Mapletree Industrial Trust

SGX:ME8U

Earnings Call Transcript 2023-Q4

[Hwei Leng Tan, executive]

Good morning. We are broadcasting live from MIT's newest Redevelopment Project, Mapletree Hi-Tech Park at Kallang Way. We embarked on this redevelopment project in July 2019 way before COVID and are pleased to announce that the final block received its completion certification in March. My name is Melissa from the IR team. And today, we have Kuo Wei, our CEO; Lily, our CFO; Serene, next to me, Head of Asset Management; and Khim, the Head of Marketing. We will be using the slides that were uploaded last evening. Without further ado, I'll pass on the mic to Kuo Wei, who will give an update of MIT's 4Q and full year results.

[Kuo Wei Tham, executive]

Hello. Yes. Good morning. [ This ] is a virtual pass. She did not actually pass the mic to me. So yes, I'm happy that all of you could join us. You can hear a lot of echo, this is to showcase how large our space is. This is a new facility as what Melissa mentioned, we just obtained temporary occupation permit in February and March for the 2 blocks, respectively. So we are talking about very large floor space of about 37,000 square feet per floor. And this echo you hear is an indication of the kind of spend and space that we can offer. And for the financial year, as what Melissa mentioned, we have uploaded in the deck of slide last evening. We'll go through the usual segments. Let's see whether my [indiscernible], okay, the 5 user segments, we talk a little bit about the highlights, then we will give an overview on the financial performance, then we'll update the portfolio information to give you a snapshot of our investment update, and also we talk a little bit about the outlook and strategy. Now going on to the highlights. You would see from the top line perspective, the first set of bullet points, property income and even distributable income, we have seen meaningful increases, sorry, I forgot to doing the click. Now in terms of net property income, just a shade below 10%, $518 million for the full financial year. Distributable income, that one has taken into account the interest cost impact is still giving us a meaningful 1.6% increase year-on-year. But of course, a big part of the downward adjustment driven by interest expense kind of a drag. On a DPU basis, we are delivering [ $0.1357 ], which is 1.7% down. This is mainly driven by the enlarged unit base that we have from the distribution reinvestment plan that we have in place and some of the unit -- fees and units that we have issue. So the second set of bullet points is the highlight that we wanted to share the full completion of this development. We're talking about the single largest redevelopment project that we have taken on, and it's about 860,000 square feet, 730,000 square feet of net lettable area. As of now, we are about 44% precommitted. So we certainly anticipate the contributions from this development from this financial year onwards. Now the next set of bullet points on the portfolio performance from the valuation perspective, year-on-year, we are seeing a 0.1% increase, very marginal. Of course, there are some pluses and some minuses. Some of you, I think, if you had a bit of time to look at the information that we have shared, you will see that for some of the Singapore assets, we have seen valuation declines, mainly driven by shortening land tenures and there are some effects from the market, for example, the Singapore's introduction of higher stamp duties that has an impact finally on the valuation. But on the U.S. data center side, we are seeing very good support level, and in fact, we are seeing a small up shift in the valuations on an aggregate basis, despite seeing the expansion in cap rates in some of the markets. The range of cap rate expansions roughly [ 25% basis point to 75% basis point ], but the rent escalations that we have embedded in the leases, as well as a fairly strong market demand in some of the Tier 1 locations allow obviously a fairly decent level of support from the valuation perspective. So we are seeing positive -- small positive contribution down there. So in aggregate, we are seeing a 0.1% increase for valuation. Occupancy is 94.9% for the portfolio. This has come down a little when you compare quarter-to-quarter basis, essentially is driven by the mathematical effect of the completion of Kallang Way. This new project because the completion, the space that we have would be included in the denominator for calculation of the occupancy level. So it's come down a little. Putting that aside, I think if we do not include that effect, our occupancy actually would have increased a little bit. On the capital management front, we continue to have a very strong healthy balance sheet. Borrowings about [ 3/4 ] hedged and a weighted tenor, very healthy 3.5 years. And of course, many of you will know we have the distribution reinvestment plan program that we started 5 quarters back, and we have just recently suspended it. So for this round, we have about $184 million raised, and this has helped us fund our current development project, and we, of course, have a stronger balance sheet because of this initiative as well. The leverage ratio, as I alluded to earlier in terms of the health of the balance sheet is only 37.4%. So it gives us a lot of flexibility and headroom to look at opportunities. Now going on to the next slide. Of course, this is a outline of our report card ever since we listed the portfolio. On the right, you can see the most recent set of data. So there's a down shift from the previous quarter, but we think we have been working very hard in containing all these cost pressures and interest rate effect. So it's a [ 3.33 cents ] for the quarter. And we think in the next financial year, we'll continue to be difficult, but we are working hard to see whether we can continue to deliver good level of distributions. And going on to the next segment, where we outline the financial results. So on Slide 8, you will see the year-on-year comparison for the fourth quarter. The revenue, we are experiencing a 4.3% increase. Property expenses because of the inflation-driven effects and also partly because of utility cost increases as well, is a 5.8% increase. So that gives rise to more muted net property income increase of 3.8%. If you look at the -- some of the downward adjustments, net fair value adjustments essentially is due to the valuation loss for fourth quarter, the minus $110 million, essentially, that is with respect to our book value driven mainly by the Singapore portfolio adjustment. So from the amount available for distribution perspective, if you look at