Mapletree Industrial Trust

SGX:ME8U

Earnings Call Transcript 2018-Q4

[Kuo Wei Tham, executive]

[Audio Gap]

fourth quarter and full year results briefing. We have the presentation pack that was released last evening. It's pretty long, so I would begin.

The usual 5 segments that you see starting from page -- the content page on Page 3, we would cover highlights for the quarter that just ended and also the year. And then we'll talk about the quarter as well as the financial year results. And we'll give an update on the portfolio and also some additional final commentary on the investments that we have made and finally rounding up with the outlook and our strategy.

Now going into the first segment that's on Page 5, key highlights. As you can see in our numbers, we have achieved year-on-year growth across, with distributable income, 5.3%; the DPU as well, 3.2% year-on-year growth for $0.1175; and of course, for the fourth quarter, similar kind of a growth profile, 7.2% increase in distributable income to $55.5 million and $0.0295 for DPU. That's 2.4% growth year-on-year basis. All this is driven by the full completion of the build-to-suit project with Hewlett-Packard, so we get the full effect of the occupancy of Hewlett-Packard for one of our largest build-to-suit projects. And HP, it is actually our largest tenant in the portfolio. And of course, as you have read in our earlier releases, we completed the transaction for the acquisition of the portfolio US Data Centre on 20th of December. So we are seeing the full quarter effect as well for the fourth quarter of the financial year '17, '18.

Now portfolio update. I will go into a bit detail later on, but if you look at the headline, occupancy level, 90%, fairly respectable. But of course, if you look a little more deeply into the numbers, you can see a difference in the kind of portfolio occupancy level in U.S. Because it's mainly on long leases, you don't have any leases due for expiry, it remains very stable, 97.4%. But in Singapore, we are seeing a dip in the portfolio below 90%, 89.6%. As a result of this, you're getting to see a fairly stable number. And of course, our focus will be on whether the level can be sustained and -- at this level. And as far as projects are concerned, we have completed our asset enhancement initiative at 30A Kallang Place, which is at Kallang Basin 4 Cluster. The total AEI that -- or additional AEI that was added is 279,000 square feet, and the temporary occupation permit was obtained on 13th of February, so within the fourth quarter of the financial year. And we are happy to announce that we have committed what I call there the demand for about 40.2% of the space from fairly good tenants. So it is fairly encouraging for us as far as the demand we see in the market.

Now the next thing, of course, is on the valuation. This is our annual valuation exercise. Partly because of the acquisition of the U.S. portfolio, you can see a larger, so-called portfolio value. So the increase year-on-year basis, 15.3% to SGD 4.3 billion as at end of the financial year. And if you look at the Singapore portfolio specifically, the increase in valuation is about $160 million, $159.7 million. And of course, if you look at this number, it is not entirely driven by value or value-add increase or valuation gain because there's additional capital expenditure that we have incurred for the development projects and an asset enhancement initiative. So if you look strictly at the value gain, it's about $65.5 million for the Singapore portfolio. But generally, I think we are still seeing a reasonable and steady improvement in value over time portfolio-wise.

And the last part, of course, capital structure. The hedged borrowing as at end of the financial year is 85%, which is very healthy. Same thing with the aggregate leverage which is now 33.1%., of course, partly helped by a slightly larger portfolio value.

So going on to the next page, Page 6, where we show you our trend for the distributable income as well as DPU over the quarter. Interesting, on the right, you can see the $0.0295, an increase over the last quarter of $0.0280. And of course, it's also incidentally same level, $0.0280 1 year back, fourth quarter of financial year '16, '17. So the distributable income bars that you see, you would have noticed there is consistent upward shift over the years. So as of the last quarter, as I mentioned earlier, we delivered $55.5 million.

So looking a little bit more closely at the financial numbers that's in the next segment, on Page 8. We do the comparison year-on-year basis, fourth quarter against fourth quarter for the 2 financial years. Gross revenue continues to go up, 2.9% increase from $87.8 million to $90.4 million. And as a quick note, the U.S. portfolio numbers are not included in the net property income or gross revenue levels because the figures are taken in as a share of the profits of shareholder joint venture numbers because of accounting consideration. So the property expenses cost has gone up as well, 3.1%. It tracks the revenue growth quite closely. And as a result of that, if you look at net property income, increased similar kind of level, 2.9% at $67.9 million for fourth quarter. So borrowing costs have certainly gone up, partly because of us expensing of interest costs for projects that are completed, the Hewlett-Packard project, instead of capitalizing during construction. And part of the reason is because of the natural increase in the interest rates themselves. So the net income, 1% growth, is a result of that.

So the joint venture, so-called contribution from the data centers, you can see in a box in the middle. So that is the effect that we're getting. The net profit after tax, SGD 3.17 million, there's a $17.9 million you see down there, that one is mainly valuation gain, which is noncash. So when you aggregate everything, you can see the $138.9 million (sic) [ $138.4 million ].

So bringing it down to amount available for distribution, which includes the $3.2 million from the data center portfolio in the U.S., that's where we get a $55.5 million aggregate and $0.0295, which is 2.4% better than the DPU last year of $0.0288. If you look at the year-on-year comparison, fairly similar profile but, of course, the revenue, a slightly larger increase because of a full -- practically full year impact of build phases 1 and 2 of the Hewlett-Packard build-to-suit project. So on Page 9, you see a $363 million revenue compared to $340.6 million, which is a 6.7% increase.

