Mapletree Industrial Trust

SGX:ME8U

Earnings Call Transcript 2021-Q2

[Hwei Leng Tan, executive]

Hi. Good morning, everyone. Thanks for joining us for Mapletree's Industrial Trust Second Quarter and First Half Financial Year 2021 Results. We have on site the management team of MIT with Kuo Wei, our CEO; Lily, our CFO; Serene, Head of Asset; and also Khim, the Head of Marketing. And joining us on -- virtually is also Peter and also Paul. This morning, we are doing a virtual teleconference. So we have both the analysts that are dialed-in and investors that can access this briefing via our online webcast. Without further ado, I'll pass on the mic to Kuo Wei, who will give a short update on this quarter's results.

[Kuo Wei Tham, executive]

Yes. She seems very relieved when she gets to pass it to me. So okay, the presentation pack we released last evening. As usual, we have the 5 segments which we normally cover.

So let's start on Page 5 on the key highlights. So the growth in the revenue we have outlined, driven by the 14 data centers which we have completed 1st September. So there's some loss of revenue from the redevelopment project. As we have already outlined last year when we started that project, we have a 1-year [ declarement ] period. So the completion of the [ declarement ] was, I think, on the 9th of July. And with completion of [ declarement ] and the project being moved to a project under development status, we have taken that asset out of our denominator in a lot of our statistics and, of course, revenue becomes 0. So in aggregate, from a distributable income perspective, we have seen an increase 14.8% to $72.9 million for the second quarter, for some of this comes from the additional contribution from our 60% stake for 1 month, 1st September to 30th of September. And part of the increase is from our acquisitions of the other data center assets in the beginning of this year and end of last year. DPU, you can see a 1% dip year-on-year basis, $0.0310 for second quarter. As you might have read in some of the details we have outlined, we did not withhold any distributions for this quarter, but I think the weaker DPU is partly attributed to the additional rebates that we have given to our tenants, especially the small-, medium-sized enterprises this quarter, despite having a slightly higher revenue contribution. And of course, we have a much larger unit base for this quarter after the equity fund raise exercise that we did in June. The portfolio occupancy has increased about 1.2 percentage point, 91.1% to 92.3% on a quarter-to-quarter basis for the second quarter. This is, of course, the mathematical representation. The effect is driven by -- or this increase is driven by removing Kolam Ayer 2 Cluster from the denominator because that cluster has been seeing gradually reduced occupancy. So now with that being removed, the average naturally goes up, but we are seeing a fairly stable occupancy levels across the other segments, nonetheless. And of course, since the last quarter, when we outlined the Data Centers segment as a separate property segment, we have since completed the acquisition of a 60% interest, and that has indirectly increased our exposure to this very exciting property class. And we have also, in the middle of September, announced the acquisition of a data center in Virginia. So now we are going through the acquisition process and, hopefully, we will be able to provide a bit more detail once we get a few of these transaction mechanics out of the way. So the value of that is between $200 million and $270 million, so depending on, finally, one we arrived at commercially. On the capital management side, the leverage ratio remains fairly healthy at 38.1% aggregate leverage level. And we have, of course, a good and strong balance sheet, more than $400 million worth of committed facilities. I think moving on to Page 6, that, in a nutshell, is our report card for the trust ever since we got listed. On the right, of course, the most recent set of figures. And you can see the $72.9 million distributable income for second quarter and the uptick in terms of DPU $0.0310 on the right. That is, of course, partly because we did not withhold any of the distribution this quarter, unlike fourth quarter financial year '19/'20 and first quarter financial year 2021. If we had not withheld the amounts, actually, the distribution for these 2 quarters would have been higher even compared to this quarter. We will share some of these details in the financial numbers in the subsequent slides. Move on. Okay. Financial performance. What do you see -- they can see the slide, right? Yes. Okay. I see a thumbs up. So on Slide 8, we have this comparison for second quarter year-on-year basis. Revenue increased, I think, due to the data center projects that we have taken on. And there is an effect of the consolidation of the data center portfolio that we completed on 1st September. Net property income as a result of that had gone up about 2 percentage points from about $80 million to $81.6 million. The share of joint ventures, of course, you see a kind of combination of effects because in the previous year, we do not have the second data center portfolio in the set of figures. That was the joint venture that we did for the Digital Realty Trust data center portfolio. So as a result, you see this very large increase, more than 100%, from $4.45 million to $12.3 million. If you bringing the numbers down, after taking all this into effect, amount available for distribution, 14.8% increase from $63.5 million to $72.9 million. So at a DPU level, as I've outlined earlier, we see a 1% reduction, $0.0313 to $$0.0310 on a like-for-like basis. This quarter, of course, there have not been any amounts withheld. So from the same-store basis, we have given a little bit more rent rebates to our tenants in Singapore. And with a larger unit base, you see a slight decrease in the DPU. Okay. Let's move one. First half year-on-year basis, similar kind of profile, but of course, the growth rate not as high because you account for 6 months and you find this rather more muted for the 1-month impact of the consolidation of the 60% interest. So revenue increased 0.5 percentage point to $201.5 million to $202.5 million. NPI level, 1.5% increase from $157.9 million to $160.3 million. So you can see a slightly lower increase in the amount available for distribution, 13.2% from $126.7 million to $143.4 million. The DPU level, you can see a reduction of 4.2% mainly because of the effect of us withholding $0.0032 for the first quarter of this financial year. So in aggregate, you're seeing that -- absence of that $0.0032 in the distribution that we have declared. So the reduction is 4.2% from $.0623 to $0.0597 for the first half. On a quarter-to-quarter basis, of course, you can see more apparently the effect of the contributions from the new so-called -- contributions rather from the 60% stake in the data center portfolio, 4.3% increase. NPI level, a similar kind of profile because of that effect, 3.8% from $78.7 million to $81.6 million. But on the amount available for distribution level, you are seeing a similar increase, 3.3%, from $70.6 million to $72.9 million.

