Mapletree Industrial Trust

SGX:ME8U

Earnings Call Transcript 2021-Q4

[Hwei Leng Tan, executive]

Good morning, and thanks for joining us for the results update for MIT's Fourth Quarter and Full-Year 2021. My name is Melissa, and we have the management team of MIT, sitting with an [indiscernible] businesses in the boardroom. We have Mr. Kuo Wei Tham, our CEO; Ms. Lily Ler, our CFO; Mr. Peter Tan, the Head of Investment; and Ms. Serene Tam, the Head of Asset Management.

Today, we are broadcasting the analyst teleconference via our webcast. [Operator Instructions]

Without further ado, I'll pass the time to Kuo Wei for a quick update of the quarter.

[Kuo Wei Tham, executive]

Okay. Good morning, everybody. I think assurance that we have given you, we're sitting far apart from each other, certainly more than 3 meters, very, very safe. So we have a presentation slide that was uploaded last evening. We can go through the highlights and maybe some of the few key updates before I take questions.

Now the highlight page is on Page 5. For the full year, we have reached almost $300 million worth of distributable income, $295.3 million, and that represents 11.3% increase year-on-year basis, driven mainly by the contributions we have from our North American data centers, which, as you know, we have completed the acquisition of the balance 60% on 1st of September 2020. But we had some drag from the rental reliefs that we are giving to our tenants in aggregate just below $13 million for the financial year. And of course, we commenced the redevelopment of our Kolam Ayer 2 cluster. So we do not have revenue contributions from that cluster.

On the DPU front, for the financial year, we have delivered $0.1255, which represents a 2.5% increase year-on-year basis. So if you look a little more closely at the fourth quarter, distributable income, $70.7 million, which is a 2.3% increase year-on-year basis, similar kind of drivers of what we have for the financial year. And a DPU level, $0.033, which represents a 15.8% increase year-on-year. Of course, this is a little kind of higher than what we normally see, mainly because of the amount that we have withheld in fourth quarter of financial year '19/'20, that was $6.6 million, that is still not released yet. And because of the lower base for the fourth quarter of the previous financial year, you see a relatively higher increased DPU level.

And for fourth quarter, as we have outlined in the bullet point, we have released the $7.1 million of tax-exempt income that we have withheld earlier. So some of you might remember, we have withheld an amount about the same $7.1 million in the first quarter of financial year 2021, the beginning of the financial year.

So we are releasing that in fourth quarter. So effectively, if you look at financial year 2021 on a stand-alone basis is made intact. So there is no kind of reporting effect of income for the financial year. So that amount is roughly equivalent to $0.003. So if you remove that effect, we would have a $0.03 distribution for the fourth quarter.

And of course, fairly recently, before the end of the financial year, we have completed the transaction we announced in September last year, the data center in Virginia in the U.S. So that has started to contribute a little, and we would expect the full kind of effect of contributions in this current financial year.

And the next, of course, on the portfolio parameters, the performance. Occupancy has shifted up a little, 93.1% to 93.7%, driven partly by slightly better performance from our Singapore properties and also a little bit of contributions from that 3 weeks of higher occupancy registered or taken in for the Virginia property in the U.S. So in aggregate, we are reporting a higher number.

The portfolio valuation as at March 31, as you know, we do it once a year, has increased by 14.7% to $6.76 billion. So I think that is driven, of course, mainly by the acquisition and consolidation of the data center portfolio past the acquisition of the asset that we did. Of course, there's some downward drag in valuation for some of our Singapore assets, which you will see in the details that we have outlined in the financial statements.

The capital management part, I think we remain fairly healthy, whether we have a strong balance sheet and amount of committed facilities, we have more than $600 million. And the coverage ratios is still a very strong at 6.4x as in the fourth quarter.

Now going on to the next page. Our distributable income and distribution profile. Of course, as I outlined earlier, on the right, $0.033, that is partly driven by the release of the $7.1 million. So if you look at the bar chart, that $7.1 million is not registered in the $70.7 million because that is not the distributable income for that quarter.

So as a result of that, there is a big profile compared to the previous quarter. And the lower distributable income for this quarter is partly due to higher reliefs that we have given to our tenants compared to the previous quarter. Previous quarter was about $1.9 million. This quarter was about $3.7 million. And we have a little bit more operating expenses [indiscernible], mosaic cleaning works for the portfolio in Singapore. So as a result, the effective distributable income has come down. And of course, some of you may have noted, usually, we do have a slightly higher level of operating expenses towards the end of the financial year, really in the fourth quarter.

In aggregate, I think we have been able to exceed the performance for last year despite the dynamic challenges. And despite having -- given now the rental relief of about $12.7 million to our tenants. So for the full financial year, $0.1255.

Now going on to the details from Page 8 onwards. On Page 8, we outlined the revenue of about 19% increase. So for fourth quarter, we have delivered $121 million. That's partly or mainly driven by the consolidation of the U.S. data center portfolio that we have completed for September. Operating expenses, of course, has a corresponding effect as well. But as I mentioned earlier, we have a slightly higher set of operating expenses for the quarter -- for the Singapore portfolio. So the net property income increase is about 17.3% to $91.8 million.

