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Mapletree Logistics Trust
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Good afternoon. Welcome to MLT's results briefing for the Fourth Quarter and 12 Months Ended March 2023. Before we start some housekeeping rules, those who are dialing in by Webex, please put yourself on mute.
Okay. Now I'd like to hand over the session to our CFO, Charmaine Lum.
Afternoon to everyone. Thank you for taking the time to attend MLT's 4Q FY '22-'23 as well as full year results. I'll first bring you through the key highlights for 4Q Year-on-year, gross revenue is down 2.2% at $178.9 million. NPI is down 1.8% year-on-year. The drop mainly due to FX, where the regional currencies have depreciated against Sing dollars.
For this quarter, we are declaring a DPU of $2.268 that's the same as 4Q last year. Our portfolio remains resilient, with a portfolio occupancy of about 97%. WALE is at 3.1 years. For this quarter, we also recorded an average rental reversion of a positive 3.1%. Portfolio revaluation gain for this financial year is about SGD224 million. On the capital management front, aggregate leverage is at 36.8%, the same as last financial year.
We have an average debt maturity of about 3.8 years and 84% of our debt has been hedged into fixed rate or 77% of our income stream for the next 12 months has been hedged into Sing dollars. In line with our portfolio rejuvenation strategy on the 29th of March, we announced the proposed acquisition of eight logistic assets in Japan, Australia and South Korea for $904 million.
Together, we also announced the potential acquisition of two logistic assets in China for about $210 million, both of which are a portfolio acquisition from CBRE IM. On the same day, we also announced the potential divestment of a property in Hong Kong for SGD100 million, and in January, we announced the divestment of two properties in Malaysia for about $15 million.
And on the 31st of March, we completed the divestment of three Changi South Lane for $22 million. The divestment gain of about $5.7 million will be distributed over two quarters, first in 4Q this financial year and 1Q next financial year. On the 30th of March, together with the acquisition announcement, we launched an EFR to raise $200 million.
The issue was 3.9x oversubscribed, and we issued at a 1.5% discount to adjusted VWAP. We also reset our perps of about $100 million -- sorry, of about $180 million. The new distribution rate will be 5.2%. So for 4Q versus 4Q last year; for 4Q last year, we started with 167 properties and ended with 183 properties post the completion of acquisitions from the sponsor. For this financial year, we started the quarter with 186 properties, with the divestment of three Changi South, we ended with 185 properties. Gross revenue is down 2.2%, mainly due to the depreciation of regional currencies against Sing dollars.
Although this is mitigated by contribution from the enlarged portfolio, as well as full quarter contribution from acquisition last financial year. Property expenses is higher due to the enlarged portfolio and net property is down by 1.8% because of FX. Borrowing costs -- about 40% of the increase is due to incremental borrowings taken to fund acquisitions, and with the rest due to higher average interest rate, after accounting for a hedging gain of about $3.1 million, divestment gain of $2.9 million, management fees as well as other adjustments, our DI is higher at $109 million, translating to a DPU of $2.268, same as last year over an enlarged unit base.
I will interrupt Charmaine here. So if you look at these sets of numbers, the gross revenue, $178 million compared to last year, $182 million. Just to let you have further flavor on the currency. So $10 million decline is due to ForEx. Our hedging gain is $3 million.
So if you want to stay on the high side, perhaps we should hedge more. So if you take out the $10 million of ForEx loss net of the hedging gain of $3 million, you are looking at a loss of $7 million. Without this, our overall gross revenue would have been up $6.6 million. Go back to the previous slide, please. The full year? Have we done the full year?
Okay. So can we go to the full year. So the full year of $730 million versus $678 million, $29.5 million is due to ForEx. Our hedging gain is $10 million. So therefore, you can see that about $20 million is due to ForEx loss.
Without the ForEx, our revenue would have been up by $81 million. So you can see that MLT, no matter how resilient and how robust we make our portfolios, the headwinds of what is happening globally against the Sing dollar as well as the interest rate, so that is going to continue to impact us. So that's why I want to highlight this word of caution that moving ahead, we will continue to see a very resilient portfolio. We will continue to have positive rental reversions, especially for the ramp-up. But the ForEx and the interest cost is going to hit us quite badly. And just to let you have a feel of -- the borrowing costs have gone up by about $6 million on a full year basis.
Charmaine, you can continue.
Yes. So on a full year basis, other than the FX that has affected us, borrowing cost is also higher, above the 29.7% increase, half of it is due to incremental borrowings taken to fund acquisitions, while the rest is really because of higher average interest rates. So after taking into account the hedging gains, which Kiat mentioned of about $10 million, as well as the income support of about $2.2 million, as well as divestment gains, we are looking at a higher DI of about what 10.8% increase, translating to a 2.5% increase in DPU at $0.09011 versus $0.08787 last year, over an enlarged unit base.4Q versus 3Q. Yes, we registered a gross revenue drop of 0.7%. This is really entirely because of the depreciation of currencies.
Excluding the impact of FX, we would have registered a gross revenue that's about the same level as 3Q last year -- sorry, 3Q last quarter. So accordingly, net property income is 1.8% lower. Gross borrowing cost is about the same level as 3Q. After taking into account the divestment gain from three Changi South, DPU is 1.8% higher versus last quarter. So I think MLT's balance sheet remains healthy. On the investment properties, we -- it's lower.