Operating expenses, we have been able to contain that increase a little more over the financial year. And some of this, of course, includes better control on the contract costs, and we have also redone the energy procurement contract for our utilities, so that has helped contain the cost increase as well. So it has a 2.3% increase in cost from $83.7 million to $85.6 million. So as a result of that, net property income level has gone up a little more, 8.1%, from $256 million to $277 million. So the same kind of effect you see for borrowing costs as well. The interest cost being expensed off instead of being capitalized for the assets that are -- or projects that are completed and also slightly higher interest rates. So that gave us that 6.6% increase in net income. And same effect that we have outlined for the U.S. project, which is in the box that you see down there, the valuation gain, the same, of course, it's all crystallized in the fourth quarter as what you've seen in the fourth quarter numbers. The net profit after tax is a little higher because we had the stub period of about 11 days in December. We completed the acquisition on 20th of December, so there's a very small short period where we accounted for the contributions in -- towards end of the third quarter of financial year '17, '18. So as a result of this contribution, you're seeing this effect in total amount available for distribution, which I read, of $215.8 million, which is a 5.3% increase compared to $204.96 million a year before. And DPU, of course, has gone up by not as much as 3.2% from $0.1139 to $0.1175. As you may remember, in connection with this acquisition of the portfolio, we did an equity fund raise of about $156 million. So there's a small level of dilution effect as well in addition to the fees and units which the manager had been taking for, if you remember, our very first acquisition of the Flatted Factory portfolio in 2011. So that's about $2 million per year. So that has resulted in a small additional dilution.

So going on to Page 10 where we compare fourth quarter to the immediately preceding quarter, which is the third quarter of financial year '17, '18. The revenue part -- revenue side you see a slightly lower figure, 1.2% lower, $90.4 million compared to $91.5 million. Part of the reason is because we do have some same-store weakness in our portfolio. The operating expenses have gone up little by 9.2%. And some of you would have noticed, usually towards the end of the year, we do have this kind of cyclical effect that gets played out towards the end of the financial year. But as a result of that, the net property income level has come down 4.2% from $70.9 million to $67.9 million. So as a result of that, you see a net income that is also 5% lower than the previous quarter. But that aside, having the contributions coming from the U.S. portfolio has helped us cushion this kind of temporary effect in the fourth quarter. So on a net basis, you can see the DPU figure that has also -- that had gone up 2.4% compared to -- at $0.0295 compared to $0.0288 in the previous quarter. So we think this contribution is certainly timely. It helps us manage the kind of short-term weakness we experience and the cyclical effect for the portfolio as well.

And going on to Page 11, the balance sheet that we have. So on the left, you see, as at 31st March '18, which is the end of financial year, total assets about $4.15 billion, liabilities about $1.37 billion. So as a result of that, the NAV per unit has gone up a little relative to the previous quarters and previous years. So it's now $1.47 per unit compared to $1.42 as at 31st December. That's, of course, prior to the valuation adjustment, and also $1.41, which is exactly 1 year ago. So that is a 4.3% increase in NAV per unit.

Now on Page 12 is the summary of the valuation figures. You would be able to see in aggregate the Singapore portfolio has increased from $3.75 billion to about $3.908 billion. So as I have outlined earlier for the Singapore portfolio, the increase is due to valuation gain as well as additional expenses that we've incurred -- the capital nature for the development works and the asset enhancement works. And the $65.5 million is the valuation gain more specifically.

For the U.S. portfolio, the valuation increase over the previous valuation that we have done at the acquisition is fairly small, 0.9%, because it's a very short time gap. But relative to our acquisition price, the increase is about 4.4%, if I remember correctly. So essentially, we have acquired the portfolio at a slight discount to valuation last year. So in aggregate, if you take the 40% stake of our portfolio and using the standard -- or rather, we just adopted a standard exchange rate of 1.31839 cost for the entire presentation for ease of comparison, the aggregate portfolio value is 4.3214 -- $4,321.4 million, a not too difficult to remember figure for the portfolio. So since we relisted the portfolio, this is slightly more than 100% growth in terms of portfolio value.

So going into the next segment which is the balance sheet, the -- on Page 14, on the right, you'll see as at the end of financial year, the total debt, $1.2 billion. You could see that it's a little lower than the $1.4 billion as at 31st December because at that time, there were additional loans that were taken on, on our balance sheet for the acquisition. Then after that, the joint venture had taken on local loans, onshore loans for the transaction. So this is not on our balance sheet anymore. The weighted average tenor of debt is actually a little better, 3.3 years because some of the new loans that were taken have slightly longer maturity period. And the aggregate leverage ratio, as I pointed earlier, is still fairly healthy at 33.1%.

So if you look at the details in the next page, Page 15, for the 3.3 years of average tenor, and it's fairly well spread kind of profile where we don't have much risk in any of the financial years. So it's a case of us looking out for good opportunities to keep refinancing and enrolling our debt obligations forward. And in financial year '18, '19, you would have seen a $125 million number at the bottom. That was the bonds or MTN that we have issued more than 7 years -- about 7 years back. So we would probably look at doing that towards the second half of this year, refinancing that part, but it's a very small content.

And going on to Page 16, that's on interest rate profile. The percentage that is fixed, it's fairly decent, it's about 85%; and average fixed tenor, 2.9 years. And part of the decrease compared to December is the natural time regression of the quarter as well. The overall all-in interest cost is fairly stable at this stage, 2.9%, no change from the previous quarter. Interest coverage ratio is still fairly decent at 6.7x. So as I mentioned earlier, we had some interest rate hedges that's expiring as well as $225 million, which we would look on in the second half of the financial year.

Now as far as currency exposure is concerned, that's what we have outlined on Page 17. This is, of course, the picture as at financial year '17, '18. And then looking at all the currency exposure we have, almost all our income is in Singapore dollar. So 97% is already naturally in the currency that we're distributing. For the U.S. income, we're already hedged 2%. That's coming back -- the balance left unhedged is 1%. But I think, as of now, we have done 100%. So anyway, this is more for managing the distribution, coming back for the financial year '17, '18, our attention, of course, will be on continuing to hedge forward for all the income streams that's coming back in the subsequent quarters. So we are taking a fairly prudent approach in managing the currency exposure as well.

Going on to Page 19, the portfolio update. So this is just a summary of the valuation figures that we have outlined: $4.3 billion in aggregate, including that 40% stake in the US Data Centre portfolio, total NLA about 18 million square feet. And of course, some of you would have noticed our footnote down there. We included the parking deck in the U.S. portfolio, we cannot really lease out on a per square foot basis, so we've just taken the property NLA in this set of figures. The total tenant base or the number of tenants that we have still remains fairly large, more than 2,000 tenants. For this particular perimeter, the contribution from the U.S. portfolio is not significant at all, only another 14 tenants. So it's a drop in the ocean for us, but those are very significant and large and good quality tenants.

