Mapletree Logistics Trust

SGX:M44U

Earnings Call Transcript 2023-Q2

[Yuen May Lum, executive]

Good evening. Thanks for joining Mapletree Logistics Trust results presentation for the second quarter ended September 2022. Sorry for the slight delay. We had some technical glitches over here, but not to worry. Here, we have the full team here to present the results, we will start with Charmaine. Okay. So Charmaine will be giving the presentation on...

[Sheh Min Lum, executive]

Hi, good evening, everyone. Thanks for dialing in. I'll bring you through the key highlights for 2Q FY '22-'23. So for the quarter, gross revenue rose 11.4% year-on-year to $184 million. NPI grew 10.8% to $160 million. And DPU for the quarter is at $0.02248, that's 3.5% year-on-year increase from last year. Excluding FX on DPU, DPU growth would have been 5.7%. As at 30th September, MLT's portfolio occupancy stood at 96.4% with a WALE of 3.3 years. Average rental reversion for leases renewed or replaced in 2Q is at 3.5%. We remain proactive with our capital management. Aggregate leverage stood at 37% as at 30th September.

MLT's debt maturity profile remains well staggered, with a debt duration on 3.6 years. Approximately 82% of our debt has been hedged into fixed rates and income -- sorry, 72% of income stream for the next 12 months have been hedged into Singapore dollars.

During the quarter, we completed the acquisition of 2 parcels of industrial land in Subang Jaya. This is intended for potential amalgamation with MLT's existing assets, Subang 3 and 4, to develop the first mega modern warehouse in Subang Jaya. We've also started developing our 51 Benoi in preparation for AEI works by the end of the financial year.

Moving on to details of the results. 2Q this year versus 2Q last year, gross revenue increased 11.4%, mainly due to higher revenue from existing properties and equity acquisitions completed last year and in 1Q this year. However, the revenue growth was moderated by FX losses. As currencies we have exposure to such as JPY and Korean won continued to depreciate against the Sing dollar. Similarly, property expenses is higher by 15.7% due to the enlarged portfolio with 185 properties versus 163 properties last year as well as higher provision for doubtful debt. Accordingly, NPI is higher by 10.8%. Borrowing cost is higher by 33.7%. This is mainly due to interest incurred on additional borrowings drawn to fund this year's and last year's acquisition as well as higher average interest cost.

After taking into account income support for the quarter of about $974,000 as well as hedging gains of about $1.9 million as well as other adjustments, DPU for the quarter is at $0.02248, 3.5% higher than the $0.02173 last year. And excluding FX, DPU growth would have been 5.7%.

Year-on-year, first half this year versus first half last year, the trend and reasons behind the variances are largely similar to those of 2Q year-on-year results. Gross revenue is higher by 13%, mainly due to higher revenue from existing properties as well as accretive acquisition, although the revenue growth was moderated by FX losses as currencies continue to depreciate against the Sing dollar. So similarly, property expenses is 20.1% higher due to the enlarged portfolio as well as higher provision for doubtful debts and NPI higher by 12%.

Borrowing costs also higher mainly due to interest incurred on additional borrowings drawn to fund last year's and this year's acquisitions as well as higher average interest cost. Income support for the period, the first half of the year, is at 1.6% -- sorry, $1.6 million, hedging gain of $3.4 million. And after taking into consideration other adjustments, DPU for first half is at $0.04516, 4.2% higher than last year. Excluding FX impact, DPU growth would have been 5.3%.

Quarter-on-quarter, MLT's portfolio generated lower revenue in 2Q versus 1Q, mainly due to lower occupancy in certain properties in Singapore. As we convert some of these properties from SUA to MTB as well as lower occupancy in 51 Benoi, as we decant the property in preparation for AEI works. We also saw lower occupancy in China due to the uncertain economy as well as COVID lockdowns. Gross revenue is also lower due to the depreciation of JPY, Korean won, renminbi and Aussie dollars. So accordingly, NPI is 2% lower. Borrowing costs increased quarter-on-quarter due to incremental borrowings drawn to fund this quarter's acquisition as well as higher average interest rates. DI is lower by 0.5%, resulting in 2Q DPU being 0.9% lower than last quarter.

MLT's balance sheet remains healthy. Total investment properties stood at $12.9 billion versus $13 billion last quarter. This is $163 million lower, mainly due to net translation loss of about $192.3 million, offset by acquisition of land parcels in Subang and CapEx of $29 million. Total debt decreased by $96 million from $5 billion last quarter to $4.9 billion as at 30th September, mainly due to net translation loss on foreign currency denominated borrowings. NAV is slightly lower, $1.46 versus $1.47 last quarter. Due to the lower borrowings, our aggregate leverage ratio reduced to 37% versus 37.2% last quarter.