IP is lower $12.8 billion versus $13.1 billion, notwithstanding that we have a net appreciation in investment properties, i.e., revaluation gain of $224 million. We recorded a net translation loss of about $758 million. We also accounted for acquisitions as well as CapEx of about $206 million, as well as divestment of three Changi South. So with all this taken into account, we ended the financial year with an investment properties value of about $12.8 billion. Net asset NAV over per unit is at $1.44 versus $1.48 last year. Aggregate leverage, same as last year, 36.8%.
Interest cover as well as adjusted interest cover has dropped a little from 5x to 4x as well as 4.2x to 3.5x. So for our debt maturity, while, it remains well [staggered], with an average debt duration of about 3.8 years. We have available committed credit facilities of about $1.16 billion on hand. This is more than sufficient to refinance our $374 million that's coming due in the new financial year. In terms of interest rate and FX management, about 84% of our total debt has been hedged or drawn in fixed rate. On the unhedged portion of 16%, 7% is in JPY, which we expect to remain stable. The rest in Sing dollars and other currencies, basically to provide us with the flexibility to pare down the more expensive loans with divestment proceeds.
With every 25 basis point increase in base rate, we would see our DI drop by about $500,000 and DPU by about $0.0001 per quarter. For FX, about 77% of our DI for the next 12 months has been hedged into Sing dollar or derived in Sing dollar for the unhedged portion of 23%, these are mainly due to provide flexibility to meet our onshore funding requirements such as CapEx. This is the distribution details. Due to the EFR, we declared a cumulative DPU of $0.02502 for the period from 1st Jan '23 to 10th April '23, which is the day immediately preceding the listing of new units. So after the $0.02502, $0.02268 will be for 4Q for the balance -- for the 10 days in the new financial year. The distribution payment date will be on the 22nd of May.
James will now bring us through the portfolio update.
Okay. Thanks, Charmaine. So in terms of the 4Q results AUM, the contribution is still fairly stable. 70% of AUM and gross revenue comes from the developed markets, i.e., Singapore, Hong Kong, Japan, South Korea and Australia. In terms of our occupancy rates, we managed to register a small increase in overall occupancy rate to 97% in 4Q.
However, you can see that our portfolio is still very resilient. But obviously, there are headwinds coming around, especially in markets like China, you can see that occupancy rate even, we have registered a slight increase in China to 93.4%, but the Chinese occupancy rate is still the lowest. Right? We see that the recovery in China is not as fast, as smooth as anticipated. Domestic demand remains weak and industrial ARPU remains weak. So we are just wary and concerned about the recovery and sustainability post-COVID for China.
So most other markets in our portfolio remains fairly strong in terms of higher occupancy rates. Next; so I've mentioned about China. You can see from the rent reversion in 4Q. Sorry. This is lease expiry, jumped a bit. So in terms of lease expiry, 29% of our [area] by NLA is expiring in coming FY.
Most of it is coming from China, followed by Singapore. The reason being -- most of our customers are particularly worried about committing early. They're taking slower to decide. And in countries like China, the [rule] is very short, so they're not going to take long leases with us. So generally, it's less than two years, one to two years.
But progressively, as we engage with tenants closely over the next few quarters, this percentage should improve over the quarter -- quarter-by-quarter, right?
Can you show the chart that is lease expiry by geography? So I think the -- in MLT's portfolio, the weakest link is actually China. The nature of the business there is the tenants tend to do very short leases. They will roll over. So they'll do one plus one plus one, two plus two plus two, but you can see the long tall bar is actually China.
And then with what we are seeing, the uncertainty and lack of clarity on where the government is going in terms of global trade as well. So they think is -- I think the country that I personally will be most concerned about will be China. Thankfully, it is only about 20%-odd of our portfolio. We still have about close to 70% of our assets in very mature, stabilized markets like Japan, like Australia, Singapore and Korea. So that will mitigate this. So I think that is the -- and then the thing is, having said that, about China, China Tier 1 cities continue to behave very well, meaning that we continue to see very, very tight supply.
So therefore, occupancies and stability of rental reversions and all that are still going to be strong. It is the Tier 2 cities that we are concerned about, that are seeing more, what we call, uncertainty due to the increase in supply and also the more fragile growth trajectory that we are foreseeing for the domestic consumption. So that is, I would say, the key concern that the management teams will be focusing on for this next 12 months.
So this chart shows the top 10 tenants by gross revenue. So it's quite easily spread out across 3PLs, end users, including our food -- so-called cold chain companies like Bidvest at number 10, and supermarts like Woolworths and Coles Group in Australia. So they contribute about 23.5% of our total gross revenue. Overall, in terms of sector mix, our portfolio and tenant mix is geared towards consumption. So these are fairly resilient in terms of demand rather than fleet related, which is import and export, which is very volatile. So most of the sectors here are domestic consumption.
Thanks, James. I will touch on the portfolio rejuvenation. We continue to be very proactive in our portfolio rejuvenation. And in fact, we have actually geared our strategy. In end March, we have announced the proposed acquisitions of six assets in Japan, which has since been completed last Friday.
As for the Sydney assets, this is currently pending some condition precedence to be fulfilled. We expect to be able to complete by end May, early June. And on the sole asset, this is currently pending the [ROFO] to an existing co-investor. So once it's lapsed around -- we are targeting around this one, two weeks, we should be able to enter into a binding SPA shortly. So all in all, the proposed acquisition of 8 assets, is fully leased, relatively young assets, with an average age of about 5.5 years. Mainly it's actually due to 1 old asset in the Sydney.