the bottom line, is a 3.5% reduction from $90.3 million in the previous year for the fourth quarter to $87.2 million. So that gives you that downshift from [ 3.49 cents to 3.33 cents ]. But of course, we see more, I would say, material impact from all these headwinds in the fourth quarter. But for the full financial year, I think the performance have been still relatively stable. If you look at the next page, on Page 9, in aggregate, we are still experiencing a fairly good growth, as I've mentioned earlier, revenue [ 12.3% ] increase. The operating expenses, of course, because of cost pressures and then inflation effects, it's gone up almost 21%. So that gives us a net property income increase of 9.7% from $471 million to $518 million. So if you look at the real bottom line, the amount available for distribution, despite the interest cost effect, we're still getting a 1.6% increase in terms of distributable income from $351 million to $357 million. So the DPU for the entire financial year because of the enlarged unit base, if you noted, our earlier DRP proceeds, $184 million, this were all converted into units. So that gives rise to the 1.7% reduction in the DPU when you compare year-on-year basis. Now looking a little bit more closely at the quarter-to-quarter kind of performance that's on Page 10. Not a lot of difference from a revenue perspective, a very marginal increase 0.4%. And some of these are driven by some of the good renewals and new leases that we have done. Operating expenses, I think the increase, while is still happening, it's fairly muted. So net property income base is very stable. I would say, almost the same 0.1% increase from $128.8 million to $128.9 million. So if you look at the distributable income on a total amount basis is a very slight downshift, 1.4% from $88.4 million to $87.2 million. So in aggregate, we are seeing a quarter-to-quarter down shift of 1.8% from [ 3.39 cents to 3.33 cents ]. So I think going on to the next page, Page 11. On an NAV basis, if you compare to end of last year and end of the last financial, 31st March 2022, we have seen some downshift because of revaluation losses, and that has an impact on our NAV. So it has come down from last year, [ 1.86 ] per unit and December [ 1.90 ] per unit to -- we are ending at [ 1.85 ] per unit. So going on to the next slide, Slide 12, that's the picture we have on the valuation. As I mentioned earlier, though you will look at headline numbers, it's a 0.1% increase year-on-year. But compared to book because we have taken on the development project and fully crystallize it, and we also have some of the expenses that are capitalized in the balance sheet. So on a like-for-like basis, we see that minus [ $110 million ] effect on the portfolio when you compare the book. So the main drivers, I think, for the Singapore portfolio downshift, I mentioned in the earlier slides, essentially due to shortening land tenure and margin effect and also [ as well ] the stamp duty kind of effect that came very recently, I think on the 14th of February when the budget was announced by the government. So all this had contributed to that downshift for the Singapore portfolio. But I think we are seeing a good level of support for the North American data center portfolio that has offset some of this decline. Now on Page 13, on the balance sheet. I think it's very stable. We're having a total debt of still at $2.8 billion level, very marginal change, but we have managed to extend our debt tenor from 3.1 years to 3.7 years, so with the refinancing of some of our debt that comes due. So it gives us a lot more, I would say, stability in the balance sheet. And aggregate leverage ratio, very little change despite us having taken on the development project. So it remains at around the 37% level as of the end of financial year 37.4%. So the DRP take-up, I think just to highlight, would always be hovering around the 40% level, and that has been instrumental in us containing the -- any leverage increase despite the commitment that we have for our project, And if you look at the pie chart on the right, the currency exposure has not changed much. It's still a [ 20%/80% ] kind of split 20% Singapore and 80% U.S. dollars. And going on to the next slide, Slide 14, where we show the expiration profile of our debt, very well spread. And if you look at the bars on the left, very, very short bars. So I don't think there's any costs. We're already [ ahead ] in terms of financing and so-called expiration exposure. So it's essentially business as usual for us looking for the right kind of opportunities to lock in rates that I would describe as relatively low, but not low because in the current environment everything is expensive. So we look for the right windows to refinance this in terms of quantum, very, very small. I think we are talking about [ $300 million] over 2 years. Now going on to Slide 15 on the financial indicators for our exposure. In terms of fixed rate debt is [ 3/4 ], very little change from December. So we are keeping this at a fairly high level to cushion us from many of the uncertainties in the market. The weighted hedge tenor has shifted down a little, mainly due to [ time remission ]. But the all-in cost has, of course, shifted up a little from 3.3% in the previous quarter to 3.5% because of the movement -- upward movements in the market. In terms of coverage ratio, it's still very healthy, depending on which metric you look at 4.5x for the quarter. Trailing 12 months, we're talking about 5x. So I think what we have, say, at the bottom is a simulation on the effects of base rent increases on our DPU. So we think certainly, there will be a negative impact, but it will be quite well contained because of the hedges we have in place. So you look at every 50 basis point DPU impact 0.7% kind of down shift. So that one, I think, is still very manageable. And next, I think we go on to the portfolio update, starting from 17. So the total portfolio remains at the same level, $8.8 billion and very little kind of adjustment in terms of the profile, we are still roughly [ 50-50 ] in terms of North America, Singapore and data centers are slightly shade above 50% in terms of representation at 53.7%. And going on to the occupancy chart, the -- that's on Page 18. If you look at the various segment is very stable. The only down shift is a mathematical effect for Hi-tech buildings, 94.8% to 87.5% because of the inclusion of this newly completed building. So then it gives rise to the 94.9% aggregate figure for the portfolio. So I think we would say steady as it goes, as far as occupancy is concerned. And on Page 19, for the lease expiration profile, we do