Mapletree Industrial Trust

SGX:ME8U

Earnings Call Analysis

Company Achieves Growth Amid Headwinds

The company's distribution increased by 3.5% year-over-year to $94 million, with a slight dip in distribution per unit (DPU) to 3.32 cents due to a larger unitholder base from equity fundraising. Operating results remained strong with positive rent revisions across all property segments, averaging 8.8%. Rental rates grew in Singapore and North American portfolios, and average lease term extended to 4.2 years. Management has kept financial health steady, with 80% of borrowings hedged and a healthy leverage ratio at 37.9%. Looking ahead, while the third quarter was challenging, the company is guiding for low single-digit revenue growth.

Overview of MIT's Second Quarter Financial Results FY2024

MIT presented its results for the second quarter of the financial year 2024. The CEO Kuo Wei Tham highlighted a distribution increase of 3.5% from the previous year to $94 million and a 1.2% increase in distribution per unit (DPU) to 3.32 cents. This was linked to an equity fundraise in June for a Japanese asset acquisition, leading to an 8% unit increase from 2.7 to 2.8 billion units.

Operating Performance and Property Portfolio Growth

The company reported positive rental revisions across all property segments, with a notable 8.8% rental revision rate, validating the revenue growth. Rental rates in Singapore and North America saw growth to S$2.19 and US$2.42 respectively. Additionally, the average lease tenure across the portfolio extended from 3.9 to 4.2 years due to a recent transaction, promising more stable future income.

Capital Management and Interest Rate Guidance

MIT maintains a healthy capital management with 80% of its borrowings hedged, and an average debt tenor of 3.7 years. The leverage ratio stands strong at 37.9%. As for the interest rates, CFO Hwei Leng Tan expects them to stay between 3.2% to 3.5% for the rest of the financial year, subject to federal decisions. Future hedges will likely affect costs, anticipating a rise in interest expenses due to the replacement of hedges previously acquired at lower rates in 2020.

Ongoing Negotiations and Future Contributions

The management is actively engaging in negotiations for the renewal of leases for the AT&T facilities, with expectations to reveal more details in the fourth quarter. This ongoing process highlights MIT's efforts to secure tenant agreements and manage lease expirations strategically. The impact on rental income and potential new tenant incentives is being closely monitored to minimize disruptions to cash flows.

Earnings Call Transcript 2024-Q2

[Hwei Leng Tan, executive]

Good morning, everybody. Thank you for joining us for MIT's Second Quarter Financial Results for Financial Year 2024. My name is Melissa from Investor Relations. We have the management team of MIT with us this morning, Kuo Wei, our CEO; live Lily, our CFO; Peter, our Head of Investments; Serene, the Head of Asset Management; and Chng, the Head of Marketing. We have uploaded results presentation last evening, which we'll be using for this discussion. Without further ado, I'll pass it on to call and we'll just go through the key highlights and we'll proceed on to Q&A. Kuo, please?

[Kuo Wei Tham, executive]

Okay. Good morning. I hope you can hear me because we don't get any feedback. I believe this is not so [indiscernible]. We'll run through the key highlights, it's actually a fairly big forward quarter for us. And the questions after that. If you look at the first bullet point, it's actually from the distribution point of view, able to deliver more 3.5% more year-on-year basis for the quarter to $$94 million. DPU perspective, you see our 1.2% 3.32 cents. Key reason is because of the large order base, we remain reverse the series of our equity, the distribution reinvestment plan. We had one equity fundraise exercise that we did June this year for our Japanese asset acquisition. So that increased our unit base of 2.7 billion to 2.8 billion units, 8% increase or essentially have more unitholders, share, slightly larger distribution. So that resulted in the near-term shift in DPU. On the operating front, if you look at our second bullet point, we have registered very, I would say, robust kind of results. Rent revisions, we're happy to say positive for all the property segments. In fact, if we aggregate property rather the rental revisions, we're looking at 8.8%. So that's very encouraging on the revenue side. Of course, that is reflected in the higher rental rates as well. If you look at the Singapore portfolio in the U.S. portfolio growth, getting higher rates, S$2.19 for Singapore and US$2.42 North American portfolio. The portfolio average lease to exploration has also increased from 3.9 years to 4.2 years because of our recently completed transaction. As you can see in the third bullet point, it's finally completed just for the end of the 8th of September. So we would expect contributions to start or to be meaningful from the quarter onwards. And on the capital management front, I think it's relatively stable. 80% of our borrowings are still hedged, tenor 3.7 years. Our leverage ratio see as a fairly healthy 37.9% level. So I think that sums up what we have for the quarter. Maybe I can take questions.