Weighted average annualized interest rate increased from 2.3% last quarter to 2.5%. Average debt duration, interest cover ratio as well as adjusted interest cover ratio, all slightly lower than last quarter.

Our debt maturity profile remains well staggered with an average debt duration of about 3.6 years. Debt due for refinancing for the rest of the year is at 7% or about $362 million with available committed credit facility of $923 million. This is sufficient to meet our refinancing for the rest of the year.

To mitigate the impact of interest rate base and FX rates on MLT's DPU, we have hedged 82% of our total debt into fixed rate. Out of the 18% that remains unhedged, 6% or about $290 million is denominated in JPY, where we think JPY interest rates will remain stable, 8% or about $414 million is nominated in Sing dollars, where we are keeping some of this unhedged to allow for paring down of loans with any divestment proceeds that will come in later and the remaining 4% are denominated in the various currencies.

For FX, about 72% of the estimated distributed income for the next 12 months has also been hedged either through currency contracts or derived in Sing dollars. On this slide are the distribution details for 2Q. And James will to bring us through the portfolio details next.

[James Sung, executive]

In 2Q our AUM stood at $12.9 billion, 70% continues to be contributed by our developed markets or developed economies [Technical Difficulty] like in Hong Kong, South Korea and Australia. Our occupancy rates we registered 96.5% occupancy rate in 2Q, a slight drop of 0.4% against the first Q. Overall it still remained stable and healthy. Though occupancy rates in Singapore, Japan and China were down slightly. Singapore is down mainly because of MTB conversions for properties in Japan we managed to backfill one of the balance availability space in the coming months. In China it was due to lower occupancy in some of the assets we had due to the COVID lockdown. In other economies like Hong Kong Vietnam and Australia and India, we continue to maintain a full occupancy rate.

So in terms of lease expiries, as at 2Q, we have 16.3% of lease expiries biannually expiring in this year. And in terms of multi-talented buildings and single-user assets, as of this quarter, we managed to bring it down to 25% of our NLA being contributed from SUAs from 31% in the last quarter.

In terms of the tenants, the top 10 tenants that we have in our MLT portfolio, it now accounts for 22.7% of our total gross revenue. CWT, our #1 customer, we have managed to sign direct leases with the end customers. So we have brought down the concentration from 6.3% to 4.4% of our overall MLT's revenue. The other top 10 tenants continue to be rather stable in our portfolio.

We have more than 800 tenants in our customer base in 2Q. And again, the 3/4 of these tenants belong to the consumable and consumption-based trade sectors. So this will continue to hold up and underpin our residential portfolio.

Next, in terms of investment update. We have -- just to recall, in the last quarter, we mentioned that we have acquired 2 adjacent sites to our property in KL, Subang 1 and 2. So this 1.4 million square feet potential development project, right, is meant to be completed in 2027 after we amalgamate these 4 sites by middle of next year to start construction by second half of next year. So the estimated development cost is about SGD 173 million.

In Singapore, just to recap again, we have ongoing redevelopment project in the west side of Singapore, 51 Benoi Road. The GFA will be increased by 2.3x. We have started decanting the customers or tenants in this property. Demolition will start in December this year, and this development will be completed around Q2 2025. So for this -- hopefully a snapshot, you can see that WALE is now at 3.3 years. Occupancy rate is 96.4%. And properties by country counts in each country is reported as such.

[Yuen May Lum, executive]

Okay. Now on to the slide on sustainability, which is on Slide 24. We have -- since last quarter, we have already updated you that it is our long-term plan to achieve carbon neutrality for Scope 1 and 2 emissions by 2030. We are pleased to inform you that we have begun good progress on this track with respect to our focus area being green buildings, energy intensity as well as our solar generating capacity. So for green buildings, we have set a road map to increase our overall percentage of green building progressively as well as green leases. We have started to introduce releases in Singapore for our tenants in multi-tenanted buildings and especially for the ramp-up. We estimate that probably in 3 years' time, we'll be able to cover about 50% of our tenants in Singapore. And we are progressively -- based on the reaction or the response from our tenants, we intend to progressively roll that out to our tenants in other overseas markets as well.