So as far as the spread over the different property types is concerned, you can see that in the pie chart at the bottom. You would have noticed that probably for the first time, we have a higher representation now in Hi-Tech Buildings, 37.7%, relative to Flatted Factories. We started off, of course, with a large representation for Flatted Factories. But over time, as we do more build-to-suit projects, as we do more asset enhancement initiatives, as we acquire more assets in the Hi-Tech Buildings category, we see a higher and higher representation in this segment. And as far as geography is concerned, of course, we are still mainly Singapore, 90.4% in Singapore; and the U.S. portfolio, 9.6% of the portfolio.

And going into the next segment, we talk about -- or rather, the next page, we talk about the portfolio rates and occupancy. The occupancy level, as I have mentioned earlier at the start, for Singapore portfolio, has come down with 90.1% to 89.6%. But of course, the U.S. portfolio is very stable, no change at 97.4%. So in aggregate, we're seeing a 90% figure for the overall portfolio. And coincidentally, rent levels are the same, the passing rent levels. If you look at that table at the top, $2.01 for Singapore portfolio; USD 2.01 for the U.S. portfolio. So we did not engineer it this way but I mean, coincidentally, this happened to be the same level for both parts of the portfolio.

And going on to the lease expiry profile, that's on Page 21, you would see that the Singapore portfolio would have 3.6 years balance weighted average lease expiry; the U.S. portfolio, 6 years. I think when we did the announcement earlier, it was 6.3 years. Of course, over a quarter, with the natural time regression, you have another quarter of a year being taken off from this. So you have, in aggregate, for the entire portfolio, 3.8 years weighted average lease expiry. But of course, that's where you see the difference between the portfolio with that kind of attributes in U.S. and the Singapore portfolio, which are still mainly multi-tenanted with the kind of user churn in tenants. So that is exhibited in the chart you see at the bottom. Most of the multi-tenanted kind of expiry is represented by the 3 bars on the left, and most of the US Data Centre assets you can see on -- in the bar on the right beyond financial year '22 and '23. So most of the leases are due much later. So that has helped to give us a fair bit of stability and diversification as well in the portfolio.

And going into Page 22 where we outline our top 10 tenants, in aggregate, 26% of the overall portfolio. Largest, of course, is now Hewlett-Packard, 9.9%, by virtue of the full contribution and completion of the project. The next largest, of course, is AT&T, the U.S. portfolio, they are in 3 of the facilities in the U.S., 3.3%. So the rest are the usual suspects and yes, where our friend, Johnson & Johnson has left the scene. So -- but we don't see a lot of shifts in this picture, except for our ninth largest tenant, HGST, because they really indicated the intention to downsize. So we will see how much adjustment finally we will make. But anyway, these are the kind of businesses which shifts for our large tenants in and out of the portfolio. And hopefully, we get more of those very large ones that you see, HP, plus, say, close to 10% instead of those minus 1%, 2% kind.

So on Page 23 would be our tenantry mix. Of course, this is taking -- has taken into consideration the US Data Centre portfolio contribution, which most mainly into the InfoComm segment, the blue part in the bottom. So we are getting a bit more diversification here. But as what the picture has shown, our tenantry mix, very, very diverse.

And next we go into the Singapore portfolio more specifically, that's on Page 24. So that's where you see the occupancy downshift and our rents at $2.01, still holding up very well, actually, an increase of $0.04 over the previous quarter.

And going into the details on Page 25, you'll be able to see where are the segments that are having low occupancies generally, or rather more specifically, that's the Business Park Buildings. And the reason for that is because of the exit of one of our large tenants, Johnson & Johnson, in the previous quarter. The amount of space given up is about 160,000 square feet, and we have been able to secure leases of about 23% of the space vacated. So we are still trying to fill up the rest of our space. As a result of that exit earlier, you can see a lower Business Park occupancy level for the quarter, fourth quarter. And of course, the lower point was at 76.6% in the previous quarter. So if you look at the rest of the property segments, still fairly stable. You might have observed a slightly lower number for Hi-Tech Buildings, 91%. The reason for that is because of the completion of our asset enhancement initiative project at Kallang, Kallang Basin 4. At completion -- or rather upon receiving a temporary occupation permit, we will account for the space available in the denominator of our occupancy level calculation. So though we have committed occupancy of 40.2%, not all the tenants are in yet. Some of them are still preparing for the shift in. But even at, say, 40%, include that into the calculation you would have, break down the number a little, so that is the effect that we're seeing. Whenever we have completion of projects, you always see this kind of short-term effect as we are building up the occupancy. Unless it's a case of, say, a build-to-suit project with 0 rent-free period, yes. Then you see upon completion, immediately, that contribution comes in. So rerating for Hi-Tech Buildings. This is probably a short-term phenomenon. But when you aggregate the effect of the Business Park Buildings, a short-term drag in terms of the calculated number for Hi-Tech buildings, our occupancy level for the Singapore portfolio has come to the 89.6% level.

And on the next page, Page 26, our rent adjustments overall for all the different properties segments, relatively flat. But if you look at the kind of shifts from before to after rent, before being the green bars and after being the blue bars in the middle, you can see negative revisions for all the segments, except for Hi-Tech Buildings. So we are still seeing a little bit of weakness. I think the adjustments can be as low as negative 3.8%, I think, for the stack-up facility. But generally, the kind of downward pressure is still present in the market, partly because of the supply situation and partly because the demand is still lagging the market.

The other thing you may want to note is Business Park Buildings for new rents, we have a lower level of $3.12. That's because we secured a very large tenant that had more than 28,000 square feet at a strategic Business Park building. That is one of our so-called tactical move to quickly fill up the space vacated by J&J. So these are, of course, not typical of the kind of rates that we will do for new leases. But I think in consideration of the almost immediate take-up, we made a decision just to get a tenant in for a very large amount of space and for us to lease some of the space without much modifications and assessments. So this is the kind of anomalies that we are seeing in the portfolio now.

