Mapletree Logistics Trust

SGX:M44U

Earnings Call Analysis

Challenges in China Impact Revenue and Future Guidance

In the recent earnings call, the company reported a 1.8% year-on-year decline in gross revenue to SGD 183.3 million, primarily due to underperformance in China, where negative rental reversions hit 12%. However, excluding China, rental reversion improved to 3.6%. The outlook indicated that negative reversion may narrow to single digits over the next two quarters. Distributions per unit (DPU) fell 10.6% to SGD 0.02027. The company is focused on divesting SGD 300 million in assets this fiscal year and has successfully reduced borrowing costs to 2.7%, with expectations for marginal improvements in interest rates next year.

Earnings Overview

In the latest earnings report for the second quarter of the financial year ending March 2025, the company reported a gross revenue decline of 1.8% year-on-year, totaling SGD 183.3 million. Net property income (NPI) also dipped by 2.1%, reaching SGD 158.6 million. The distribution per unit (DPU) fell significantly by 10.6% to SGD 0.02027. The occupancy rate across the portfolio remained stable at 96%, although the average rental reversion showed a negative adjustment of 0.6%, primarily influenced by underperformance in China. Excluding China, however, rental reversion was a more favorable 3.6%.

China's Performance and Outlook

China's real estate market presented challenges, with a stark negative rental reversion of 12.2%. This negative trend is expected to persist for the next two quarters, but management intends to see it taper down into the single digits afterward. Currently, 90% of leases have been marked to market rates, offering some relief amidst high vacancy rates and falling market rents. Notably, occupancy in China stands at 93%, which is better than many competitors facing 70-80% occupancy. There’s cautious optimism about future recovery, anticipated to take about six months based on government stimulus and market conditions.

Revenue Impacts from Divestments and Acquisitions

During the reporting quarter, the company completed divestments amounting to SGD 50 million from properties in Singapore and Malaysia. The management indicated a pipeline of additional potential divestments totaling SGD 300 million, predominantly from China. The recent acquisition spree, approximately SGD 220 million, appears to have positively contributed to revenue growth, mitigating the overall decline from China's adverse performance.

Operational Efficiency and Cost Management

Despite the pressures on revenue, the company's proactive capital management helped contain the average interest cost to 2.7%, stable for three consecutive quarters. However, financial costs are expected to rise as older, cheaper loans are replaced with newer debt at higher rates over time. The reported borrowing costs increased by 8.2% largely due to higher average rates on existing debt and new incremental borrowings amounting to SGD 3 million.

Balance Sheet and Financial Ratios

Net Asset Value (NAV) dropped to SGD 1.33 from SGD 1.37, primarily due to translation losses and lower fair value on financial derivatives. The company's aggregate gearing rose to 40.2%, reflecting the impact of currency strengthening and valuation changes. Importantly, 84% of the debt was hedged into fixed rates, securing financial stability in an uncertain interest rate environment.

Future Growth and Strategic Direction

Looking ahead, the company aims to capitalize on its robust diversified portfolio, maintaining a hopeful outlook on growth from regions outside China, such as Singapore and Australia, which exhibited better performance and positive rental reversions. Plans for acquisitions are still centered around recycled proceeds. Management remains vigilant about labor markets, with intentions to expand in emerging regions such as Vietnam and India, while keeping debt financing considerations top of mind as the market stabilizes.

Earnings Call Transcript 2025-Q2

[Operator]

Good morning, welcome to second quarter results for the financial year ended March 2025. I'll now hand over the session to Sheh Min who will kick off the presentation.

[Sheh Min Lum, executive]

Morning, everyone. Quickly go through the key highlights for the quarter before going into details of the financial results. Key highlights, okay. So for the quarter, our gross revenue is 1.8% lower year-on-year at SGD 183.3 million, NPI is 2.1% lower year-on-year at SGD 158.6 million, and DPU is 10.6% lower SGD 0.02027. Portfolio occupancy remained stable at 96%, with an Average Rental Reversion of a negative 0.6%, mainly due to our China portfolio.

Excluding the China portfolio, our Rental Reversion is a positive 3.6%. WALE is stable. Aggregate Leverage at 40.2%, higher than 39.6%, against last quarter, mainly because of the strengthening of the JPY as well as lower fair value on our financial derivatives. Our debt hedged into fixed rate, 84%. Average Debt Maturity of 3.6 years and income for the next 12 months, 77% have been hedging into Sing dollars or derived in Sing dollars. We have three properties in Malaysia, where we announced divestment and spending completion.

A total of about SGD 50 million. And what we completed during the quarter would be one property in Singapore and one property in Malaysia. We also proactively issued SGD 180 million of perks at 4.3%. And this is with the intention of redeeming the SGD 180 million, which is at 5.2% at the end of September. So the SGD 180 million at 4.3% was issued at the end of August, while the redemption was at the end of September.