And for green space, in Singapore this year, we'll be focusing on Jurong Logistics Hub. And to get it Green Mark certified by BCA, we are also working to get green certification for some of our properties in China, Japan and Malaysia. So we are on track to reach this target of increasing our grid space by 25% this year. And as for the solar, we are also pleased to update that we are probably well on track, in fact, probably ahead of this target to increase the capacity by 15% to 20% this year based on the projected installation in Singapore, China, as well as Australia.

Some of these are actually put in by our tenants' efforts. So overall, I think we are quite pleased to update that these targets that we have set, we are on track to achieve them for this financial year as well as for the medium term.

Moving on the next slide, on outlook.

[Kiat Ng, executive]

Sorry, passing the mic around. Yes. So well, our outlook is we think the global economic outlook will continue to weaken among the high inflation, rising interest rate and geopolitical tension. FX will continue to be against us. Overall, leasing demand in MLT's markets remain resilient, supporting our stable occupancy as well as rental rates.

As mentioned, we are faced with higher interest rates as well as depreciation in the currencies that we are exposed to. This will negatively affect MLT's distributable income, although we have partly mitigated this with hedging, the hedging program that we have put in place. So our focus for the rest of the financial year will be proactive asset management to maintain portfolio stability as well as cost containment, as well as to rejuvenate our portfolio through selective divestment as well as cleaning the portfolio and AEI. We will remain prudent with respect to our capital management and discipline with respect to our hedging activities, while maintaining a strong balance sheet.

So I think this quarter, MLT has been fortunate that for the last, I think, 4 or 5 quarters, we were doing about 5% DPU increase year-on-year. And then I think now with the headwinds, which we have been the forecasting or predicting, I think, is hitting us, especially on the ForEx side. So if you look at our Q2 of the results, we are at $0.02248 -- Charmaine.

[Sheh Min Lum, executive]

Yes. $0.02248.

[Kiat Ng, executive]

without DPU -- without ForEx impact, it would have been 5.7% growth -- $0.02296. So I think the -- while our occupancy has been resilient, we think the outlook for the next 6 to 12 months, we think that our occupancy will continue to -- the occupancies across the various countries will continue to hold up.

The challenge will be on the rental reversion. Can we show the rental reversion slide.

[Sheh Min Lum, executive]

No.

[Kiat Ng, executive]

So I think James will give you the rental reversion. So what we are seeing is occupancy, we expect to be resilient, stable. In terms of rental reversions, we think the challenge will be to keep at the high 3.5% to 5% kind of level that we are seeing. So maybe, James, do you want to give the rental reversions for the different countries.

[James Sung, executive]

Yes. So in the second quarter, we registered 3.5% rent reversion rate versus 3.4% in 1 quarter -- in the first quarter. We continue to enjoy high rent reversions in several of the countries, which I'll go through now. Making at the top is Australia, 8.1%; Singapore, 4%; Vietnam, 4.2%; Japan, 4.1%; Hong Kong, 3.2%; Malaysia, 3.1%; Korea, 2.6%; and China, 2.5%. So overall, it's about 3.5%. We expect some countries like, for example, in China, because of the weakening economic environment to soften a bit in the next 1, 2 quarters. But overall, we see that the whole portfolio for the other countries continue to hold up in terms of rent reversions.

[Kiat Ng, executive]

Yes. So I think the country that will be most volatile for the next 6 months to 12 months will be China. The rental reversion, we are seeing right now, we are at 2.5%. Will it continue to soften rental reversion? I think, for China that could be a possibility. The occupancies in China, you can see is, again, way below. Can we show the slide -- the occupancies in China is again below what our portfolio average is. I'm sorry, I can't see the slide. Sorry, guys, some technical problem over here. I can't see the slide. But you can see that our overall portfolio is about 96.4%, 96.5%, but China is hovering about 92%. Will it soften? I think the volatility will be there. But overall, as a portfolio, the mature -- or rather the developed markets like Japan, Hong Kong, Australia and South Korea will continue to hold because of the lack of what you call a huge influx of new supply coming.

So Malaysia and Vietnam will be the more high growth -- will be the higher growth markets. So we will expect to see that. So I think overall, we are cautious and optimistic that our DPU will continue to grow but maybe at a slower pace, depending especially on how China will unfold over the next few months.

Any questions that we have.

[Yuen May Lum, executive]

Can we open the floor for the Q&A.

[Mervin Song, analyst]

Maybe if you could touch on the different segments, e-commerce, [indiscernible] what you see in terms of demand, which is softer, which is stronger. Second question I have is of the acquisitions and [indiscernible] previous results call, you were targeting to sell $300 million to $500 million of properties, so I think 3% to 4% cap, and was that still realistic on the [indiscernible] how you're seeing acquisitions, cap rates?