And of course, for the fourth quarter, you see the effect of valuation in the P&L. So a couple of lines down, you see $87 million. That is the fair value loss from valuation adjustments that we have seen, mainly for the Singapore portfolio.

There is another line that we would highlight, which is a deferred tax $32.35 million, just around in the middle of the table. That one is for our wholly owned U.S. data centers. Essentially upon taking ownership of 100% of the portfolio based on accounting standards, we would need to provide for deferred tax. That is equivalent to cap against tax in the U.S. if we had disposed off the assets but, of course, this is a provision that I think being very obedient law abiding so we provide for that. And this is a noncash item. So this provision as well as evaluation, fair value adjustments, they have no impact on the distributions. So all these gets reversed out. And therefore, we have the amount available for distribution of $70.7 million which I outlined earlier and the $0.033 of DPU for the quarter.

And going on to the full year year-on-year performance comparison. That's on Page 9, the revenue side, and we have reported a 10% increase from $406 million to $447 million. Operating expenses follows the same trend, $87.8 million to $96.2 million. So in aggregate, about 10% increase in net property income from $318 million to $351 million. So the same kind of effect gets so-called represented here with the fair value loss of $87 million because it's already -- it was registered in the fourth quarter, and that is only registered ones for the financial year. Same thing on the deferred tax effect, $32.5 million.

So in aggregate, for the full financial year, we have delivered a 11.3% increase of the amount available for distribution from $265 million to $295 million, as I mentioned, just a shade below $300 million. So that gives you that 2.5% increase from $0.1224 to $0.1255. But I think if you stay hard in the numbers, you would have noticed that $0.1224 was the effect of us withholding the $6.6 million in the fourth quarter of last year. And at that time, for a slightly lower unit issue base, that was equivalent to roughly $0.003. So from the DPU perspective, we are back to about the same level, if we had not done the withholding last financial year. But, of course, this year, we had quite a lot of rebates that we need to account for, plus a slightly weaker leasing market at the beginning part of the financial year.

So going on to the next page, Page 10. When we compare quarter-to-quarter. There's very little shift because this one -- the time frame is just 3 months from the comparison. The revenue has drifted down a little. Some of these are driven by, of course, rebates, that we have given. As I mentioned earlier, we have slightly higher rebates given for fourth quarter. So $123.7 million down to $121 million.

Operating expenses, you can see that increase, which we talk about, from $24.8 million to $29.3 million. So net property income on a quarter-to-quarter basis is 7.2% downward shift from $98.9 million to $91.8 million. So the rest of the effect, similar to as what I've outlined the key kind of shift with net fair value loss and also the deferred tax. So on a quarter-to-quarter shift of 12.7% down. From a DPU perspective, because, we have removed the effect of the noncash item, we still see a 0.6% increase from $0.0328 to $0.033.

So going on to the next page, Page 11, where we look at the financial position and also the NAV. So the NAV shift from December 31, 2020, to 31 March and our financial year is mainly driven by the adjustments in our asset value. Of course, compared to last year, we have seen an increase 5.4%, and our NAV per unit, year-on-year basis, 2.5% increase, and adjustment [ now at ] 2.4% from the end of the previous quarter due to the valuation adjustments.

Now going on to the next page, Page 12, where we give an update on the valuation. So you can see the aggregate figure, SGD 6.76 billion equivalent for 415 properties. The Singapore assets, you can see about the -- near the top part of the chart, is $4.39 billion. And you compare that with last year, you will see that dip, it was from $4.47 billion -- $4.44 billion to $4.39 billion. And quite a few of these assets that had downward shifts on the shorter land tenure assets. And also some of the properties where we encountered challenges in rental levels and occupancy. So there's a certain adjustments or variables we have made based on the take of the market rents outlook as well. So that has accounted for a big part of the $87 million downward shift in the valuation. For the North American portfolio, we are seeing an increase for the wholly owned is about 1% and the joint venture portfolio is about 2% increase.

And going on to the balance sheet on Page 13. The notable so-called perimeter, of course, is aggregate leverage ratio that has increased by about 3 percentage points from a quarter ago from 37.3% to 40.3%. Key reason is because we have used debt 100% to fund our data center acquisition in Virginia that was completed on the 12th of March, depending whether you use Singapore time or U.S. time. But anyway, we have -- look and the size of that transaction is a little small for us to go out to the market to raise equity. So at the end of the day, we have decided to just use debt for the time being to complete the transaction. So we certainly look out for opportunities to again adjust our balance sheet as we go forward. But this leverage level is certainly nothing for us to be concerned about.

So going on to the next page, Page 14. Our maturity profile for our debt, a very, very diversified across all the different financial years. So we don't have any notable kind of expiration. The larger one, I think, is about 4.5 years from now, the financial year '25/'26, 23.7%. So we are not that concerned about exposure. So we just continue to make sure that we have a well spread expiration profile.

And on Page 15, sorry, the risk management aspect of our balance sheet. You will find that the amount fixed as a proportion of the total debt has come down from 96.2% in the previous quarter to 76.8%. That's -- the key reason is because the debt that we have taken for the acquisition of the data center is mainly not fixed. It is on floating basis. So effectively, that has resulted in the percentage drifting down.

