Mapletree Industrial Trust

SGX:ME8U

Earnings Call Analysis

MIT Reports Resilient Financial Performance Despite Tenant Challenges

MIT delivered a resilient performance with a 0.6% year-on-year increase in net property income to $521 million. Revenue from new projects significantly contributed, despite a 1% dip in distribution per unit (DPU). Rental reversions remained positive at 6.6% this quarter, though trending down from previous quarters. Portfolio valuation increased by 0.9% to $8.8 billion, driven by the Osaka Data Center. Key challenges included a 28% valuation reduction in a U.S. office asset and low occupancy levels. Future rental revisions are expected to trend towards 4-5%, with divestments ranging between SGD 200–500 million anticipated.

Introduction to Performance

The company has had a relatively resilient performance this quarter. Net property income improved by 0.6% year-on-year to $521 million, while the distributable income to unitholders increased by 2.7% to $378.3 million. This resilience is attributed to new projects offsetting some drag from recent equity issues.

Distribution and Dividend Per Unit (DPU)

Despite the improved distributable income, the diluted DPU dropped slightly by 1% compared to the previous year, now standing at 13.43%. This was mainly due to a larger unit base from a $200 million equity issuance last year.

Operational Performance and Rent Revisions

The company had positive rental reversions across all property segments, averaging 6.6%. This marks 10 consecutive quarters of positive rent revisions, though the rate of increase is slowing. Future rent revisions are expected to trend towards a more modest 4-5% as the current up-cycle moderates.

Rental Levels and Market Conditions

The company has registered higher rental levels, with $2.22 per square foot for the Singapore portfolio and $2.51 for the North American portfolio. The Business Park spaces are under pressure due to submarket vacancies, yet the overall rent revisions remain positive.

Joint Ventures and Distribution

Distribution from joint ventures saw a year-on-year increase of 3%, despite high-interest costs and a dip in U.S. portfolio occupancy. This stability is partly due to the strategic withholding of some distributions earlier in the year to manage risks.

Net Property Income (NPI) Margins

Current NPI margins are at 33.7%, impacted by occupancy levels and ongoing property expenses. No significant up-shift in NPI margins is expected for the financial year until new revenue contributions are secured.

Asset Valuation and Divestment Strategy

The portfolio valuation remained stable at $8.8 billion, a 0.9% increase from last year. The company plans to focus on divesting non-core assets, especially those with declining value or less strategic relevance, potentially targeting $200-$500 million in divestments.

Future Outlook and Revenue Growth

Looking ahead, capital management remains a priority, with a focus on opportunistic bond issuances and borrowing hedges. The leverage ratio stands healthy at 38.7%, providing room for future acquisitions to strengthen the portfolio.

Key Challenges and Risk Management

The company faces challenges from high vacancies in certain U.S. assets, which are expected to stabilize as new tenants are secured. The maintenance costs for significant assets such as Kallang Way will increase as temporary provisions expire, likely impacting NPI margins.

Interest Rate Management and Financial Health

The guidance for interest rates remains below 3.5%, supported by existing hedges. Upcoming debt expirations will necessitate refinancing, which could influence future rates depending on market conditions.

Earnings Call Transcript 2024-Q4

[Hwei Leng Tan, executive]

Hi, a very good morning. My name is Melissa. Thanks for joining us for MIT's Fourth Quarter and Financial Year Results Briefing. We have the management team of MIT on site for this virtual briefing. We have Kuo Wei, our CEO; Lily, our CFO; Peter, Head of Investment; Serene, Head of Asset; Sara, our U.S. Asset Manager; and also Khim, who leads the marketing team. The results presentation slides were issued last evening via SGXNet and available on MIT's website. We will use it for this morning's briefing.Without further ado, I invite Kuo Wei to provide a short update on MIT's performance. Kuo Wei, please?