not have any material kind of, say, expiring leases to be, say, concerned about is very well spread over the various financial years. And for financial year, '23-'24 only 16% due for expiration. But of course, some of you would have been checking our releases and data [ shared ], the few of the larger ones that we will be tracking more closely are the U.S. data center expirations, for example, the AT&T ones that will be expiring end of 2023. So that brings us to Slide 20, our top 10 tenants profile in aggregate, just below 30%, 29.5% of gross rental income. And the tenant that we will be keeping a closer watch on in terms of the expiration of leases. AT&T, the second largest tenant in aggregate, 5.4%. But whereas for the rest, I think it's essentially having leases that are expiring many years from current financial year. So we don't have any kind of near-term expiration exposure to be concerned about. And going on to Slide 21, the trade diversification across all the different industry segment, I think, remains very, very diversified, so that gives us a lot of kind of protection against any segment or sector coming under stress. And going on to Slide 22, for the Singapore portfolio performance, occupancy, as I've outlined earlier is down -- there's a downshift because of the new completion, whereas for the rental levels, we are still seeing a good level of up shift from [ 21.5 to 21.6 ]. And the effect of this, essentially, you can see on Page 23, for most cases, when you compare before after -- the green bars before renewals and the low bars after renewals, we are seeing positive rent revisions. But you might have noticed for Hi-tech buildings, there is a down shift of about 11.5%. This is essentially due to us working on a renewal of a fairly large tenant and it's a more defensive position, having the tenant not giving a bit of incentive for -- to the tenant for the renewal. So that accounted for that down shift, which we think is reasonable. If you look at the rate, it is still very much higher than average for that property segment and also higher than new rents that we can get. So that is the adjustment that we have accommodated. And if you were to exclude that effect in aggregate, the portfolio is getting roughly 6% positive rent revision, so that is still encouraging. As you may remember, the previous quarter, we're talking about 8.5%. So it has probably moderated now a little, but still a positive territory. I think this is probably the fifth quarter, where we are seeing from a general basis, the rent -- positive rent revision. And going on to Page 24, in terms of retention level, nothing exceptional to highlight. I think we have been successful in keeping most of our tenants. So in aggregate, we're talking about 80%, 80.7%. And more and more of our tenants, of course, stay with us for long periods of time and extending beyond the first term of lease with us. And of course, there are quite a few initiatives that we have taken on, on Page 25, that's essentially on the sustainability front. And you might see, yes, there's a photo of us working hard, greening our space. This is at our current cluster here. We have promised to plan 10,000 shrubs if you care to count. I don't know how we can verify and take every single plant, 10,000 and 296 trees, now that's a little easier to count. So that's one of the trees, which we did this exactly 2 weeks back. And on lady's right, is Chairman, Mr. [ Cheah ] of the Mapletree Industrial Trust Management; and on my left is Mr. Paul and is Chair of the Audit Committee. So we [ continue the plan ]. And I think if you look at the broad initiative [ on a group ] 100,000 trees by 2030, so there will be a lot of planting to do. And on the renewable energy side, I think we continue on with the initiatives for the Phase II project. We have successfully installed 4,000 kilowatt peak or 4 megawatt peak. So we are embarking on the third phase for the rest of our buildings in Singapore. So hopefully, over time, we have a portfolio that is more and more climate resilient. Now going on to the investment update. I think the key thing to outline essentially is completion of this project, which we are in now. And later on, if you have a bit of time again [ and walk ] around the premise to have a few of the new prescient. So in terms of committed occupancy, now [ about ] 44%, we are getting our leasing team to work very hard to carry on pushing the leasing momentum, and hopefully, the trajectory of commitment will continue to be strong and allow us to maybe arrive at stable occupancy by the next financial year. So I think finally, we have a Slide 29 on outlook. I think a quick or simple statement is that 2023 will be challenging. There's still a lot of uncertainties everywhere else. And we don't see any of these so-called macro issues easing away anytime soon. But the comfort we have is there's still a bit of economic growth and activities in Singapore. But the sentiment, of course, not so positive, especially in the manufacturing segment. And interest rate, while we take is creating a bit of issue for everybody that borrows money. It should be, I would say giving us a bit of a reprieve possibly by the second half of this year, and then hopefully, we can see more muted kind of interest rate, the shift or growth environment and it gives us a bit more certainty as well. And for North America, for the data center space, we're still seeing a fairly good take-ups in many of the Tier 1 markets. So -- that said, certain other segments, of course, have been moderating in terms of the demand. But as a property segment, we will continue to see good level of take-up in many of these locations, and that has, of course, been very supportive in the rent levels and the valuation, as well for the portfolio. So I think, finally, we talk about our strategy has remained the same. We will keep the portfolio resilient, and certainly, our capital structure is very sound. We retain a lot of flexibility. And of course, for growth, we continue to look at acquisitions, developments like this one at Kallang Way. And we will look at opportunistic divestments of non-core assets as well. I think that was also one of the outline that we have mentioned in our press release. So it is a good time for us to look at rebalancing the portfolio, look at opportunities or perhaps adjusting the portfolio profile. So if there are good divestment opportunities, we could look at it in a bit more closely and then it will help us [ chart ] the next phase of growth as well as we look for acquisition possibilities concurrently. So I think that ends what we have for the presentation deck. I'll be happy to take questions.