On the DPU level, this is, of course, not as a meaningful kind of comparison. You see an 8% increase mainly because we withheld $0.0032 in the previous quarter. If we had not withheld that amount, which was incidentally equivalent to about 10% of our distributable -- our DPU for that quarter, it would have been $0.0319. And compare that with $0.0310, you'd be at minus 2.8%. So that is essentially the effect of us accommodating some of these rent rebates and assistance. Okay. Moving on to our financial position that's on Slide 11. Partly because of a transaction that we did in -- completed in the quarter, the NAV per unit has shifted up 4.3%, now at $1.69 for 30th September.

Okay. Moving on. On the balance sheet side, I think there's some consolidation effect. We outlined a set of numbers on the total debt. So it has moved up from $1.55 billion to $2.0 billion. And the weighted average tenor of debt has shifted down from 3.9 years to 3.2 years mainly because the debts that we have for the U.S. portfolio onshore relatively shorter. So mathematically, you see that figure averaging down. But the aggregate leverage ratio remains fairly healthy at 38.1%. It has, in fact, dropped 0.7 percentage point from previous quarter. So this is our debt maturity profile that's on Slide 13. We have nothing due in financial year 2021. So we'll be keeping an eye on what to do with the amounts that we need to refinance in the subsequent 2 financial years. You see slightly taller bars. If you compare this with our previous expiry profile, because this comes from the consolidation of the U.S. debt, and this U.S. debt actually on a slightly higher interest rate basis because we took them on about 2 to 3 years back. So we think there's some room for us to gradually average down some of the interest rates for these debts that are due. Okay. And from the risk management part, we outlined some of these perimeters on Slide 14. Most of our debts have been fixed. 93.8% is higher compared to the previous quarter because a lot of our U.S. debt has already been hedged. And weighted average hedge tenor is also 3.2 years, similar to our weighted average debt tenor, and this is essentially an effect of the consolidation of the U.S. debt. So all-in cost still remains fairly low at 2.7%; interest coverage ratio, 7x; and for the trailing 12 months, 7.3x. And you can see the bullet point at the bottom, slightly more than half of our income stream for the coming quarter has already been hedged. So we are doing that progressively to make sure our income is stable. Okay. Moving on to the portfolio update. With the completion of the acquisition [Audio Gap] on the left close to 39% data centers, and out of which North America, 32%; Singapore, of course, the balance, 6.5%. The High-Tech Buildings has come down mainly because we have carved out the Data Centers from the High-Tech Buildings property segment for more granular information on the portfolio to be given. So high-tech now is 21%. And in terms of country split, it is roughly a 1/3, 2/3 kind of split; Singapore, about 67.8%, and the balance 32% North America, mainly U.S.