You would notice in our financial results that there is a onetime overlap which resulted in the distribution of output being higher quarter-on-quarter. But in the meantime, I am going to [indiscernible], we have actually some release of proceeds to pay down loans of similar interest rates. Moving on to 2Q versus 2Q results. Gross revenue was lower, mainly due to lower contribution from China, Absence of revenue contribution from divested properties as well as currency weakness. This is mitigated by stronger performance in the rest of our countries. as well as contribution from acquisitions completed at the end of last financial year and the beginning of this financial year.

On a constant currency basis, gross revenue would be flat and NCR would have declined by 0.3%. Borrowing costs increased mainly due to higher average interest rates on our existing debt, where we replaced our expiring or expired IRSs at higher rates, incremental borrowings to fund 1Q FY '24 and 4Q FY '23 results. And then the increase is actually partly mitigated with loan repayments and proceeds. So out of the 8.2% increase, which is about SGD 3 million, about SGD 2.3 million is due to incremental borrowings to fund the acquisitions, while the remaining is actually whatever increase in our IRS is actually offsetted by interest savings on the loan repayment proceeds from divestments as well as our proactive capital management.

And accordingly, our PI is 8% lower, SGD 109 million versus SGD 118 million, translating to a DPU of SGD 0.0202, 10.6% lower than SGD 0.02268. Excluding the DPU of SGD 6.1 million in this quarter and DPU of SGD 8.8 million in 2Q last year, our adjusted DI would have been 7.2% lower and the adjusted DPU, excluding the effect of divestment gain, would have been SGD 0.0907 (sic) SGD 0.01907 versus SGD 0.02091 last year. For the 1 Half results versus 1 Half last year, the reasons behind the Gross Revenue and [indiscernible] are largely the same as what I have mentioned earlier. Borrowing costs also similar trending as what I mentioned 2Q versus 2Q last year. Amount distributable to unitholders is 7.5% lower than last year, translating to a DPU of -- which is 9.8% lower than last year, SGD 0.04095 this first half versus SGD 0.04539 last half -- first half of last year. Excluding DG, our first Half DPU would have been 7.9% lower, SGD 0.03861 this first Half of FY '24, '25 versus SGD 0.04191 1 Half last year.

Quarter-on-quarter, our gross revenue is 0.9% higher 2Q versus 1Q. This is mainly due to higher contribution from our same-store assets in Singapore and Australia and full contribution from the acquisitions made in 1Q this year, partly offsetted by lower contributions from China as well as currency weakness. So really, the increase in Gross Revenue is mainly due to the acquisitions made last quarter.

Otherwise, whatever shortfall, I mean, or lower contribution by China would have been offset by better same-store performance in the other markets. NPI is 1.2% higher accordingly. Borrowing costs increased by about SGD 1.4 million, mainly due to incremental borrowings to fund 1Q acquisition. Otherwise, whatever interest -- higher interest we have in terms of IOS replacement that is offsetted by savings from the repairing down of loans with divestment proceeds. DPU is 2% lower, SGD 0.02027 versus SGD 0.02068. Excluding DG, it's SGD 0.01907 versus SGD 0.01954, 2.4% lower quarter-on-quarter.

Moving on to the balance sheet and capital management ratios. NAV is at SGD 1.33 versus SGD 1.37, mainly due to two key reasons. One is translation losses and the other would be lower fair value on our financial -- lower fair value on our financial derivatives because I think at the end of last quarter -- at the end of September, because of the interest rate movements, I think generally, all our IRSs are of lesser fair value as compared to the end of -- as compared to 30th of June 2024.

Gearing peaked up to 40.2%, 0.6% higher than 39.6%, mainly due to the strengthening of JPY debt as well as the lower fair value on our financial derivatives, which decreased the total asset base. Our debt duration remains at about 3.6 years. Interest cover is 3.5x. And I think I'm glad to share that our -- we have managed to keep our interest rate stable at 2.7% for the third quarter already.

I think moving on to the debt maturity profile. Okay. I think our debt maturity -- debt duration remains healthy at 3.6 years. We have more than sufficient credit facilities of SGD 987 million to refinance whatever is coming due for the rest of this financial year as well as next financial year.

And moving on to our hedging strategy. At the end of 30th September -- I mean, at the end of the quarter, our total debt that has been hedged into fixed rate is 84%. Of the remaining 16%, we only have unhedged portion in JPY and Sing dollar, JPY because of the low interest rate environment and then Sing dollars because we needed the flexibility to pay down loans with our divestment proceeds. And similarly, for FX, 77% of our DI for the next 12 months has been hedged to our to our Sing dollars. I think I will now hand the mic over to James to talk you on the portfolio.

[James Sung, executive]

Good morning, everyone. so hopeful of the -- of despite issues of last 2Q, our portfolio speed by developed markets and developing markets 77% and 23% remains similar. AUM and [indiscernible], In terms of [indiscernible] 96%. This is mainly to space in foundational countries like Vietnam, South Korea and Hong Kong. So overall, the portfolio occupancy remains pretty robust and stable.