And on Page 27, on the tenant retention profile. You will have noticed over the years, we have been increasing the number of our long-staying tenants we have. So as of now, more than 2/3, 67.6%, of our tenants stay with us more than 4 years. And the retention rate for the portfolio is healthy, 83.8%. But of course, if you look more specifically, Business Park Buildings is still fairly low, 47.6%. But I think we are not unduly alarmed. If you look at the renewal leases on the next page, just jumping back, there's very little net deal for renewal. So we think it's a case of a smaller kind of number of tenants and smaller amount of space due for the quarter that resulted in this low retention rate.

And going into the next segment, which is our investment update. We have Kallang Basin 4 asset enhancement initiative, which was completed on 13th of February, as I mentioned, and 40.2% of the space committed. And we think we are seeing fairly decent demand from fairly strong companies who wanted to be located in a fairly central part of Singapore. And if you look at the building, this is not an artist's impression. Some of you might have asked, this is the real McCoy, the real thing. So it looks very nice. So that's one of the reasons why we managed to commit

[Audio Gap]

between $3.50 to $3.80 per square foot, which we think is a fairly healthy level for this location and this type of facility.

And the next one, of course, is the build-to-suit project. The key kind of thing to highlight is, of course, completion of the structural works and external facade. So we are on track, and we're looking at completion around July, August 2018. And that should start contributing, of course, immediately upon completion because there's no leasing up kind of a drag. You don't have any concerns about vacancy, it's 100% committed. So one thing you might have noted is the addresses there. Really, some quarters back, when we announced this, we only tell you whether it's on the east side or the west side of Singapore. So at that time, we say it's on the west side. And part of the reason is because tenants tend to be a little bit more concerned about -- [ as we're willing to wait ] too much. Finally, they agreed, I can give the address, okay.

So next, I think we go on to the outlook and strategy in -- on Page 32. Of course, we talked about the Singapore economic growth. As at the end of first quarter calendar year, which is a -- which coincides with our fourth quarter financial year, 4.3% growth, fairly decent, and it's actually higher than the previous quarter. And we think that market might be a bit more conducive for landlords, I guess, coming -- going forward. The market rents, I think -- median rents for industrial space, I think, is still a mixed picture. Multiuser, generic space, we are still seeing a slight dip in the figures as at, I think, 22 April, so we'll probably get another refresh from JTC in about a week or so. So we'll see whether there is still a representative. But -- so there may be some pockets of weakness in the market. But Business Park space continues to be fairly strong, positive 5.1% increase to $4.30 in that quarter. So as far as we're concerned, I think the business sentiment certainly has been improving. That's the kind of feedback we get from our prospects, from our tenants and some of our existing tenants. So they are more willing, more inclined to take up space to expand the activities they have. But it is primarily consistent across the board. So there's still a lot of uncertainty in the general economic outlook, especially when you have the large trading nations still jostling around and trading now. Not -- they are not at war yet, but they're just issuing a kind of threat to each other, but we will have to see finally how this plays out because, at the end of the day, as a trading economy, if there's any trade war, if there's any strong protectionism in place in any of the large economies, there will be a drag on the health of the economy and also indirectly, the demand for our space. So we are keeping a close eye on that.

The large supply of industrial space, I think, is to anticipate it for 2018. We are looking at about 13.7 million square feet for our kind of space, excluding warehouses, that is coming onstream for 2018. Next year will be a bit lower, we will probably be looking at about 5.7 million square feet. But this is, of course, based on the figures that we can read off as of now. Then we would, of course, continue to track the stock at this plan and then coming onstream, but the comfort we have is 2019 numbers certainly look a little lower than 2018 numbers. So all things being equal, we should see slightly better situation for landlords, industrial landlords, in the coming quarters.

And for the U.S., we think it's going to remain fairly good for us for the data center segment. And looking at the kind of reports that we receive, the demand continues to be strong. Supply, of course, is growing as well. But generally, we think the market will be stable. And as most of our leases are locked in anyway, we are not as exposed to any of the renewing -- renewal churns. But generally, the market is certainly still doing fairly well for this segment. So we are fairly comfortable with it.

And finally, going on to our strategy. I think we have been keeping to this 3 simple strategies: keeping the portfolio stable and resilient. The retention rate, of course, very healthy this quarter. And weighted average lease expiry, fairly long now, 6 years, partly because of the contribution from the U.S. portfolio. And next, of course, is our capital structure where we continue to enhance our financial flexibility. Our hedge borrowings is at fairly good level at 85%, and our leverage level is not that high at 33%. And certainly, we continue to look for growth opportunities, and as well, we have demonstrated the asset enhancement initiative completed, good level of commitment, and our build-to-suit project is still on track. So that would help deliver a bit of growth in the financial year. And we continue to look for possibilities, whether they're in Singapore or elsewhere, to help grow the portfolio further in the coming years.

So I think that ends what we have for the presentation. I'll be happy to take questions.

[Brandon Lee, analyst]

Kuo Wei, Brandon here. Just a couple of questions on the 30A Kallang Place. Is the rent level that you committed and the occupancy levels in line with your expectations? And do you expect this -- I mean, the level you expect to be hit by FY '19?

[Kuo Wei Tham, executive]

Oh, okay. The rent levels, I think, I've outlined earlier $3.50 to $3.80 per square foot and is actually a little better than what we have anticipated because I think while we have done asset enhancement initiative projects before, quite a couple of them already, and we certainly have many clusters at Kallang. So we have a pretty good sense of the kind of rent levels and demand, but this is still a new product in the precinct.