[Kuo Wei Tham, executive]

Can you hear us? I assume you can. If not -- if we speak an hour without you hearing anything, as you know, just spending another 30 minutes without any productive thing done. So anyway, our fourth quarter and full financial results, I hope you can see we have projected it. We can go on to the highlights and talk about what we have delivered. I think all in all, we have relatively resilient performance and the revenue contribution from the new projects have been quite meaningful. If you look at the net property income improvement, 0.6% year-on-year to $521 million and the amount that we are able to deliver to unitholders has increased 2.7% to $378.3 million.But on a DPU basis, if you look at the full year performance, we have a 1% dip compared to the previous year actual results, so we are delivering 13.43%. Of course, if you look at this in relation to the higher distribution availability is driven mainly by the slightly larger unit base that we have. You could remember, we issued $200 million of equity in the third quarter last year for our Osaka Data Center acquisition. So that has resulted in this small little drag. All in all, we are still looking at a fairly resilient financial performance.If we look at the second set of bullet points on the operational performance, we have reported positive reversions across all property segments. The aggregate average, we are looking at positive 6.6%. So, if you look at the rental revisions over the last 10 quarters has been positive as what we have outlined in some of our conversations. For the last 2.5 years, we have turned the corner as far as revisions are concerned. But if you look at the kind of trend, the previous quarter 7.2%, this quarter, 6.6% and 3 quarters back it was 8.8%. So it is, I think, a case of us reaching a kind of point of diminishing returns.What we get -- or we'll be able to have rental revisions, positive rental revisions next few quarters, we probably have, but my sense is that we will probably trend towards a 4%, 5% level. I think quite difficult to look at us going for high -- even high single-digit figures because as you might have seen, with 10 quarters of consecutive positive rent revisions, by the time we hit another 2 quarters, we will be catching the front-end of this so-called period of positive rent revision. So, the kind of award adjustments had already been affected about 3 years back. So that kind of additional up-shift from the rental rate perspective will be a bit more, I would say muted.Now, going on to the rent levels, we are registering higher rent levels that has been fairly encouraging. SGD 2.22 for Singapore portfolio and USD 2.51 for the North American portfolio. For the North American portfolio, you might have seen in terms of our detailed numbers, we see a small up-shift. And if you look at the -- for our AT&T representation, essentially AT&T [Technical Difficulty] extension of 1 year. For our San Diego asset, we had a small little bump, in terms of rental rate. So, from a rental rate perspective, we see a higher so-called numerical representation. That one I would say is temporary.The portfolio valuation is relatively stable. If you look at that from a sales value perspective, $8.8 billion and compared to last year, 0.9% increase. But if we look a little bit more deeply compared to book value, we had some write-downs. We look at our other announcement on the valuations for this year. The portfolio valuation seen a small uptick mainly because of the addition of our Osaka Data Center that we took on third quarter last year. So that had marked the downshift in like-for-like valuation adjustments. Later again, run through some of the details.But certainly, from the perspective of the portfolio management, we continue to look at rebalancing it, improving the profile. For the Osaka Data Center, as some of you may know is a phase completion kind of arrangement because it's not a fully completed or fully fitted asset. We have phases 2, 3, 4 to be done. We have recently completed the Phase 2 feed out works. And of course, we are receiving the corresponding revenue contribution. So as of now, 80% done. We have another 10 plus 10 for phases 3 and 4 in this year, that we would expect completion.Now divestment, this is another key initiative that we would look at a bit more closely and some of you may know we have reached out to the market to get the sense of interest for a broad range of assets in our portfolio, the Singapore assets, flatted factory assets, business park buildings, and some of our U.S. data centers. The demand has not been that strong, steady on some level of insurance but not at a level where we can for the kind of the interest level, not at a stage where we are able to cross the line and go into a firm kind of transaction. So, we will continue to look at the -- this divestment initiative.This year, we think the market should be more conducive while the interest rate cut start