Okay. And on slide -- I can't see the number, 17, because that cursor was on the page number. Anyway. This is the portfolio update. The numbers are really quite static in terms of the number of assets. But this quarter, we had a reduction of 3 properties in Singapore portfolio because that's Kolam Ayer 2, which we have taken out from this set of figures. It is a project under development. So the 3 buildings are almost fully demolished, so they are no longer accounted for. So instead of 87, now we have 84 properties. So occupancy level, you would have seen the increase for the Singapore portfolio, 91.5% from 90.2%. And that one is a mathematical effect. And let me explain. Flatted Factories, essentially, you see an increase. If you look at the details at the bottom, 85.4% to 88.1%, and that is essentially due to the Kolam Ayer 2 Cluster effect. If we had removed that cluster from this set of data points, previous quarter, instead of 85.4%, it would be 88.8%; and this quarter, instead of 88.1%, it would be 88.4%. So that, on a like-for-like basis, for the rest of the Flatted Factories, you would have seen a reduction in the occupancy level. So this one is a magic show when we remove Kolam Ayer 2 from the calculations, but I think the takeaway is that there's still some pressure in the multi-tenanted space. For the U.S. portfolio, you would have seen a corresponding reduction as well. Key reason is because the data center portfolio, which we recently completed, where we took on the balance 60%, the occupancy was 97.4% than when we took over. So when we take larger stake or when we consolidate 100%, mathematically, that average comes down. Okay. Let's move on. This is the lease expiry profile. You can see the split up there. Singapore portfolio because of a multi-tenanted kind of component in our portfolio, 3.4 years weighted average; North American portfolio, 6.6. So in aggregate, you see a 4.2 year kind of weighted average figure. For the balance of this financial year, we don't think there's anything remarkable to talk about, just 6.5% of the leases that are due for renewal. And most of our leases are due. Even see the tall bar on the right, 38.2% that are due financial year, '24, '25 and beyond, 5 years -- 4, 5 years from now. So it will be quite some time before we need to be worried about this, but we are already working on engaging some of the larger tenants on maybe forward renewals as far as possible. So on Page 19, we have our top 10 tenants. As we grow our data center part of our portfolio, you can see higher representation in this chart. We have just 2 colors down here, High-Tech Buildings and Data Centers; High-Tech Buildings, represented by the yellow-orange bars. So the #1 tenant, 7.5%. HP build-to-suit tenant has gradually come down from 10%. Now it's about 7.5% as we increase the size of our portfolio. Other than Sivantos, which is at 18 Tai Seng, the rest are data center tenants. And the largest -- the second largest now is AT&T in terms of representation of top 10, 6.6% mainly because of the consolidation of the interest in 60%. So this is, on Slide 20, our trade sector mix. For the first time, I was reminded yesterday, we have a large representation in the telecoms segment, which essentially is where we account for our data center tenants. So at the bottom, you can see 28% infocomm; telecoms, 22%. In the previous, I think, 3, 4 years, the bigger representation had always been in manufacturing and precision engineering, machinery and, of course, a big part accounted for by Hewlett-Packard then.