[Kiat Ng, executive]

Okay. On the acquisition front, I think we have been keeping to the discipline of making DPU accretive acquisitions. So that involves the cost of debt as well as the cost of equity. The cost of debt, I think, Charmaine will tell you, we are looking at a few basis point increase. But what is really hitting us on the acquisition front to make DPU accretive deals are actually the cost of equity that has come down quite -- I mean, the cost of equity has actually gone up substantially. So if you look across our portfolio, the countries that can offer some opportunities will be like Vietnam, where the yields are like 7% and 8% sales and then maybe Japan because the cost of debt is relatively low. Charmaine, do you want to talk more?

[Sheh Min Lum, executive]

Well, I think adding to James' point, indeed, I think in terms of the acquisition opportunities, I think we continue to be -- want to be very focused and disciplined. And we will want to, especially in the current climate with the rising interest rate environment and the higher cost of equity, we need to look for, hopefully, for better buy. And we are hopefully there are -- on the vendor side, they are softening on -- in terms of the pricing expectations -- so that is something that we want to continue to keep a look up so that in the event that we are ready, we are able to acquire, of course, need to be supported by a favorable environment in terms of the interest rates and hopefully, our share price performance. But back would move northward in term of further staff. Yes.

So I think from the sponsor, you will see that there is some pipeline coming up from Vietnam. So that's probably something that we can take. And then as for third party, I think we were looking at 300 to 500, I think with the current climate where we are moving, we will need to shift that acquisition opportunity target down. So I think this period, we will focus more on strengthening our balance sheet. So the focus is really -- we always have this recycling strategy. So what we have shifted to high gear now is divestment.

So we are in the process of divesting. I think the last time we mentioned, right, we are already at about $180 million in progress, right, in the markets that we are operating, there could be another $200 million, $300 million coming up. So I think we're shifting gears towards recycling, divesting so that we can get our dry powder ready in event that there is an uplift. But having said that, definitely, Mervin, the optimism on acquisition has shifted quite substantially over the last 3 months. So I think we are now no longer as aggressive, in terms of acquisition because we want to stick to the discipline of DPU accretive.

On the other question, which is the sector, can you show the tenant mix that we have? So maybe, James, you can give a few...

[James Sung, executive]

Yes. So just to give you a feel of how the different sectors are doing. Overall, as you see that in terms of essential buying or essential services, which our customers are facing, particularly in the F&B consumable consumer staples, they continue to be resilient, right, health care and electronics similarly. But in terms of discretionary kind of spending, whereby because of the cost of inflation and business facility, we see that fashion apparel, cosmetics, this kind of sector in the near term date, it could take some weaker demand and also sectors like furnishing and finishing, right? This could be perhaps taking a slightly weaker demand. But overall, e-commerce are encompassing many of the consumer and the domestic consumption sectors continue to be strong, particularly in Southeast Asia, in markets like China, demand is going to grow like 20%, 30% like in the past but it is still growing, albeit in a smaller percentage. So overall, we see that consumers are a bit more cautious in the discretionary spending. So sectors which are catered towards agri goods and so forth will perhaps be more effective.

[Kiat Ng, executive]

Just to add on right now in the demand side rate for high-value goods that we are still seeing substantial growth and substantial sustainability in the spending power. It is the mid- and the lower-end that we are starting to see the pressure. So I think you're talking about cold store, semiconductors, electronics, pharmaceuticals, these are what we call the higher value goods. So these -- the demand continues to be fairly robust. So back on to the question on acquisition. The other part of the story is really we haven't seen cap rates expanding. Yes. So I mean, the natural assumption is with this very volatile economic situation, where we see like what James was trying to get, buy at better pricing. But unfortunately, the capital values are still holding up very well, and we still see a lot of investors chasing logistics. So I think what we are doing now is we're taking a wait and see attitude, recycle, get more ammunition ready such that in the event that the capital market -- the capital values of the real estate logistics side shift, then we can move in quite quickly.

[Mervin Song, analyst]

And this was -- I was actually asking about disposal. I think you guided you're targeting exit yields of 3% to 4%. I just want to check whether that's still realistic or that's been revised higher?