[Hwei Leng Tan, executive]

Thank you, Kuo Wei. [Operator Instructions] The first question would be Derek Tan from DBS.

[Derek Tan, analyst]

Hi, good morning. Melissa, can you hear me?

[Hwei Leng Tan, executive]

Yes.

[Derek Tan, analyst]

Hi, good morning, Kuo Wei. I just 2 quick questions. First one is, could you give us an update on the AT&T leases that is expiring this year? Then my second question will be on the interest rates, right? Maybe you could really give us a sense of where will you expect interest rates to land by the end of this financial year. Yes. Just 2 quick questions. Thanks.

[Kuo Wei Tham, executive]

[indiscernible] Happy to answer a very difficult question. [indiscernible] is crystal polling. Kuo Wei is a bit easy and solving. So on the leasing of the AT&T facilities, we are still engaging the market. So as you would have seen in our highlight in and don't have any leases with the life yet. So for the Mesasset, which is the second largest on -- I think stay closer to reaching suffer being very hard on that. And hopefully, by fourth quarter, the financial year, we're able to share whatever we are able to...

[Hwei Leng Tan, executive]

I think I did – ddi you say you're sorting in and out?

[Kuo Wei Tham, executive]

The reason why sorting is other line, if you remember our brands for Muhammad Ali. But I wouldn't think you acting [indiscernible] anyway, so I will stay put at I am -- so essentially for that particular asset is -- tenancy asset is users reaching some of agreement. And it is a long process, but we are market. That's why I'm saying, I believe, by fourth quarter, we will be able to share the specifics. The other and the lease for the tenancy assets will be expiring -- we still have a bit of entity in time. The one thing to note that even if we are able to secure a lease generally for leases with very long to allocate and free our tenant incentives. So that is a bit off of the year. [indiscernible]

[Derek Tan, analyst]

Okay. Thank you. How about the interest rates? [Technical Difficulty]

[Hwei Leng Tan, executive]

Hi, can you hear me?

[Derek Tan, analyst]

Yeah, I can hear you.

[Hwei Leng Tan, executive]

The system doesn't want me to speak. Okay. So okay, as I was saying, the interest cost for this quarter is reported at 3.2%. It is definitely lower than last quarter, simply because of the addition of the Japan borrowings. So that mathematically kind of bring it down. So if you look at the rest of the year, we don't think that the interest cost will change very significantly. So we probably can look at it to around between the 3.2% to the 3.5% range. Of course, that depends on where the interest rate goes and what the Fed decides to do. I guess too high or not too high that is the question, right? So I think for next -- but I would say for this financial year, we don't have a lot of hedges that will be expiring. So they are actually quite a small percentage and the effect of which is not expected to be that significant. So I think that's not so much an issue. For the next financial year, we do have some close to about $200 million of debt of hedges that will be falling off. So those, I think, if we were to do a replacement, again, the impact shouldn't be too significant. But I think the bigger -- bigger risk that we have here is really the replacement of the hedges that is reported at the contact level, okay? So at the joint venture level, for this financial year, we have about 120 -- sorry, USD 120 million of hedges of the up for renewal. So we have actually done some forward -- some hedges ahead of time on a forward start basis. So I think all in, the impact is not will be quite hit. But I think for this financial year, the impact may not be that significant. Come next financial year, we would expect to see the full effect of such replacement. So we would -- should be expecting the interest cost to go up. And I would -- if you can recall, -- the joint venture was actually acquired back in at 2020. So the interest rate -- general interest rate level at that point of time is relatively low. We are looking at around the 1% level. Today, if we were to go out and hedge. I think the 2, 3 years rate would be on around 4.5%. So we can expect quite a bit of the impact arising from this replacement. I hope that's the question.