date has been shifting back and forth, probably more back based on the current set of articulations, but we think is a case of when, not the case of whether. And we think the market will probably respond favorably to that towards the later part of the year. And there might be window available for us to look at divesting some of our assets. But of course, we have successfully completed one, the Tanglin Halt flatted factory cluster, $50.6 million, that was completed just before the end of the financial year on 27th of March.I think some of you have asked, I think, on the gains that we will be distributing. I think relative to what our original cost plus our capitalized cost, we have gains of roughly [ SGD 13 million ]. So our intention is to distribute this SGD 13 million equally over the 4 quarters in this financial year. So of course, you won't see this in the fourth quarter set of results. In the next quarter, we will add this as a line item for the distribution of gains.Now, on the capital management part, we'll continue to strengthen our balance sheet and we look at opportunistic issuances of bonds or getting our borrowings hedged at attractive favorable rate whenever we can. So, we have recently issued SGD 50 million, 3 years at 3.75%. Further, it will give us a bit more certainty and also allow us to look in, I would say, a reasonable rate in the meantime. Hedge borrowings we have reported just a shade below 5%. So, we have a fairly good level of protection average tenure for the hedge, 3.7 years, which matches our borrowing tenure relatively fulfilled. So, we have a bit of kind of a good match along this front. Leverage ratio, we think is still relatively healthy, 38.7%, gives us a big headroom to take on projects and then to look at the possible acquisitions to help us further [indiscernible] and strengthen the portfolio.So, I think that rounds up the key highlights. Maybe I'll go through the valuation part to give a bit of color. So, this is on Slide #12. The figure, which I've outlined earlier, you can see aggregate [ 8,802 ] for the entire portfolio. So there are, of course, essentially some write-downs across the portfolio. In the Singapore portfolio, mainly due to the shortening land tenure clusters, because this is a case of a mathematical representation. Once your asset goal to a stage of below, say, 15 or 16 years of balance and tenure balance, cap rates generally the same, except for -- compared to last year, except for the Singapore data centers because of the very high demand for this space, we have seen a roughly 50% cap rate compression for the Singapore data centers.And of course, mind you, this is the year where we have switched valuers. So, while we see that as an indication of the read of the market, because when you shift your friends, you cannot do a like-for-like comparison. You say last time this to me. Last year, you do this to me, this year, you did another thing, right? So we -- but I think the cap rates being likely the same for the rest of our sectors is an indication of the stability in the Singapore market. Now, whereas for the U.S. data center market, we are seeing cap rate expansions generally across the board, except for some 1 or 2 assets where we see slight compression because of the relative strength of certain submarkets.Now for the U.S. assets, I think if you look at the cap rate reference, most of them will be clustering around the 5.75%, 6%, 6.5% level. The broad range at the extreme end and the low end, 5%, at a high end, I think it's 8.25%. So this is, of course, a tighter cap rate assets are driven by the location and the kind of attractive kind of attributes like 180 Peachtree at Atlanta is exhibiting the 5% cap rate because it's 100% occupied long leases and high demand. The 8% cap rate is represented by Arlington asset because the tenant left in March 2023. So from a cash flow perspective, there is nothing apparent yet in terms of releasing kind of prospect. So, some of this was taken into effect.But if you look across the board, the range of cabinet expansion, we would see them clustering around plus 25 to plus 75 basis points, and that represents roughly 64% of all the assets we have. So, I think that will give you a sense, I think if you're looking at modeling that kind of effect, you can look at that range or you can pin whether 50 basis points for getting a rough gauge. So, do we see this cap rate continue to expand next year? Of course, it is not easy to stare into the crystal ball and the forecast, but we think we are near or at the bottom. Because the cap rates are quite sensitive to your funding cost and interest rate environment and the markets should, I would say, turn the corner along this fund and hopefully, your cap rates would at least be stable. And if not, if the market really continues to be exuberant especially for the data center assets, we might see some improvements. But I think the stability should be maintained henceforth.Okay?