[Kiat Ng, executive]

I think the ones that we are divesting are really the smaller assets and the lower specification. So with the smaller assets, there is this group of buyers who are the SMEs, they tend to buy it for their own use. So it's not your private equity or portfolio buyers that will come in. So for these guys, they are taking a much longer-term view. It is usually for their own use. So therefore, they are still prepared to pay a certain price in order to get space for the operations. So we are looking at assets in this, I would say, more niche class of activities that we are selling. So I think we're looking at 2%, 3% break in price. And then in certain cases, the larger properties may be 4%, but basically, the exit cap rate for us is still hovering around that.

[Mervin Song, analyst]

So my third question...

[Kiat Ng, executive]

Go ahead.

[Mervin Song, analyst]

My first question to more with regards to China, specifically the different sectors, but is it consistent across the commentary about high value in China to doing well? And then any comments on like [ JD Baba ] whether there's [indiscernible] and difference between Tier 1 China cities and Tier 2. I think you historically said Tier 1 has been quite healthy but Tier 2 and lower are a bit weaker. Is that sort of the same messaging -- you expect?

[Kiat Ng, executive]

I think just to -- I mean, in terms of numbers, if you look at the occupancy for China, can I have occupancy chart. If you look at the occupancy for China, we are looking at about 92.4%. The Tier 2 cities are doing more like 91%. So the same-store those that we have that are longer with us in Beijing, in Guangzhou, in Shanghai, they are doing more 97%, 93%. So that scenario, what is happening on the ground, the situation still holds. The Tier 1 markets continue to be very, very stable; very, very resilient because of lack of supply.

So these are -- the Tier 2s are the ones that we are watching. And then the behavior of the e-commerce guys have -- I think we have spoken about this quite over the -- quite a few times over the last few years already, like the behavior of the e-commerce in China are very different from what we see from the American ones, I think, their leases tend to be 1 year plus 1 year. So they do 1 plus 1 plus 1 kind of option rather than signing a 5-year or a 5-year lease with you. So that has not changed. So what is -- we have to watch for in China is really those markets with supply where there's still quite a substantial high level of supply. That's where it will hit occupancies and the rental reversion.

[Brandon Lee, analyst]

Brandon here, can I ask a question.

[Kiat Ng, executive]

Hi, Brandon. Yes, sure, go ahead.

[Brandon Lee, analyst]

Just on CWT, right? Can you give us a reason for the SUA conversion? And should we read this as a sign that the 3PLs are starting to rationalize space?

[Kiat Ng, executive]

Okay. I think as far as CWT is concerned, the -- I think when we made the acquisition back in 2018, right? I think we stated very clearly that although we buy on a sale and leaseback, the intention is we intend to take back some of the space and sign directly with the underlying clients. So -- we have managed to persuade CWT to do that. So now we have direct leases with a lot of what we call the non-anchor tenants over there. The reason why we want to do that is to remove concentration risk because CWT is our largest. And we are doing very well now. The operations are very good. They, in fact, are very reluctant for us to sign directly with their end users. But we do not want to take a risk that in the eventuality that their shareholder or their business start to take a turn. So we'd rather diversify our tenant risk and then sign directly with the underlying users.

So it is a deliberate attempt. I think you all probably know, especially those who have been covering us for a long time that I personally do not like SUAs. Single-user assets tend to be very volatile, meaning that when you have them, the 100%, the cost structure is very low, but then the moment they leave your occupancy swings quite dramatically and then your expenses also go up. So I'd rather have a more stable kind of growth pattern, where I can manage the tenant mix in a much more comprehensive manner. So that is what -- I mean already in 2018 when we bought CWT because of the very good quality assets that they have, that was our intention. So Brandon, to take a long story short, it basically, if you ask me will I want to even take more back from CWT, the answer is yes.

[Brandon Lee, analyst]

Okay. Just going back to China, right? Is it correct to say that perhaps we will only see occupancy bottoming over the next 6 months and potentially reversion hitting to the negative level. Is that the right way to see it?

[Kiat Ng, executive]

I think at this point, we are not seeing negative reversions because the assets that we have are what we call the latest Grade A specification. So you know how it is like when you have a downturn, right? The poorer quality assets will get hit first. The poorer locations will get hit, first. So per quality, I'm less worried because I think the assets that we have are of the latest specifications, in terms of location where you have more supply coming up and more competitive, and that is where we will see the pressure on this rental reversions and escalation. So will we see negative reversion coming from China? I think right now, we are not. So the challenge is how far we can push that positive number. Now we are starting to see some resistance from the ground of pushing that positive rental reversions higher. So I think for China, reversion this time is 2.5%. So it may come down to 2% or 1.5%, but it's unlikely that we will be in the negative -- because of the quality of the asset.

