Chat Shen Goh, executive]

Okay. Thanks, William. Perhaps I just share my assessment of where the markets are and how we view them, rather than talking specifically about occupancy. I think first off, there's a big general macro trend in terms of global logistics. We're coming off a supercharged growth phase. At that point, we're getting very strong double digit rental reversions. Occupancy was 100% because at any point we could backfill a tenant that is not renewing their lease with a new tenant.

Coming off that, we are still in a very high and strong growth phase, but you will expect a bit more downtime. As William has mentioned, there's a bit more normalization in terms of for the logistics cluster and that's globally. We see that trend in Singapore, in Australia, in U.S. as well.

Next, if I were to touch on Singapore, and perhaps I'd like to also talk about our business parts. There's been a lot of negative publicity and news flow in terms of our exposure to Changi Business Park. But first, I'd like to just highlight to everyone that Singapore Business Park continues to be an integral and very important asset class for us. If you were to look at Singapore BSP, it contributes about 30% of class total AUM and NPI.

And if we drill down a bit further, we break down that 30% figure, you'll see that one-north and Science Park, they contribute about 75% of the total Singapore Science Park NPI and AUM. And if we were to look at the performance of one-north and Science Park, on a blended average, we're looking at about 92% occupancy. We continue to see positive rental reversions, and the tenants that we have in Science Park and one-north, they are underpinned by life science and government tenants.

On average, just under half of our income are derived from these 2 large customer segments, which means that this cash flow is a very high-quality cash flow. There's a lot of sustainability in it, and we expect to continue to get the same stall growth from one-north and Science Park.

Now let's look at CBP, where there's been a negative news flow, as I've mentioned. We think that we have hit an inflection point. If you look at CBP's contribution to CLAR's NPI, that is currently at 6%, so it's not a big exposure that we have to CBP. And we did go through a difficult phase. Over the last 18 months, we had almost all of our major financial institutions' leases coming up for expiry.

A number of them did downsize, which is why you see that slight decline in occupancy from your low 80s to where we are, 76% right now. But in that process, we did reset a lot of the rents. We secured much higher renters. If you look at FY '23 renter reversion, just for CBP, we clocked it in at 18%. That's one of the highest that we've ever achieved. So what that means is, while occupancy did come down, we managed to partially protect the underlying cash flows because we did reset the rents, we brought it up to a much higher level.

Now, if I look at the next 18 months, in terms of the visibility that I have, I only have one major FI lease that's coming up for expiry, that's coming up for expiry in about 4Q next year. We are currently already in advanced negotiation to forward renew that lease, and that tenant has already indicated that they want to renew it in full. Plus, the positive news flow that you would also have seen, that SIA, they have committed, they are coming in. That will be in the second half of this year. You'll see occupancy start to ramp up. So we think we have hit bottom. At least for the next 18 months, things are starting to turn.

We have also announced, if you look at the slides, that Hansapoint, which is also in CBP, currently in March, the occupancy was in the 30s. Now we are in the high 40s, right? So we are starting to see a bit of that demand coming in, and we're hoping to capitalize on that.

And the last point I would just like to add on CBP is one of the flip sides, and that was something that was kind of unexpected, is that because of all of this negative news flow, we have discerned that the regulators are a bit more receptive in terms of our request to either for change of views or for relaxation of some of the restrictions. I would say that this is very early days, but at least now they are a bit more open to exploring different ideas that we had. So these issues, to be honest, are not new, right? But they were picked up by the press, and because of that, I think all of that publicity, there's now better alignment in terms of everyone wanting to turn around CBP. So we think that we are in a fairly solid base right now, and that at least for the next 18 months, I've got pretty good visibility of where our cash flows are going to be.

I think the last point I'd just like to add for Singapore is we actually have a very stealthy underperformer, a very bright spot for us, which is industrial, right? So logistics has been hogging the headlines for many quarters now. BSP is business as usual, right? Industrial, if you look at industrial, we are currently at about 95% occupancy, and in terms of reversion, it's about 14%. This is the highest that we've achieved in the last 5 years. And we continue to see improvements in occupancy.