In terms of rental reversions, negative 0.6% over in the overall portfolio rental reversion. This is mainly due to China's negative bookings and negative reversion of 12.2%. Overall portfolio was 3.6% up if we exclude [indiscernible]. So from the top, you can see that Singapore's reversion remains pretty healthy and strong due mainly to the robust demand for warehouses. And Japan is flat. Hong Kong is 1.2%, South Korea 2%, Malaysia 2.9%. In Vietnam, we had about 4.1% and Singapore, India. In terms of Lease Expiry, [indiscernible] 30th September.

Almost half of lease expiry for India 3.7% in the second half of this year. [indiscernible] from China and Korea and this lease expiry is challenged the [indiscernible] inflation rates of 4% this year. [indiscernible] these are some of the ongoing initiatives we are doing in Malaysia and Singapore. So this project is due for completion in the middle of -- so we also have divestments. So far, we have announced and completed divestments in our portfolio, 5 in Malaysia, 1 in Singapore and 1 in China. So the ongoing initiatives we are doing in Malaysia and Singapore.[indiscernible]. So this is all the updates.

[Sheh Min Lum, executive]

Okay. I'll quickly give you a quick update on our ESG journey -- and you recall, we are committed to achieve carbon neutrality for Scope 1 and 2 emissions by 2030. And this is, of course, in line with the Mapletree group's longer-term target of Net Zero by 2050.

So growing our solar capacity as well as green building certification is one of the -- two of the key focus area. Pleased to update that as of September, our solar capacity, self-funded one has already grown now to 44.8 megawatts peak, which puts us well on track to achieve this year's target of 45 megawatts peak. And as well as, of course, we still are driving our efforts to reach the 2030 target of 100 megawatt peak.

Then for green buildings, we have also grown it to about 45% as of now. And this will be in line with our -- and this year's target of 50% of our portfolio by GMA, between 35%. Our longer-term target, it's going to 80% by the year 2030. For green financing, we continue to make good progress, and we procure about SGD 395 million of new grown -- green lease rent and credit facilities year-to-date. Currently in total green or sustainability lane lower amount of about SGD 966 million. Then for Green Lease, we're also pleased to update that since last year where we ended at about 22% of our portfolio will have the leases are all has incorporated green lease provisions. That statistic has now grown to 40% as of September. Okay. I now hand over the session to Jean to conclude.

[Jean Kam, executive]

In terms of the outlook, right, we continue to see this macro headwind with this rising global tensions that is affecting the business and the consumer sentiment. We are actually monitoring the current economic situation closely on China. So I think for China, right, despite the current weak property market and the weak domestic consumption, it still offers a very healthy fundamentals. Where we have a large population base, rising urbanization, a high savings rate that offers actually a very significant demand potential.

So I mean, as you can see from some of the reports, we are seeing that the analysts are actually anticipating some property market turnaround in the second half of 2026. So I think -- and with that, right, we have also seen that China has entered into a rate cut cycle. And they have this low interest rate that is slightly continue in the medium term.

So because we have our asset in China, right, we are actually able to benefit from this low interest rate as they offer us a very attractive interest rate. Being the second lowest in our portfolio after the Japan debt call. And if you look at the reversions in China, I mean, this quarter, we reported a negative 12%. On the other hand, we are actually seeing that 90% of our leases have been marked down to market. And in terms of the negative double-digit reversion, we expect it to continue over the next 2 quarters. And barring any further unforeseen circumstances or any external shock, right? We should hopefully see it trending down, meaning in a negative reversion in a single-digit zone in state thereafter.

So -- the other thing is despite the high vacancy rate that is happening in the China market, our team continues to follow our tenants very closely. We have a very strong and experienced local team. And with that, we are able to achieve a high occupancy of 93%, so as contract to our peers, which is mainly in the high 70% to 80% range, right. And lastly in terms of the signing lease, the world is too stocked right now. The -- our tenants are still signing short at around 19 months. But I think it also means that we can capture the rental rebound when the market recovers. So I think that's what I want to say for China. And for the rest of the markets, right, I would say it remains resilient with our diversified portfolio.

As you'll hear from James, we have a high occupancy rate of 96%. And then in terms of the reversions, excluding China, we are looking at a positive rate of 3.6%. And in terms of the financial performance, as you have heard from Sheh Min, we have also sustained a stable performance in local currency terms, right?

So for first half, you have seen in terms of the gross revenue and NPI, we grew by about 1% to 0.5%, respectively, on a local currency term. And with our proactive capital management, we actually managed to maintain 2.7% average interest cost for three consecutive quarters despite the higher interest rate environment. We have actually refinanced more expenses debt with CNH borrowing. We have also done things like cross currency swap from currencies like Australia dollar, Hong Kong dollar, U.S. dollar into CNH. And of course, I think Sheh Min mentioned earlier, we have done a pop that actually gave us a 90 bps savings in terms of the interest cost.

Despite that, I mean, we still foresee that our financing cost is still expected to rise. As Sheh Min mentioned, our replacement loan and hedges will be progressively go off, and this will be answered in a higher rate because as you are all aware, we entered the earlier -- in cheap debt during the COVID years. So the borrowing cost -- the high borrowing cost will continue to hit us.