Other than that, the -- most of the assets is about 2 to 3 years old. WALE is about 4.4 years. And as part of the single large transaction from a single vendor CBRA Investment Management, we are also currently in discussions on the potential acquisitions of two assets in Jiaxing, one of the submarket to Shanghai. And at the same time, we have also continued with our asset recycling strategy, and we have also announced the potential divestment of our assets in Fanling, New Territories, Hong Kong, and that is a very old six-story industrial asset and estimated sales proceeds of about $100 million, potential 20% premium to valuation. Next slide. So this is something which you are familiar.
So we have purchased two land parcels next to our MLT, Subang 3 and 4. Currently, it's still undergoing the amalgamation process. We're targeting to commence the construction towards the later part of next year, with an estimated TDC 170 million and TOP estimated in 2027. Next. On the 51 Benoi asset enhancement, we are currently undergoing the demolition works, and we have also obtained the planning approval to develop it into a six-story Grade A ramp-up warehouse, targeting to commence construction later part of this year and estimated TOP in 2025. On the divestments, as mentioned, we continue to be very active on our recycling and rejuvenation strategy. To date, we have divested about $650 million assets of older specs warehouse.
And we have just completed the divestment of three Changi South on 31st March. In January, we have also announced the divestment of Chee Wah and Subang 1 and estimate completion by the first half of this FY. And as mentioned earlier, the other asset on -- the Fanling asset is also -- we estimate to enter into [abiding docs] by end of the month. On the portfolio revaluation, moderate increase in capital values is seen across most countries. As mentioned earlier, total reval gain of about $224.2 million. In terms of the same-store assets, those in Japan, we have seen the strongest increase in terms of the percentage of capital values, followed by Hong Kong and India.
For Japan, the asset valuation increase is primarily due to the cap rate compression arising from strong investor demand for well-located and good spec assets. In Hong Kong, it's mainly driven by rental growth, in particularly for higher specs modern warehouse and this increase is mainly coming up from our [Cainiao] asset. And in India, the same-store asset valuation increase is primarily driven by market rent growth. And as for the asset in Australia, Singapore and Korea, it suffered a decline in capital values, mainly for Singapore, it's due to the shortening remaining land lease and recent increase in the buyer stamp duties, but is mitigated by rental growth. And for Korea, it's primarily due to the marginal cap rate expansion as well as -- but mitigated by rental growth. This is also similar in the case of Australia.
So in terms of the portfolio weighted cap rate year-on-year, it remains the same at about 5%. So next, I'll let Yuen May talk about the sustainability initiatives.
Hi. This slide is to share with you some updates on our environmental progress during last year. We start the year to achieve carbon neutrality for Scope 1 and 2 emissions by the year 2030, and this is something that is an intermediate target, that is aligned with the Group's commitment to achieve Net Zero emissions by 2050. We are pleased to update that all of our environmental targets set for the year were achieved.
So with regard to green buildings, we have already rolled out green leases for new and renewal leases in Singapore last year, and we plan to roll out to other countries in this financial year. For green space, we increased the green certified space by fourfold to now 1.7 million square meters, which accounts for about 22% of our portfolio GFA.
Our long-term goal is to achieve green certification for more than 80% of our portfolio GFA by the year 2030. As for energy intensity, we are pleased to update that we are on track to achieve more than 3% reduction on a portfolio basis compared to the previous financial year. And we -- our long-term goal is to reduce energy intensity by 20% for Singapore and Hong Kong by 2030 from the FY '18-'19 baseline. For solar, we also made quite a good progress during the year. The capacity increased by 163% or more than doubling to now 36.3 megawatt peak as at March 2023. We intend to grow this to over 100 million megawatt peak by the year 2030.
During the year, we also added more trees to our asset base across the region. We planted over 1,000 -- more than 1,200 trees in nine markets, continued from the 1,000 trees that we planted in the previous year. We're also very pleased to update that our existing asset, Jurong Logistics Hub was awarded the BCA Green Mark 2021 Gold Plus, which is a very stringent criteria compared to before, and I believe we are one of the first logistics asset to win this award.
I'll now hand over to Kiat on the outlook.
Okay. I think during the presentation, I have also jumped in and highlighted some of the areas of concern to us management. So we -- our customers have continued to become cautious. The renewals and expansions are slower. The e-commerce guys are returning spaces rather than adding spaces unless it is in very prime locations, where they are still competing for the time to market, time to customer.
So the good thing is our portfolio is very well diversified. Like I mentioned earlier, mature markets, stable markets continue to provide the base that we need to drive our growth. So can we go to the rental reversion page? We don't have the slide. Can you go -- so James to give you a flavor of how the rental reversions are happening.
So on the rent reversions in the 4Q, we managed 3.1% growth, which was a slight improvement of 0.2% over 3Q. Most of it actually is coming from Singapore, Malaysia and Vietnam, Singapore is mainly from the -- driven by high reversions and the ramp-up renewals that we have. But in countries like China, it came in at 0.6%, which is -- we expect to be -- going forward to remain weak, as long as the sentiments in China, post-COVID recovery remains uncertain, tenants remaining cautious, the rent reversions will continue to be on the lower side, right?So overall. Yes, in terms of country, I'll give the numbers now, Singapore is 5.0%, Malaysia, 4.5%; Vietnam 4.4%; Korea 4.0%, Japan, 2.8%, Hong Kong 1.2%; China 0.6%, overall is 3.1%.
The Singapore performance of 5% are the ramp-up buildings. So the dichotomy that we have been saying is becoming much, much ingrained now. The good ramp-ups will continue to see very tight supply. We will see rentals. But for the -- what we call, lower specifications, that is where we think that the rentals will start to soften.