As Kit Peng had mentioned earlier, we recently completed the AEI for PTC, Pacific Tax Centre. We spent about $2.4 million. About a year ago, the occupancy was 75%. Today, it's over 90%, right? And we're seeing similar success stories across both our light. Our light is in fact at 99%. Again, another record for us. Our high specs is at about 92%. So I would say that there's a counterbalancing.

Some logistics, I would say it's coming off a bit in terms of that super strong growth momentum that we had. At least now we have industrial coming in very strongly to help to bolster our income as well, which is why if you look at our results, our NPI, even over the preceding second half of last year, we're doing fairly well. So I think that gives me quite a bit of confidence, at least for Singapore, that we're fairly well anchored and we've got very defensible, very defensive kind of cash flows.

[Operator]

Thank you, James and William. So we'll move on to the next person. We'll start with Dale first from DBS.

[Dale Lai, analyst]

Just 2 quick questions from me. I think the first one being, just wanted to follow up on the U.S. occupancy rate. I think over the past few quarters, we've seen single tenants, master tenants leaving. So are we expecting to see more of these conversions, something similar like what you did to the last? Or are we expecting more and more AEIs, redevelopment within your U.S. portfolio?

[Wee Tay, executive]

James, I saw the question online as well. So same thing on U.S., tenants moving up. Yes, we are not ready to announce some AEIs, but yes, we are. There are some plans for AEI. In fact, when we talk about AEI, we always constantly looked at whether it's overseas and Singapore. And we do see traction that the AEI does benefit in bringing tenants, especially in the U.S. We do see that it's bringing tenants, perhaps more because of flight to quality and our locations are more suburban, nearer to residential, nearer to schools. And with the amenities being renewed, it does help with tenant retention, especially and then new take-ups from tenants.

Maybe you want to take on a question together with the one online?

[Chat Shen Goh, executive]

Yes. So I don't think we are able to provide very specific guidance in terms of occupancy. However, what I would like to just add to what William has said is, yes, we expect a continued pressure on occupancy for U.S. I think this is a very macro-structural trend. I mean, that work-from-home phenomenon continues to be washing through our portfolio. We have not seen the end of that. But there are some green shoots here and there. I mean, we are seeing a return in terms of tenant inquiries, particularly in Portland and in Raleigh.

I mentioned, I think, in last quarter that we did sign a pretty large lease in Raleigh, and that was one of the top 5 largest in Raleigh for the whole of 2023. That lease will commence in the second half of this year. You'll see the occupancy going up slightly. By the same time, we continue to face pressure. So that's something that we try to counter with some of the AEIs, as William had mentioned, and also proactively doing white-boxing, which is doing tenant reinstatement.

Typically, what happens in the U.S. is that when a tenant vacates, they do not have the obligation to have to reinstate into bare-shell condition. They typically leave their fixtures and all that behind, which makes it a bit more difficult to market. But given that we have got the financial capacity and capability to do it, we very selectively do white-boxing so that we present it with a fresh coat of paint, new carpets, new lighting. It totally changes how the presentation of the space looks to a prospective tenant and that helps us with our marketing as well. So those are some of the things that we are actively doing right now to try and secure new tenants.

[Dale Lai, analyst]

I just wanted to follow-up on that. Are we expecting any drastic redevelopments or change of use for some of these older properties?

[Wee Tay, executive]

At present, development are mainly here in -- I mean, development plans that we intend to do is mainly here in Singapore and the one that we mentioned in the U.K. For the U.S., as we have done so with our Life Science conversion, if there is a tenant that we can work with, it is probably more for us to be able to ensure there is a customer in place instead of any speculative redevelopment. I mean, office occupancy is not exactly great for us to capture.

[Dale Lai, analyst]

And just quickly moving on to my second question, I think, James, you touched on CBP hitting the bottom and inflecting. I am just wondering, are we expecting something similar in one-north Science Park, especially with tech being such a big contributor over the past decade, and now they look to be consolidating, downsizing. Should we be expecting when the first cycle of leases are due in the coming few years?