And now in terms of the portfolio rejuvenation efforts, you have seen us acquire about SGD 220 million this year. And we are also actively on a lookup for equity acquisitions, and we continue to see -- we continue to see potential opportunities in emerging markets like Vietnam, India and as well as some developed markets like Japan. As you are all aware, it is still no doubt that the interest cost has risen and it still offers a positive use spread.

And as for Korea, Australia, I think we are still watching the environment closely. Korea, there is still a gap in terms of the buyers and the sellers. And then for Australia, I think they're still quite an attractive yield that they are expecting.

So that's on the acquisition side and on the divestment front, we -- you have seen us announce and completed about SGD 130 million. To date, across its effect in three countries: Singapore, Malaysia and China. And we continue to have a pipeline to divest, and I'm pleased to say that we are actually halfway mark there. I have identified about SGD 300 million of assets to be divested, and we are right now close to halfway mark there.

Because at the same time, while we want to accelerate on the execution front, right, we also need to balance against the tenancy expiry, the time taken for the regulatory to review as well as for some of the assets that we are looking to divest. We're speeding up for macro market recovery for better pricing, particularly in the China and Hong Kong assets. So I think -- I talk about the divestment. So in terms of the AI, right? So as Sheh Min and Jean has mentioned, we are expecting our Benoi AI completed by around May, June next year. And we are actually based on the current team feedback that we had, we have been receiving pretty healthy level of inquiry from a broad spectrum of industries such as electronics, industrial goods and consumables.

And we hope to be able to secure some pre-commitment ahead of completion. I mean, prospects, I would like to generally view the space and feel it before they would like to commit. And hopefully, we can have some traction by early next year. So I think that sums up what I want to share on this, yes. So maybe I'll hand over to Sheh Min.

[Yuen May Lum, executive]

Okay. Now we will open the floor to questions. Mervin always first in the line. Please, your first question.

[Mervin Song, analyst]

Yes. Maybe we can throw all the bad stuff first and then hopefully, we end on the call on a positive note. I mean China is terrible. But in terms of the negative rental reversion double digits, so they still run that...

[Sheh Min Lum, executive]

Mervin, it is a bit muffled.

[Mervin Song, analyst]

Yes. Can you hear me?

[Sheh Min Lum, executive]

Yes. Can you start again?

[Mervin Song, analyst]

Maybe we can start with all the bad stuff first, get out of the way and then end the call on a positive note. Just on China. China is terrible clearly. So in terms of the guidance on the negative rental reversion double digit, for next two quarters? Would it be around that 12% or be worse? And in terms of leasing inquiries, are you seeing a pickup in interest? Or is it starting to slow off as any -- are these sponsors we're talking about buying properties from MLT.

Is there anything imminent? Then the second question I have is for Japan. It seems rather weak on the NPI basis Q-on-Q and year-on-year, even if I adjust for FX headwinds. What's happening there given the occupancy has been somewhat stable.

[James Sung, executive]

In terms of reversion, the Chinese, inverted yes, it's negative, sure to say this quarter, so last the quarter. But last from now or funding feedback on the ground -- we're starting to remain around this level in the next two quarters, in the next 6 months. We don't see that you will -- what do you call it, a significantly worse at this credit level overall this level for the next two quarters until such point that the effect of the mercury stimulus and the sector because of the ground there, we think that it will take about 6 months or so.

And then we should -- everybody is crossing their fingers and optimistic that things will turn after that. So that's for China. And your second question is related to Japan?

[Mervin Song, analyst]

Yes, Japan is weak. What's being there?

[Jean Kam, executive]

Yes. I think for Japan, right, in terms of the NPI because we acquired the larger assets like [ Kuwana ] and Kobe. So these are MTV in nature. And typically, on a quarter-to-quarter basis, there will be movement in the occupancy. So we did it as a more frictional kind of movement, mainly due to [ Kuwana ] and Kobe.

[Mervin Song, analyst]

Okay. So commitment is high, but we had some friction in between. Okay. Then China divestments, any progress there or there's still more next year?

[Jean Kam, executive]

Okay. So for China divestment, we are in negotiation on one asset in China. So that is currently under exclusivity. So on top of the China divestment in Xian that we have announced earlier, we are working on another one that we hope to be able to announce -- sometimes, yes in this quarter.

Yes, we hope to be able to make some announcement this quarter.

[Mervin Song, analyst]

Okay. Excellent. I'll hand over to rest.

[Sheh Min Lum, executive]

Okay. Next on the line is Derek Tan. Yes.

[Unknown Analyst]

Just going back to China, right? I thought that the negative reversions were quite in line with what you were guiding. Maybe your thoughts on your rents currently in China, right, versus where you think you could get. You mentioned that there's still negative rental reversions. But I thought you have already mark-to-market 90%. So is there further winners from what you have signed recently? Just wanted more color on that.

And if you give us a sense how is Tier 1 doing versus Tier 2?

[James Sung, executive]

So most of our China mark-to-market, we see it about 90%, really mark-to-market being about 10%. There is still coming up originally that take 12 months. So -- so that's has stabilized. That's what we can say in terms of bottoming out. So that's that the mark-to-market project that we can analyze. And in terms of -- what is second question again?