[Hwei Leng Tan, executive]

Thank you, Kuo Wei. Can I request for analysts to raise your hands, and we'll pass along the mic for the benefit of our webcast attendees. Please state your name.

[Mervin Song, analyst]

Mervin from JPMorgan. Yes, congrats on the new building. I see a lot of greenery, hopefully the money will [ weight down ] on you from this building.

[Kuo Wei Tham, executive]

Yes. Thank you.

[Mervin Song, analyst]

Maybe just start with the U.S. data center portfolio. I noticed the top end of the range, where cap rates has lifted. Maybe give us a sense of on a weighted average basis, how much the cap rate have -- cap rate has expanded by? Second question I have is for that portfolio is, can you touch on the tendency risk there? Any updates on AT&T lease, Atos, Sungard and Cyxtera or any other tenants do you think could potentially leave or could replace those tenants?

[Kuo Wei Tham, executive]

Okay. I think as what you have rightly pointed out, what we have is a range, [ 25 basis point, 75 basis point ], but we see most of them clustered around the [ 30, 40 level ]. So if you look at the down shift, you're talking about minus 70%, if you're talking on a like-for-like basis in terms of value effect.

[Mervin Song, analyst]

Sorry just clarify the cap rate expand by...

[Kuo Wei Tham, executive]

[ 30 basis point, 40 basis point ].

[Mervin Song, analyst]

On average for the U.S. data center. Okay.

[Kuo Wei Tham, executive]

So in terms of the so-called tenant exposure, the larger one, which we have outlined AT&T, we are talking to prospect for the -- 1 of the 2 larger ones, as you might have seen in some of our earlier releases, the 2 of them expiring in 2023, the San Diego one 2024 December. So that one is a little early. We do not have any so-called leasing engagements for the San Diego one. But for the Tennessee one, we are talking to a potential user, but it's still at an early stage, hopefully, we'll be able to crystallize something prior to the expiration of the lease. And this prospect that we are talking to is looking at the entire campus. So that is a kind of match that will be preferred. We [ weren't try ] not to cut up the campus into a couple of so-called multi-tenanted product offerings and is quite a bit more difficult to manage in terms of lease and operations. So that's one. Atos, we're also talking to a potential user. It is still not at a stage, where we can crystallize any contract yet, but we recognize that this is probably from a time perspective, a little bit more critical because the lease expiration is already taken place. So while it's a smaller asset, we will try to see whether we could lock that in as well earlier. Now for the other tenants in our portfolio, we have essentially fairly long leases. So it's a case of the exposure to any of the issues tenant face. For example, Sungard, as you have outlined, they will add 2 of our facilities. They have extended the lease with us for 5 years. So they remain in our premises. But they had of course, negotiated for some of the lease terms to be changed for one of the facility, the so-called lease rate about the same. The other one, they have asked for quite a significant reduction. So we have accommodated that request because at the end of the day, we will look at the impact of the portfolio, the downtime so-called effect as well and what we can reasonably get from the market for that premise. So in short, for the Sungard, the so-called issue has been closed, fully resolved. They're continuing with the lease, especially when they have a new shareholder or a new owner on board. So it is essentially back to business as usual. So for the rest of the leases or rest of the tenants, we, of course, continue to be mindful of the operating metrices and whether the facilities are well used, whether they pay on time to make sure that the portfolio continues to be healthy. So, so far, we do not have any so-called material things that would cause us any [ alarm ].

[Mervin Song, analyst]

[ So just ] final question for me. How under rented are your U.S. data centers [ at this point ] relative to market?

[Kuo Wei Tham, executive]

Okay. At this stage, I think for most of the single-user buildings quite in line with market. I don't think it's a case of us being able to extract meaningful so-called up shift in rents. So our sense is that if there's any vacancy or any -- due to expiration of leases or whatever, we'll probably be able to lease at about the same rent levels. The challenge in most of these cases is actually downtime and the rent fee, and all the tenant incentives that we need to give. So depending on the market, sometimes you may need to give or you may need to wait up to 6 months, 9 months for finding the right match. So that is a kind of impact that we think we will try to reduce as far as possible.

[Terence Lee, analyst]

This is Terence Lee from UBS. Will we continue to see pressure from the large users in Singapore. In the case of the Hi-tech one, is it kind of like a one-off? And maybe if you could guide on reversions for FY '24 as well?

[Kuo Wei Tham, executive]

Okay. The large tenants is always a -- or handling large tenants is always not easy because they do have stronger bargaining power and especially in markets or in say, environments, where [ they ] are alternative. So while it's not cheap to relocate, but a lot of the large tenants have a capacity, they have motivations or I would say, attractions from other alternatives. So we would be very commercial in the assessment of this kind of transactions, renewal transactions. So if necessary, we wouldn't accommodate some adjustments from the rent perspective, if it's more meaningful for us to keep the tenants. So as of now, we do not see any other so-called large tenants in the Hi-tech space that would present this kind of challenging or -- so-called situations. So far, most of the other leases that are expiring are not large leases. So it's actually a business as usual kind of engagement we would have. Now when we talk about rent revisions for this current financial year, we are, I would say, cautiously optimistic of still getting positive rent revisions. I think high single digits may be difficult. But if we are talking about low single digits, I think it is something that we could push for in an aggregate basis. And generally, I think the so-called inflation effect is also creeping into the rent of -- rental rate kind of figures. So that would allow us to maybe make some adjustments here and there when we deal with the tenants and the renewal.

[Terence Lee, analyst]

And do you mind reminding us how you hedge your USD income?

[Hwei Leng Tan, executive]

For the [ USD ] income, we typically hedge using forward contracts, FX forward contracts, and we look at it over rolling 4 quarters. So every quarter, we will put in a little bit of a small percentage of the expected foreign income that's coming in. So, as you can expect then in one particular quarter, you -- it will be an effect of the forward contracts that has been executed over the past 4 quarters. So by doing that, we basically just do an averaging effect. So, in times when the exchange rate is going against our favor, we basically will be averaging down and vice versa if market is going up.

[Kuo Wei Tham, executive]

I assume you're talking about income. Yes. So, that is a [indiscernible]. We only have one runner running around.

[David Lum, analyst]

David from Daiwa. Two questions. The first is, what type of asking rents are you requesting for this property? What is the range?

[Kuo Wei Tham, executive]

Okay. This one, we will try more than $4 certainly. I think if you ask him, she's a bit more greedy. She can tell you what the kind of range that we go out with.