So the average tenure remains about the same despite having a time [indiscernible] because of some of the small refinancing that we have done. It turns out that we have the same number.

The weighted all-in costs were about the same. We have managed to shave 0.1 percentage points. So now we're about 2.8%. Coverage ratio still remains fairly healthy 6x. And if you look at the other perimeter which is required or calculated based on the property funds guidelines on a trailing 12-month basis is about 6.4x. It has come down a little compared to a quarter back. Okay. Now going on to the next segment where we talk a little a bit around the portfolio. So this is, of course, an updated picture. In aggregate, we announced $6.8 billion. And data centers just a little above 40%, 41.2%. And most of our data centers are in the U.S., 35% and balance 6.2% in Singapore. So in terms of geographical spread, yes, it comes out to be a nice rounded number, 35% and 65%, Singapore and North America. So we find that -- I think over time, we will have a slightly larger representation of data centers and slightly larger representations of non-Singapore assets as we go along.

And on Page 18, on the occupancy levels, I think very, very stable. The increase in aggregate from 93.1% to 93.7%, as I mentioned earlier, driven by slightly better Singapore performance, except for a couple of segments like business parts where we still seeing a bit of weakness down there. And the contributions from the so-called U.S. portfolio as well.

And on the lease expiration profile, that's on Page 19, the Singapore portfolio, I think, remains roughly the same 3.1 years. North American portfolio is 6.2 years. So in aggregate, we still have a very credible 4 years for the weighted average lease to expiry and a very well spread. If you look at the chart below. And in the near term, for the current financial year, only 14.8% of [ lease with you ]. So it's essentially business as usual tenant management for us. And most of the leases that are due for expiry. A big chunk of them way beyond '26, '27 and beyond. That's about 30%.

And on Page 20, our top 10 tenants, in aggregate, slightly more than 33% of our gross rental revenue and the addition of new entry is #5, which is 2.9% of the multinational company, the name, which we cannot outline at this moment. We will try. I mean, we are engaging the tenants. Some of the tenants are rather shy. And this is of course, a tenant using a -- that was in a data center facility in Virginia. So when they are ready to be disclosed, we will certainly be happy to copy and paste the logo on this page.

And on Page 21, tenant trade sector diversification. Of course, we have a more and more diversified portfolio. Our InfoComm or the blue part of the chart has been growing over time. So we think it is likely to be significant as manufacturing very soon. And lot of the tenants we have in this space are in the data center services. I think earlier on, we had some classification adjustments. The tenant like AT&T, I think, was originally classified under telecommunications, but the activities and operations they have are more data centers. So this is more a -- more accurate representation within a sub segment. But as a whole, we see a higher representation coming from InfoComm in the coming years and manufacturing becoming a slightly smaller kind of part of the portfolio. But it's still significant. And the larger part, of course, is still from the manufacturing, 17%, the precision engineering part of manufacturing.

Okay. Now going on to the next page, where we talk about the Singapore portfolio specifically, we have seen an increase in occupancy level, 0.7 percentage point from 92.2% to 92.9%, partly because of better performance in some of our clusters in the later part of the financial year. There's a dip in the weighted average rental level, $2.11 to $2.05. This is essentially due to the rent relief impacts because the rent reliefs were given as renter rebates. So that has a direct mathematical impact on the kind of average rent number. So you'll probably find that for financial year 2021, the reported rent numbers tend to get distorted later by rent reliefs given. But I think next -- or this coming financial year, you probably don't have that effect in, and you can see the rent numbers reflecting the actual rents, effective rents that we are securing.

Okay. Going on to Page 23, the rent revisions, fairly stable profile. But I think if you do your calculation, you'll find that we have roughly minus 3% effect in most of the property segments from the before and after range. We had a [ toolbar ], Hi-Tech Buildings $4.67. That one, I think, we would suggest not extrapolating data from there because Hi-Tech Buildings generally would not see these kind of high rent levels. This is normally the ground of this number is because we had a retail tenant at 18 Tai Seng. Of course, we don't have that many retail tenants.

So 18 Tai Seng is a Hi-Tech facility. We aggregated the data for purpose of reporting and the Hi-Tech for 18 Tai Seng, even the retail tenants, and we had some other tenants at our [indiscernible] cluster that had done -- they've taken new leases. So this becomes a valid number, but it represents a fairly high $4.67 number. So that is not really representative of Hi-Tech Buildings. Typical, Hi-Tech Buildings rents -- typically, Hi-Tech Building rents, I think, would still hover from $2.20, $2.30 for the -- some of our older facilities to about $3.50, $3.80, not much changes for some of our newer facilities.

So I think takeaway is there's still some pressure on rent revision side. We're still not able to really push our rents up. There's still some concessions that we have been giving to our tenants to keep them -- to keep occupancy level healthy. So I think that bears out in our next chart on Page 24.

The chart on the right, you'll see our retention level, 85.7%. So I think this time, we will -- I want to focus on keeping occupancies relatively healthy. So we will trade-off rents for the occupancy levels and to keep our tenants within our portfolio.