[Unknown Analyst]

Tier 1 versus Tier 2?

[James Sung, executive]

Q2. So Tier 1, in this quarter, second quarter, there was 93% reversion in Tier 1 cities, right. Compared to minus 13%, 13% Tier 2 city. The negative reversion Tier 1 mainly due to some oversupply in the Shanghai market, first of 5 new stocking in the first half of this year in the outskirts of Shanghai with the South and West.

So that is for level we visited in the first year. But Believe this phenomena in the next -- hopefully, in the next few quarters, should stabilize in terms of the occupancy. Growth occupancy is still the direct in Shanghai itself. We understand it's close to 20%. And hopefully, in the last sorry, the next 1 year, the top picture there because [indiscernible] is still a Tier 1 consumption market. We are quite confident when things move up, we show a very strong rebound for Tier 1 city.

[Unknown Analyst]

I see. okay. Okay. So I just have one more question on your interest cost, right? I think, jean, you mentioned that is still expected to trend up as we approach to next financial year, right? I'm just curious -- could you give us some guidance you expect to come off next year with interest rate coming off?

[Jean Kam, executive]

So we are stable at 2.7% now. I think previously, I've guided that we will be about 3% by end of this year. And about 3.3% for next financial year. But I think with interest rates cuts and all that where we are looking at that reducing. So by the end of this financial year, maybe about 2.8%. Bearing in mind that we report this percentage on a quarter-by-quarter basis. And then I think next year, we will probably trend up to about 3%.

[Unknown Analyst]

Okay. So you're dialing back your interest cost assumptions that we should be looking at slightly lower versus your initial guidance?

[Yuen May Lum, executive]

That was, I think, previously before that did the cut -- 50 basis points cut during the quarter itself. So yes, we think it will still increase definitely because of the IRSS. I mean we have stressed many times the IRS locked in like during the reading loss would still see them being replaced at higher rates.

Although now that we have cut the rates, it would be probably slightly lower and also proactively converting them from the Aussie dollars and Hong Kong dollars which is still high to CNH borrowings via stocks.

[Sheh Min Lum, executive]

Okay. There are no more questions, right? So I'll move on to Rachel, Macquarie.

[Unknown Analyst]

Sorry, could you repeat your comments on the Tier 1 and Tier 2 markets? It was a little bit breaking, so I couldn't quite catch. Is it 93% of the leases signed is in Shanghai? And what was the reversions for Tier 1 and Tier 2?

[James Sung, executive]

Okay. Just on the reversions for Tier 1 and Tier 2. I think Tier 1 is negative 3%. Tier 2 is 30% to 40% negative bps on the reversion side for Tier 1 and Tier 2 respectively.

So the question which was asked by Derek was in terms of [indiscernible] I think that in terms of the leases that we have renewed and signed so far, 90% really mark-to-market. So when you say [indiscernible] which is at the market. So leaving about 10% of the leases that is up for renewal, right? If you don't renew them -- this 10% is due in the next 12 months. So we believe this will be mark-to-market in the next 12 months or so. So overall, we think it is stabilizing and there should not be any much maturities whatsoever in the quarter.

[Unknown Analyst]

Okay. Got it. And probably moving on to brighter spots. I think for Singapore, double-digit reversions, is this still sustainable?

[James Sung, executive]

Well, with new supply coming up, we believe this double-digit reversion should taper off. So we should still be strong, but probably be closer to high single -- I'm sorry, high single digit, then 12%, right? But we are looking from this level. But I think high single-digit reversion is probably more realistic to expect.

[Unknown Analyst]

Okay. So by end of financial year, probably close to high single digit, is that right?

[James Sung, executive]

That's right.

[Unknown Analyst]

Yes. Okay. And Hong Kong, I saw reversion seems to have reduced, although still bit positive. I'm just wondering whether has there been any softening in terms of the Hong Kong rent?

[James Sung, executive]

Yes. Hong Kong reversion is 1.2%. We see some softening, yes, because the demand has dipped overall. But I think we believe it's more in the short term. But overall, we're still quite bullish on the Hong Kong market. So the softness is due, like I mentioned, some weakness in the spending and also to some extent in the supply of vacancy [indiscernible] project, which is only half occupied. So that's affected [indiscernible].

[Jean Kam, executive]

I think at least to add on, right, in terms of the supply, the market is actually still supported by a limited supply over the next 3 years horizon. So with that, I think though the retail momentum is not as strong, but I think the market is still supported by a limited supply. And I think the China asset, which we have articulated a few times, right, it doesn't pose a direct competition to our assets, in particular our Tingyi asset, which is a different location and different product type that we are targeting on our tenants profile.

[Unknown Analyst]

Got it. Just one last question in terms of the debt refinancing. Can I just understand how much of your debt has still not been mark-to-market just yet? Did the debt expiries in this year, next year or up to 2027?

[Sheh Min Lum, executive]

We should see the mark-to-market by the end of next year. So yes.

[Unknown Analyst]

Whatever, it is not bad.

[Jean Kam, executive]

Yes, there should be -- you'll see the higher rate this year and next year.