[Chat Shen Goh, executive]

I think we have plenty of lead time in terms of planning and marketing those spaces should some of the IT giants decide to downsize. We have not gotten a very clear indication that they will definitely downsize, but that is something that we are prepared for. And again, we think that space, given its location, its specifications, its proximity to the train station, there will be plenty of other users that will find that space appealing besides large IT companies.

[Wee Tay, executive]

Actually, in terms of one-north, I don't think it is an issue for us. In terms of the location. You talk about tech tenant. We don't have clear indication. Obviously, my top 10 tenant, one of them, there's consolidation of space in their plans, but they have not given us clear indication that they will vacate, but I think we are prepared for that.

[Operator]

We will move on to Yew Kiang from CLSA first.

[Yew Kiang Wong, analyst]

My first question is, thanks for raising the guidance for rent reversion from mid single-digit to high single-digit, but what gives you that confidence to do that given that you still see occupancy, I mean, it's slightly dipping off a little bit. So are you positive that your leasing spreads for the second half is going to be at least high single-digit?

[Wee Tay, executive]

So you have 2 questions.

[Yew Kiang Wong, analyst]

This is one. This is one, because I'm trying to gel the 2, because your occupancy is sort of like tipping off.

[Wee Tay, executive]

I think overall, as you will see, the occupancy, even in Singapore and overseas, while the key decline comes from U.S, you do see some U.S. softening in terms of occupancy. But the rest of the countries and asset classes, you look, say, Australia office, we've been pushing towards 100%, right? The rest of the asset classes and country are doing fairly well.

The occupancy is stable, even to your question of rental reversion, I would say that even for US office, we are expecting positive rental reversion. Why? Because, like you mentioned, the spread to market. I think we are still under-rented against the market, even in, just now we talked about business park in Singapore. We had a high of 18% before, now we are normalizing to single digit. The next 2 quarters, I think we will still be looking at positive rental reversion, even for business park in Singapore. So you asked me whether confidence is mixed bag of the leases that we are talking to, as well as where the market is today, in terms of market rent. We are still very much under-rented.

[Yew Kiang Wong, analyst]

Then for the business parts in Singapore, right, you are doing double-digit positive reversions. How much is…

[Wee Tay, executive]

No, it's for [ 8.3 ].

[Yew Kiang Wong, analyst]

So how much is the uplift for the SIA that James mentioned? Is it a strong…

[Wee Tay, executive]

SIA is a new lease, so it won't be here, reflected here. But I think what James is trying to say, in terms of our strong rental reversion, and the occupancy changes, especially on FIs. We had experienced downsizing, but I did mention to you, we have got it all renewed, right? In fact, we got 2 new FIs that came to CBP in the past 18 months, right? While they have downsized, their occupied space is lesser, but they have given us very strong rental reversion.

That leaves vacant space for us to fill, which is why our occupancy came down, for example, CBP to 76%. But now if I can catch up, in terms of filling this space back, take SIA for example, ASUS for example, these are non-FI companies that we can attract, and that is where we can get a better property income.

[Yew Kiang Wong, analyst]

My last question is on the gearing, right? Does it include -- how much of that $570 million AEI has drawn down for the debt? -- progress. But the major $300 million.

[Wee Tay, executive]

Mainly -- if you're talking about $300 million now, we are probably about close to 90% completed. So if you go by S curve, that's probably where we are. Yes. We are approaching -- because the TOP is first Q 2025. So we are approaching the end of construction.

[Operator]

We will move on to Xuan from Goldman Sachs.

[Xuan Tan, analyst]

First question is on, I guess, acquisitions. Gearing is pretty comfortable right now. What -- how are you thinking about acquisition or divestment at this point? Or is the focus more towards a IMB development given the better yields? And second question, if I can. It's just that if we were to include the leases, they are not renewable. So the backfill would the reversion number be still in line with was reported?

[Wee Tay, executive]

Your second question is whether we are getting the same rental compared to -- for the new leases compared to renewed leases. About similar, maybe slightly lower if you -- because new leases, you got to give rent-free. So that's probably the difference. On your first question, yes, activities for acquisition and divestment for first half is nothing much to show about -- but we are still -- we are looking at some opportunities, whether it's it acquisition, including divestment. So we hope that we can make some announcement, if you like, for second half. But those are still are in progress. There's no guarantee. But you're right, emphasis is very, very much in terms of AEI and redevelopment. Why so is because, as I mentioned before, we are sitting on a very good location in terms of our assets.