So the -- even Japan at 2.8%, what James mentioned, is doing better than Hong Kong, which was doing 1.2% reversion and then China at 0.6%. So the Tier 1 versus Tier 2 in China, James?
So Tier 1, as Kiat as mentioned, is doing better than Tier 2. Tier 1, is 3.3%. Tier 2, is 0.6%. So there's a clear difference between occupancy in terms of the demand and supply in these Tier 1, Tier 2 cities.
So the -- so we will -- I think to date, you will see that we are very divested, about $600-odd million, excluding the recent ones that we have announced, which is about $100-odd million. So they -- as we continue, we expect that pace to not stop, we are in the process, if you are in the markets that we are operating in, you will hear that we are already in the market. We are even looking at divesting some of the -- what we call limited potential assets in China itself as well. So these are the things that will happen. The thing is the regulatory as well as with all these sales processes, it will take time. So as and when it comes up, we will announce that.
So the divestment pace has not stopped. It is still ongoing very actively in the background. So I think in a nutshell, the portfolio continued to be underpinned by stability, largely coming out from the stable mature markets. China continues to be a spot -- a weak spot that we will be very vigilant about, especially the Tier 2. And the ongoing rejuvenation of divesting AEIs will continue. And the part that we are most concerned about is, as our portfolio continued to deliver in local currency terms, stable, resilient growth, what will hit us will be the ForEx and the borrowing costs. So these are the two things that -- while we have a certain amount of control in terms of hedging, but the global -- macroeconomic situation, the interest rate environment is something that we will find it hard to actually manage completely on our own.
So I think this will answer -- I mean, the last 12 months have been challenging. We managed to pull quite -- I would say, a resilient set of numbers. But moving ahead, we -- I think we have to work much harder in terms of agility, especially on the ForEx front, and then the borrowing cost fund to drive the DPU, because at the end of the day, the DPU is delivered in Sing dollars yes. And of course, with the enlarged unit base, there's additional pressure, that amount distributable can go up, but a large unit base is something that we will continue -- to have to feed all these new units, be it to the sponsor in management fees and units or to the new EFR units that we have launched, yes.
So I'm open to -- I think we are open for questions, now? Yes, Mervin.
Hi Kiat. It's Mervin from JPMorgan.
Hi Mervin. Brandon, go first, his hand came up -- okay, so just give a few minutes there.
The first one is with regards to the Japan acquisition. I just wanted to ask whether for the recent one, the Blackstone so, did you look at that? And how do you think that portfolio compares to what you bought recently? So that's the first one. The second question would be, I think given where your gearing is and how well your share price has performed; for the next 12 months, will you actually be even more, I would say, proactive on acquisitions?
If so, where would this be?
I think the Blackstone one, that's the one that we used to have, and that's the one that our...
Okay. For the Blackstone one, this primarily -- the assets that was previously developed by Daiwa, and they have since sold to Blackstone and I think it's Blackstone and also to GIC. So this is a closed transaction. But from what we know from the assets that Daiwa has developed in various locations, there's only one that is in North Central Tokyo. The rest, I think there's one in Fukuoka.
There's one in Greater Nagoya, Ibaraki. So I wouldn't say that because comparing to the assets that we have acquired, most of our assets are located in Tokyo, which is a tightly held supply location. So I wouldn't say it's comparable, because it's different locations for the ones that GIC has bought.
I think -- so the thing is, we will continue to be very opportunistic in terms of acquisitions. So that you have seen us do acquisitions on third party -- I mean, out of our $12 billion, $13 billion, easily $8 billion are from third-party acquisitions, only $4 billion are from sponsor, of which majority are from China. So I do not foresee us doing any more China acquisitions, at least for the next 12 months, until we see greater clarity on the macroeconomic front in China, as well as the performance of the logistics market, especially in the Tier 2 and Tier 3 cities. So we are continuing to be very opportunistic. And then the -- to drive that, we obviously have the constant divestment, right? The balance between high cost of equity, high cost of perp, versus still the relatively lower cost of debt.
Of course, the best is, we like anything that is lower cost. But I think we are very mindful that we want to keep our gearing around 40% and not push that, because we have kept to that discipline. So discipline continues, accretive acquisitions. We will continue to recycle, which locations, the high-growth markets continue to be attractive to us like Vietnam and Malaysia. But these will continue to be small. And then the stable markets will continue to be attractive to us.
For certain mature markets, we are hoping to see some cap rate -- further cap rate expansion. So like, for example, the recent current transaction that we did in Sydney or rather we are doing in Sydney and in South Korea, we're looking at 4.6%, 4.7%. I think a couple of years back, you will remember us competing for a part, that eventually went to ESR at 3.8% in Australia. And today, we are -- a majority of it was in Melbourne. So now in Sydney, you can get 4.7%, 4.8%. So that shows how the cap rates have moved.
So if cap rates continue to expand, we want to be ready to capture such opportunities. Balance sheet-wise, we're still very, very strong, just that there are a lot of levers that we have to pull. So we have to ensure that we do that well.
Yes. Sorry, Mervin. Sorry.
Mervin, sorry.
Yes. Sorry, Kiat I was [indiscernible]. Just on -- tracking somewhat more what's just told today. I mean, the FX headwinds, the interest rate cost, the Tier 2 issues in China, is something that you've discussed and talked about in the past. Are you incrementally more bearish today, because you're seeing further weakness in China, or what exactly is happening?