[Sheh Min Lum, executive]

Okay. Next is [indiscernible]. Please go ahead.

[Unknown Analyst]

Can I follow up on China in terms of expiry, right? It's roughly about 40% of NLA. But can you give us what is China's lease expiry as a percentage of rental income for the rest of 2025 and 2026?

[Sheh Min Lum, executive]

We will come back to you on that. Do you have another question?

[Unknown Analyst]

Yes. And then the reversion guidance to narrow to single digit, right, after 2 quarters. Is the underlying assumption that by then 100% of the leases will be marked down to market, but market rent continues to decline?

[James Sung, executive]

We believe the market rents in terms of decline has slowed down, really. So it's not as severe as first half of this year. So then back to the earlier question. In FY '25, China expiries 45% in FY '25; FY '26, it's about 36%.

[Unknown Analyst]

I can't hear you.

[James Sung, executive]

In terms of the China expiry portfolio, in FY '25, it's about 45% by NRA and 36% in FY '26.

[Unknown Analyst]

Yes, I get the NRA, but would you be able to share the rental income -- lease expiry by rental income. How much does China make up in this year and next year?

[James Sung, executive]

Well, it will be slightly less because the China rentals compared to other markets is lower. So the impact is going to be much less dips, so only 3, 4 percentage less.

[Jean Kam, executive]

I think, [ Shasha ] we'll come back to you on the proportion in terms of by GR. In terms of the exact numbers, yes.

[Unknown Analyst]

And just to clarify, the underlying assumption is the spot rent continues to decline, right, but at a lower magnitude, and hence, the single-digit negative reversion?

[James Sung, executive]

Yes, that's correct.

[Unknown Analyst]

Okay. Just one last question on acquisitions. I think the previous guidance was that acquisitions would be funded by divestments and you're not expecting any EFR. But given rates movement and what peers are doing, has your stance towards that changed?

[Jean Kam, executive]

For the time being, I think it is still -- for any acquisitions, it's still primarily to be funded by the recycled proceeds. So in terms of whether there are any plans for further equity fundraising, we do not have any plans at the moment, at least for this financial year. So any acquisitions, if any, we would prefer to recycle it with the divestments that is ongoing, and we are pretty confident that we are able to actually divest the targets that we are looking at of SGD 250 million, SGD 300 million. And we have done half of it and the other half is actually under exclusive negotiations. So we are looking at markets like, again, Singapore, Malaysia, some small one in Japan as well as in China. So to sum up, to answer your question, it is really priorities to fund it by divestment proceeds. And any EFR will not be happening for this FY.

[Sheh Min Lum, executive]

Okay. Next, we have Brandon.

[Brandon Lee, analyst]

Just few questions on Hong Kong, right? I think recently, there's been a site at Yen Long coming up for development. Will MLC be keen on that? That's my first one. And the second question would be, any latest update on the funding divestment? Is it totally caught off really?

[Jean Kam, executive]

Okay. So on the Yen Long side, it is actually a greenfield site to be launched by the Hong Kong government. Together with the sponsor, we have reviewed that potential opportunity. But I think in terms of some of the tender restrictions that they are putting in, it is something that we felt that is a bit prohibitive, and it is something that we do not think we will come in to participate on the Yen Long side.

And for the funding side, I think, as I mentioned earlier, we are trying to wait out for better pricing. We are still trying to sell at a target pricing that we are looking at. So in the meanwhile, though it is still an asset that we would still want to divest, but at the same time, we have managed to actually lease up the place. So we have actually leased up to [indiscernible] Express in this quarter. That's why I think in terms of the occupancy, you have seen that Hong Kong occupancy has improved this quarter. So Brandon, I hope this answers your question.

[Brandon Lee, analyst]

Yes. So out of this SGD 250 million, SGD 300 million, right, is it safe to say that it doesn't include funding?

[Jean Kam, executive]

Yes, it doesn't include. So I actually have identified quite a huge pipeline. It's about SGD 1B, but not everything can be implemented right away. So like I mentioned, it depends on the market, whether there's a buyer's appetite. But at least for this FY, right, I'm thinking about executing 1/3 of it.

[Brandon Lee, analyst]

Okay. Okay. I just have one last quick one, right? Your comments on single-digit negative reversion subsequent to the next 2 quarters, right? How long do you see that level being sustained?

[Jean Kam, executive]

In terms of the single digit on China?

[Brandon Lee, analyst]

Yes, correct. Is it going to be another like 2 years or another like 4 quarters? Yes, basically, I just want to know when do you see that negative magnitude kind of turning around?

[James Sung, executive]

Turning around is -- hopefully, it's not for them...

[Brandon Lee, analyst]

Turning around is totally not negative, like maybe positive or like flat.

[James Sung, executive]

If anybody can, obviously, we hope we can start faster than later. But I think, [indiscernible] pretty much dependent on how much the feel good factor [indiscernible] the individual consumers because the government has really done -- hopefully can do more, right, to more money into the pockets of the people to spend. So yes, I mean, it is anybody's guess. So the market is stabilizing. So waiting for how soon we can see an uptick in demand growth.