[Hwei Leng Tan, executive]

Okay. Currently, we are asking $4.50 per square foot.

[David Lum, analyst]

$4.50?

[Kuo Wei Tham, executive]

Yes. I said, she is greedy.

[Hwei Leng Tan, executive]

Yes. And we are even trying to ask $4.80 for smaller sizes now. So, this is -- we are definitely higher than our friendly competitor opposite, they are already asking for $4.20.

[Kuo Wei Tham, executive]

So, at the end of the day, some of you may know or some of you may be a bit young, [Foreign Language]. When you go to a night market, you heckle and negotiate. So, at the end of the day, it is a starting point when you break it your negotiations. But I think with the kind of demand that we are seeing in the market, the market remains challenging, of course. But I think the kind of feedback we get gives our leasing folks that confidence in trying to push the boundary. But at the end of the day, as you know, it depends on the negotiating position you come down with -- to a fairly reasonable level, which would still be, I think, a respectable level. What we are trying to do is to try to hit at least $4 per square foot.

[David Lum, analyst]

And what would be a reasonable assumption of your pre-commitment rate by the end of this financial year?

[Kuo Wei Tham, executive]

Okay. If I were to give you a number that will be set as a KPI for the [indiscernible], so okay, I think as of now, of course, 44%. But realistically, by end of the year, if we can get another 20%, 25% that will be really decent. You'll be talking about 70% or so. So, if we were to set some reference level, if I were to round it out, let's try 3 quarters then [ 25% ] pre-commitment. So, this one really depends on whether we can get large users like the 2 that we have secured for this building. The first one got -- I mean took up 2 floors, second one, one full floor. So, this kind of large so-called leases will be very helpful. You just do a few more, you'll be able to hitting the target quite comfortably.

[David Lum, analyst]

And my second follow-up question is going back to the U.S. data center portfolio, how many of the data center saw decline in valuations? And is there a common like denominator? Is it like their location, vacancy rates or like the tenant getting a credit downgrade? Is there any common factors for those that saw a loss in the valuation?

[Kuo Wei Tham, executive]

Okay. I think quite a few of the facilities, if you do a comparison about half, you see some downshift in valuations, but mainly driven by the cap rate effect. Of course, that was offset by the built-in escalations, roughly 2% to 2.5% for most of tenants. So, effect from the market, the effect from tenant so-called quality, I think, getting up, if any. The only more meaningful one, if you do a comparison, it's a [indiscernible] asset minus 47%. That one is the [ Sungard ] facility because of down shift or downward adjustment in the rent level.

[Vijay Natarajan, analyst]

Vijay from RHB. Just a couple of questions. Maybe first one on the follow-up on the [indiscernible] site. I mean, in terms of pre-committed level, slightly below where the market is in terms of overall occupancy and what it is. Is it because of the factor which you said that you're holding up the items that you want to hold up to the rents that this building is likely below pre-committed? And also, can you give some color in terms of new demand versus expansion demand seen in the market, especially in light of macro numbers, which seems to have come down quite a bit in the recent months?

[Kuo Wei Tham, executive]

Okay. Well, the practical consideration for development projects is that it's quite unlikely to get high commitment or pre-commitment prior to completion and this is a build-to-suit project. So, while occupancy or the committed occupancy level is lower than the average or lower than what we are experiencing in the portfolio, we think this is not an uncommon observation for development projects. So, if you look at the past redevelopment or development projects that we have, from completion to steady-state occupancy level, you'll probably be looking 1.5, 2 years for us to get there. So of course, your environment, market situation does play or they will play a part in how fast or how slow we get there. So, we think this is a fairly normal observation for the development project at the point of completion. So that said, we are, of course, getting the team to really work out in maintaining the momentum. So, there the kind of aim, I think just now, we had a question on the committed occupancy target towards -- or by the end of the financial year. Hopefully, we're about 3 quarters about that. But I think for us to get to full occupancy, particularly for occupancy, we'll probably be talking about the subsequent financial year. And whether it's 1.5 year or so kind of time frame, we do not know. It really depends on the market demand. And as what you might have observed, there could be a certain kind of challenges in certain market segments. So, we want to be a bit more targeted in approach. The tenants that we think will continue to be interested in this space with the medical, technology ones, I think, continue to feature. And I think Khim probably can share some of the other possibilities that we are dealing with or other prospective we're dealing with.

[Chng Siok Khim, executive]

Okay. I think you just set my KPI for this year. Okay. Well, the -- like what do we see for development project, right, usually, the commitment level was slowly built up. So, after the TOP, which is now -- this month, in April, we actually see more increases in terms of viewings and inquiries. So, the types of tenants, is still the IT sectors. We see more now of electronic sectors. Bio-lab companies are still there. So, this is in line with the type of tenants that we are targeting for this building. So yes, I think you were very hard on it.

[Vijay Natarajan, analyst]

My second question is in terms of your strategy on divestment. You mentioned about divestments and rebalancing your profile of your portfolio. Maybe can you elaborate a bit on this? Because I haven't heard divestment word from you for some time, maybe you do more on redevelopments. What kind of divestment and where and where you are planning to rebalance your portfolio to?