[Hwei Leng Tan, executive]

Yes, I think we will move into Q&A. If I can request for the analysts to state your name and firm and limit your questions to 2 per round. I think the first one on the line is Mervin. Mervin, please?

[Mervin Song, analyst]

Congrats on the results. First question, in terms of rental revision guidance for the coming year. Any thoughts on that and how you're seeing demand? Second question I have is in terms of the distribution for JVs. It's very strong, I think up, like up-to-date, 3% year-on-year. What's happening there given that we -- I presume you're facing high interest costs and there's been a drop in occupancy from the U.S. portfolio. Is there a higher payout ratio, capital return or what's happening there?

[Kuo Wei Tham, executive]

Yes. Okay. I think the rent revisions kind of outlook, I have touched a little earlier. We think we still be able to nudge rent up certain segments of our market, especially, the more generic spaces. We are getting still decent rent levels. I have talked about roughly 5% positive rent revisions and we should be able to maintain that for another 2 or 3 quarters, then we'll see. I also outlined earlier by that time, we would have reached a 3-year cycle and we will be at the start of the current set of rent up-shift cycle than what we call that increase might be more muted.Now on the rent levels, we think the Business Park space would still be under a bit more pressure because the submarket vacancies on a relative basis are still high in the International Business Park and the Changi Business Park space. While we have a fairly respectable occupancy level, above 80%. But the kind of challenge in this kind of market and the competition for prospects is tough. That said, you might have seen us getting high new rates. If you look at the chart we have on Page 23, [ 4.31% ] for Business Park buildings. So it's encouraging, but it may not tell you the entire story.I think just as so-called bit of a background. We had a couple of small tenants or I wouldn't say small tenants, but tenants who took up a small amount of space, 1,000 square feet for coffee joint, $5 per square foot; 2 small tenants, slightly more than 2,000 square feet, $4.40 or $4.50 level. So, in the mid-4 dollar level. So that has helped us pull up the weighted average figure. But generally, there's still a lot of competition in that space. Now of course, if you look a bit more closely at the other sector, the Hi-Tech Buildings, this aggregate kind of a representation, may not tell the full story because the new rents that we are able to get are not representative of what we see at, say, our Kallang Way Hi-Tech Building, we think we'll still be able to do $4 plus/minus for that space. But the kind of tenants that we can get, I would say, not very large tenants. We will be looking at those 10,000 plus/minus square feet kind of tenants for the time being, like those 70,000, 100,000 square feet tenants that's very difficult to combine in the market.

[Hwei Leng Tan, executive]

Distribution and JV.

[Kuo Wei Tham, executive]

Distribution and JV, if you're talking about the comparison, what you might have seen or might not have noted is that there is a dip at the beginning of the year from the amount that we have withheld for the tenant that we did not name that ran into arrears issue and that had undergone a Chapter 11 proceedings. So, because of the amount withheld, we had a slightly lower amount of distributions on the JV. But I think we noted that there had been since resolved, we have received the arrears. And of course, the amount withheld had been released. So that has resulted more directly from this particular tenant, the additional contribution of about USD 2 million that were recorded in the line distribution from JV. So that has been helpful.So, maybe since we are on this topic, we can close up the loop on this outcome of the proceedings. As you could have read in some of our earlier materials, all 8 of the leases were taken over, but we had some modifications, 2 of the leases. One, we had a downward rent adjustment. The other one, there's a right of termination given with 6 months' notice. So, we are now seeing that the effect of the termination right being exercised. So, we will see that effect not now. The right had been exercised. We are looking at the expiration on the 8th of September 2024 this year. So that is this is tax circle and the impact to the portfolio is roughly 0.3%. So that is anticipated. But I think slightly later exercise on the right give us a bit and reprieve and we continue to get the revenue contribution in the meantime. So, I think that should close up that part on this tenant.

[Hwei Leng Tan, executive]

Thank you. We have Ezien. Ezien, would you like to ask your questions, please?

[Ezien Hoo, analyst]

It's Ezien from OCBC Credit Research. So, my 2 questions is the first one is about U.S. data centers. So, you mentioned that the REIT may be looking to divest U.S. data centers. Is there any similar characteristics of these U.S. assets that is planned for divestments? Like what's the reason? And then the second one is if you can clarify more on the accounting of the Osaka Data Center because the stake is not -- the interest is not 100% yet, but then there is another 20% that remains to be paid. So, in terms of the consolidated net property income, how is it actually recognized? That's all for me.

[Kuo Wei Tham, executive]