So on Slide 21, we have the Singapore portfolio performance figures. While our occupancy had gone up mathematically, you can see on the right, 90.2% to 91.5%, partly because of the mathematical effect of us taking out Kolam Ayer 2, rents have come down, mainly because of the rebates that we have given and also the rent revisions for some of the leases. So from $2.08 in the previous quarter to $2.03 in the second quarter. If you look at the aggregate numbers, we are back to around the second quarter financial year '19, '20 kind of rent level on an average basis. And on Page 22, we have our rent revisions chart. We think the performance is relatively stable, but please do not -- don't get too excited about some of these large increases, like, High-Tech Buildings, you see a $3.01 figure for new leases. That's mainly because of the retail-related leases we have at 18 Tai Seng. So on a relative basis, you see higher rents down there. But that aside, the renewals at still a fairly stable kind of level before, after, no change, $2.29, $2.29 for the High-Tech space. Business Park Buildings, you can see a slightly higher positive rent revision. We would also caution that we shouldn't read too much into this increase. Key reason is because we had a tenant that was on a 5-year lease, I think, that was on a slightly lower rent, fairly significant amount of space, relative basis. So with renewal, we have managed to adjust the rents back up a little. So it is very helpful, but we don't think it is a clear indication that we are seeing an uptick -- a strong uptick in this case for Business Park rents. I think we are looking at some good level of stability, but the key thing to note is renewal rents and the new rents are a shade above our passing rents, which is represented by the purple diamond, and I think that's encouraging. So the weaker part remains Flatted Factories. You can see in the chart in the middle. The new rents, I think, are relatively lower, $1.55 compared to our renewal rent $1.72, and there's still negative reversion of slightly below 2% for some of the leases that we deal with. So we continue to see more pressure at our small- and medium-sized enterprises. And this gets manifested in some of these rent levels that we are seeing. Similar observation for Stack-up/Ramp-up facilities, where we do have many smaller-size tenants down there as well. So you can see the minus $0.05 and minus $0.07 relative to the original rents for renewal rents and new rents coming. So we continue to experience some pressure in this space. Okay. Let's move on. The tenant retention level, I think, relatively healthy. Most of our tenants stay with us long term. For this quarter, the figure is 64.8% more than 4 years. But the more interesting chart on the right, the retention level, 77%, is still relatively healthy. But I think part of the reason is because, unless necessary, the tenants probably would not want to take on capital expenditure shift of premises, and especially now when they may be able to get some rent assistance or relief either from landlords or from the government. So they tend not to make big decisions on moving, and some of them would just bear with remaining in the existing premises. So we won't know whether this kind of behavior will continue, but this is still a fairly healthy retention rate as far as we can see. And looking at the other parts of our portfolio, what we have outlined on Slide 25, we continue to look at rebalancing the portfolio. On the left, I think, of course, is the balance 60% that was done. So that has increased our exposure for the North America/U.S. part, and on the right, I think there's the most recent acquisition that we have announced. So this one pending completion around first quarter of '20/'21 calendar quarter. So we should be able to move our AUM closer to $7 billion, and that would also increase our data center as well as non-Singapore exposure to, say, about 34%, 35%. So this is helpful in rebalancing our portfolio for a more resilient and stable kind of performance. Okay. Moving on to the next slide, on Page 26, the divestment of 26A Ayer Rajah Crescent. This one is still on track. We are still waiting for the paperwork to be done by JTC. As far as we are concerned, it's just going through the process, and we think we'll probably be able to get all these completed towards December of this year. And the next, of course, is our redevelopment project, Kolam Ayer 2. As I mentioned earlier, we have almost completed taking down the existing structures. So we are about to start on the construction of the 3 buildings in the new high-tech precinct. So now we are going through the tender submissions from the construction companies. And we are already seeing some increase in the construction costs mainly because of the COVID-19 pandemic, additional so-called safe distancing measures, additional PPE required and additional kind of constraints on working on site in construction sites. So all these we anticipate to have impact on the construction costs. And we are now doing our final evaluation. But certainly, that would have a material impact on the final project time of value, and we think it is still meaningful for us to continue because despite this cost increase, it's still a meaningful redevelopment project that allows us to increase our plot ratio by another 1 time. And the leasing demand, I think, continues to be encouraging, especially for some of the high-tech users in this space. So we will probably commence the works in this quarter once we get the construction kind of bits evaluated and finally decide on the approach and the scheme to go forward. So finally, I think we talk about the outlook. In Singapore, I think it's still challenging as well. We have outlined economy kind of declined 7% for the quarter. Of course, you compare that with the previous quarter, it is less -- negative. It is still something to be concerned about. Business sentiment actually has improved for the fourth quarter. So hopefully, the environment continues to normalize a little and that certainly will be helpful for our portfolio. For our Singapore portfolio, we, of course, continue to see the pressure being faced by our smaller tenants, and a lot of the businesses are affected. And the rent reliefs that we have given so far, first quarter and second quarter in aggregate, $7.1 million. We have earlier estimated that we need roughly $20 million. And that's one of the reasons why we have done the withholding of the distributions in the previous 2 quarters. So we think the amount that we require should be in the same level of $20 million that we have anticipated earlier. So we think there's no need to withhold more. But certainly, we would have more of this kind of relief being crystallized in the third quarter, maybe some spilling over to fourth quarter financial -- this financial year because some of these reliefs are still pending confirmation from the government agencies. And arrears as at 30th September, I think, still not alarming. We are talking about 1.4% of previous 12 months' gross revenue. Certainly, it's higher than what we have been seeing traditionally, but as -- in view of the pandemic situation and condition of our market, this is still a very -- fairly low level. And we think it is a manageable level for us. Many of our tenants, I think, working with us fairly closely on the payments and there are some that have asked for rent deferment or restructuring, but not that many. Still a fairly manageable number, less than 100 tenants, have asked for some of this rent deferment or restructuring. So as a result of that, we think the situation is more or less under control. So we think there's no need for us to continue withholding income for this quarter. So I think moving on to the U.S. or North American portfolio, it is very resilient property segment. So there continues to be very strong demand for data center space. And partly driven by this pandemic as well, there's an increase in demand for off-site working, then the digital connectivity becomes more important. There's a lot more e-commerce usage as well. So that has been a very good driver for data center kind of needs. So we think this remains resilient. So in summary, that's our, I think, final chart. We certainly strive to keep the portfolio diversified, and we want to keep it resilient as well. And we have very good financial flexibility, and we certainly continue to look at the growth through acquisitions and developments like what we have always been doing. So I think that sums up what we have for the second quarter. I will be happy to take questions.

[Hwei Leng Tan, executive]

[Operator Instructions] Is there a question from an analyst to start the ball rolling?

[Mervin Song, analyst]

Melissa, this is Mervin from JPMorgan. Maybe -- I think, Kuo Wei touched on some of the rental trends, but maybe some color on your expectations going forward. I presume it's going to be rather challenging still, but any green shoots you want to highlight and potential stabilization in terms of timing?

[Kuo Wei Tham, executive]

You are talking about the outlook for the rents in the coming quarters?

[Mervin Song, analyst]

Yes. New few quarters, yes.

[Kuo Wei Tham, executive]

So yes, I think it's not easy to read, but the figures that we are seeing in the High-Tech space and the Business Park space is certainly a bit more in encouraging. These 2 property segments would probably be the first that would see that reversal in terms of the negative rent pressures. My read is that we will get to some level of stability probably middle of 2021, so around May, June time because it is still difficult for us to say we are [indiscernible] even for some of the stronger assets. A lot of our tenants are still cautious and may see certain segments that are -- industry segments that are seeing a return of demand, return of kind of business activities. A lot of them are still taking a wait-and-see approach. So in terms of rent levels, we'll probably be seeing a flat kind of profile. If we are hoping to see any meaningful positive reversions, it can only be second half calendar year 2021 and beyond. That is mainly for the stronger segments like High-Tech space and BP. BP, maybe we can see some spillover effect from the commercial space in some of the commercial office users looking for slightly more attractively priced alternatives. So that might spur some demand. But our worry remains on Flatted Factories and Stack-up/Ramp-up facility, which are all multi-tenanted kind of facilities. So we think the negative revisions on the rent is going to continue on at least till, say, the second half of 2021. Maybe by, say, September, October next year, which is about a year from now, we'll probably see that level of -- so that weakness is going to continue on for some time, especially when we have a lot of small-, medium-sized enterprises in this space. And some of these companies are being supported by a lot of these government measures, and that cannot go on indefinitely. So if the business environment doesn't improve meaningfully by next year, some of these companies can -- may really consider downsizing significantly or growing out of business. So that would have an impact on our rents and occupancy levels for the multi-tenanted space.