Take a peer, for example, I think over $20 million spend intended to be spent, but that will change the way we -- the layout will be changed. If you know a period, we have a B1 space as facing the road and it has been very difficult to lease, and we use it as -- we use our workshop as a means to get tenants in those space, but they are ground floor space. We are moving them up to third floor retail and moving the retail down to first floor. So there's some change in the configuration. And if you know retail onto floor doesn't come at good rent. It's probably the same as B1 space.

So $3, $4, for example. But I bring the retail down to ground floor, I possibly can push to high single-digit or double-digit retail rent. And yet the B1 space go up to third floor, no change. It's probably still the same renter. And that is where we want to be able to sharpen in terms of monetizing the assets. For this, we are looking at 7.5% to 8% return on investment.

[Operator]

We will move to Vijay from RHB.

[Vijay Natarajan, analyst]

I have 3 questions. Maybe I'll take it one by one. First question is again on the U.S. properties. And some of the U.S. properties that has been vacated has been recently acquired in 2021. Was this something which was factored in during the acquisition as a BK or things have changed since then? And since you are expecting some more pressure on U.S., what could be the occupancy floor, which we should watch out for?

[Wee Tay, executive]

You want to take the second question. Just to answer your first question, quite easy. If you're referring to what we acquired in 2021, which is the San Francisco properties, they are vacant, but they are leased tenants are renting are still paying us renter. Both have been subleased and they still have long will. So there is no issue with the quality of the income to us.

[Vijay Natarajan, analyst]

And the Kansas logistics property, was that acquired in 2021?

[Wee Tay, executive]

Kansas property. Chicago is the 100%, Kansas is the only one that has recent some tenants who have vacated, but it's because they wanted to expand, but we couldn't accommodate the expansion. They have moved out, yes.

[Chat Shen Goh, executive]

Yes. As I've mentioned earlier, the downtime for logistics assets will normalize. And in the past from our experience, it would take about 6 months to 12 months on average to lease up the space. But like I mentioned earlier on during COVID and immediately post-COVID, we were able to backfill all of those leases, but that phase has been transitioned out and we're now into this more normalized space. So I don't think, again, there's any issues with those assets, locations or specs, given that they were previously leased and the lease just recently expired. So we would expect to be able to release this in the next few quarters.

[Vijay Natarajan, analyst]

Maybe what kind of occupancy should we expect after the pressures or bottom out kind of -- would 85% be a level below which we would not expect in U.K., I mean, U.S.?

[Chat Shen Goh, executive]

Yes. I don't think we are able to provide guidance at this point in time. I think there are still a lot of moving parts. So I can only tell you to watch this space.

[Vijay Natarajan, analyst]

I'll just club my second and third questions. My second question is in terms of U.K. data center redevelopment, can you provide an update in terms of have you gotten some approvals and what kind of cost we are looking at for this property? And my third question is, I think operating expenses seems to have, I mean, margin seems to have picked up slightly, half and half. What is the guidance moving ahead? Should we expect operating expenses to be slightly lower?

[Wee Tay, executive]

There's also a question online on our data center in Europe. In terms of progress, we have decomp, means that we are in the process of demolition. That means that actually we have planning permission, which is we are going to decomp in the next 6, 7, 8 months. Progress-wise, we are still waiting for the power allocation. As I previously mentioned, we have put in the request, we have paid a deposit for the power, but we are waiting for the confirmation of when the power will be allocated.

So that if you like, in the past few months, there was slowdown in the government sector in terms of responding to such requests. So we are hoping that in the next 6 months or so, they should give us an indication. So we will not talk -- we will not give you guidance on CapEx or exactly how much megawatt we'll be building until we got better clarity of how much power we can get.

[Vijay Natarajan, analyst]

I thought the recent government has promoted something in data structure front.

[Wee Tay, executive]

Yes. That was most recent, right, yes. So we hope that will actually propel and progress the case.

[Vijay Natarajan, analyst]

Margins, can you give a guidance in terms of margin?