[Derek Tan, analyst]

Yes, you gave me a good color on that. All right, thank you very much. That's all for me.

[Hwei Leng Tan, executive]

I think we have just a request to repeat the last part of the AT&T explanation because I think there was news accident. [Technical Difficulty]

[Kuo Wei Tham, executive]

Anyway, what... the last group kind of 3 assets. The second largest, which I mentioned earlier, and I see above 1.8%. -- Gauging the spend very closely. Hopefully, by fourth quarter, we put share specifics on whatever we are able to close up. That the existing visibility and expiring not November. -- We would have still a little bit of rental income in the meantime. But in fact, rent-free for any new tenant would be to be taken in. So from a cash flow perspective, even if we are able to get lease in place, that we have a year or so of 0 cash flow. So that is a practical consideration from the poorer perspective.

[Hwei Leng Tan, executive]

Okay. We can we have the next question from Mervin.

[Mervin Song, analyst]

Yes. Thanks for the opportunity. Congrats on the strong rental revisions. But maybe you can touch on divestment gains, how much do you have left in the kitty because of some of the surprise that you have that case from 2017? And in terms of managing DPU, would you also increase the proportional management fees paid in units going forward to temper any impact from higher borrowing costs? And my second question is related to Slide 13. For FY '25, about $544 million, how much of that is US dollar versus Sin dollar? And do you have a borrowing cost guidance for FY '25? Thanks.

[Kuo Wei Tham, executive]

Yes. Okay. Now first, let me share with you we have no [indiscernible]. So the reason why we have this distribution this way was essentially a sequencing consideration and potentially lever we have for the [ level ], so we try to distribute. Now if you look at the capital distribution this quarters that we also apply the next quarter coming from the full EDs first $4.2 million from 65 Tech Park Crescent investment. At that time, were still waiting for clarity the tax treatment only recently get a tip and with us having that certainty we proceeded with the divestment or rather distribution of the divestment gains. Of course, one consideration a couple of years back was -- so we have done the distribution while setting aside a bit of the slum ex treatment, but the amount becomes very small, meaningful. And as you have seen, soon after that, we have the 26A Ayer Rajah Crescent investment done for the center that we do for Equinix. So that is relatively material. We could see that with 8 quarters, the distribution of close to $16 million. So I don't know coming these various -- this was put aside to we have that clarity. Same consideration for the OM compensations we have written down that it was from compensation from the government or taking a small flavor of land for the MRP works. So not a lot of money, super fund. So it's not that significant also relative to the earlier set of distribution gains from 26A Ayer Rajah Crescent. So now that we have completed distribution of the more material from 26A Ayer Rajah Crescent . The DPU, I think WALE a need for some level of support. We have that available and it's time for us to continue that distribution, but it's not a lot. If you look at the effect it's only 2 quarters, this quarter and the next quarter, subsequent quarters don't have anything program of center. So the question on the 546 million…

[Hwei Leng Tan, executive]

$24 million.

[Kuo Wei Tham, executive]

$24 million, $545 million. I think we can give you that the…

[Hwei Leng Tan, executive]

I think in terms of the currency part of the $544 million is actually the Japaian loan that we have taken on, on a short-term basis. So currently, at this point, for the Japaian, as you all know, we have done long-term bonds covering about $160 million. The balance is actually to be done through bank loan. We are now in the process of redocumentation should be completing this quarter or this coming quarter. And currently, for us to do the completion, we have actually drawn on short term loan. So the bulk of your $544 million is actually on a short-term loan basis check-in. I hope that answered your question. The rest of it are actually -- the rest of it are actually rebound.

[Unknown Analyst]

Mix of U.S. and Sing.

[Hwei Leng Tan, executive]

Okay. The rest of the power is actually a mix of Sing dollars and U.S. dollars. But if we're trying to figure out how much of these are hedged, I would say a large part of them are hedged. It's just that when we manage the hedges, it is managed on a portfolio basis. So as I said earlier, in terms of the hedge expiry, we have about $150 million to $160 million of hedges that is due. And so the impact is not so significant.