[Derek Tan, analyst]

This is Derek from DBS. Can you hear me?

[Kuo Wei Tham, executive]

Yes, Derek.

[Derek Tan, analyst]

Kuo, just a few questions for me. Just to follow up on what Mervin has asked. I'm looking at your occupancies. I'm just curious whether -- do you think that your SMEs are supported by liquidity provided by the government in the first half of the year? Just curious whether should we expect some form of weakness moving to the second half?

[Kuo Wei Tham, executive]

Yes, that is a worry, as I think you have mentioned, the government support is actually quite important and is critical for the survival of some of these companies. So the rent rebates and reliefs have been helpful, but not directly from a real estate kind of landmark perspective, but the support on the -- job support scheme of government offsetting some of the wage costs and also the moratoriums from the financial institutions and the banks have been helpful, and that has helped the companies, especially the smaller ones in managing the liquidity and cash flow. So as you might have seen in a couple of these speeches and government kind of statements, this kind of assistance cannot go on forever for all industries. So we see that support probably being kind of a [ win ] of -- towards end of this year and some of the tenants may find that they would not be able to continue meaningfully without this kind of support in place. So we think there's a risk of us seeing lower occupancies and lower rent levels, especially for the Flatted Factories space.

[Derek Tan, analyst]

Okay. So it doesn't mean that your very big guidance of $20 million is likely to be utilized, given that you only use about $7 million circa?

[Kuo Wei Tham, executive]

Yes. The thing is the $20 million, of course, we made some gauge earlier on around the same time when the government had the fortitude budget or supplementary budget, and the rent relief is a fairly well-defined framework now. Out of our 87 properties -- of course, 87 because we included the 3 Kolam Ayer 2 assets. Now we have 84 plus 3, 87. Out of our 87 properties, we have only received the notifications on the relief details and quantum for 37 of them. 5 are not eligible, either single tenant or different MNCs. So we have a balance of 45 multi-tenanted properties that are done -- that are assessed by IRAS for property tax on a global basis. So the kind of relief details are still pending the confirmation from IRAS, but we are very certain based on all the indications that we have received for the 37 buildings that are already processed, most of the smaller-sized companies will get some form of relief. And we think we'll probably utilize most of that $20 million that is anticipated. And if you look at the amounts that we have set aside, $6.6 million from fourth quarter, $7.1 million in the first quarter, $13.7 million. And of course, in the first 2 quarters of this financial year, we have already used $7.1 million. So we think the balance $6 million or so will probably be utilized, and some of the effect would be manifested in slightly lower kind of revenue collected for either third quarter or fourth quarter. So that kind of balancing kind of outcome will probably be seen in the third or fourth quarter. So at the end of the day, we are looking at a fairly even kind of distribution profile for the rest of the financial year without us needing to set aside more income.

[Derek Tan, analyst]

Okay. Sounds good. Sorry, last question for me. I have noticed that -- you mentioned earlier in the call that your interest cost is expected to drop a little bit. And I also noticed that your hedge ratio is quite high. Just curious whether are you looking to go towards more floating when the hedges come due?

[Kuo Wei Tham, executive]

Well, in short, yes, I think when the debts are due in the next year or 2, we will probably look at refinancing [ several of ] them and then try to nudge the interest rate down a little. As you know, the interest rate environment is fairly conducive. But I think we want to be able to do it in a prudent manner because some of these debts and some of the interest rate hedges are already in place. If we unwind is just -- wind them now is just the case of us crystallizing the differential and the loss. So we will look at the expiration in the next 1, 2 years and then of course, try to take advantage of the current low interest rate environment to adjust the rent -- rather the interest rate down. And that, of course, would have an impact on our profile, whether it's more fixed or more floating. But I think in all likelihood, we'll probably still have a reasonably high level of fixed debt because of the nature of our portfolio, but there's a good likelihood of us moderating that ratio down a little.

[Brandon Lee, analyst]

Brandon here. Yes. Can I just ask a couple of questions just on the Kolam Ayer 2, right? Can you give us a bit more details on how much construction costs you see rising? And what's the impact on your initially guided year on call?