[Sheh Min Lum, executive]

Okay. Joy from HSBC.

[Qianqiao Wang, analyst]

Just a few questions from me. First, if I can just follow up on the divestment pipeline you mentioned, Jean. Out of the SGD 1 billion, what would be the geographic split? And also, for this year, we've done quite a bit already in Malaysia. Can I say for the rest of it, is it predominantly in China?

[Jean Kam, executive]

Okay. So in terms of the SGD 1B pipeline, yes, we would probably have about half coming out from China and Hong Kong, and the other half would be -- we still do have a few more in Malaysia, we still have assets in Singapore, and we have also 1 or 2 in Japan, Australia and Korea. So these are the countries that we have identified where assets are no longer relevant. It doesn't fit with our strategy and doesn't have much potential for redevelopment. But of the SGD 300 million that I guided for this financial year, we are expecting to sign 1 in China.

[Qianqiao Wang, analyst]

Got it. Okay. That's helpful. And then secondly, just in terms of China, can I get -- your occupancy is really high. Is that because you have a very high retention ratio. Or what's the retention ratio in China actually?

[James Sung, executive]

The retention ratio is about [indiscernible] it's about 70% to 80%. The other factor, it's high, it's also a function of market is very competitive, as you're aware, [indiscernible] trying to push tenants and we try to push other tenants. So it's incentives that is, [indiscernible] right, to ensure that the tenants are incentivized to stay on. So that's the other factor.

[Qianqiao Wang, analyst]

And your negative rental reversion would have included the incentives, or that's not part of the rental reversion?

[James Sung, executive]

Partially.

[Qianqiao Wang, analyst]

Okay. Got it. Cool. And lastly, just 1 question on Japan. Could you share your JPN hedging rate and the percentage that's hedged for this financial year?

[Sheh Min Lum, executive]

For whatever that's coming during the -- the hedge rate for the next 12 months, we are looking at about 90%.

[Qianqiao Wang, analyst]

And is there still a -- 90% is the rate, right? And then is this still about 85% hedged or...

[Sheh Min Lum, executive]

80% hedged now.

[Yuen May Lum, executive]

Mervin, do you have a follow-up question?

[Mervin Song, analyst]

Yes, I have a question. It's a question from a client. With regards to your divestments, what the exit yields are you targeting in China, Singapore, Australia, Korea and Japan? Or what have you achieved thus far? I think the question is coming from the fact that they're worried that you're selling at very high yields and actually, the divestment exercise leaves you diluted.

[Sheh Min Lum, executive]

Mervin, I can't hear you clearly.

[Yuen May Lum, executive]

No, he's asking what kind of view are you expecting for the divestment in China as well as for the other countries, what have you achieved so far, and the concern is whether are you selling at high yield and therefore, will be dilutive.

[Jean Kam, executive]

Okay. In terms of the target that we are looking at, in terms of the exit yields for the assets that we are looking to divest, right? So those that we have divested, we actually are able to -- for example, like Malaysia, we are actually able to exit at tight yields ranging about 3-over percent, below 4%. And even for the CN asset that we have divested it is actually 2% in terms of the exit yield. So really, I think in terms of the pricing that we are able to achieve, I think it really depends on the special niche target segment that we are able to identify. So mainly, they are all end users in terms of the divestment pipeline.

Then as for the China assets that we are looking to divest, right, it is about around 4% kind of exit yield that we are looking at. So we are still able to achieve a decent type exit yield for the assets that we are looking to sell. And mostly, it's because I think we are able to find some niche buyers that are keen in this particular asset. And for the one that we are actually currently working on the China asset that we're currently working on, it's a bit confidential at this point, but it is actually also going to be a very decent type yield. So Mervin, I hope I answered your question, yes.

[Mervin Song, analyst]

Clients dialing in. So it is the right answer. The [indiscernible] occupancy, where does it stand now in Hong Kong?

[Jean Kam, executive]

Do you ask [indiscernible] occupancy?

[Mervin Song, analyst]

Yes.

[Jean Kam, executive]

It's 100% in the quarter. Yes, so I mentioned earlier, for the [indiscernible] asset last year, you have heard us wanting to divest. But I think we will look at -- we have a certain target pricing that we have in mind and the target yield. But in the meantime, while we wait out for the market recovery and for the buyers' appetite to improve, right, so we have managed to lease it out to a tenant called [indiscernible] Express that actually took on the full building just this quarter.

[Mervin Song, analyst]

Okay. Excellent. I noticed the DRP is still activated for this quarter. Given your divestments, should we be turning it off given it's actually quite dilutive to your DPU performance going forward?

[Sheh Min Lum, executive]

As of now, we are still -- I think the intention of the DRP is we need to fund the 51 Benoi redevelopment. So as of now, we still -- I mean, we have to keep it activated, but yes...

[Jean Kam, executive]

It is something that we are reviewing. Yes. But for now, it remains to be available for us to tap to actually fund our CapEx as well as some AI. We have our 51 Benoi AI that's ongoing. But it's something that we are reviewing internally.