[Brandon Lee, analyst]

Just one final one for me, right? More of a strategic question, I think Kiat had been around MLT for the past like 6, 7 years or so, and REITs are really...

[Kiat Ng, executive]

10 years.

[Brandon Lee, analyst]

And REITS have really favored you, right? 10 years ago. Yes. And I think REITS really favored you guys. But I think looking forward, if REITs stay the way they are, is -- are you -- what kind of like innovative strategies do you think MLT can sort of navigate through this whole challenging environment?

[Kiat Ng, executive]

Okay. I think the first part is when we were -- when we were about $4 billion. Today, we are closer to $13 billion. So I think the stability of the portfolio is a lot deeper and is spread deeper and wider. I mean, back then, we have fewer countries and fewer cities that we have exposure to. So if you're talking about the rate -- you're talking about the interest rate environment, right? Is that what...

[Brandon Lee, analyst]

Yes, that's right -- that's right. Yes.

[Kiat Ng, executive]

I tell you my main challenge is not so much the interest rate environment because they -- I mean, of course, we have to have our hedging policy in place. I think for this quarter, we are hedged up on interest rate, we hedge up to about 82%, right? In fact, what my treasury, Charmaine and Jean Kam will tell you is, in fact, banks are coming to us and saying that, do you want to borrow more? Because in this very volatile climate, they would rather have blue chip customers than -- so they are actually trying to get us to borrow more from them.

The one that is most, I would say, more difficult for us to actually control is actually the share price. So you look at our cost of equity now, our acquisition ability is hemmed a lot more because of the cost of equity. We are trading at 6-ish percent. Right? So if your cost of equity at 6-ish percent, your -- Japan is still going to be doing about 4 plus, your -- this Australia is going to be doing 4 plus in terms of yields, only the places like Vietnam, which is 7%, 8% and maybe Malaysia. So I think that is the main, I would say, painful point at this moment in time. Yes. So does that answer your question, Brandon? Is that your question?

[Brandon Lee, analyst]

Yes. I think generally, it's going to be quite tough, though, yes. That's all I can conclude, right?

[Kiat Ng, executive]

So what strategies do we have? I think Brandon, your question is what strategies do we have. So now we have to work our brand portfolio harder. Previously, we could let it float a bit. But right now, we have to work it harder, meaning that -- we really have to dig in and see what are the areas that we can unlock potential value. So the AEI is what we have been doing. But what we have been doing is the -- acquiring neighboring sites like, for example, Subang, where we are able to increase the GFA by 5x. So we spent $20-odd million, buy a piece of land and then put in another $100-over million over the next few years and then increase it by 5x and try to hit a yield of 7%, 8%.

So I think that is one clear strategy that we need to adopt. That means taking the development headroom that we have that we have not fully utilized and then shift it into some of these adjacent sites. So what we're doing is more of such strategies because the reason is in such -- our properties are one of the oldest around, but the good thing is they are in one of the oldest locations. And you know what real estate is like. If you are able to get in earlier, the locations tend to be better before it gets pushed up, right?

So these locations are still very, very prime that does not change. So it allows us to capture that upside. We are able to do the development ourselves and not have to pay a development gain to the seller, then this is the part that we will benefit. So we will dig harder on that, recycling the capital, right, because of the rising interest rate environment and all this, we also continue to do that. Then on the leasing side, I think this is where we -- over the next few -- 6 months or so, you will start to see the separation of what is the good tenants, the resilience, those survivors versus the non-survivors. So the good thing is we have been monitoring the situation of that. Of course, we have some tenants that are not so good, but the percentage is not large.

So the revenue exposure to all these not so strong tenants is, at this point, quite low. But whether we will have more of such tenants we will have to see. So I think the ability to grow may expand, allow them to expand and contract their space is a key advantage in our generic warehouse. So for example, in Shah Alam, we actually have a list of customers who are keen to expand in the existing properties. In Vietnam, we have ability to preterminate tenants, not because they ask for it but because we ask for it. The reason is because we are able to bring in other tenants who are able to go into higher value logistic operations and therefore offer us higher rents. So I think working the current portfolio harder is something that will help us a lot over this more difficult times when acquisitions on the low side.

[Derek Tan, analyst]

Derek from DBS. Just a few questions from me. I just ask them one by one. So firstly, going back to Brandon's question on CWT, right? So are you getting a positive NPI uplift with the conversion? Or is it down at this point in time? And are we expecting more properties to fall off the master lease?