And initially, when we first did the project, there were some reservations from prospects that we had gone to. This one is higher review. It's not total review, what we're doing for. So you will see a brand-new project, a brand-new product. This is a addition of a building within an existing Flatted Factory cluster. And while maybe some of the existing infrastructure is in place, there are also constraints because you are building within the bounds and then so-called the confines of an existing facility. And when we pitched this product at a slightly, say, higher level and we wanted a premium rent, we were not too sure whether we can push the envelope for the rent as well. We had some earlier experience at Toa Payoh. As some of you may remember, Toa Payoh enhancement initiative, we were also doing about $3.80 to -- $3.50 to $3.80 per square foot. Also a new product, similar kind of specifications. So that give us the comfort to try to go for that level. Toa Payoh, generally, is a slightly more established location of relative basis in terms of amenities, in terms of the receptiveness of prospects. So we think we might be able to do it. So it's just how much more we can push the envelope. So it's a little better than what we have anticipated, but we have set our leasing folks fairly, say, reasonable target. So they managed to be able to secure tenants coming in at this level. And the tenants are relatively good tenants. Some of the names -- I don't know whether I can reveal, some of the tenants are large MNCs. And say, one of the larger ones that came in is -- can I say? I cannot say. Okay. Next time when they come in, you can look at the display box. They will definitely be there. But some of these are fairly large companies. So essentially, we are looking at a well-located facility that is well -- has good specifications and well-designed and efficient and at the right price point. So well, later on, we'll probably be able to outline who these people are, but for the time being, like, they [the returns are too nimble], and they are very shy at the beginning. So the -- for the so-called leasing up, I have my usual timeframe, 6 to 9 months. So now that we are at the start of the -- beginning of the financial year, we hope that, say, in about 9 months' time, we will be able to hit close to 90%. That is the intent in terms of committed occupancy. Whether we are able to have actual contribution of 90% up to 9 months, I'm not too sure. But at this stage, I think, not easy for us. I think, looking at the kind of prospects that we are seeing, especially the larger, better names, usually will come with their own constraints. They are usually committed in their leases, in some of the existing premises, and the expiration dates are usually staggered or not -- don't fall in nicely into our kind of preferred schedule. So that's it. We are looking at about 90% towards the 9 months from now.

[Brandon Lee, analyst]

I just want to follow up on that. Given the success of this property, do you think you can replicate that across the 5 other Kallang Basin properties? Because I'm just quite interested to know what your plans for them because I -- it seems that the lease tenure is less like -- I think that term is about 23 years. So do you think the government would buy back from you given the Kampong Bugis rejuvenation plans? Or do you think that more of these AEIs can be created?

[Kuo Wei Tham, executive]

Well, it's not easy to anticipate what the agencies would have in their plans. And of course, hopefully, we get some clarity every few years when they refresh their development guidelines. But as far as these investor assets are concerned, I think getting that kind of Kampong, kind of big scale precinct kind of development may not be high. They're so broad and so-called all-inclusive in terms of development. My sense is that the likelihood of this kind of large-scale rejuvenation probably not very high in the near term, and there'll probably be other priorities the agencies would focus on. Our preference, of course, is if we are able to get some extensions in terms of lease tenure, that is, obviously, a structural issue that we have to grapple with. So we are having regular engagements with agencies to see whether there's possibility that we can consider in terms of lease extensions. That would give us a little bit more clarity and then allow us to look at economics of any works that we do a little better. But other than that, say, if we are not able to get absolute clarity along that line, we'll still look at selective upgrading possibilities. The upgrading possibilities, of course, is for -- can be fairly wide, from simple building upgrading up to complete redevelopment. And of course, asset enhancement initiatives, which may involve new buildings being set up is part of the spectrum. So we want to be careful in the way we commit our capital and resources and time as well because we do not want a case like we'd -- that we're putting so much effort that the additional gain is so marginal that we might have to apply the resources and capital elsewhere. But certainly, Kallang is a attractive location for us and then, of course, for a lot of our prospects because of the connectivity, because of the maturity of that state. But we want to weigh that against the risk of the declining land tenure and we'll look at the site configurations as well, whether we could do something meaningful. I mean, the reason why we went ahead with this asset enhancement initiative at Kallang Basin 4 Cluster is because we think we can deliver a product which is meaningful and usable and attractive enough to the end-user. Ideal situation, I would want to tear down the adjacent buildings and have a much more regular, much bigger kind of development. But I think, we look at the trade-offs, we are getting more than 90% occupancy in some of the existing buildings. We want to forego the rent contribution just to have a slightly nicer buildings, probably not for that cluster. But these are some of the kind of deliberations and debates we have all the time internally on what makes sense, what is more prudent for us to do. Okay. Yes, sorry, David?

[David Lum, analyst]

Kuo Wei, when you started your presentation, you mentioned that on a quarter-on-quarter basis, there was some same-store weakness at the revenue. You probably touched on it in the rest of your presentation, but what assets were you referring to?

[Kuo Wei Tham, executive]

Yes, I think Flatted Factories, we are seeing that kind of a decline if you look at our rent before and after for existing rents. So the renewal rents, we are seeing a dip. And as I mentioned, I think in part of the presentation earlier, we anticipate one of our larger tenants, HGST, to shrink down quite materially. So that, of course, would remove the revenue contribution, at the same time, create a gap in the cluster where they are in. So we think in the short term, certainly, there will be some downward bias for the Flatted Factory space. And if you look at the multi-tenanted factory space figures from URA, it's also negative in terms of median rent adjustments. So we think the kind of weakness is there, but it's not kind of pervasive across the entire portfolio. We are still seeing fairly decent tick ups in rates for high-tech space and that's the segment which we'll be focused on. Business Park remains quite healthy, but is probably also a short-term effect of Johnson & Johnson, which had left us, so we needed to push a little harder for getting new tenants in, and we would have to maybe look at the trade-offs between occupancy and rents for the time being for the Business Park space.

[David Lum, analyst]

And can you remind me again which building HGST is vacating?

[Kuo Wei Tham, executive]

Kaki Bukit.

[David Lum, analyst]

Bukit?

[Kuo Wei Tham, executive]

Yes.

[Audio Gap]

[Unknown Analyst]

Kuo Wei, just some thoughts on Johnson & Johnson vacating. Just wondering, in the location, I thought the vacancy level, it's fairly high. So I mean, given that you'd given a good rate to a tenant, do you think this is going to be a trend going forward?