[Mervin Song, analyst]

What's the absolute dollar amount for U.S. dollar borrowings of the $545 million? [Technical Difficulty]So just back to my first question to Kuo Wei . You don't have any things in the kitty, but are there any other properties that you divested before that you're still winning for tax treatment clarity? And also the proportion of fees paid units, will you be lifting it to temper the impact of higher bring costs?

[Kuo Wei Tham, executive]

Yes, yes. I forgot to answer your on. No, we don't have any plans yet if you look at our past coaches on this. Essentially, either on by used transactions, essentially acquisitions where we have feeding units arrangements or issue units through the distribution reinvestment plan. So right now, we don't have any plans to reactivate that. On your question on whether there is any residual elements, yes. If you look at rather the divestments that we have done all in 4 months the 26A Ayer Rajah Crescent as I mentioned earlier, where we have done distributions of gains for 8 quarters, is the fix treatment part still un-loaned. So we -- again, parity, the tax treatment potentially our engagement with authorities, they will probably be able to distribute it out. I think amount will be large. It's a small residual part of uncertain tax treatment other than that, have any call significant divestments that will result in us having gains or expanding tax cavity or not. If we look at our 2 only 4 divestments that 2 other divestments is 19 Changi South and also the Southfield facility Michigan -- the gains relatively small. Any -- it's actually very marginal. So we don't think we'll be able to pay any kind of gains distribution there. Going forward look at what else we can best in any of the assets that are probably the best relevant in our longer-term strategy that we can divest and if we are able to crystallize any divestment then we can look at the possible distributions. Now we are still at an early stage. As I have shared some of our propositions as well, engaging the market and trying to get some sense of interest assets. So there's some level of interest, not that interesting yet. Maybe we will be able to look at 1 or 2 kind of possibilities, but I think [indiscernible] will be large, something that will continue to manage in terms of the portfolio profile.

[Mervin Song, analyst]

I think [indiscernible] small umbrella makes a big difference.

[Hwei Leng Tan, executive]

We have Tan Xuan ask me question, please.

[Xuan Tan, analyst]

My first question is on reversion, right? 8.8% for the second quarter. Can you share what is it for the first half? And for full year, are you still guiding for low single digits?

[Kuo Wei Tham, executive]

Okay. We will work out the mathematical effect on the first half. I don't think it's actually our third quarter number is actually we say, a relatively challenging number. Going forward, in the market and grow by not seeable I think low single-digit on can go for ABC [indiscernible] in the next 4 quarters.

[Xuan Tan, analyst]

I think we may not provide 6-month rental revision number, but the portfolio rent reversion for 1Q was 5.3%.

[Kuo Wei Tham, executive]

So I mean, earlier mathematical thing can just take a simple average, and that we quite close on you can [indiscernible] now starting at every single reversion. So essentially, we are quite I will say, happy with the outcome for this quarter, but I don't think it's a level that we are able to derelict mutual quarter. So low single digit level, 5% level is probably above real estate.

[Xuan Tan, analyst]

Okay. Got it. And second question is on ramp-up at [indiscernible]. It seems a bit low, what would be the main pushback from prospective tenants?

[Kuo Wei Tham, executive]

Okay. Essentially, there are not that many much users out there that are ready to commit cost for on we present a lot of space that we need to lease -- we are talking about close to 400,000 square feet. So our plan is to get a large space users, but the kind of demand is relatively low, most of the prospects that we're dealing with, and they are cutting across many, many industry sectors. Most of the projects we're dealing with, they are looking at smaller space needs, a few thousand square feet or even a larger one, 10-or-so thousand square feet, which is taking us a bit more time the occupancy. So especially now that the economic outlook coming in less certain capital costs is, I think, getting to be a bit more a bit higher for any businesses looking to wait to any lease commit to any expenditures. So the companies are becoming a little more careful. And therefore, I think it's the more it for us to secure much commitments. So -- our team is certainly working hard gauging the market. Talking to the prospects, or sense is that in the coming months, will probably be a major accumulation of more smaller users. There a couple of very large ones that help us move our occupancy levels. So in short, it is a bit lower than what we have anticipated, but we're working on it.