[Kiat Ng, executive]

Okay. Right now, what is happening is because we are signing direct as with every new leases, we have to offer incentives. I think that one you know, right? So that's why this incentive will kick in. So for this initial period, there are all these incentives or rent-free them getting to know us, us putting in taking over this common property management that will bring our NPI for these properties slightly down, but the higher rents that we're able to get from them will make up for it over time. So maybe next -- so what we are seeing is over the next 12 months, it will gradually close the gap. So we should -- we wouldn't be worse off than where we are today.

So your question is, will we take more of CWT off? Is that your question?

[Derek Tan, analyst]

Yes, sorry.

[Kiat Ng, executive]

Yes. I think there will be certain tenants that we are keen to sign directly with and then -- because we would like to offer them more than what we have with them now, which is at a single property. So some of these guys, like the Mitsui, the ExxonMobil guys. So these are the guys that we will be keen to actually have a direct relationship with. Do not quote all these names in your report.

[Derek Tan, analyst]

If I can just circle back to China. I think a lot of conversations we have with clients is whether some of the demand we see is going to be a structural kind of down shift. I just don't know whether -- do you subscribe to this view? Or do you think things are more cyclical at your end, based on your portfolio? I mean now we're seeing occupancy dropped off, but any thoughts on that?

[James Sung, executive]

James here, just to share with you, I think at what happened at the recent 20-year CPC outcome, right? So I think most people are not optimistic in the short term, like, for example, the Zero COVID policy would go away, right? So sporadic lockdowns will continue to happen. And until such time that we believe by perhaps in the mid of next year, things will probably recover.

And like what Kiat has mentioned, Q1, Q2, we are -- we see a high demand for Tier 1 spaces, by issue of the higher consumption of power in the cities and good supply. Tier 2 supply is more coming up. So in terms of pricing, in terms of [indiscernible] will be slightly weaker compared to Tier 1. And structurally, we are seeing recovery as we talk because traditionally in the third quarter, we had [indiscernible] demand will pick up towards the year-end. So in Q3, we expect a pickup in occupancy rates in China. And hopefully, that will ride us through Q4 in the Chinese year period. So I think in the short- and the medium-term, the prognosis is such. So it's going to probably pick up some from middle of next year.

[Derek Tan, analyst]

Okay. So later on next year.

[Kiat Ng, executive]

I think, Derek, you are right that China will be the country that we will be monitoring very closely in view of what is happening, what we are seeing is, like, for example, you have red thing, I mean, we know for a fact like from some of our tenants, the higher value goods are still doing very well in China, right? Like the luxury sector is continuing to be very, very strong. So what it demonstrates is the domestic consumption power, especially on the high end of the market is still strong. So the -- while we see all this clampdown and all this. So the situation is such that we have to be very, I would say, discerning when we are selecting our tenants. We have -- it's no longer a case that highest rent will be the most -- will be the best tenant. It's going to be a case that reliable and stable tenants are the ones that will survive better in such an environment.

[Derek Tan, analyst]

Just last one for me. I'm just looking at your weighted average debt expiry, right? So next 2 years, majority of the debt expiring is in Hong Kong dollar, and you have hedged about 80%, I'm just curious how long will hedges last. And if you look at base rates movement, right? So what kind of increase in interest rates can we potentially look at, especially for Hong Kong dollar. Yes?

[Sheh Min Lum, executive]

So we manage our hedges differently from our loans. While some of the Hong Kong dollar loans are due to expire. Our hedges are extended all the way to 4 years of our hedge duration.

[Derek Tan, analyst]

Sorry, full year...

[Sheh Min Lum, executive]

The hedge duration is 4 years.

[Derek Tan, analyst]

Good. Sounds good. Okay.

[Sheh Min Lum, executive]

And you were asking about the interest rate as in what we expect it to be.

[Derek Tan, analyst]

Correct. Yes.

[Sheh Min Lum, executive]

As a whole or Hong Kong dollars?

[Derek Tan, analyst]

I mean I'm just looking at Hong Kong because that's the majority of expiry, right? So maybe just Hong Kong will do. Yes.

[Sheh Min Lum, executive]

In terms of IRS due for Hong Kong dollar, actually, we only have $60 million coming due next year. Towards second half of next year. The short-term rate is expected to grow possibly 4.5% level. But the thing is cost maybe hedged previously, the rates were not at super low level. So there could be a slight increase in the Hong Kong dollar interest rate when we replace it, but not the full 3% to 4%. Maybe about 100 bps?

[Derek Tan, analyst]

Okay. I just looking at like Slide 10 and it appears the Hong Kong dollar is the majority of your expiry. So I'm just curious what is the increase -- so it's 100 bps.