[Kuo Wei Tham, executive]

I hope that we wouldn't need to do that too frequently. I will see the rent level, which we have given. That was -- of course, that was aggregated as well, but it's indication of the kind of rent levels that we might see in some of the larger research, but I think those were more tactical kind of positioning. We think the Business Park market is certainly improving. And certainly, there's a correlation with the promotion market as well. So they'll be picking up again. So we do not want to be too quick to do downward rent adjustments. So at the end of the day, our leasing team would make that gauge and judgment on the level of enthusiasm of their prospects and also, whether our facilities and space fit what they need. So if we can find a right fit and it's a win-win kind of situation, we certainly would want to encourage a slightly higher rent level. But as I said, we would always look at the trade-off between occupancy and rent levels. And for the situation now, we think we might prioritize occupancy a little more over rent. But I don't think we will just go overboard in just taking on any rent offers that comes, especially the low ones, knowing that the market is certainly drifting up, yes.

[Unknown Analyst]

Just some clarification on your WALE. What are leasing spreads looking like? I mean, expiring rents versus the market? Assuming market stays at -- stays flat, are we still going to see some pressure on reversions for this financial?

[Kuo Wei Tham, executive]

Well, for the next 1 to 2 quarters, probably so. I think whether that will persist beyond, say, end of '18, we're not too sure. Our hope is that there's not a lot more new supply or new stock that is coming onstream. But say, if you look at the kind of couple of land sale program that is in place, it's still fairly measured. We are talking about 8, 9 hectares per year kind of levels, which is very manageable. So we don't think there will be so-called additional kind of uncertainty in terms of new supply. But one thing to keep an eye out would be the level of demand from the industries and also, the other thing is whether there's any shifts in the segments that operate in Singapore because over time, you can see some of the manufacturing activities moving out of Singapore and some of the new entrants, say, the financial technology companies and the software development companies, they have a different set of requirements, different needs, and the [ ball play ] they require may not be as large, even if the economic output is a lot larger, is a lot, compared to some of these manufacturing facilities. So we're seeing that shifts now. So our focus, of course, will be on whether we could cater to, whether we can accommodate some of these new needs. And some of our newer tenants in the facilities are software development companies, financial technology companies. So as long as our assets are well located, we are able to adjust, recalibrate our product offering, we probably can continue to remain relevant. Then we have to calibrate our price level to match.

[Unknown Analyst]

Very nice. Question. If you look at HGST, right, it means, they are returning space. Do you mind if you let us know how much risk to top line that will be? And if the current vacated space that they are returning, right, is it tough to lease it out in the market? I'm just trying to get a sense of the demand at Kaki Bukit here.

[Kuo Wei Tham, executive]

Okay. I think we outlined the Top 10. HGST is #9, which is 1.1%. Assuming everything gets given up, that [ 1.1% ], okay. But I think they will -- in our engagement with HGST, we think they are likely to retain some space because, I think, they still have ongoing activities in Singapore and the higher value-add, maybe the development related kind of activities will remain here. So from what we understand, of course, and then you could have read in some of the earlier releases by them or by -- in the news, that they have been downsizing their production of disk drive facilities and activities, and I think some of these have moved to the neighboring countries, partly because of cost consideration. So that part will probably be the bow of a ship. So we think the impact will probably be lower than this for sure, it is how much we adjust or how much kind of impact that we can mitigate and accommodate. And Kaki Bukit is a relatively well located cluster. It's in between 2 MRT stations. And I would say even nearer than Labrador to MBC between the 2 MRT stations. So for people who are open to walking a little, it's certainly a fairly attractive location. But of course, we would -- we may need to look at what additional works we need to do to maybe upgrade the building to make it more attractive to end users. So we think it will not be difficult to lease. It's probably getting the right kind of tenants, but as in the experience that we have in the exit of some of our large tenants, likelihood of finding 1 or 2 or even 3 large tenants and soak up all the space is quite low. You probably need to take in a lot more smaller tenants to do that. And of course, another possibility we can look at for this cluster is maybe another asset enhancement initiative or redevelopment like what we are doing in the other clusters. So that kind of deliberation is always in place because now that we have HGST shifting out, that creates a possibility because, as you know, as with all asset enhancement work or development works, the constraint from a using tenants is always an issue. And the time where we bid Hewlett-Packard build-to-suit project, it took us a year to shift the tenants out. So it could enhance. We can see that's an opportunity. But we also see that the challenge, say, if we decide that maybe a redevelopment or asset enhancement initiative might not be right immediately, then we have to look at that balance how much more new tenants we bring in and how much more constraints that we are putting into the cluster, as well. Yes. Yes, sorry? Ladies, Xuan?

[Xuan Tan, analyst]

A few questions. Firstly, is on NPI margins you're expecting, do you see more cost pressure or cost saving opportunities?

[Kuo Wei Tham, executive]

I hope to be able to say we see more cost savings opportunities, but I think the inflation is certainly creeping into our P&L, and we think the NPI margin will probably continue to be within this range of 73% to 75%. And there's probably a slightly higher bias towards cost increases of so-called a margin compression.

[Unknown Analyst]

And secondly is on your development projects. I think as you've mentioned, most of them are already completed. Will your focus next be of doing more redevelopments or acquisitions? And specifically, when are you thinking of doing the remaining proportion of US Data Centre?

[Kuo Wei Tham, executive]

Okay. When it comes to growth possibilities, I think we certainly explore all that comes very much driven by what's available, what comes our way. Preference, of course, it's to do acquisition at the right price because it is more immediate. It's certainly, in some ways, less painful. Development may look simpler, but it's really painful. It's a lot of heartache, getting the land site, getting the place ready, and say, well, for the, say, redevelopment, you need to manage the tenants and the construction process is not so straightforward. So on balance, certainly, we will prefer acquisitions compared to development. But with the existing portfolio like this, we would try to see whether there are development possibilities so that we do not just wait opportunistically for acquisition deals to come because they may not come all the time for us. For same-store or existing portfolio redevelopment or asset enhancement initiatives, we can always think and rethink and deliberate again and see whether the [ fighting ] situation exist in terms of demand kind of situation and profile before we will kickstart some of these. So we look at all. Preference, acquisition. And the balance of the 60% of the US Data Centre portfolio, I think, probably very much depends on the Mapletree Investments, the parent or joint venture partner, when they think they want to divest -- if they wanted to divest. So my sense is probably a bit too early now because if that had been the strategic intent, and I think we have articulated that before, if we wanted to take on the entire portfolio at onset, we probably can in terms of capacity. But this is a case of whether we want to do a step approach and also, the comfort level of the -- our joint venture partner as well. So right now it's just barely a quarter after the portfolio had been with us, so we want to see. And I believe the sponsor want to see the performance and the stability of our tenants and maybe have some engagements with the tenants on, say, renewal further down the line and see the kind of comfort we have before they make the decision. So it probably won't be something that we would anticipate in this financial year. Too early for us to do that. Yes.