[Hwei Leng Tan, executive]

Brandon, would you like to ask your question?

[Brandon I. Lee, analyst]

Yes. Kuo Wei, can you hear me?.

[Kuo Wei Tham, executive]

I can hear you.

[Brandon I. Lee, analyst]

My first question would be, you wanted to follow up on the divestments in Singapore, right? Can you give us more clarity on that? And how far would you go in terms of the divestment in or even [indiscernible] right? [indiscernible] a question. Second one is, can you update on the [indiscernible]?

[Kuo Wei Tham, executive]

Brendan, I think you are breaking up. We didn't hear the end of your first question.

[Brandon I. Lee, analyst]

Oh, can you hear me now?

[Kuo Wei Tham, executive]

Yes.

[Brandon I. Lee, analyst]

Yes. Basically, I just want to ask how the updates on the Singapore divestment exercise. And how far would you go in terms of the discount or premium like for instance, are you will be willing to sell, say, 10% discount just to get it going. Just want to hear a [indiscernible], that's my first one.

[Kuo Wei Tham, executive]

Okay. I think the second one will be more to get a gist of what you ask, so the divestment exercise is actually a portfolio rebalancing exercise. So let me, as this positive impact if you are able to divest meaningfully on a positive impact on the average as you have seen in our current reported leverage level of 7.9%, many healthy level.So there is no compelling reason for us to do a divestment for the purpose of managing our [indiscernible] level. So I think just maybe about 10 minutes back, talked about engaging the market on our Singapore assets. So we do get some offers coming in, but some are interesting, but not all are interesting enough. So the assets that I think we have looked at essentially some of our better factories within our business part buildings to see whether there's some level of test.So there were some initial interest in terms of pricing, probably at a level which we think is meaningful for us to be [indiscernible]. So as to your question, we want to push for the divestment with some discounts being even advantage, I think, is probably necessary for us to do that. A lot of these assets, as you have seen in are putting the [indiscernible] giving us very good [indiscernible] levels and very strong use.So if it is the case of selling at a discount, at higher use than we have taken, these probably not move and we're thinking in the meantime, there would be selective divestment process, and we don't get probably divesting and valuation or prices, it gives us a bit of a premium that was to strengthen our balance sheet. Well, it's a relatively selective [indiscernible] approach that we are taking at the moment.And for the other question, the other 2 assets, San Diego, one of the largest facility we have [indiscernible] the lease has extended to December 2024. So exploring all options, whether it's a divestment, whether it's redevelopment [indiscernible] a kind of approach. So we do not have anything material as of now. So we will be continuing to get all these options. Milwaukee asset, the smallest of 1%. This had expired last month, September. So it is vacant now. We are engaging the market on a few prospects that might be interested. So we do not have something the cost will be crystallized, the tenancy assets where we are really [indiscernible] on the lease. So this will take a bit of time. So I think at least 6 to 9 months of downtime for some clarity, we were part of that.

[Operator]

Maybe before we take the next question on Derek Tan, I'd like take the question from Jonathan Lim on the web. The Japan data center started contributing at the start of Q2 instead of actual end of Q2, would DPU still have declined this quarter despite the enlarged share count?

[Kuo Wei Tham, executive]

We will see our friends [indiscernible] scratching their heads, it is a very relevant question. My sense is that you get a bit of you in that is the contribution won't be large enough to offset some of you would have seen other than the operating for the top of portfolio of some of the success we still trying to lease up and some vacancies building up, but a bigger impact clearly was from those costs increase. Look at the quarter percent increase for small first half, 20%, so that will continue to [indiscernible] test, I think these next quarters this announcement where we have one full quarter of cost intrusions from Osaka facility. I think one thing we would like to share our other [indiscernible] as well is that the Osaka data centre, they faced completion kind of on a faceplate schedule. The completion of the acquisition transaction on 28th of September, we have 70% more cash flow because it's 70% that has woken up.We have the balance 30% [indiscernible] progressively from this year from early part of next year awards. So we still have a small mine ramp-up. Okay. Our mathematical will be down here since the huge numbers into the giant [indiscernible]. They say maybe marginal kind of DPU growth if we would factor all these as if we had the asset at the start of the quarter. I think the fact of the method is we only got it 3 days before the of the quarter.So a positive effect will fell in the third quarter of the financial year, but overland of is the interest cost impact that offset whatever gains we get from this.