[Unknown Analyst]

This is [ Chengzhi Chen ] here. Can you give some color on the $5.1 million of allowance for Netcool receivable this quarter?

[Kiat Ng, executive]

The Netcool receivables that is the Netcool receivables of $5.1 million is actually a penalty that is imposed on us, which we have in turn imposed on Netcool for illegal subletting the premise during the COVID period.

[Unknown Analyst]

So there's no impact because it's passed on to the end tenant, right?

[Kiat Ng, executive]

Okay, I think this is the accounting component and...

[Sheh Min Lum, executive]

Okay. So the $5.1 million we have originally intended to pass it to the tenant, but it has entered into voluntary liquidation winding up. So we have provided for doubtful debt. However, as you know, for which, right, we have to distribute 100% of our taxable income. As this amount has never been included as our taxable receipt, there is also -- it's also not tax deductible and hence, no impact to our DI so it doesn't affect our DPU.

[Kiat Ng, executive]

Yes. We are exploring potential avenues to reclaim the money back from Netcool.

[Unknown Analyst]

And then can I also check on how should we think about the payment of management fee in units this quarter, it seems a lot higher. And also, is this a way to support DPU growth going forward?

[Kiat Ng, executive]

With respect to the management fees in units like this, this quarter is higher. Are you looking at the cash flow statement.

[Unknown Analyst]

Yes, that's right, $26 million or something.

[Kiat Ng, executive]

Right. So I think a couple of things. One, there is the acquisition fees for the IPT that we completed last financial year, those were settled in this quarter. That's the first one. The other one is the performance fees. Performance fees, I think, by regulations are supposed to pay only on an annual basis. So those were paid this quarter as well. That's why the higher management fees paid in this quarter.

Yes. Yes, it's like happened in this quarter, we make more payments because of the acquisition fees in units for the IPT.

[Unknown Analyst]

Will you consider paying higher percentage going forward as a way to support DPU, especially in the near term?

[Kiat Ng, executive]

I think for us is the consistency is very important so that investors can understand and so-called predict a bit of where we are going. So I think we have always get management fees in units when we make acquisitions with -- from the sponsor. So if your question is, are we -- what is your question? That means that some of the existing management fees in cash to management fees and units. Is that your question?

[Unknown Analyst]

Yes, that's right. I think some of the REITs do use it as a way to support DPU.

[Kiat Ng, executive]

I think we have no intention of doing that because I think consistency is something that we appreciate. Yes. And we don't like it that we can to prospectively do something just to support the DPU unless it is a policy change, like what we see in the merger of MCT and MNACT. But other than that, no.

[Sheh Min Lum, executive]

Derek, I think I want to clarify on what we explained to you just now on the interest rate. You were looking at Slide 10, right, and highlighted that there was HKD that was going to be due in the next few months, right?

[Derek Tan, analyst]

Yes.

[Sheh Min Lum, executive]

So okay, that is. I also mention just now that we manage our interest rate and the loan separately. So this is on the loans path. So yes, you're right. For the next 6 months, we have Hong Kong dollar deal for repayment. And basically, this slide shows like new financing risk, and we have highlighted that we have sufficient committed facilities as well as banks wanting to lend us. On the other hand, we manage our interest rates with IRSs. And for the rest of the financial year, there's no Hong Kong dollar that is due for refinancing. What's going to come due for refinancing is next year, only $63 million. And I think Kiat Ng she was highlighting because the rates of this expiring IRSs was entered into in 2018 when the risk was still quite high. We're looking at incremental 100 basis points.

[Derek Tan, analyst]

The 4-years hedge is only for Hong Kong dollars or for overall?

[Sheh Min Lum, executive]

Overall.

[Yuen May Lum, executive]

We've got a question from the audience on what's the guidance on average borrowing costs in this year.

[Sheh Min Lum, executive]

We're at 2.5% currently, maybe looking at 2.7% for the full year. Next year, maybe to 2.8%, 2.9%.

[Yuen May Lum, executive]

Do we have any more questions from the analysts? No more questions?

[Kiat Ng, executive]

I think we've answered more than -- right.

[Yuen May Lum, executive]

Yes, we've answered all the other questions from the webcast audience.

[Kiat Ng, executive]

Okay. There are no -- any more questions from anyone? No?

[Yuen May Lum, executive]

Okay. If that's the case. Thanks for joining the call.

[Kiat Ng, executive]

Thank you very much for your time. Thank you.