[Kuo Wei Tham, executive]

Okay. We are looking at it in an opportunistic manner. And as you say, analogy of managing a garden you let the plants grow and you have a very vibrant kind of green scape. But periodically, you will need to do some pruning, some adjustments here and there. If not, you'll go in to a jungle. So, we have not done much divestments and most of the cases are very opportunistic. If you look at our history over the past 12 years or so, only 4 done. One was a option to purchase, which is the Equinix data center in Singapore. So, that one was part of the deal, part of the transaction. The other 3 are very small assets; one in the U.S., 2 others in Singapore, single-user -- end user type of transactions. So, it's more driven by the demand we see coming from the space users, but we think it's probably a good time after managing this portfolio for a good period of time for us to look at a more confident approach, still opportunistic, but we will look at what makes sense for us to keep for longer periods, what makes sense for us to maybe look at even redevelopment or on a total return basis, what might be a good time for us to crystallize some value. So, we'll be cutting across the portfolio in terms of the review and assessment. So, both in Singapore and North America. Because at the end of the day, it's about finding that right kind of value that we can crystallize. So, you'll be quite opportunistic. We would probably be grouping some of the assets together, whether in a logical manner by type or by so-called location and we will engage the property brokerage firms in the respective markets to see whether we could get a good level of interest, then we will see how we can take it forward. So, it's about rebalancing. It's about pruning the garden that we have. Then hopefully, that would also rather than helping us crystallize a good value would also help us rebalance the portfolio, allow us to have the capital to deploy to other more, I would say, relevant or suitable assets for us. So, it will probably be a process that will embed in our kind of our strategy going forward as the portfolio gets to a certain scale gets to a certain kind of age. This is something we'll probably need to do a little bit more as time goes on.

[Vijay Natarajan, analyst]

Just one follow-up on this. In terms of the mix, are you happy with the current mix of your data center high-tech buildings? Do you plan to change this mix in terms of assets or geography?

[Kuo Wei Tham, executive]

Well, I think the second question, geography, for sure, we want to be represented in more locations other than Singapore and North America, mainly U.S. because while it has worked well in the last couple of years, we, of course, have strong attributes in both of these markets. I mean, long-term diversification would be a primary consideration. We have talked about going into the other more developed markets for the data center space, the European market, the key Asian markets, we will continue to look at these locations. Hopefully, we are able to find the right asset to bring into the portfolio. So, we want to have greater geographical coverage. And in terms of asset type, for the time being, our focus will still be on data centers. That's the reason why we will probably be comfortable with letting the ratio creep up to, say, 3 quarters. I think we will talk about the bands earlier, 2/3 or 75%. But at the same time, we are keeping an eye out on the other asset or property types that fall within the industrial mandate, whether they are high-tech buildings, whether they are R&D facilities, if it's -- or even biotech pharma facilities. So, if those opportunities would surface and we will be -- if we were able to find a good match, we will certainly think of bringing them into the portfolio as well.

[Xuan Tan, analyst]

This is Tan, Xuan from Goldman. My first question is on growth opportunities, right? I guess what you're guiding on acquisition divestment seems quite different from what you mentioned last quarter. Can you share like what has changed?

[Kuo Wei Tham, executive]

Okay. The acquisitions will continue to be a mainstay because at the end of day, the redevelopment or asset enhancement opportunities, not so easy to execute. We have a fairly mature portfolio. So, we can only look at certain opportunities within the portfolio, once every couple of years, depending on the market situation, depending on whether we can find saleable prospects that can anchor some of these initiatives. And say, unutilized GFA is not spring up everywhere. We only have a couple of clusters with a decent amount of so-called unutilized GFA that we could exploit. So acquisitions, whether they are for individual projects, but or assets or portfolios will continue to be a driver and that's what we've been doing in the past. I think the new thing that we have brought to the fourth is divestments because I think as outlined in the earlier response is essential for us to look at rebalancing the portfolio and also pruning the portfolio over time. While if you look at most of our assets, they are getting very good occupancies even the older facilities, but at the end of the day, as a manager of the portfolio, we will look at whether it makes sense for us long term, whether on a total return basis, it is an appropriate time for us to crystallize some of the gains -- gains, maybe some future value or future unknown. So, it's a balance that we're looking at, but there will be mindful of the impact of the portfolio as well because I think if you just crystallize gains without having a strategy on how to position the portfolio forward, it'll not be meaningful for the portfolio in the medium to long term.

[Xuan Tan, analyst]

Can I follow up on longer term, if you think about divestment and acquisition, what kind of gearing do you think you will be comfortable at? And also how are you thinking about equity fundraising?

[Kuo Wei Tham, executive]

Okay. The -- I think leverage level -- we have now -- we are very comfortable. I think we have talked about the 40% to 45% level, which is banned and we are okay with. But at the end of the day, we will be guided by the market -- guided by what investors are comfortable with. But I think if you have instances where we say, look a little beyond 40%, it's not a big issue because our coverage ratios are still fairly robust, 4.5%, 5%. So, I don't think it will be a big concern for us. And say, if there are opportunities available, and we need to, say, lean on debt for the time being to say, execute certain projects that we bring our leverage slightly below 40%, I don't think it's a big issue. Now on the fundraising part, from our perspective, we would always try to match fundraising exercises with transactions. So, to make sure that we put the money to good use. If you look at our historic fundraising exercises has always been pegged to transactions or deals. So, that is the approach we will likely take in managing the portfolio going forward. And we certainly recognize the market is not so clear in terms of fundraising opportunities. Maybe some windows will open up now and then. But at the end of the day, it will be more driven by transactions that we can bring forth that we can marry to any exercises.

[Xuan Tan, analyst]

Just a last quick question. Can you share the portfolio rent reversion for fourth quarter and full year?

[Kuo Wei Tham, executive]

Fourth quarter, minus 1.9% because of the higher tax space effect. And if you were to exclude that roughly 6%. For the full year, I think it'll probably be at 3% or so level. I don't have that full year number. Do we have?

[Hwei Leng Tan, executive]

I will get back to you on the number.

[Jian Hua Chang, analyst]

Derek from Morgan Stanley.