And on the investment update, I think on Page 26, is the Virginia data center that we have completed. So not a lot of additional updates. This is probably a case of us completing the story. So it has started contributing from for 12 or 13th of March, depending on which time zone you use.

So there is an amount that we have set aside, about $35 million [ debt ] for -- to account for any so-called lease structure finalization with the tenant. And hopefully, we get some carry down there, and we can lock in the finer, finer purchase consideration, but for all intents and purposes, for now, we take it at $208 million.

And on Page 27, our divestment of 26A Ayer Rajah Crescent, that is the data center that we booked for Equinix and the sale price has no change as well. We have announced only $125 million. But we think we are likely to have a transaction cost of roughly $5.2 million. You can see that in the middle of the chart. So the effective, so-called, value to us and also the, so-called, profit level is roughly 18%, which has been adjusted down because of this transaction cost. And this transaction cost is mainly attributed through the kind of levy, which this [ JDC ] would be putting on this transaction. So we're waiting for final confirmation, but this is our gauge at the present moment. And this adjustment has also been reflected in our valuation numbers.

Okay. And next chart, of course, is on the redevelopment of KolamAyer 2. It is progressing on track. In the total, the redevelopment cost has we have outlined of $300 million. And some of you may remember, it was slightly more than [ $216 ] million than when we first conceived the project.

The increase in total development cost is mainly due to increase in construction costs. And that's driven, of course, by the pandemic, supply chain issues, manpower availability issues. And so it's already accounted for. And some of this effect have also been reflected in the valuation for this cluster in the end of year valuation figures.

So the commitment level is still the same, 24.4%. And we, of course, are working hard to try to secure Anchor tenants for our other space. And then we are developing. And the updated picture, of course, you can see on the right is the construction progress. A lot of work on-site. So we hope to be able to finish most of the substructure work soon and then start building up and in time for our delivery to our B2C tenant.

And next, I think we go on to the outlook and strategy segment. I think for the economy, we're seeing some green shoots. If you look at the first quarter, a very, very small improvement. So the take is that for 2021, we'll probably see easily 6% growth. But I think the 16 cases that we saw yesterday was a little worrying. So hopefully, that one is just a blip and then we get to some good level of recovery and normalization this year.

So on the Singapore portfolio impact, as I've mentioned earlier, in aggregate, we have given up $12.7 million. And the rent arrears very, very much under control. And we have already seen a reduction in arrears level 0.2 percentage points. So as at end of the financial year has come down from 1.4% from December 31 to 1.2%. So we think situation is getting a little better and then we will see probable less stress in our tenants now.

And for North America, where we have, of course, just data centers, the growth remains strong. Demand remains strong. And we see a lot of pickup in the pipeline that has been created, mainly hyperscale and also cloud service providers. So we think this will continue to drive the demand and requirement for data center space.

So I think finally, just to sum up on Page 32. Our strategy, I think it's the same. We would work hard. We'll keep the portfolio stable and make sure it's very resilient, and we'll work on the occupancy levels and then we'll have healthy retention levels. And we have a very strong balance sheet. Coverage ratio is very healthy. And certainly, we continue to look for growth opportunities, and we have the upcoming redevelopment completion that should start contributing from next year onwards.

So I think we have completed our presentation. I will happy -- be happy to take questions.

[Hwei Leng Tan, executive]

Thank you, Kuo Wei. I think we have a few questions. I'm not sure who raised their hand first on my list. Can I get Yew Kiang to ask the first question?

[Yew Kiang Wong, analyst]

Can you hear me?

[Hwei Leng Tan, executive]

Yes, we can.

[Yew Kiang Wong, analyst]

Yes, yes. The first question is on the outlook of business park. Can you give us some color? I see that the occupancy trending down a little bit. I just want to get a sense of what's happening there. Are you also seeing some of the financial institutions, if you have any, that is like thinking about giving back space?

Secondly is on acquisitions. What are your thoughts on acquisitions this year given that your gearing is close to that 40% level?

The last question is on the redevelopment of Ayer Rajah. What is the initial projected ROI versus the current status? And could we say that this could go even lower given that your -- the building contract has yet to be awarded? So construction costs could actually increase further. That's it from me.

[Kuo Wei Tham, executive]

Okay. I would address questions in order which we have outlined. The business park space is still under a bit of stress. The -- from the tenant profile perspective, I think we do not have really financial institutions in our 3 buildings. As you may know, we used to have Credit Suisse in our facility about 7 years back. So that -- they have -- it has moved out quite some time back already. But we do have companies that are in the infocommunications technologies sector serving financial institutions. So we have seen some kind of reduction in space needs from these companies because sometimes, if the financial institutions have adjustments made to their needs, requirements or they no longer need to be in certain of these premises, the support kind of companies sometimes would shift away or shrink the space needs.