I think out of the few factors that I've mentioned, the greatest impact would be ForEx. China, I think that because it's still a very small percentage, it's only about 20%-odd of our portfolio. So I'm confident that the remaining 70%-odd of the portfolio will be able to mitigate any movements downside -- movements from China. So the China on the operating front, yes, it is the weakest link. But overall, it is only 20%-odd.
I have 70%-odd of the portfolio that are still pretty resilient and strong. You can see from the rental reversion. So in terms of local currency terms, I don't see China dragging the portfolio down in a significant way. So that's just to put things in perspective, that's on the operating front. But on the DPU front, the part that hits us in a huge way, like I mentioned this year, ForEx hit us $30 million. Our total revenue is how much, $700- over million.
Yes. So it hit us just a $30 million with ForEx, and get hit and that it hit. So that's the one that worries the most -- worries me the most, because that's something that we have limited control and that's something that I don't have visibility -- very clear visibility as compared to operating side. I have very clear visibility over the next 12 months, 18 months, what we can do, what we can pull. But on the ForEx side, unfortunately, I don't have insights into what the different central banks are going to do. Like the Reserve Bank of Australia just raised the -- I mean, one of the banks in Australia just raised their interest rates, I think, yesterday or today.
So I think that is the part that will be the uncertain factor hitting our results.
Sure. I mean I think people are cognizant of headwinds and you historically have had [indiscernible] expectations. So I'm sure -- hopefully, have a few rabbits in your hat that you can pull out, especially the recent acquisition. My second question is regards to the cap rate changes, in particular, I don't know whether you can share with us the exact changes in terms of weighted average cap rate movements for Australia, Japan and Singapore, and Vietnam. Can we see the, I guess, the ranges?
Okay. In terms of the cap rate variance for Singapore, we are looking at about the range of about 100 bps expansion -- sorry, 50 bps to 100 bps for Singapore of expansion. For Japan, all compression about 100 bps. Hong Kong, very slight compression, about 10 bps. For China, it's largely similar, no significant changes.
The reason why you see that there's differences, is due to the gross cap rates versus the net cap rates that was used, because this year, we used a different valuer. For Korea, expansion of about 10 to 20 bps. Malaysia, no significant changes. Vietnam, about [50% to 75% bps] of compression. Australia, about 50 bps expansion.
India, no change in the cap rates, it's mainly driven by strong rental growth.
Okay. Derek?
I just want to follow up a few questions. So could you just remind us for your China right, how would you define Tier 1 and Tier 2 in terms of exposure percentage?
So in terms of Tier 1, we include Tier 1.5 cities. So in order -- the Tier 1 and 1.5, revenue split is about 55% contribution, the other 45% is from Tier 2 and 3.
Okay. Then my next question is on your top 10 tenants, right? You have your usual guys, JD, Shun Fung and Cainiao. So based on your engagement with them, is there any risk that they will be returning space? Just wanted to get some color?
Yes. So like Kiat has mentioned, some of them -- e-commerce players are very cautious. So that -- so some of them have told us, that they're going to shrink slightly 10%, 20% of the space, but they're telling us way in advance. So we have time, right, like two quarters ahead to find a replacement tenant. But not all e-commerce players are shrinking, right?
Only two that have [sounded less or] are more cautious. So the e-commerce companies, they're having a promotion, they call it the 618 Promo, right, end of June. So they are really -- surprisingly, they have come to us also for short-term spaces, because what they have with us today and what they have on their own is insufficient, right? These are short-term leases, typically three months or so. So in terms of our performance like J&T -- as you're aware, J&T bought over this Best Express in China and expanding fairly fast. So J&T is fairly stable.
So we are more concerned about the lives of say Cainiaom S.F. Express, right? These are big companies. So when they move, they move. So I mean -- in a big way. But we have -- in terms of the early engagement that we have with them, they -- whatever they want to, so-call not renewing like 10% to 20% of space, they already told us.
So we have sufficient time to replace them. But overall, their business is still growing, but not in the double-digit percentage in like pre-COVID -- I mean during COVID times and before, right? So now they've really stooped down, right, to single digit.
Okay. So the impact would be felt this financial year, like essentially -- that's what...
Yes. Yes. We should see the impact in this financial year. There are two schools of thought; one is that second half, China should start to see some recovery. But there is another school of thought that says that, perhaps the recovery will take beyond that -- the mix, it will be slower than that.
So we are watching that space very, very carefully. The good thing is our warehouses, we do not have many SUAs with them, they are MTBs. So therefore, they are generic warehouses. So the ability for us to replace them will be quite quick. But what is important is like, what James mentioned, the ability to capture their plans early, if they intend to expand, or they intend to reduce and when, I think that critical information is something that the team is working very hard, to keep track of. But in terms of replacement and all that, I think we are all quite confident. Meaning that we don't see our occupancy suddenly collapsing because we don't have SUAs with them.
Okay. Sorry, just last one. Your debt currency mix has changed post acquisition. Just wondering whether could you give us a refresh guidance where should interest costs land this year?
So yes -- you're referring to the acquisition that we announced that year for March, yes. So we are taking this opportunity to rebalance some of our debt. Post the rebalancing, we are looking at interest cost for the new financial year, about 2.8% to 3%.
Hi, Vijay from RHB. Few quick questions. My first question is in terms of acquisition, you mentioned for the next 12 to 18 months, you are not planning to look at China at this point of time. Does this include the portfolio which you are already doing due diligence on as a part of the larger acquisition also. And if I look at your sponsor pipeline, most obviously it's in China, other than that, there are some markets like Vietnam and India.