[Zhi Bin Yeo, analyst]

Kuo Wei, Zhi Bin, CIMB. I just want to follow up on Tan Xuan's question on the NPI margin. If we just look more in terms of segment, like for Flatted Factories, I think, increased 76%, 76.8%. This is despite saying that the previous year had some one-off, cost is increasing. And so you've signaled that occupancy has came down, but you still seem to be making these operational efficiencies. So just wondering whether we could be a bit conservative here and 76% should be where we're looking at, still 75%. You also noted, I think, also Hi-Tech Buildings' NPI margin also increased quite a bit. I noted it's because of HP, but again, it seems to be a bit ahead of budget, so maybe you can talk to people of that?

[Kuo Wei Tham, executive]

Okay. Well, of course, the attributes of the property segments are a little different for Hi-Tech Buildings, for this case, Hewlett-Packard, mainly because it's not fully operational yet in the financial year, as well. And so it's not a case where we have the full set of costs in place. So if you see, say, some of the newer projects exhibiting higher margins, it's because of that ramp up kind of profile. And the other thing to note is that in most development projects or construction projects, you usually have a defect liability period of 1 year after completion. So during that period, the contractors -- is some [indiscernible] -- and then for these cases, some of these M&E contractors or suppliers would be responsible for maintenance of the systems they put in place. So there's no operating cost for, say, the building. So you can see this anomaly usually in the first year ramping up, plus DLP, or defects liability period, cost being taken as part of the development costs. So I wouldn't use that as an indication of the steady-state kind of margin level that we would have. So it'll probably take the second year or the year beyond where you have near steady-state occupancy and when you have a full set of, say, resources and staff on-site to gauge across to our high-tech facilities. The high-tech facilities' so-called tenants are really a little bit more demanding. So all things being equal, even you are talking about, say, similar systems, they may want more frequent cleaning, for example. So some of these costs goes up quite frequently depending on the service level they needed. So for Flatted Factories, yes, certainly we have been able to contain the costs quite effectively, last time I showed you. Not because we lowered our service level, because I think on relative basis, we certainly adjust our service level to suit, but we try to maintain a certain level which is, say, meets most of the needs of our tenants. Some of them, of course, do have very exacting needs. But generally, the present service level, we have been able to contain our costs quite a bit. And I want to say that it's not because we are conservative in the way we do our gauge. Certainly, we do see some of these new contract so-called rates and then new so-called services contracts that we are getting in, exhibiting higher levels. So we don't want to be so, so optimistic about the possibility of us improving the margins more. So that's the reason why we are looking -- still looking at the vicinity of 73% to 75% level for our margins. Some of us might remember, some years back we had the progressive rate system that's been introduced. So some of these -- we are seeing some of the effects soon are coming, creeping into our -- the economics as we renew our leases and as we renew -- or sorry, not our leases, renew our contracts, because some of our contracts were done earlier on, say, 2-plus-2 or 2-plus-1 basis. So we might have a bit of advantage earlier in having some of these lower rates locking, but by the time we get the resets done, you can see human resource cost that would certainly shift up over time. So while it is a -- continue to be a focus for us to contain cost, but I don't think we want to be unrealistic about the kind of levels that we should be looking at.

[Zhi Bin Yeo, analyst]

Okay.

[Kuo Wei Tham, executive]

So as Lily has reminded me, part of the reason, I think, we could have mentioned earlier as well, we have a re-contract of the utilities with a power retailer for last financial, I think, about middle of the calendar year. So that helped us contain utility cost as well. So that resulted in some savings for us. But if you do a comparison on a year-on-year basis, now with the contract already in place, I think that one will go mainly on discount of tariff structure so it's just a shifting up and down with the tariff rates. So with that [ law ] in place and you do a year-on-year comparison, will we do more savings this year compared to last year? Probably not. Because with that rate shifting up and down with tariffs, and tariffs is very much dependent on the oil prices, and I think a lot of the oil ministers are celebrating the increase in the oil prices. So we think tariff rates probably will be adjusted up. So our rates will probably go up on an absolute basis, though our discount may be the same. But if the -- your base reference rate goes up, our absolute kind of exposure, our absolute cost still goes up. So we don't want to be too enthusiastic about whether some of the earlier cost savings can carry forward into the subsequent year, as well.

[Zhi Bin Yeo, analyst]

Okay. One more question for me. With regard to, I think, sponsor's '18 tight pricing, just wondering whether you will look at property that is closer to the first lease renewal cycle? And maybe you could share -- I don't know if you can share the occupancy and the passing rents for that property?

[Kuo Wei Tham, executive]