And the few more material ones that we are seeing are in Signature business park building, where we have some ICT companies that are serving the financial institutions. And from what we understand, some of them have shifted some of their activities back to, say, places like India. So there's some effect down there, but as a whole, we think the business park space for us is not out of the woods yet. We are, of course, working hard to keep our tenants in our premises. That's the reason why you see the negative revision of about 3%. But I think the rent levels of about $3.50, $3.60 would probably be good support levels. And we think the situation is going to be -- getting to be a bit more stabilized soon.

And the -- your question on the investment and the kind of leverage level that we have reported, the 40.3% is -- I know I have mentioned earlier, was driven mainly by the way we have done the acquisition or done the funding for the data center asset in the U.S. in Virginia. That was, of course, roughly about SGD 300 million equivalent. It's a bit too small for us to do any equity fund raise. So it was a considered decision then to use debt for the time being instead of going to the market again, a very small amount of equity raise. So that certainly would not prevent us from taking on opportunities if they surface. And we see that as a very minor consideration in that leverage level as we have still very, very healthy coverage ratios and very good access to a lot of funding sources.

So at the right time, we will probably look at maybe recalibrating the balance sheet a little and adjusting the leverage level to help us build a headroom. But that said, even as of now, at 40.3% -- say, if we use 45% as a reference point, I think it really has already very generously allowed me to use $500 million of headroom, right? We have $600 million of committed lines available. And through this, we can use easily $500 million, $600 million. So yes -- so for us to move from the current level to, say, even 45% above, of course, I think that would allow us to capture opportunities that's available. And if there are any sizable transactions, it will probably step on the equity fundraise initiative. So the position that we are taking is that we will remain opportunistic. And I think if there's the right window, we will make some adjustments for the balance sheet while keeping an eye for possibilities to bring in new, good quality assets into the portfolio.

Now the last question...

[Yew Kiang Wong, analyst]

So -- okay. Can I say that in the interim, you could actually go up to 45% versus...

[Kuo Wei Tham, executive]

We -- okay. It's a possibility because I think at the end of the day, it is about availability of opportunities and whether the market offers a window for us to, say, take on more equity at the right pricing. So if it is a fairly stable market, I think our first preference is always to have a good mix of the funding sources. So we will certainly draw debt, and we would try to get some equity raise so that we maintain a very healthy kind of level for the portfolio. But we do not discount the fact that, say, if the situation requires, we would draw a little bit of -- a little bit more debt like what we have done in the last month or so for that transaction, draw a little bit more debt to complete our transaction. So we wouldn't want to set very hard thresholds, like 40%, 45% or whatever that level is, because if we very rigidly set the level, say, like 40%, then you put us in a bind. In the last couple of weeks, say, should we raise or should we not raise or should we just borrow and cross that 40%? So at the end of day, these are reference levels. We keep an eye on the serviceability and the strength of our balance sheet. So we certainly will be prepared if the right opportunity comes to take on more debt at least for -- on a temporary basis to complete transactions. So we go to 45%. Yes, certainly, it is possible. But I think all things being equal, we will probably not want to, say, test the envelope -- or push the envelope too frequently and then see how the market will react because we think it's still better to take a prudent approach or have a prudent approach when it comes to managing transactions and getting the funding in place.

[Yew Kiang Wong, analyst]

Okay.

[Kuo Wei Tham, executive]

So -- and on...

[Yew Kiang Wong, analyst]

And my last question is on Kolam Ayer.

[Kuo Wei Tham, executive]

Kolam Ayer.

[Yew Kiang Wong, analyst]

That's why I mentioned Ayer Rajah.

[Kuo Wei Tham, executive]

Yes, yes. No problem.

[Yew Kiang Wong, analyst]

Kolam Ayer.

[Kuo Wei Tham, executive]

So for Kolam Ayer, the original intended yield on cost was 8%. And with the increase in construction costs and, say, all the other perimeters, health concern, we think we'll probably drift closer to about 7% yield on cost. It is still, of course, a meaningful project for us to proceed. And on the construction cost front, we're, of course, a little bit more careful in the way we structured our tender. The construction scope for the third and the last block had already been included as an option in our construction contract with, say, Lum Chang. So we -- if we are proceeding with that, it will be just a simple exercise of the option figures. I think we -- at that time when we had the contract or tender structure, we wanted to have the maximum flexibility and wanted to keep an eye on the market, and we see whether construction costs would shift over the last couple of months or over the next couple of months. And I would say...

[Yew Kiang Wong, analyst]

So would it be fair to say that $300 million is sort of finalized?

[Kuo Wei Tham, executive]

Yes. It is more or less in place. So that is based on the -- so we got the contract [ sum ] that we have secured. So when -- if we were to finally exercise the option, it should come out to be about the same number. So right now, we are just getting some final gauge on the construction cost shift and indications on the market and from the quantity surveyors. There, the labor market and supply of materials continue to be very tight. So they expect construction costs to actually go up -- continue to go up in the interim. So I would say luckily, we had the option in place. If we had deferred making the decision, we may now be faced with even higher cost on the -- I think we have that kind of comfort that we know that costs have been contained already and then the figure that we have visibility on.

[Hwei Leng Tan, executive]

Thank you, Yew Kiang. I think we do have quite a number of queries online. Can I ask Donald to ask this next question?