[Operator]

[Indiscernible] questions for us, Derek Tan.

[Derek Tan, analyst]

Hi, morning, can you hear me. I just wanted to follow up on Lilly's earlier comments on the interest rate outlook. I'm not sure if I heard correctly, but are you guiding for 3.2% for this FY and then exits when it moves up to 3.5%?

[Lily Ler, executive]

Okay. Currently, it's about 3.2%. I think for the rest of the financial year, we probably do still expect interest rates to creep up to be creeping up. So I think on the average for this year, we will probably be looking at a range of about 3% to 3.5%. That should be the range for this financial year. But next financial year, when you see the full set of you replacement of some [indiscernible] hedges, we saw the expiry hedges that comes through, we would expect the interest cost to increase a bit.

[Derek Tan, analyst]

I see. So probably further towards the 4% end of?

[Lily Ler, executive]

I think that one really on what happened in next quarter. Like I said, the big question of this quarter and of the year is too high or not too high.

[Derek Tan, analyst]

Okay. Understood. And just understand difficult. The next one is on Milwaukee, expired in September, but is that reflected in the U.S. DC occupancy? Because I noticed that crapped up actually in this quarter.

[Kuo Wei Tham, executive]

Reason why we have that increase in occupancy is because we have finally started a lease for our asset in Nuna 67,000 square feet as you were in our earlier [indiscernible] left over a year back. So they managed to use maintenance. And finally, all these people have done after the lease, I think for September, is it September. So that has resulted in that small bump up [indiscernible]. Anyway, please not mentioned earlier, it's not even tenant. So trying to find the right categorization for this tenant, they provide and now healthcare service.

[Derek Tan, analyst]

Right. So is it more pistons vacancy reflected already?

[Hwei Leng Tan, executive]

No. I think that has not been reflected because the lease expiry of September. So you'll see that in the next [indiscernible].

[Derek Tan, analyst]

What was the [indiscernible] with that.

[Hwei Leng Tan, executive]

You have to come back to be on that.

[Derek Tan, analyst]

Okay. That's not a problem. And this is lastly on divestments. The Singapore divestment. Is there a dollar value that you can share for, guess, the assets that they have put on market? And I guess on the inquiries, you mentioned you've had a few inquiries so far. Just wondering what the profile is like that and occupiers or even [indiscernible]?

[Kuo Wei Tham, executive]

Okay. I think this is not something secret and we very block spectrum of potential buyers, we have put in 3 business not buildings as possibilities. You will look at the aggregate, [indiscernible] put in a couple of our other factories and all of them. So we are talking about another $500 million. So we look at it as possibilities.So I mean the idea were when the market is very tight, I'd say we're able to crystalize maybe a [indiscernible] but the one is what putting up as items on our menu each one with the potential mines. But I think realistically, case of weather, you get interest for a couple of them, 1 or 2 of them may be [indiscernible]. So the sense we get from indications is that there's some interest as I said, some of them are looking for some number of discounts and support or it might not be as interesting meeting for us.So this is, I would say, [indiscernible] engagement that going forward. I think it is a time share earlier as our catering grows need to do some funding. So this is the right market made adjustments that we'll be doing. So we will go through this process periodically and see the market is [indiscernible] for transactions.So we will go through this process [indiscernible] see the market limonite DPU for transactions. The outlook is -- maybe you will crystallize some of the other.

[Derek Tan, analyst]

All right. But for [indiscernible], $500 million to $1 billion available for sale?

[Kuo Wei Tham, executive]

Yes. I mean that's the kind of items we have on main. But it is not like a target size of scale that we're looking at as at the end of the day, the engagements with potential buyers either a case of us telling them look at our at report, whatever that's down there is available for sale. And it comes to broadly in terms of the [indiscernible]we decided to narrow down the rate in terms of what we are possibly looking at. So that's how we are living then I say, "Okay, this is a smaller subset, which might be possible to solicit [indiscernible] feedback, but it doesn't certainly mean that "Oh, yes" is there's some level of interest are prepared to do is essentially, as I mentioned earlier, outlining what might be venue."