India, previously, you mentioned it's a market which you'd like to look at, but you haven't been mentioning. Has that changed in your view? And would you also do a greenfield asset with your sponsor?
I think India, we are very keen. The India properties tend to be very small in value, so we can easily take on. So I think Gene is looking at one or two India acquisitions, hopefully, not too long. And then on Vietnam, again, there are some properties that we are keen to take from sponsor. So again -- but the values are, again, not that big, right?So back to the question about the portfolio that we are buying, where the China piece is part of that portfolio.
So the intention is we will take -- because it's part of the portfolio, where we have no choice but to take it. So when -- after we take it, we want to try some leasing strategies on it. And then if they work, it should reposition itself. But if it doesn't, then, of course, there's nothing stopping us from selling it. And then if you noticed the cap rates, one thing very interesting about China, is you have your -- all this uncertainty, but your cap rates are still holding steady. So that's the part that the -- what you call that, the uniqueness of the Chinese market and the Chinese investors.
Understood. Second question is again on the perps. If I look at your reset of 5.2 percentage, it is higher than your cost of equity, you are trading at 5% and your debt is also around 2.89%. Any specific reason why you couldn't upsize your EFR instead of taking -- resetting our perps at 5.2 percentage?
The first thing is that perp is -- every six months, we could...
So for the perps, right, while we reset the rate for the next five years, we have the flexibility to recall it every six months. So we will have to look at it again in November and see -- I mean, if the perps market open up then, and the rates in our favor, we may choose to redeem and reissue a new set. After all, perps is still considered equity.
Okay. Then as to why we didn't raise the additional -- or rather why didn't we upsize the EFR, which apparently on the hindsight went pretty well. So I think the whole idea is, the cost of equity is still more expensive than the cost of perp that we have. And then the other thing is, I think I wanted to keep the EFR small, such that I get genuine investors coming in, rather than investors just looking at us, growing for the sake of growing. So I think that was a very deliberate position taking that -- look, we are going to you, investors, we are giving you a value proposition.
And you look at the value proposition, if you like it, you come in, if you don't, you do not come in. So I think that was the positioning. We do not want, what we call speculative or just -- people just in it for a quick buck. Yes so I think we want to control; because we have the divestment program going. So our gearing will have a certain amount of control coming out from the divestments. Yes.
So lastly, just quickly on your debt profile as it is. You mentioned about the ForEx impact, and that is something which is not under control. Since you have a wider range of debt currency, some of them are trading at much cheaper, would it be possible to increase some of your JPY loans or other loans in the near term to keep your funding costs lower, in terms of asset level?
So as of now, -- in terms of the capital hedge proportion, JPY we have already hedged a bulk of it, almost 19%. So we would not want to borrow more JPY than the asset value itself. I think during the -- I mean, when we launched our acquisition announcement, we also mentioned that Chinese yuan -- I mean, our China assets is a bit lower in terms of the capital hedge. So we will make use of this opportunity to rebalance some of the debt portfolio to move some of the higher cost currencies to currencies like Chinese yen, which is lower. So that is part of the rebalancing of the debt portfolio that we're talking about.
Yes, David.
The first question before I forget, your tower of lease renewals in China this current financial year, is the breakdown roughly 55-45 Tier 1, Tier 2? Or is it skewed to Tier 1 or Tier 2? So it should be 55%, 45%, like you mentioned...
Tier 1, Tier 2 in lease, I would say, it's 50-50 because most of our properties are still in the Tier 2s, but expiries are -- yes.
Yes. Okay. A question on ForEx. Please correct me if I'm wrong, but on your latest valuations, your total assets or investment properties are about $12.8 billion. Is that after the net translation loss of $760 million?
The $12.8 billion is after the translation loss of about $700 million...
One thing that I don't totally understand is that, it seems like the reval gains can go through the P&L, yet the currencies are not through the P&L. It's through other companies' [indiscernible] income or something? Is that...
Right. So look, the translation difference basically arise from the FX, the exchange rate used on the 31st of March 2022 last year versus 31st March, 2023 this year. So during the financial year, most of the currencies are actually depreciated against the Sing dollars. The FX loss from there, we take it directly to foreign currency translation reserves, which is in the balance sheet without flowing through the P&L, yes. So I mean that's -- so this will be kept in the balance sheet until we sell and dispose the asset.
So at that time, it would be compared to realization fees, but that is based on the FX on the date of disposal. So at the moment, it's all unrealized and has got no DPU impact, yes?
So David, this is something that I also had a one-on-one on the beauty of accounting. You have $757 million hitting the balance sheet. But you can book a $224 million of valuation into your P&L. Well, that's what the accountants say. Okay.
So that is my problem as well, what [I thought is].
Yes. My issue with that is that -- fine if it's accounting, fine. But during -- when you announced the acquisition in 30th March, right, you had this pro forma gearing that -- it seems like you just incorporate the $200 million plus, but you didn't also incorporate the ForEx decline, right? I mean what would be the pro forma gearing if you took into account the $700 million?
Okay. The pro forma gearing is really largely the same as what we set out in the announcement itself. So most of the currencies have actually depreciated against the Sing dollars in the first nine months. So we took that 31st December position as a starting point. So if you look at the circular -- I mean, the announcement, right, our pro forma gearing before the acquisition is at 36.6%.
This is what we're announcing at 36.8%. The pinch of the 0.2% is mainly because of deposits paid on the acquisition transaction itself.