[Donald Chua, analyst]

Can hear you me? No?

[Kuo Wei Tham, executive]

Yes. We can hear you.

[Hwei Leng Tan, executive]

Yes. We can hear you.

[Donald Chua, analyst]

A few to -- from me. First is on Virginia acquisition. As much as you can guide, could you let us know where -- what is the debt cost, NOI and NOI margin type of information? They will be very helpful.

And the second question is on rent relief. We are at $12.1 million so far. Do we expect more going to this new fiscal year? And what kind of momentum?

Third is on your operating performance. I've seen that your retention ratios are improving. Occupancy, on a portfolio basis, also have started to inch up. Would this be an indication that things could really start to turn around or stabilize especially in the Flatted Factories segment, where reversions continue to be negative?

[Kuo Wei Tham, executive]

Okay. I think for the Virginia asset, I think the tenant is still a little sticky. And as you know, we have this ongoing process to finalize the lease kind of perimeter. So we would prefer not to outline the specifics on the NOI or the margins yet. And until that is locked away -- if not, then the fellow -- yes, the lawyers will send us a couple of nicely worded letters. So I mean we will -- please bear with us there. And we will certainly be working towards closing that up soon so that we could give more clarity. So it's a bit...

[Donald Chua, analyst]

Of course, but more in cost?

[Hwei Leng Tan, executive]

Yes. I think for the Virginia asset, we do expect the [ NPIU ] for the first renewal term to be about 6%. And as Kuo Wei has mentioned -- and you can also see the tenant is maybe in no hurry because rent really commences next June. So we will take the time to speed up the process and try to get the details from them. But as you know, we do -- we are paying out distribution based on accounting standards. And based on that, we actually have started paying from 13th of March. And so if you look at the stretched-out yield, we're looking at 5.2% based on a straight-line...

[Donald Chua, analyst]

Okay. But you're paying out from balance sheet at this point, isn't it?

[Hwei Leng Tan, executive]

Sorry?

[Donald Chua, analyst]

Are you paying out from your balance sheet at this point given that the tenant has not started to pay rent yet?

[Hwei Leng Tan, executive]

Yes, yes.

[Donald Chua, analyst]

Okay. And the borrowing costs roughly for this kind of asset in Virginia, I assume that you're taking on U.S. debt, right?

[Hwei Leng Tan, executive]

I think the borrowing costs, I will leave Lily to answer that question.

[Lily Ler, executive]

Why you always ask so sensitive questions?

[Donald Chua, analyst]

It's important question.

[Lily Ler, executive]

Very sensitive...

[Donald Chua, analyst]

[ Last year ], I've been.

[Lily Ler, executive]

Yes, difficult. Okay. If you look at that in line...

[Donald Chua, analyst]

Okay. Is it in line with the previous U.S. acquisitions?

[Lily Ler, executive]

I -- so I think the one that we [ have done is ] -- they're probably about that. Is it -- I mean anyway, if you look at your 5-year swap rate now, I think it's close to about 1. So it would -- it's likely to be in excess of 2.

[Donald Chua, analyst]

Okay, okay.

[Lily Ler, executive]

Good enough?

[Donald Chua, analyst]

Okay.

[Kuo Wei Tham, executive]

Okay. The...

[Donald Chua, analyst]

[ Interesting ] when I can get that. Rent relief?

[Kuo Wei Tham, executive]

Okay. The rent relief is actually $12.7 million instead of $12.1 million. So we think that is probably going to be most, if not all, of what we are likely to give out to our tenants. The government agencies, I think, are likely to come up with additional measures because the market is probably getting to a good degree of normalization. So that's one of the reasons why we have made the decision to release the amount with help in this quarter, the $7.1 million. So yes -- say, if there's any residual or balance effect in the current financial year, '21, '22, it will probably be in the form of maybe installments or whatever for some of our tenants. And we do have a couple of tenants who have gone on the scheme to allow them to do early termination, but the impact is fairly small. So it will probably be not manifested in the form of rent relief. So I think if your specific question is on rent relief or rebates, we do not think we will see that being featured in financial year '21, '22. So that should be about it.

And the operating performance, I think we're seeing some kind of encouraging signs, fever for the multi-tenanted space. We are seeing the tenants coming back and having a bit more confidence. And I think the occupancy levels, of course, has drifted up little. So we hope to be able to at least find the bottom for the occupancy levels now and start shifting that up. But for the rental levels, we think there will probably still be a bit more downward pressure a little bit more for another quarter or so especially for -- say, in the business park space because our occupancy is relatively lower for the business park space and we would want to, say, make sure that our overall kind of revenue is protected. So we will probably adjust our rents at renewals and even for new tenants coming in to make sure that the revenue trajectory is intact. So hopefully, by second half of the financial year, we should be able to see positive upticks in both occupancy and at least the rent levels. And rent levels, yes, I think if you can see 0 revisions, that will probably be a good sign.

[Donald Chua, analyst]

Okay. Maybe just very, very quickly, Lily. The debt numbers in this full year, does it include the Virginia debt yet or not?