[Wee Tay, executive]

Yes. You want to take that?

[Chat Shen Goh, executive]

Yes. I can take that. I think that the biggest influence on margins typically would be because Singapore is such a large base, contributes so much of the income, that the OpEx in Singapore would affect overall clear. And for the last 2 years, we have seen, because of the high utilities cost, the unit rates, plus increase in consumption, particularly post-COVID by our tenants, has -- had led to a compression in our NPI margins.

Now, as I've also flagged out, I think about quarters ago, that we have re-contracted some of our electricity rates and that has come down significantly. And we continue to forward lock some of this and hedge some of this electricity cost. So I would say that our first half would be a very good indication of where the second half would be. And even looking forward into next year, I think we have only locked in a couple of months for next year, but that is in itself also lower than where we are currently at in '24. So I would say that it's quite benign in terms of the outlook for our OpEx, and that bodes well for NPI margins.

[Operator]

Now we will move to Derek from Morgan Stanley.

[Jian Hua Chang, analyst]

I just want to follow up on the U.K. data center redevelopment. I think 6 months ago, William, you mentioned a 60 megawatt number in terms of power. Is that still accurate? I mean, did you submit power plans for that?

[Wee Tay, executive]

Yes. Based on 60.

[Jian Hua Chang, analyst]

So it's still 60. Okay, cool. And just wondering, I know you can't share a lot of specifics. But do you intend -- is this meant to be an asset which you operate or which you have someone do the operations for you, like a [indiscernible] power asset?

[Wee Tay, executive]

We are open to customers' requests, but if you let us make a decision, we still prefer to just be a real estate player. We're not going to operate that. So unlikely to do a colo, but if there's a request for that, that's something that we will look into.

[Jian Hua Chang, analyst]

And I guess, you mentioned AI, previously you talked about $1,500 this year. Do you have a number in mind for redevelopments, how much you're going to put into this year?

[Wee Tay, executive]

We will wait for the -- frankly speaking, we wait for the $300 million, you can mention to roll off first, then we will make announcements to any development, redevelopment or AEIs.

[Jian Hua Chang, analyst]

And just lastly, on these expiries, do you see any tenants at risk of leaving, departing the portfolio?

[Wee Tay, executive]

For the remaining second half?

[Jian Hua Chang, analyst]

For next year?

[Wee Tay, executive]

Yes. For next year. Next year, big one, as mentioned, is probably the tech tenant in Galaxis, because it's top 10 and they are due for renewal next year. So that's probably the one that is of interest. But I don't think there's any big tenants that we are concerned with. So we will watch that space, because even the tenant has not given us any clear indication. But having seen they have another space to consolidate to, I think we are ready for the worst.

[Operator]

We will move to Joy from HSBC.

[Qianqiao Wang, analyst]

Just a few questions. First on change of use, you mentioned about change of use. How -- are we likely to see a more significant change of use, say, for example, like BP to a data center type of change of use? And also, in that regard, do you -- have you done some power studies on your existing land? Any excess capacity on your existing land from a power perspective?

[Chat Shen Goh, executive]

I think, firstly, we can't go into the specifics, because a lot of these are confidential discussions that we're having with the regulators. So change of use to data center is one of the options that we are looking at as well. And again, I can't share too much. But beyond that, we are looking at other uses as well, besides data center for conversion. So again, I can only tell you to watch the space.

But I would just like to add also that I think, based on our preliminary discussions with JTC, they are, in principle, quite supportive. But some of these proposals that we have would require other agencies' buy-in as well. So it's not as straightforward as just getting one regulator's approval to proceed. So there are a lot of granular details that we need to go through in order to get a buy-in from all the other agencies as well.

[Qianqiao Wang, analyst]

And then, just in terms of, if we look at your earnings, do you still think rental reversion is actually the best indicator of how your portfolio performs? Or should we look at alternative trends? Have you looked at like-for-like NPI growth? Because that would take into account the multiple factors, right?