[Derek Tan, analyst]

All right. I guess more imminently, do you think you could do maybe 50 million next -- over the next 2 quarters? Is that realistic?

[Kuo Wei Tham, executive]

What was effect to $50 million…

[Derek Tan, analyst]

The 100 million like. Is it realistic... Yes.

[Kuo Wei Tham, executive]

I believe 1,500, that is, I would say, the possible time of level. Because at the end of the day, it is in a market like this where it's a bit more, of course, challenging. And you need to find the right match in terms of where they are able to fire at price levels, which we think that we will be able to divest. So I think that number 1,500 might be a realistic reference level for us to look at finally being able to match demand and supply time of divest. Yes, it's something to look at.

[Hwei Leng Tan, executive]

Thanks, Derek.

[Derek Tan, analyst]

Thank you so much Kuo Wei.

[Hwei Leng Tan, executive]

Thank you. We are going to take your last 2 questions so that we can try to target to close at the end of the hour. Terence continue to ask your questions, please.

[Terence Lee, analyst]

Yeah. Hi, thanks Kuo Wei stepping from my query. Just 2 questions. First of all, just a follow-up on Xuan's question, particularly on the Kallang asset itself. Can you give us an idea -- right now, let's just say you're going to go out to lease to a tenant, what sort of rents you're going to get? What sort of tenant profile they're hoping to get into right now? And then maybe some idea as to like what is going to be or the next 12 months? I understand that the market may be soft, but really what is the target? And then ultimately, some guidance on this particular asset over the next 12 months. Second thing is that I think last quarter, you did talk about acquisitions. So I just want to ask right now, is this still going to be there? And then acquisition pipeline, is it still like some profile? Is it going to be a sponsor party? And then is this really going to be something you look at? Or is this going to be selling assets right now? Because your balance sheet is actually okay.... Yeah, thanks,

[Kuo Wei Tham, executive]

Well, I think the rent levels that we're targeting still around the $4 per square foot per month more than [indiscernible] asset. We think our product is good as very high specifications and rental revisions. So while we recognize that the leasing progress is a little bit slower. We have fairly in full kind of engagements with the market. So it's across a very broad spectrum from instrumentation companies, to tech companies precision engineering companies across above. This is a very broad industry segments. So we do not have any particular sector that is very prominent. So our -- so is flexible enough to accommodate many of industry users who suddenly more parts building up the occupancy. Looking ahead, 12 months, we hope to put and get to a level of 70% - 75% that meaningful number. So that is the term target for us. On the acquisition front, really, they are us popping up now and then. But if you look across the port spread over cost of capital I would say not distant any markets. So unless it's a very compelling objection. It's difficult for us to utilize any use now meaningfully. So we will continue to look. But I think relisting to come is that any acquisitions will probably be buying the part next year or beyond versus near term likely for the term market. -- we adjust also physical market assets that are at the right kind of pricing level for us to deliver appropriate level of addition -- the only few occasions, if you had a decent spread, it would be at. That's the reason why sees the opportunity in this year that transaction, but opportunities at least fuel and fund between. So I think we'll be very selective and careful the way we look at the acquisition opportunities. So as you have observed as well, the time for us to look at maybe adjusting the portfolio a little divestment on the something that we look at a bit more fully. That's why we started this disengagement process. But our balance sheet is still relatively strong. So be selective well we adjust our portfolio.

[Hwei Leng Tan, executive]

Thanks for Terence.

[Terence Lee, analyst]

Okay. Thanks a lot. Thanks, Kuo Wei. Thank you.

[Hwei Leng Tan, executive]

Krishna, would you like to do the ones of asking on last 2 questions?