[Mervin Song, analyst]

Final question for me. The NAV seems to have dropped quite a bit this quarter. I'm just wondering what's exactly happening there?

[Sheh Min Lum, executive]

Sorry, what is your question? What has dropped?

[Mervin Song, analyst]

Your net asset value per unit seems to have dropped quite a bit to 1.33, yes.

[Sheh Min Lum, executive]

Yes. Unfortunately. Okay, I think the first reason is because -- I think I tried explaining it earlier in the call. The first reason is because of the lower fair value on our financial derivatives. So we have all the interest rate swaps and currency forwards. These are actually mark-to-market on a quarterly basis. So because of the Fed cut during the last quarter, generally, our [ IRS ] and our CCS as well as forward because of FX movement have actually moved against us in that sense. While it's still a mark-to-market gain, it is a lesser mark-to-market gain and it has hit the NAV amount. That's on the first point.

So because it's a total asset, your gearing is computed against total asset. And when that value goes down, your total asset base reduces and, therefore, negatively impacted our gearing. So that's the first point. The other point is because of the strengthening of the JPY just at quarter end. So I think we closed our books when JPY was about 109 versus Sing dollar. Of course, now it has depreciated back to about 130, 140 level. Because of that FX impact -- I mean, FX rate at that point in time, and because we have about 80% of our JPY that's hedged -- I mean, our borrowings of the JPY portfolio is actually hedged and JPY loans, that movement has actually negatively impacted our gearing and NAV.

[Mervin Song, analyst]

Okay. Hopefully, all this bad news is in the price already and -- yes.

[Yuen May Lum, executive]

Okay. I've got a few questions from the floor. These are from the audience who dialed in. Okay. I think this question is China related. Okay, not sure about the question, but I'll read out anyway. Are all the Chinese-related debt converted into RMB? If not, when we'll convert them to RMB? Not sure what that means. And then second question is interest rate for SGD has come down somewhat. When will this benefit be felt by MLT?

[Sheh Min Lum, executive]

Okay. So I think on the first question, our Chinese assets, when we acquired them, it was doing very high renminbi borrowing rate environment. So a lot of these were actually funded with equity. So we do not have any onshore loans in terms of our asset investments in China. But progressively, what we can do now is whenever there is an Aussie dollar or Hong Kong dollar or maybe Sing dollar IR asset coming due, we will actively convert this and replace with renminbi, thereby increasing our percentage of borrowings to Chinese-related debt.

Then on the interest rate for Sing dollar, yes, I mean, we will benefit. But I think what we have locked in, in terms of [indiscernible] Sing dollars that has really priced in the cut. So that fixed rate part, I think it will take some time before we will benefit. But definitely, on the unhedged portion, we will benefit from the interest rate cut. And I think we are benefiting from it now already.

Do we have any more questions?

[Yuen May Lum, executive]

I think we have some more questions. Any payment default or indications of delayed payments?

[James Sung, executive]

Based on the last quarter, [indiscernible] was lower than, in terms of arrear percentage, below 2%, 1.8%, it's actually lower than the first quarter. And as of last week, in fact, even the arrear percentage is 1.5%. So it's very manageable currently. So I'm not sure what...

[Jean Kam, executive]

We do not actually see a further deterioration in the rental collection. I think in terms of the arrears, it remains a comfortable range. It is under 2%. And we didn't see any further deterioration in terms of the rental collection by the portfolio.

[Sheh Min Lum, executive]

Okay. I think this should be the final question from the webcast audience. Okay. This question is about what MLT's long-term strategy for China and whether any plans to reduce exposure? I think we have talked about our plan to divest. So what's the longer-term view for China?

[Jean Kam, executive]

I think I mentioned in the outlook is that no doubt currently, China is suffering in terms of the property market, in terms of the domestic consumption that is currently weak. But on the other hand, if we look at China, they are the second largest in terms of economy and in terms of the large population base. And as well as with the rising urbanization rate that we are seeing and as well as, if you look at some of the savings rate that they have based on some of the statistics that they have, they actually have a lot of high savings rate, but they are just afraid to spend. They're just afraid to spend because of the current weak sentiment.

And when the market starts to turn around, when the property market starts to turn around, the people will then feel richer, because they'll see some positive wealth effect, and they will start to be able to spend. And we would then see, there's actually a huge significant potential in terms of the demand, primarily because they are very large consumer base. So I think in the long term, it still offers very healthy economic fundamentals, and China still remains an important market for us for MLT.

So I think that's -- do we have another question?

[Sheh Min Lum, executive]

I think there's no more questions from the web as well as the webcast of this. So I think coming back to earlier on, [indiscernible], your question on the lease expiry, China portion, by...

[James Sung, executive]

Yes. So China for the balance of this year is 3.4% for China for MLT. For next year, FY '25, it's 7.5% and FY '26, 4%.

[Sheh Min Lum, executive]

Okay. So thanks to everyone for dialing in. If you have follow-up questions, please just e-mail me. Okay. Thank you.

[Jean Kam, executive]

Thank you. Thank you, everyone.