[Kuo Wei Tham, executive]

Yes, yes, no problem, please.

[Jian Hua Chang, analyst]

Follow-up on the acquisitions angle. You talked about data -- create more data centers in Europe, key Asian markets. What are the cap rates over there looking like right now?

[Kuo Wei Tham, executive]

I think the cap rates are still not so helpful. In Europe, we'll probably be talking about the 4% level. We have not seen big adjustments yet, responding to the interest rate increases. For the rest of the Asian markets, you'll still be around 3-plus, 4% level if you're talking about the more prime assets. So the -- if you look at it from the perspective of spread, the Asian markets probably look a little more interesting, whether it is Japan or South Korea relative to Europe or even U.S. because in those places, the borrowing cost is quite horrendous, you'll be staring at a 5% kind of figure. And if you look at our equity cost, also 5-plus percent kind of even in good times. So, to get deals to work or for deals to be accretive, you won't be able to find the right kind of opportunities in the market. Now the market has not adjusted yet. So, we will be certainly be hunting in all these locations, but I think realistically, the Asian markets might present more opportunities in view of the funding conditions.

[Jian Hua Chang, analyst]

In the U.K., Digital Realty as a portfolio that they've been trying to sell for some time. Is that still too tight for your...

[Kuo Wei Tham, executive]

It is for the time being, because I think the mindful of the spread that we can push for. And while we anticipate the say, interest rate hikes to be moderating, it is still not moderating yet. So, it is a case of whether we think it will be another 25 basis points or 50 basis points more. But would it stay high at that level, if it stays at the same level without any clarity on when that downshift is going to take place. Some of these transactions could still be challenging in the near term.

[Jian Hua Chang, analyst]

And on the divestment front, do you have a dollar value target?

[Kuo Wei Tham, executive]

It's not driven by dollar value. I think we are looking at the assets that might be suitable and it's across the portfolio in terms of location or in terms of the asset type. So, we don't have a very specific dollar value in mind because at the end of the day, it is not a case of us needing certain capital -- amount of capital. So, it's a case of, as I mentioned, in a garden analogy, pruning and looking at what is relevant, what might be suitable longer term. And if we can crystallize a good value, say, upfront relative to looking at future possibility. So, that is a kind of analysis that we'll be doing and this one that we will want to maybe check with the market. So, it's not a dollar value-driven consideration.

[Jian Hua Chang, analyst]

Just lastly, your all-in interest, what's your outlook for this year?

[Kuo Wei Tham, executive]

Actually, has crystal ball.

[Hwei Leng Tan, executive]

As I said, if I have I won't be here. I'm still looking forward to the beach where I can sip martini and [ treat ] at the same time. Well, I think for this quarter, we have actually reported all-in interest cost of about 3.5%. I believe that will still continue to move up. The only question perhaps is how far out it will go. So, if we -- I think right now, the market is really expecting that there is going to be a rate hike. The only question is how much and the expectation is even there is not going to -- I think the expectation is about 25 bps. So, if that continues, I think the interest cost -- our interest costs will continue to creep up, but you will not be seeing very significant jump as what we have seen in the past few quarters.

[Ezien Hoo, analyst]

It's Ezien from OCBC Credit Research. So this is 2/3 to 75% data centers is actually quite a large number compared to what I imagine. Maybe I missed out on a few quarters, I may be wrong. But in any case, do you have a timing for when you want to achieve this target? Then the second question is you're currently at BBB+ by Fitch, is this something that you would be willing to cut? Because if you hit, say, 40% to 45%, which you are comfortable with, would it have implications on your credit rating? And the last question is you mentioned about the trees that you're trying to plant first. So, let me thinking that in terms of industrial properties, can you share with us what is Singapore government's plans in terms of greening this?

[Kuo Wei Tham, executive]

Yes. Okay. Well, the last one, I don't have a great deal of insight, but I'll elaborate on that a little later. But in terms of the so-called profile of the portfolio, when we first started going into the data center space, the first transaction, we only had 10% of the portfolio, that is data center. So at that time, we were looking at what will be a right kind of representation and that band of kind of data center representation has shifted up over time. So, at various engagements with investors and the research firms, we have adjusted that up. And also that's partly driven by the support that we have received from the market and investors in us having a larger representation in this space. So, we have shifted that up about 2, 3 years back to 50% to 2/3, which is whether 65% or 66%. And from about 1.5, 2 years back, looking at the situation and looking at the opportunities available, we ventured a up shift in event. Yes, maybe possibly beyond 2/3 to maybe 75%. That is a possibility. So that one is also for us to gauge the level of support level of interest. But I think at this point in time, it is safe for us to say we are not turning ourselves in the data center REIT. So we will, of course, continue to recalibrate the exposure. As of now, we are talking about 53.7% or 54%. And we will probably move up to 2/3 soon. I think if you look at the pipeline, the very greedy pipeline is the sponsors, balance 50% stake in digital portfolio that we acquired in 2019 and early 2020. So that one will move us closer to the 60% level. So, that one, I think, is well prepped and if we are able to crystallize a few more, yes, I think 2/3 probably in the next year or 2 is that kind of possibility. That very much, of course, depends on whether we can do that portfolio type of deal or not a asset-by-asset incremental, and they'll probably need to stretch that by another year or 2. So, we'll eventually get there to that kind of representation in the short to medium term. But we want to push for 75% as a target. No. We were not looking at -- we are only looking at that as a band that we might see how the portfolio will be represented. It is not a destination. It's not in the case of saying we want to be 75% or we're going to be 70%, so that this is optimal mix because at the end of the day, we are also looking at other types of industrial assets, whether they are high-tech, R&D spaces. If economics work, if the attributes work, that will be another dimension because at the end day, we recognize that for a platform to be evergreen and to be relevant, we need to respond to the market and we need to have a good level of diversification because we won't be able to make the right bets all the time. Market shifts, demand shifts over time.