[Kuo Wei Tham, executive]

I see a finger sign pointed -- I mean -- so we are putting a big question mark down there. So we, of course, are running a tender now, and it is probably better not -- for me not to outline that range because I don't want some of these contractors who are bidding for the job to anticipate and manage the negotiations. But it's not a small increase. If it is a $3 million, $5 million increase, I think I would tell you upfront. It is not small because the contractors across the board face with these additional kind of measures they have to bear, and some of these costs are very real. So we were trying our best to find ways to structure the construction contract and then manage the impact. But as what I've outlined earlier, we think this is still a meaningful project for us to take on. And the additional GFA that we are creating is very significant, especially when we are not needing to pay for the additional land, so to speak, for -- or additional GFA that we are able to utilize. So the value creation is very significant. So we think the project is able to accommodate the construction cost increase. So our focus now is just to try to mitigate and manage the quantum of the increase. But certainly, once we have those contracts locked away, we will outline the revised set of figures. But right now, as I said, since we are in very close negotiations and discussions with some of the bidders, I think I'll rather not posture any kind of range yet.

[Brandon Lee, analyst]

Okay. Does it actually -- I mean [indiscernible] rising construction costs, right? Do we kind of change our decision on a couple of the AEIs that, I think, you were previously guiding for, like, the one at Kaki Bukit?

[Kuo Wei Tham, executive]

Of course, we would have to take this into consideration. The Kaki Bukit one is a fairly significant redevelopment if we would embark on it, about double the size of the Kolam Ayer 2 one. So it's not something that we would -- that we have planned, anyway, to start immediately. And we want to look at the leasing momentum and the level of demand and where the demand is coming from for the new space that we are creating now. So practically, even -- with or without the COVID backdrop, that project will come on early as maybe 2 years from now when we are near completion of Kolam Ayer 2 or when we have greater clarity on the level of commitment. And also, we have to keep our eye on the impact of the portfolio when we take down operating clusters that's contributing income effectively. Kolam Ayer -- rather the Kaki Bukit cluster is larger, quite a lot larger than the Kolam Ayer 2 cluster. So the revenue impact is significant, and you have to keep an eye on the development headroom as well. Now that our portfolio size is a little larger, we are a little less constrained along that front. This is something that we have given a lot on so that we don't use up the available headroom. So we would certainly be more careful and will be a bit more conservative in our assessment, especially on the construction costs and time line impact. For sure, this will be the new norm, unless the world convincingly shakes the disease off. But I think we might have a good chance of seeing -- look at it practically. We only start detailed planning and execution probably 2 years from now.

So if 2 years from now, you and I are still talking of COVID, it must be really a dire situation. Then of course, if economics still work, say, if we can still find certain segments of the industries that would -- one well-spec'ed facilities in those few select locations, economically, it may still be meaningful for us to push ahead with the project, but we will be sensitive -- more sensitive to the time frame and the costs in the overall assessment, say, 2 years from now.

[Donald Chua, analyst]

This is Donald from BofA. A question on the deferment. You mentioned that there were 100 tenants so far. What's the trend like for the deferments, say, for the first quarter versus second quarter of the 100? Was there an increase? Or has it started to come off?

[Kuo Wei Tham, executive]

The number is about the same. In terms of the number of tenants asking for deferment, I think the first quarter, we talked about 105, and this quarter was 94.

[Donald Chua, analyst]

Okay. So in total -- this is in total or per quarter?

[Kuo Wei Tham, executive]

Any one time. So we have -- we have slightly fewer that have asked for kind of deferment, but I think the kind of number difference is probably not so significant. So for ease of reference, about 100 tenants, any onetime that have asked for some form of deferment.

[Donald Chua, analyst]

Okay. And this is as a percentage of revenue so far. Any guidance on it?

[Hwei Leng Tan, executive]

Donald, it's about 6.9% of monthly NPI for the Singapore portfolio.

[Donald Chua, analyst]

6.9% of monthly NPI?

[Hwei Leng Tan, executive]

Yes.

[Donald Chua, analyst]

Okay. But -- and how many of these is hiding under the COVID bill as opposed to unofficial...

[Kuo Wei Tham, executive]

We will not say that they are hiding. They are just -- some of them availing themselves to this -- about 1/3.

[Hwei Leng Tan, executive]

Yes, about 1/3 -- yes, equivalent of about just 290 of monthly rent or about 1.1% of NPI.

[Donald Chua, analyst]

1.1% of NPI. Okay. One very quick follow-up...

[Hwei Leng Tan, executive]

$290,000, circa.

[Donald Chua, analyst]

Very quick follow-up on rebates question earlier. I sort of missed it. How many -- how much is being -- was released this quarter? Was it -- in total for the half, is it $13.7 million? Or what was the number?

[Kuo Wei Tham, executive]

Okay. In total, for the first 2 quarters, we have released $7.1 million.

[Donald Chua, analyst]

Okay. And so there is -- and you're expecting -- you're providing for $20 million.