[Lily Ler, executive]

Yes, it does, but the number will be very small. So it doesn't really impact it considering that we have only done it -- we probably will have drawn out towards the end of March, so not much impact. At any rate...

[Donald Chua, analyst]

Okay. The debt number is included in?

[Lily Ler, executive]

Yes. It was included.

[Donald Chua, analyst]

Okay. That's all from me.

[Lily Ler, executive]

It wouldn't swing the average number very much.

[Kuo Wei Tham, executive]

Probably the fourth or fifth decimal point.

[Donald Chua, analyst]

Yes, yes.

[Kuo Wei Tham, executive]

Decimal place, sorry.

[Lily Ler, executive]

Yes.

[Donald Chua, analyst]

One thing, the interest cost, but the debt is there already, the debt, okay.

[Kuo Wei Tham, executive]

Accounted for already.

[Lily Ler, executive]

That is included.

[Kuo Wei Tham, executive]

Yes, yes.

[Lily Ler, executive]

The debt is already included.

[Hwei Leng Tan, executive]

Can we get the next person, which is [ Derek ]? [ Derek ], can you ask your question, please?

[Unknown Analyst]

Just 2 questions from me. Just the first one, I noticed a fair amount of leasing that was done this year for the new leases, right? What kind of sources of demand are we looking at?

[Kuo Wei Tham, executive]

Okay. This one, I'll ask our Head of Asset Management to answer.

[Mei Tam, executive]

Actually, the new leases is still quite similar to what we have for -- we don't see any particular significant trade that is actually picking up extra space. Generally, it's still the precision engineering at the [ Spectrum area ] and assembly and distributions trades that we are looking at, yes.

[Unknown Analyst]

Okay. All right.

[Kuo Wei Tham, executive]

We don't have vaccine-making companies or mass-making companies in our portfolio now.

[Unknown Analyst]

Okay, okay. Semicon is better. Okay. My next question is on the sale of your Ayer Rajah property. Just wondering whether the gains that you made, right -- I mean, do you have to pay taxes? And -- or will you ask for a waiver? And how long will you pay this out if you decide to pay to unitholders?

[Kuo Wei Tham, executive]

Okay. Well, depending on what you define as taxes, the transaction cost that we have anticipated in our -- and we have outlined in this presentation, about $5.2 million is some form of payment to the agency for the transaction. So that was -- has been accounted for. So other taxes, certainly, we hope not. As you know, there's no capital gains tax in Singapore, but we do not want transactions like this to be taken as a part of trading as our operations by Inland Revenue Authority. If deemed as such, of course, you have additional kind of corporate tax of another 17%, but I don't think we do it as a matter of business -- usual business. So we certainly do not want to have exposure there.

So -- and for the time being, I think the additional so-called gains, whether the gains that we have were received from the divestment, we are looking at distributing to the unitholders over the next year or so. So now we are calibrating the kind of content as well. And we will probably make -- gauge or finalize that assessment once we get the confirmed transaction costs locked in from [ JVC ] and we have the actual profit level determined. That will probably be this or next quarter.

[Hwei Leng Tan, executive]

In the interest of time, can I request for -- I'll take 3 more questions, and I'll request for the next few and listening to ask one question each. Mervin, please?

[Mervin Song, analyst]

Just maybe you can touch on the rental [ reemergence ]. I think previously, Kuo Wei mentioned that you were looking around that minus 5% level. I think this quarter, we've seen about 3% to 4%. Just any guidance for the next couple of quarters.

[Kuo Wei Tham, executive]

Okay. I think things are, as I said, looking a bit encouraging. So hopefully, the next quarter, it will be minus 2%, maybe then the quarter after that, 0 to minus 1%, then taper off. So that is our hope in terms of the -- how the profile would look like.

[Hwei Leng Tan, executive]

Okay. Thank you. Joy?

[Qianqiao Wang, analyst]

A question from me is on sort of payout ratio. Now that your data center portion is getting larger, is there any intention to actually retain some of the dividend for future CapEx?

[Kuo Wei Tham, executive]

At this moment, I don't think we have a policy in place to make the retentions or to have the retentions. So some of the chunkier cost will still be registered onshore. Of course, some of the things like tenant improvements, some of the building improvement or even, say, leasing commissions, those will probably be registered and taken on, on an operating basis. So we have not put aside any so-called capital expenditure kind of allocation for the time being. As you know, most of our assets are on triple net leases and employ [ channel ] arrangements. So a big part of whatever that needs to be done would normally be taken on by the tenants. So probably not for the time being.

[Hwei Leng Tan, executive]

Thank you, Joy. Can we have Wai-Fai? Wai-Fai is not -- we can have Derrick, Derrick from Macquarie.

[Wai-Fai Kok, analyst]

This is Wai-Fai.

[Hwei Leng Tan, executive]

Wai-Fai, yes.

[Wai-Fai Kok, analyst]

I'm sorry. Just one question on U.S. data center. I see that Christie Heights and Kubach Road valuation fell quite substantially, like more than 30%, 40%. Can you provide some color?