[Wee Tay, executive]

I think rental reversion is quite a clear indicator, given that the key concern is always the expiry that is due for that year. And typically, we have like 15% to 20%, up to 20-plus percent, which means that these expiry are at risk. The rest of the leases are business as usual. I mean, they continue to lease, our will is 3.8 years, they will continue to pay us rental. Our rental collection has been very strong, 95%, 99%, 100%, hardly any arrears.

So the space to watch is really whether there's rent growth coming from a renewed lease. And that's probably a key indication. Our retention ratio hasn't really changed very much, maybe fluctuate quarter-on-quarter, but by and large, over a longer term, over a year is about 60%, 70%. And with a backfilling of those that are not renewed, we manage to maintain occupancy, means we are able to backfill those vacant spaces that are non-renewed.

In terms of renter, I think you heard me mention previously, we do get very strong new leases with higher renter. But now it has normalized. You do need to attract them to come in, which means that we are prepared to go slightly lower than renewed space. So I think renter reversion is probably one that should give us a good indication, whether it's a new lease or the existing renewed leases.

[Qianqiao Wang, analyst]

If I may just ask one last question. We've not seen a significant or a sizable built-to-suit or convert-to-suit for a while. And yet we're seeing quite healthy FDIs. Is there a change in end-user preference for the real estate?

[Wee Tay, executive]

Good question. We haven't seen such demand for a while. Primary reason is obviously for built-to-suit. End of the day, it's their cost of funds versus our cost of funds. Construction cost is high. The land continues to be a good price from JDC, and they have an option to do land renter. But if you do use a build-to-suit, the dynamics change, right?

So they construct at their own cost versus we construct, obviously, with profit, right? Definitely makes a difference. So we haven't seen that we are able to price competitively for build-to-suit, and it's not that there's -- I mean, you mentioned there's FDIs, yes, but nobody -- actually, I don't think we have any breakthrough in terms of getting build-to-suit.

[Operator]

We move on to some online questions first. The first one will be the cost of debt guidance for FY 2024 and FY 2025?

[Kit Peng Yeow, executive]

Okay. So for this year, FY '24, we're on track, right? We guided the last meeting we had 4% or lower. So this first half, we achieved a 3.7% number. So I think rest of the year, we only have one more refi to go, and that's in December. And all the other fixed-float ratio and all is still the same. So therefore, we think it will hover at around this level. We should finish the year at current levels, 3.7%, thereabouts. Okay. Next year is a bit a while away, so maybe we'll review the year, FY '25, at the full-year results. Thank you.

[Operator]

The next question would be management's view on the latest MAS proposal paper on the 1.5x ICR level and the increased gearing of 50%.

[Kit Peng Yeow, executive]

Okay. So MAS proposal will certainly provide the Singapore REITs with more financial flexibility. So for Claire, for the past, what, 21 years that we have been listed, we have always been very disciplined and very conservative in how we do our financial management, and I think going forward, there's no change to that. So for the past 21 years, for example, our gearing has always been at below 40%.

[Wee Tay, executive]

Maybe I'll just add on. It does look attractive to take on higher leverage, but there are other metrics that we looked at, for example, debt to EBITDA and all this. So we want to watch all the different metrics to make sure that if there is a need to take on more debt to grow, I think that must be for a good reason. We have done well in the past. I don't think it's immediate change in our way we look at acquisitions and the way we run the REIT. So that will be our guidance.

[Kit Peng Yeow, executive]

And even at these gearing levels, we have a big headroom, debt headroom easily, what, $600 million to hit 40%, and then to hit like, 45% is a few billion dollars. So we still have the debt headroom.

[Operator]

We will move back the questions to the floor, so we will head to this gentleman first.

[Krishna Guha, analyst]

This is Krishna from Maybank. Just a couple of quick questions for your U.K. data centers, have you -- are you speaking to some hyperscalers and all if you can? I mean, what's the sense of demand there? And would you prefer to have first secure a demand and then do the development? That's one. And coming back to Singapore, if you can give some pre-commit levels for the asset enhancements that are due for 2025. I think the one, the logistics assets, and then the Life Sciences one.