Okay. Got it. And my last question is -- correct me if I'm wrong again, but I have had the impression when you announced the equity fundraising and then the advanced distribution, it seemed like it was much bigger than your fourth quarter DPU, because what I did was, when you announced your advanced distribution, I had to change my forecast, because I thought my fourth quarter was very low, but all of a sudden, what I'm saying, it seems like now it's -- so why -- what is the reason why the advanced distribution is much higher than your fourth quarter DPU? It's not?
Yes, you have to take into account the DPU for the first 10 weeks.
How much can that contribute?
Just take the cumulative distribution, divide by 100 days, then pro rate to 90 days here, you should be in line, if not -- actually better.
Okay. Sure. I will take it away from here.
We can show you the calculations later.
Unknown Hi. This is [Tian Shen] here. Can I ask a question?
Tian Shen, you can go ahead.
Unknown Yes. Can you help to refresh the China operating metrics guidance? I think in the past, the guidance was that -- occupancy will be volatile, but reversion is still positive. Does that still stand or any change there?
Yes. So I think occupancy, what we're seeing is that going forward, particularly in the Tier 2 cities, it will continue to be stable. That's what we've seen in the last few months. But what will happen is, that the reversion is the -- cost of the reversion because we see the rents incentives, more incentives could be given for -- to attract new tenants or for existing tenants. So this is something that we see going forward.
So reversions will still continue to be very weak in the next two quarters for China. Occupancy will be stable. Yes. So Tier 1 reversion I mentioned going forward, will be closer to 3%, like what you see in 4Q. Tier 2 will still be under 1%. So overall, you could -- overall, we see that it's going to be probably 1% or less -- between 0% and 1% going forward for China.
And in terms of occupancy, well, the Tier 1 is still much stronger. In fact, it's high 90s, 97%, 98%, but for Tier 2s, we are more trending about 90% to 92%. So that is our focus for the next few quarters. Okay.
Unknown And then on gearing, right, having taken into account the ForEx translation losses post completion of all the announced acquisition and divestment is still expected to be around 40%? Any change there?
Yes, about the same levels.
It's Derek from Morgan Stanley. Just wanted to ask about the management fees in [units]. In December, you talked far more than usual, what, 60%-odd. Is this going to be the case going forward?
About 55% to 60%, we will be about this level going forward.
55%, 60% Okay. And then just on divestment. I think you mentioned $600 million. Is that the number that we should be expecting in this financial year, $600 million?
I think we are targeting that. We are hoping to hit that about $500 million to $600 million in divestment. I think we have already announced, I mean, close to $200 million. So we hope to see another $400 million. Yes that's announcement because it takes time for completion to happen and all that there.
So we're still targeting to hopefully announce by end of this financial year, $500 million to $600 million kind of divestment.
Taking those proceeds, I mean, $600 million divestment, you still have $100-plus million in the EFR yet to deploy. So could we assume $700 million in acquisitions financially -- in this financial year?
We just did a $1 billion acquisition and you're asking me whether I'm going to do another $700 million? So I think based on what we are seeing, Jean will jump in -- based on what we are seeing, we hope to see some cap rate expansion, further cap rate expansion in some of the stable markets. So again, we'll be opportunistic, if a good portfolio comes up, yes, we will be keen. But yes, I think -- nothing stopped us from doing it, but the thing is, we want to be more selective, meaning that we do not want to jump in just for the sake of jumping in. We want to ensure that -- we do not end up in a situation like -- we go in and then the cap rates continue to expand yes?
So we want to wait till a point that, look, I think the cap risk is more or less stabilized than [we were going]. Having said that, I think growth markets like India, Vietnam, those are very small acquisitions. So that one, we can move quite quickly. Yes.
Also on this, you didn't seem to mention Japan just now on target market. Is that not the case going forward?
No, we'll continue to look at Japan, but very, very selectively. If you look at the reason why we bought this portfolio is, because of its Tokyo presence, majority of it is in Tokyo. Unfortunately, we were not able to cherry-pick what we like. We have to take it as a portfolio in order to be the winning bidder. So the reason why we went very aggressive on this one, is because the very prime locations and the very new specs of the Tokyo portfolio. The Hiroshima, Nagoya ones, whether we have it or not, I think I won't lose sleep over it.
But the ability to get around Route 16 is a very unique opportunity. So if we come across things like that, we'll do it again. Yes.
Joel from DBS. I just had one question. It's regarding -- I was noticing your NPI margins for Japan, Korea and Australia was trending down over the last three years. And not that you also made acquisitions in this market. I know you shared a bit on Japan.
Could you share some color on the dynamics in these three markets?
Japan continues to be quite resilient. Our NPI yield, based on the latest valuation, is close to 4%, right, [indiscernible] 4%. And over the year -- in fact, FY '21, we also took 4%. So it's been fairly stable. The leases tend to be very long and what we see is that, when it comes for renewal, like what we've reported in the last few quarters, we managed -- because these leases were signed few years back.
So when it comes for renewal, we're able to up the market -- Japan, is it?
Yes. NPI margins.
[indiscernible]
I think if you look at Japan, right, our NPI margins has been about 85.5% to 85.2% yes. So yes, it's a drop of 0.3%, but this -- but it is around the 85.5% kind of range, right? The country that we will...
One thing for Japan, I think it's also because of the acquisitions that we have made during these recent periods. Japan started off with mostly SUAs, which will have a higher margin, but recent acquisition like the [indiscernible] Hiroshima and all this. Basically, they are MTBs, multi-tenant buildings that will be of a lower margin. So the mix in terms of MTB SUAs have actually changed a bit for Japan itself.