Well, we certainly look at it once in a while but as a bystander, because as you would realize, MAS requires us to be dedicated to this trust by regulation. So the project is done by another team within a sponsor. So once in a while, we go and take a look. I go there to [ Makan ]. So I look around and have a gauge on the occupancy level and how good the food is. Yes, the soy chicken thing. When they first started, it was pretty good. My own opinion. The -- yes, okay. It could have been better because I think the -- over time, I think as you get your trainee chefs to take over, sometimes the standard may not be consistent. So after eating that, then I went to eat in the Japanese one also, another Michelin-star thing. Well, that's quite decent. So generally, I think the F&B offerings and the retail offerings down there are doing quite well. And their momentum, I think, is continue from the start. You really have huge crowd going down there. So I think that retail segment for the building and for that precinct bodes well. And occupancy level, I think from what we can sense, it's fairly good. And you'll probably be reaching the so-called steady-state probably middle of this year or towards end of the year. So certainly, we don't have absolute visibility on the economics, but view inspection tells me that it is getting ready soon. So at the end of the day, we will have to say, keep an eye on readiness while taking a cue from the sponsor, whether there's a kind of timeline he's looking at, whether you're looking at a slightly earlier divestment, whether they're looking for 1 renewal cycle first, carrying 1 renewal cycle. And also whether he wants to divest or not in the first place because they probably have their own considerations and plans for the assets within their portfolio. Though, of course, we hope that it is something -- it is an asset that we could pursue if the sponsor decides to divest. And while the first to [indiscernible] is in place, but is not automatic. And then at the end of the day, it is not a call option for the trust. It is only an attractive asset for us in terms of location, in terms of the tenant profile and attributes. And the food is not too bad. So that is, of course, one of the many things that we will look at. And I think to make sure that we have sufficient, say, growth possibilities, that won't be the only thing that we would bet on. If it comes and if it's up within a set of time line finding growth, we certainly owe it to ourselves to look out for possibilities everywhere else, not just in Singapore, but including the new geographies that we have gone into as well.

[Teck Ching Wong, analyst]

Kuo Wei, Andy from OCBC. Kallang 30A currently, can you just remind us in terms of what the 3 techs that you took up space? And all of this on a 40% occupancy, how much is already rent paying? And based on current run rate, what is the kind of estimates NPI yield on cost that you are looking at?

[Kuo Wei Tham, executive]

Okay, the space, I think mainly taken up by technology companies -- yes, mainly, say, equipment developers, makers and we have so-called the IT kind of development company there, as well. We also have another so-called technology company doing a product for robotic systems. So mainly technical so-called link-related kind of tenants. And you're asking about ramp up that we have built in...

[Teck Ching Wong, analyst]

Of that 40% occupancy, how much is already paying rent? Or are they still all rent-free currently?

[Kuo Wei Tham, executive]

Most of them still doing fit out, I think. Yes. So if you're talking about as of now, we don't have any rent collection yet. I think we're starting the first one in June. June this year.

[Teck Ching Wong, analyst]

And in terms of the current rent they're able to get and also what your expectation is going forward, so what kind of NPI on costs are you expecting?

[Kuo Wei Tham, executive]

Okay. Well, I think the rents, we hope that we'll continue to be able to get them within the $3.50 to $3.80 level. And our yield on cost, we hope to be able to clear between 7.5% to 8%, which is what we have originally set out to do. And I think margins, of course, is the one thing that we'll look at. And hopefully, once they start operating the building, we would have a better sense on their kind of cost structure for this facility, as well.

[Teck Ching Wong, analyst]

Secondly, on acquisitions front, previously you seem to have a more, like, we can see, approach on the current U.S. -- the asset, that portfolio. So does it mean that you're actually not been so actively looking for third-party acquisitions in the U.S. and would it be even be more far-fetched to say, is looking at data centers in Europe, would that be something not so in the near distance?

[Kuo Wei Tham, executive]

Well, we -- okay, we certainly look in these markets. In the U.S., of course, a little bit more closely because the infrastructure is already in place. And as you can see in the approach we have taken for the first portfolios is done together with the parent. So we are getting the resources on the ground from the parent. I think, the parent is also building up a lot of -- they are building up a fairly large team and putting a lot of resources in the U.S. So we are leveraging off that to look at deals and transactions. So it's certainly not the case of us waiting down here in this part of the world and then for some U.S. seller to come knocking on our doors if we want to buy or not. Certainly, we don't take such a passive approach. We are getting our team members down there to look actively around. And of course, we have engaged many of the agencies and the folks out there to lead us to transaction. Of course, we have not taken the step of us setting up a separate base under Mapletree Industrial Trust and to have resources that are, let's say, employed by us sitting down there and hunting. So we have not taken that step yet, but we are already leveraging off the resources and network of the parent. And of course, we have our own engagements with the market and agencies and some of our chaps, our investment chaps, attend the conferences in U.S., as well. So we try to increase our reach to look out for right opportunities and the right match. So certainly, we want to see whether we can do a little more, especially when it's one of the larger and deeper markets and the infrastructure is already in place. Other markets like Europe, yes, we do get leads once in a while, but I think on a relative basis, it will probably be not as much as what we see in the U.S. And in terms of readiness to do a transaction, certainly, we would be a little more ready to do U.S. than the European market, for example, because of the resources and infrastructure we already have in place. Yes?

[Unknown Analyst]

Sorry, can I just quickly ask on the hedges that's expiring in the second half? What's the plan in terms of looking to enter to new hedges? And if you were to do that, assuming at this current market environment, what would happen to the average cost of debt?

[Kuo Wei Tham, executive]

In not so many words, yes, your cost will increase for us.

[Lily Ler, executive]

But it will not increase so much. Okay, I think if you look at it, part of the $225 million, about $125 million is the expiring MTN, which is coming due in March 2019. So if you talk about the impact of the refinancing cost, okay, you wouldn't expect a huge impact for this particular year. The effect -- the impact, if anything, will come in the next financial year, right. And as to how we plan to do it, of course, when -- is the MTN that's always the risk option, we can either look to refinance the MTN out with bank loan or with another MTN, right. So if it is with another bank loan, then we typically will be looking at interest rate hedges, et cetera, okay. So I think for the team now, we are monitoring the market. And if the numbers make sense, we can even look at taking on the interest rate hedges on the forward basis. That means unlocking today on ForEx stock -- forward stock on the future, but there is always a cost that comes along with it. So we need to monitor that, we need to make sure that -- or we need to balance between the protection that we get now in view of the lower interest rate at this point, okay, versus what we could possibly get later on, right. So definitely, the team is looking on it, right. So we don't have to wait until the second half to do the locking in. We can actually look at it now. Okay. Does that answer your question?

[Unknown Analyst]

Yes.

[Hwei Leng Tan, executive]

That's all, and thank you for attending. So if there's any question, just push our [ soft link ]. Thank you.

[Kuo Wei Tham, executive]

Yes, thanks very much for joining us this morning. Okay.