[Kuo Wei Tham, executive]

Yes. We're looking at around $20 million. So we think there will be more than $7 million in -- certainly more than that in third quarter and fourth quarter financial year. As I've outlined earlier, some of the notices that were already processed by IRAS are for the 37 buildings, and some of these have, of course, MNCs and larger companies, who are not eligible for the additional relief, and that's why the kind of crystallization of relief is a little lower in the second quarter. But third quarter, we anticipate that most of the multi-tenanted buildings will be processed and assessed by IRAS and most will get crystallized this quarter. So we take this as -- or rather the third quarter will probably be the quarter where we would release some of the amounts with help to balance off the impact of the rent reliefs that we would need to give. So we will calibrate that and see. But generally, we would expect everything to get evened out for the financial year. Most would be in the third quarter. There'll probably be some spillover or residual kind of rebates going into the fourth quarter of the financial year, but that should be all.

[Donald Chua, analyst]

Okay. So assuming that you released the entire $20 million, so the remaining $13 million will be spread in the next 2 quarters in the fiscal year?

[Kuo Wei Tham, executive]

Yes. That is how we see it. And of course, we would use the amount that we have retained earlier to then try to offset the effect over the third quarter and the fourth quarter, depending on finally how much gets confirmed by IRAS within that quarter.

[David Lum, analyst]

It's David Lum from Daiwa.

[Kuo Wei Tham, executive]

Yes, please go ahead.

[David Lum, analyst]

The Ayer Rajah Crescent divestment, is it necessary to distribute the $19 million in profits over 3 years? Shouldn't you just reinvest everything into the Virginia data center?

[Kuo Wei Tham, executive]

Yes. It's something that we can do, but at the end of the day, we would look at the effect on the portfolio and where we get additional funding from. So -- yes. So certainly, a bigger part of the proceeds, [ I was reminded, ] for this one was $125 million. A bigger part of our proceeds would be recycled. This $19 million is essentially just the profits that we are distributing. So there's no kind of standard guide on this, but I think our original intent then was to, of course, distribute the profits, especially when this is a fairly meaningful quantum for the unitholders.

[David Lum, analyst]

Okay. Got it. And the Virginia data center, can you provide some guidance in terms of the yield that you're going to acquire?

[Kuo Wei Tham, executive]

Not at this stage because the vendor is extremely careful about this -- the confidential information, and we will want to lock away all the commercial and financial perimeters first before we outline anything. This, unfortunately, is the nature of some of this type of transaction. So in terms of, I think, profile, quite similar to what you will normally expect for data centers with this quality of tenants and then release in place, please do bear with us, we, of course, would very much like to give you a little more, but the counter-party is a little sensitive about the information being released way ahead of time. So we will probably be able to provide a little bit more details in the subsequent engagements or conversations.

[Wai-Fai Kok, analyst]

It's Wai-Fai from UBS. Can I ask 2 question?

[Kuo Wei Tham, executive]

Yes.

[Wai-Fai Kok, analyst]

Just to follow up on your comments on rental outlook. For Flatted Factories, you mentioned negative reversion likely until September next year. May I know what is the pace you're expecting? I think previously, you guided around 2% to 3% negative reversion. Has that changed?

[Kuo Wei Tham, executive]

The 2% to 3%, I think when we look at the overall kind of portfolio, on a lease-by-lease basis, I think probably minus 5% is the kind of range -- around minus 5% level is what we anticipate.

[Wai-Fai Kok, analyst]

For Flatted Factories?

[Kuo Wei Tham, executive]

Yes, for Flatted Factories.

[Wai-Fai Kok, analyst]

Okay. Secondly, on your Ayer Rajah divestment, are you able to share what drove Equinix to exercise their option? And so do you have any other buildings with such option?

[Kuo Wei Tham, executive]

Okay. The second question is very easy to answer. No. So that is the only asset that we have with this kind of option. So we certainly try not to embed this kind of options in because we want our portfolio to give us stability. We do not want the portfolio size to shrink and expand erratically over time, especially when this kind of structure is in the form of an option, which may not be something that we have control over in terms of the time line and exercise kind of flexibility. So from what we understand, Equinix had a kind of balanced approach in their own portfolio management. We want to have ownership in some of the key notes or key hubs, and it's also prepared to lease space in other premises. So we do have Equinix as a tenant even in Singapore at 7 Tai Seng. We did that upgrading project for the entire building for Equinix. It's also in our facility in the U.S. at 180 Peachtree.

So it has kind of a hybrid model, [ need not overall ], and it is prepared to lease even in some of the key data center locations as well. So for this case, because it is one of the, say, key connection point for Equinix, that was the reason at that time when we had this project being initiated. It -- 1/3 -- the option to purchase to be built in is a nonnegotiable point than when it was looking for the developers that you book with. So it's the same condition it has put across to all the bidders for this project then. So it was a deal breaker condition then, and we have considered long and hard. And at that time, of course, we were still trying to build up our capability and track record in this space. And we thought, okay, fine, if there's something that we could take on, we have worked out all the financial impact and the economics still, of course, financially meaningful for us at that time when we did the transaction. So that was one of the considerations this Equinix had then and that was our commercial gauge at that time. Of course, we are very careful in this kind of options because, certainly, we resist giving any of these options as far as possible.