Any other country that you would like to ask. I think if you look at...
Korea and Australia as well.
Yes, Australia was 95% and then after that, it dropped to about 92%. And that's because there is a land tax adjustment that we had to put in for last quarter, right? Then the other one is Korea...
That's for MTB conversion.
87.5% to 84%. So that is again us taking off the SUA converting it to MTBs.
Sorry, for the land tax, it will be permanent [indiscernible]?
I think it will be ongoing adjustment, because there is additional land tax that we now have to pay. So overall, our NPI margin, like let's talk about first Q of '22, we are at 87%. And then this last quarter was about 86.3%. So that's a movement of $0.7 million, of which largely due to SUA to MTB conversions, as well as on the unexpected land tax that were imposed. Of course, then there is the -- I mean, China being one of them dropping from 78.8% to 76.7%.
I think you probably have all these numbers like what I have. So moving ahead, I think the question you asked is, so what kind of margins are we looking at? I think we're looking at between 86% kind of margin level because, as we all know, there's inflation. So our property management, our security, our cleaning services, we would expect to see some slight incremental impact, but something around 86%-plus margin, I think we are confident on maintaining that. So I'm not overly concerned on the margin side.
Okay. We have quite a lot of questions from the floor from the -- I mean, the webcast audience, but they've already largely been covered, because they're all relating to China. Maybe just one question from Helen Wang, for the comments on e-commerce channels to return space, is it across the board in the portfolio or just in China alone? And rental reversion outlook by country, if possible?
In places like, for example, in Hong Kong, one of the largest this e-commerce players, Hong Kong TV is in fact one of our tenants in Tsing Yi, and they've taken extra space over the last one year. And demand in Hong Kong for e-commerce still remains strong. In China, regular, like I mentioned, there are people that are returning space. It's not across the board, I can assure you. It's only those who have over expanded in the past, right, taking out more space than they require.
This way the market is concerned a bit. Like I've said for us, because we have spread across our -- the risk across the e-commerce players and end users and 3PLs. So we -- and we've moved away from SUAs to MTBs strategically and across China in our portfolio. So we paid down this SUA risk just for e-commerce companies. And the people that's returning space at 10%, 20% of space, they are also letting us know early.
I think, Helen, to answer your question another way is, the return of space tend to happen with Chinese e-commerce guys. So if you are talking about like Shopee, that is owned by the Chinese e-commerce guys. So they have also been expanding very aggressively in Southeast Asia, so they are also returning space. So guys like Amazon are very stable. But the -- like our coupon guys in Korea are still very stable.
But is the Chinese e-commerce -- expansion strategies that are now being pulled back. Yes David?
Have you changed your ForEx risk management strategy? Because after years of Singapore appreciation, don't you think at some stage that the other -- currencies might strengthen and you probably don't want to overhedge. How do you balance that?
I think from a governance perspective, we would still want to hedge a certain portion of it. Yes. Maybe now that Sing dollars have appreciated so much against the other currencies, we would probably take a reduction, but it won't be like -- to a really lower bar from a governance perspective.
Just a quick question. I think roughly 5% of your assets are below 20 years, mainly in Singapore. Is there a risk you see there from nonrenewable or your plans for divestments or redevelopment for these assets? Is that something you can share?
The thing about the Singapore assets, right -- was a very low land-- tenant base.
I think for those that are with very low land leases, I think you've been aware, we have been also trying to actually put it to the market. But -- and also in JTC, Singapore contracts is actually very heavily regulated. So with this JTC authority that is actually subject to their approval. So it's actually not so easy to find a suitable buyer. And typically, even if so, it's going to be quite long drawn, with a series of consultation, because they would evaluate the business plan of the buyer.
What is the valuer contribution to the economy, and what is the multiplier effect, like in terms of the labor wages, what is the workforce that's going to be incremental to the Singapore economy?So though we are still trying, but it is not easy.
I think, Vijay, your question is more on the short land lease that's remaining, right?
Yes. What are the chances of the renewal or...
So JTC, I think Jean, you can add in, as they will -- so if we have a remaining land lease of, let's say, 10 years, they will not entertain us for any extension. It's more like within five years.
And even then, we have to find a very suitable qualified buyers that they will assess. So for extension -- sorry, for the assets with short land lease, you will have to look at the business plans of the tenants, whether they qualify for a further extension of the land lease in the current asset. Yes?
So I think how we monitor, is we look at the overall URA development plan. So for example, Boon Lay, we have a property 30 Boon Lay Way, that we actually wanted to redevelop, with a potential to ramp up. But that whole area has been rezoned as commercial. So that means the probability -- I guess now it's only, I think, 13 years left. So for probability of it being extended as industrial is gone.
So I think we look at that. But they have places like our 5B21 our [indiscernible] area, which is still zoned as industrial and logistics. So those -- the probability of us getting a land extension, as long as we are able to demonstrate the leasing track record our existing tenants, the value add that they bring to the property, then getting the land extension, I think we are very, very optimistic. So we balance it on both. So the Boon Lay one, we tried, but that problem is the whole zone is going to be commercial. Are there any more questions from those who have dialed in? Okay.
But if not, then thank you all for dialing in, and thank you, especially those who made the effort to come and see us like David, Cheryl, Brendan, Derek, I forgot your name Amanda, Joel, yes, Vijay, I know, and Derek I know. Yes. And of course, thank you all for making the effort to come. Sorry, I would like -- germs and infected. So I'll shake your hand the next time.
Thank you very much. Thanks.