[Krishna Guha, analyst]

Yeah. Hey, thank you very much for taking my question. Just housekeeping ones. First is on the operating expense -- what happened? Like I think Q-on-Q, it was increased by about 15%. If you can give some color on that? And then some general industry question. First is, you hear a lot of the headlines about large companies coming to set up basis, be it in electronics, automobile, electric vehicles or life sciences. Just wondering if the supply chain participants of these large companies, I mean, are you seeing demand for that? And I'm just trying to get some color based on your earlier comment that you see you potentially likely see more of the smaller tenants coming into your facilities later part of the year, so if you can give some color on that? And then the last question is that you have this divestment thing, where will you acquire, if you were to, would you be more interested in further increasing our footprint in Japan?

[Kuo Wei Tham, executive]

Well, I answer the simpler question first. Yes, certainly, in the near term, Japan looks interesting and more meaningful to us. It also helps us improve our portfolio diversification. So in the near term, that's where we put more fee. Now going backwards in terms of the question answered it. So the second question, next question is on the industries. Yes, we have seen certain macro kind of companies setting up shop here. Fortunately, some of these kind of bids and demand, not the good match for the products that we're offering. For example, your [indiscernible] and all those, those are very... [Technical Difficulty]

[Krishna Guha, analyst]

Kuo Wei, you are breaking apart on the second question.

[Kuo Wei Tham, executive]

Okay. Actually, kind of large industrial users, like, for example, some of the EV producers the good measures or whatever products that we have, especially now where we are trying to highly spec Kallang Way . So the pockets of kind of demand continues to be a bit smaller. And take one observation that we have is that new corporates companion including Chinese corporates, I would say, a meaningful representation on our prospect list. So still, you generally are smaller in not complete production plan kind of impact that we are seeing, no debt, of course, observe in the other so-called Singapore. We saw a good match or not that way. The next question is on the operating cost or margin.

[Lily Ler, executive]

I think in Singapore, the slight increase in terms of our utilities. We need to cause the slight increase in tariff rates from SP services. Also with the commencement of Kallang Way increased drop. If we do expenses for the U.S., I think United that look at NPI margin. So if you're referring to a Q-on-Q increase, you'll note that actual MIT's dropped. For the U.S., in particular, because some expenses are charged to the tenant at per day, and we look more closely at the NPI margin. And I think that was due to rent-free period for some leases and lower pass-through income. [indiscernible] Higher expenses [indiscernible] and in the U.S., in effect plus pass-through income -- lower pass-through income.

[Krishna Guha, analyst]

Right. Okay. Okay. So you are showing positive reversions, but then your rent fees have also sort of gone up, right? So face rent relatively kind of -- effective and kind of relatively flattish?

[Lily Ler, executive]

I think the rent refers to the North American portfolio, which tends to be lumpy because there are just not that many leases that can be signed in a particular quarter. So any that you've already seen in all portfolio.

[Krishna Guha, analyst]

Okay. And if I just can squeeze in this Japan acquisition, is it like, do you really like kind of like these assets? Or is it more true for the JPY cheap JPY debt?

[Kuo Wei Tham, executive]

First and foremost, we are a real estate platform. So we need to like estate attributes for us. The JPY thing is icing on the cake

[Krishna Guha, analyst]

Okay. Okay. No, because I think you have more JPY debt than the asset value for that Osaka asset, if I remember correctly. So I was just wondering that.

[Lily Ler, executive]

Let me just clarify, we did not raise more in that. We raised exactly the same amount that is required for the acquisition. So I'm basically 100% capital hedge for the JPY.

[Krishna Guha, analyst]

Okay.

[Lily Ler, executive]

Of course, the obvious result being that this is just a way of doing the -- I think the capital to minimize any type of actuation in terms of the capital, right? And of course, the other consideration is amongst all my currency -- definitely, JPY is the lowest. Is it like we will borrow more in JPY to fund other investments in other countries, not likely to debt based on [indiscernible].

[Krishna Guha, analyst]

Okay. Thank you very much for your answers. Thank you.

[Hwei Leng Tan, executive]

Kuo Wei, we are at 10:29. Thank you for standing hour with us. If you have any more questions or if it was not clear because the audio, we apologize. Please reach out to me if you have any more clarification.

[Lily Ler, executive]

Okay. Thank you

[Kuo Wei Tham, executive]

Thank you. Yes. Have a good day.

[Hwei Leng Tan, executive]

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