[Wai-Fai Kok, analyst]

Yes. Sorry, just one last one. On data centers, have you seen any cap rate compression since you last bought your first U.S. portfolio a few months back?

[Kuo Wei Tham, executive]

Since the first one, certainly. I think the one when we bought it, it was just a shade below 7%, about 6.9%. And I think now if you are looking at equivalent kind of assets, you'll probably be looking 6.5%, 6%; and for hyperscale facilities, probably even lower. And as you might have seen in the transactions being done now, a lot of investors are still putting in a lot of money in this space. So for some of the key markets, like U.S., I think we are talking about pure core and shell. We'll probably be trending below 6% already in terms of cap rate even for simpler kind of assets or portfolio. If we are talking about very established tenants or very strong tenants, in some of these key locations, you may even be pushing at 5% level in terms of cap rates.

[Unknown Analyst]

[indiscernible]. Can you share a bit more about where is new leasing demand in Singapore coming from?

[Kuo Wei Tham, executive]

New leasing demand. I think I was -- okay, I will be hard-pressed to really identify certain bright spots really in the market. I think maybe the description is which one is less weak. So I have Khim with me. She's faced -- she's facing these kind of questions on a daily basis. And then I'll let her give you a bit more color from our perspective in engagement of the prospects from the different industry sectors.

[Siok Chng, executive]

This is Khim. Which one is -- like we always say, which one is actually less weaker because the new demand we don't really see. We see still a little bit more like musical chairs. Then the industry that is still doing okay is still the biomedical companies, the precision engineering and the semiconductor industries. So the -- those that is supporting the hospitality and the retail, like the wholesale trade, those are hard-pressed. So that is some color I can give you. How we're going to attract more people? Seriously, we really have to try to find that niche for our property. I hope that answers your question.

[Unknown Analyst]

If I can follow up, if it's more than musical chairs, how low are you willing to sort of lower rents in order to attract relocation demand?

[Siok Chng, executive]

Okay. I think that is the area that we actually don't want to play in. We don't want to be paying on a price war. So what we are trying to find is, those customers or companies that find a place, which would probably be because of the locations, not so much of the specs, but sometimes it's really the location and then the usage pertaining to that [indiscernible]. So we are trying to carve out this niche instead of going to the price war.

[Unknown Analyst]

Okay. Got it. And my second question is on data center. Can you share how the acquisition landscape like both in U.S. and outside? And should we be expecting more acquisition in this area in the near term?

[Kuo Wei Tham, executive]

If you're talking about acquisitions, I think we would, of course, look at the potential acquisition of the balance, 50% of the sponsor for the portfolio that we acquired from Digital. That one, of course, very much depends on the sponsor's time frame, but it's something that we would work on. Other than that, we are still looking for opportunities in the key market and nothing that we are able to really crystallize at this moment, nothing that is near kind of a mature level where we are able to transform into a workable deal. A lot of these RFPs being done in the market. So we are continuing to look. Nothing yet. In Singapore, it's even more difficult, as some of you might have seen that moratorium being put in place by the government agency. So it's very difficult to get new data center development being approved. So while the demand continues to be very strong in Singapore, the likelihood of us being able to crystallize another build-to-suit in the very near term is quite low because you can't even get the agencies to give the go-ahead. So I think the market may only open up in 2021, probably from mid-2021 and beyond, not immediately.

[Unknown Analyst]

If I can just follow up on what you mentioned about overseas data center assets, right, is it due to a lack of asset up for sale? Or is it due to discipline around price that deals are not coming to you?

[Kuo Wei Tham, executive]

I think the deals are still surfacing once in a while. I will characterize it as a lack of opportunities. I think in terms of availability, may not be as many as what we see in the last 2, 3 years, but there are still transactions being done and opportunities being surfaced every now and then. But I think the bigger challenge for us is actually price, the very sharp cap rates. So we find that some of these transactions will be a bit difficult for us to do and for the deals that are done may not be -- that are done in the market now may not be something that we will be able to price competitively.

[Hwei Leng Tan, executive]

Thank you all for your questions this morning. I think there are some questions that are online as well. Maybe I'll just read out one before we end the session.

From [ Fraser Smith ]. How much of the $7.1 million rental relief was booked in 2Q versus 1Q?

[Kuo Wei Tham, executive]

1Q was $2.5 million, so the balance, of course, about $4.6 million, $4.7 million in the second quarter.

[Hwei Leng Tan, executive]

I think we can end the session. And if there are any follow-on questions, please send that to myself and [ William ]. For the webcast questions, we'll try to get back to you. Drop me an e-mail, I'll contact you. All right. Thank you, everyone. Stay safe.

[Kuo Wei Tham, executive]

Yes, thanks very much for joining us.

[Hwei Leng Tan, executive]

Thank you.

[Unknown Executive]

Thank you. Bye-bye.

[Kuo Wei Tham, executive]

Okay. Thank you. Bye-bye.

[Siok Chng, executive]

Bye.