So that is a kind of consideration, so we don't have a very fixed time frame. But we think with the trajectory going this way, yes, there is maybe a 3-, 5-year kind of possibility, maybe we hit 75% if we have all the right elements in place, we do a few more portfolio transactions. But I think before we arrive there and we'll probably have a lot more conversations and engagements with the community and NC, whether there's any need to recalibrate and readjust. Now on the greening of the facilities or the guide, we don't have very specific kind of guidance, because at the end of the day, we recognize that many of the industrial facilities, especially the ones that are non-air-conditioned difficult to secure, say, the local standards, the Green Mark standards. The facility that you see down here, this Block 161, 163, setting them BCA Green Mark setting them, we have secured that because it's air-conditioned, we have put in a lot of features like low ETV so-called design for the premise. And we would incorporate as many of the features on green features as possible other than efficient ACMV systems, we're talking about replanting. And in the future for this, we will be looking at possibilities of the solar panels as well. We have not put in any solar manner for this building yet at this present moment, though, we've embarked on initiatives or many of our other classes because we are looking at the tenant's needs, requirements, let's say, the roof space first before we lock some of this in, but this will be a feature that we'll be looking at. And especially for newer buildings, newbuilds, high-tech facilities, we would, of course, track the guidance given by the government and also within certain of the sustainability framework. Of course, from measurable ones for ones that you get certifications, we would aim towards those certifications. I think we have our line in one of our releases for newbuilds, we will look for at least a Green Mark goal for our newbuilds. But we will be mindful of certain constraints like if there's a [indiscernible] facility, it's practically not possible, but we do what we can. So, things like solar panels, energy saving, like fittings, things like that, we'll do.

[Hwei Leng Tan, executive]

Thank you. I think we might have to end the briefing shortly, but I will take 2 last questions. I know the gentleman in white and maybe Brandon.

[Dale Lai, analyst]

Dale from DBS. Just a [ record ] question for me. Going back to the high-tech building, the renewals, I understand you said that it's because of a large timing. But just trying to wrap my head around why that big drop? Because I mean, I know we've been hearing about rentals still being very strong over the past 2 years, growing. And at the same time, in terms of the new lease signed for high-tech, it was significantly below your passing rent. So just wondering, is all of these one-offs or is this a sign of where rentals will be trending?

[Kuo Wei Tham, executive]

Okay. A quick response to that is that the renewal rents that we're signing is still quite respectable relative to the market. The reason for that downshift is because of the mechanics built into the earlier lease, they're expiring this because there were escalations built-in and we managed to have the originally packing it fairly high levels. So, while the market has been supportive, but relative to what is in place, we think it is reasonable for us to accommodate that adjustment. So, at the end of the day, will we be able to -- we have to make that assessment. What we're able to push for the rents to be the same or an increase that will be slightly higher than market that might encourage the tenant to really look at alternatives or not. So of course, if a tenant will come back to us and that's for half price, then easy discussion, but it's about looking at that balance and the kind of managing the exposure and uncertainty. For high-tech space, the kind of comparison, say, for the new rents might relative to, say, in place or passing rent may not be instructive in certain cases because our high-tech space is quite a mixed bag in terms of attributes. As many of you know, high-tech is not a property zone type. So, it's partly a marketing term that we use. So, our high-tech rent or high-tech space so-called offerings, we have rents that were set as low as low-2s, $2-plus to $4-plus like what you see down here. So, it depends on the deals that we crystallize in that quarter where we do the reporting. So, it will fluctuate up and down fairly wildly within that band. So, if you track the reports that the or figures that we have outlined, you'll find that, that volatility is relatively higher. So of course, at the end of the day, is whether we want to have 2 types or 3 types of high-tech descriptions within our portfolio. But then we don't -- it's not as if we have, say, 1,000 assets, 10,000 assets where we have large enough kind of scale that will give us that a good number of data points to represent. So, for the time being, you will see this kind of fluctuation. But I think a observation that we can share is that the market continues to be supportive in this space. So that is not an indication of any weakness in, say, in the demand.

[Unknown Analyst]

Yes. I just want to question on the acquisition plans again, right? I think in FY '23, you mentioned that the sponsor pipeline is probably off the table. But looking at FY '24, does you make better sense now where you're trading?

[Kuo Wei Tham, executive]

Okay. The -- it is still not an easy kind of execution even if, say, the sponsor is looking at doing that transaction because while we are at the small premium over NAV from the capital cost perspective, especially when you take into consideration the borrowing costs, both on the borrowing cost, it is still quite close to the cap rates that we are seeing. So, getting the deal to be reasonably accretive, is not easy. So, you have to still wait for the right market conditions. And of course, depending on the sponsors, so-called plans follow divestment. So, it's something that we would want to plan for, but it's really driven by the sponsors' own considerations and also the market readiness.

[Unknown Analyst]

So is it going to say that the underlying yield of that portfolio is about what...

[Kuo Wei Tham, executive]

5-plus.

[Unknown Analyst]

5-plus?

[Kuo Wei Tham, executive]

Yes. So, the case is whether we can find the right window for us to execute the transaction.

[Hwei Leng Tan, executive]

Right. Thank you very much. I think we can take questions offline. But right now, we have to end the webcast. Just a note, so I apologize for the late delay of this briefing. Thank you very much and have a good day.

[Kuo Wei Tham, executive]

Yes. Thank you for joining us.