[Wee Tay, executive]

We are talking to a few prospects for U.K. redevelopment, but nothing concrete. And there is no preference whether we -- obviously, okay, I will say that the preference will be to build with someone in mind. But if it's required for us to do speculative, we may consider that. But 60 megawatt is interesting because now hyperscalers, if you look at hyperscalers today, they have enough development on their plates. And they don't mind taking on leases or powered shell from different developers. That should give them a better, effective or efficient way of managing their CapEx. So there are some interests, but nothing concrete right now. And I mentioned last meeting, they also want to know whether we are able to secure the 60 megawatt and wind, before they make any commitment. So it does, it's important for us to be able to achieve that.

In regards to the other AEIs and redevelopment, I think you're referring to say, [indiscernible] and our logistics assets. They're under construction right now. We will make known any pre-commitment towards the TOP period, not now.

[Operator]

We will move on to the gentleman.

[Terence Lee, analyst]

Hi, this is Terence from UBS. You mentioned that the portfolio is under-rented to date. Any rule of thumb to what degree the under-rentedness look like?

[Wee Tay, executive]

Rule of thumb, maybe we take our guidance. For this year, in terms of leases as due, I think against the market is high single-digit that we are looking at. Next year, we then will watch whether how the market will behave. I think James has briefly mentioned we do see that some of the renter are peaking. For logistics, in the past, we have seen from a low base to a new lease that was signed the past 12, 18 months, we have seen as high as 60% renter reversion.

Probably because it came from lower base. That was signed during COVID. But today, in terms of the rent growth, we do see that it is probably peaking. It is not as aggressive as what we have seen in the past. But even if they are holding steady today in the market rent, we are still at least in our view high single-digit away from where they are.

[Terence Lee, analyst]

Just to see if I got the message right, if I think about 2025 lease expiries, expiring versus market, would that also look like high single-digit reversions in the making?

[Wee Tay, executive]

I cannot tell you exactly where the market is. If I assume everything constant today, it should be slightly lower than the high single-digit. Each year, if you catch up, the tail end of renter reversion should narrow, right? I hope you get that.

[Terence Lee, analyst]

So is it fair to say that this gap to the market or rather your leases will mark the market in the next 3 years?

[Wee Tay, executive]

Typically, yes. Because the wheel is 4 years, so if continue on a trend, we have demonstrated in the past there is double-digit and then it fluctuates from quarter-to-quarter, right? But by and large, I think we have demonstrated in the past even double-digit now, we are guiding high single-digit. At least that shows our confidence for 2024. 2025, we will look at where the market is. If the economy is still doing well and if there are still good supply-demand balance, I think we should still be seeing positive renter reversion next year.

[Terence Lee, analyst]

Shifting to acquisitions. Can you just walk us through your thought process on which markets look interesting? Yes. That's the last question.

[Wee Tay, executive]

Thanks. Maybe one market that I will say doesn't look interesting is Australia. I think I mentioned this a few times. It continues to be tough given the fact that the mismatch between cap rate and interest rate is still a gap in Australia. We do see U.S. coming in to be accretive right now as I mentioned previously. Europe is slowly creeping up to be able to make accretive acquisition, but it's still a bit way off for us. So likely to be more U.S. and Singapore if there are any acquisitions.

[Operator]

I'm very aware of the time. We're already past the hour, so I guess we have just the time for one last question and I'll pass it to Yew Kiang of CLSA.

[Yew Kiang Wong, analyst]

Just now you mentioned that there's in the last 12 months you signed 2 FIs in CBP. I just want to know the kind of rents versus what the existing FIs they are paying. Like, is it very materially different? Cannot disclose?

[Wee Tay, executive]

Right.

[Yew Kiang Wong, analyst]

Okay. Okay. Later we'll have dinner. And then to the other point on longer lead time to fill rate, how does it compare with the past cycles? And what kind of period are we looking at? Like does it take 12 months, 18 months?

[Chat Shen Goh, executive]

Yes. So this -- that comment was specifically for logistics, not across the board. And, yes, that's reverting back to norm. So in the past, even before COVID for logistics assets typically takes about 6 to 12 months to lease an empty space.

[Operator]

Okay. Thank you. The last call for any questions. If not, then we will end this briefing. Thank you everyone for joining us physically today as well as online. We wish you a pleasant evening ahead.