[Kuo Wei Tham, executive]

Well, that is driven mainly by the valuers' read on the market, rent levels. And we find that the experience over the last couple of years dealing with the U.S. valuers, they tend to rely a lot on their own gauge on the market rents and the cash flow. So is very, very much cash-flow-driven. Whereas, say, the valuers we have in Singapore, you tend to see the valuation fluctuations being a little less. It's a little more in the U.S. So for this too, very specifically, it's driven by the read on the market rent levels.

And that being said, there are not many, many data center lease or transactions in some of the markets. So sometimes, they make assumptions. They make certain interpolations in what they thought could be market. By the end of the day, it's the professional read. And the valuation done -- rather, the valuations are actually the same as what they had outlined in the secular -- in the transaction document last year for these assets because we need to have 2 valuers to be in place for the IPT transaction last year. So this was one of the valuers, Newmark Knight Frank, one of the valuers. So those were the numbers that they have outlined then already. So they are keeping it consistent.

[Hwei Leng Tan, executive]

Yes. I think just to add, there was a change in valuers from last year compared to this year. And based on that, as Kuo Wei has mentioned, they have different assumptions, which is why there tends to be varying differences in the valuation.

Thank you, Wai-Fai. I think we can just take a question from Derrick, Derrick Heng from Macquarie.

[Derrick Heng, analyst]

So just to be very clear, you understand -- I understand that business park seems to be calling for a bottoming of the underlying performance. When I look at IBP area, big boxes, a huge amount of space, [ empty ], and the space that is pretty competitive and close to train station. What gives you the confidence? And are you already seeing like the competition coming from these new spaces for that?

[Kuo Wei Tham, executive]

Yes. You're absolutely right. I think there's more competing space in International Business Park precinct or that area even without the big box kind of addition. So some years back, the leasing market was a little more difficult at Changi Business Park, then it shifted to IBP when you have higher vacancy levels in some of the older buildings. So it is a challenge. But I think our products have recently gone through a facelift, not a very drastic cosmetic surgery, but I think the makeup is probably decent enough. And we think we'll probably be able to at least compete effectively with the buildings in the facility. And our leasing team is working hard to identify newer segments of the industries or the companies that could value being in that location.

So it is challenging, no doubt, but I think we are seeing some good level of kind of inquiries coming back on. And we think we'll probably be able to find the bottom very soon and then be able to shift up. But of course, if your question is along the line, could we push beyond 90%, I think that will be difficult. But I think we'll probably be able to push the high 80s and get a support level for the rental levels.

[Hwei Leng Tan, executive]

Thank you, Derrick. I'm going to run this for 5 more minutes. I think we have 3 more questions at least. Tan Xuan, Terence and Brandon, who is doing a call-in. Tan Xuan, would you like to ask your question?

[Xuan Tan, analyst]

So I have a question on acquisition with Virginia. We saw some office component coming along the data center. So outside of Singapore, are you -- is there a potential that you might also widen your mandate to include things outside of your usual data centers as well?

[Kuo Wei Tham, executive]

Well, a simple, short answer is no because I think our focus is still industrial and data centers being a part of the industrial coverage. The reason why there is some office element down is because of the nature of the existing development and the use of space. And so of course, if you want to be purist about it, we can always cut out the building, but that is extremely different to do in some of these transactions. So we, of course, took on this acquisition that has data center space and with some office elements. So it's a considered decision, but we have no plans to widen the mandate to cover office.

[Hwei Leng Tan, executive]

Can we have Terence from JP?

[Terence Lee, analyst]

This is Terence from Credit Suisse. I have question...

[Hwei Leng Tan, executive]

I'm sorry. I only see Terence on the screen.

[Terence Lee, analyst]

Okay. I have a question on rebates. Basically, I think the rebates for the fourth quarter is somewhere in the order of $3.7 million. And this is -- yes, I think this is much lower than what was previously guided in a previous briefing, which was, I believe, in the order of $14 million to $15 million. I just want to clarify if that was the correct understanding from the briefing. And if so, why is the differential [ stuck ]?

[Kuo Wei Tham, executive]

I see. Okay. Well, the $14 million, $15 million was an aggregate figure. So the aggregate for the financial year is $12.7 million. So it's a little lower certainly compared to the $14 million to $15 million that we're talking about. So the $14 million to $15 million is not for the quarter but for the financial year.

[Hwei Leng Tan, executive]

I think we'll take our final question. Brandon?

[Brandon Lee, analyst]

Kuo Wei, can you just comment on the kind of cap rate and yield that you are seeing in the U.S. data center market? And is it much harder to make acquisitions in this current environment?

[Kuo Wei Tham, executive]

Well, I think for that market and for the asset class, we have seen cap rates rapidly compressing. So there are quite a few transactions we are seeing out there, seeing very intense competition. And for, say, [ core and shell ] type, if you have good counterparty, a good tenant, you'll probably see the rates drifting down to the 4-plus percent level already.

[Hwei Leng Tan, executive]

Okay. Thank you, everyone, for joining us today. It has been quite a long briefing, and we thank you for your patience. And keep safe. We will see you next time. Bye.

[Kuo Wei Tham, executive]

Thank you. See you. Bye-bye.

[Lily Ler, executive]

Thank you.