Yes. Okay. Well, for the U.S. data centers, I think certainly from the perspective of portfolio manager will try to divest ones that are less relevant to us, whether financially or operationally or from an attribute perspective. So, I sense that not say likely to give us, say, reasonable revenue contributions whether due to occupancy issues, due to attributes issues, we will look at divesting. An ideal situation is that things that are -- or assets that are a little less interesting to us might appeal to buyers who value some of the other attributes. The ones that we have mentioned earlier, like, for example, our San Diego asset. Of course, now we have the extension of a year from AT&T, we get a bit of a premium rent, but that lease will expire 31st December 2024. Will be able to get a replacement tenant in the data center space? We won't be -- we're not too sure now, we are reaching out to the market.But I think we have outlined before that the asset is adjacent to a vibrant biotech or life science market in San Diego. It's one of the few largest life sciences market in the U.S. So that might appeal to a different group of developers or space users. So, we will be looking for measures like this. There are some assets that we have lower occupancies or that are vacant, similar kind of consideration, like, for example, our Arlington asset, say, if we are not able to lease meaningfully or at the right pricing, but if you have an end user that can repurpose the facility at the right price, it will be something we look at. That is one perspective.The other perspective is that for some of the assets that are, I would say, fully valued that we have fully exploited all the kind of opportunities available in moving up occupancies, moving our brands and it is relatively stable and we can get a good offer from the market is something that we will consider because at the end of the day, if we can get -- or if we can divest asset at cap rates that are meaningfully tighter than what our valuation says and what we think we'll be able to work on in the years to come because these are fully valued, fully so-called work assets, then we could crystallize some of the gains. China, the capital or recycle the capital into other maybe more interesting opportunity. So, these are some of the options that we're looking at.And there's another so-called subset, which is the kind of interest that we have received from the market or even end users or the existing tenants who express the interest of exploring the possibilities of buying over the premise that they are occupying. So, these are possibilities that we'll be looking at. And as a professional portfolio manager, while we like our assets, we don't form emotional attachment to them. We look at the economic outcome and see whether it makes sense on a platform for us to keep how we do or divest. So, I think that should provide a bit more color on how we approach the possibilities in our U.S. portfolio.Now, on the Osaka Data Center, mathematical gymnastics, allow the gymnast to answer the question.

[Lily Ler, executive]

Okay. For the Japan acquisition, basically, as you know, we have only paid up to 80% of the agreed purchase cost in view for the fit-out works that are still outstanding. So that's another 2 phases to go. In terms of accounting, we would have reported in the P&L, the relevant income with respect to the 80%. So, I think the agreement that's been set up during the acquisition is that as the fit-out works are completed, we will pay our -- the proportionate portion of the purchase consideration. And at the same time, we will also receive the relevant income stream from it.

[Ezien Hoo, analyst]

Sorry, go ahead. Go ahead please.

[Lily Ler, executive]

Sorry, go ahead.

[Ezien Hoo, analyst]

Because you only allow me 2 questions. I thought I can squeeze one, slight one as a follow-up to this data center, this Osaka Data Center. So, the remaining 20%, how much is that roughly?

[Lily Ler, executive]

About 20%. So, I think that's about JPY 10 billion.

[Ezien Hoo, analyst]

Sorry, I interrupted you at book value.

[Lily Ler, executive]

Sorry, again?

[Ezien Hoo, analyst]

I interrupted you when you're about to say something about book value.

[Lily Ler, executive]

I see so we're saying that on the balance sheet, the book value we have -- we would have also accounted for -- that means we would not have accounted for 100% of the valuation as well. So, we have adjusted out the fact that there is a balance $10-plus billion that needs to be paid out.

[Hwei Leng Tan, executive]

Derek, would you like to ask your question, please?

[Jian Hua Chang, analyst]

Can you hear me?

[Hwei Leng Tan, executive]

Yes, we can.

[Jian Hua Chang, analyst]

2 questions for me. My first one is back to go over your thoughts around valuations, right? So, you're -- and you're seeing that you're going to sell U.S. DCs. Given that your new values or your girlfriends give you higher cap rates, right? Do you think you can sell a book at above purchase price? I'm just curious.

[Kuo Wei Tham, executive]

Okay. we would say, take confidence or we have confidence that the valuers are able to -- are pricing the figures at what they think the market is transacting at. So of course, many of you know, valuation is an add. We think those are fairly representative numbers. But that said, we are not fixated on needing to divest or one thing to divest at the prices that are above valuations, though that had been our so-called feature in the last 5 divestments. We always deliver a little bit of profit, very big or small, some large enough for us to distribute. Of course, those are more opportunistic divestments. And of course, we will entertain the opportunities that came then for assets, we think we will be able to realize meaningful gains.But now our approach has taken a slightly different posture, we will be looking at the recycling capital. We'll be looking at whether some of these assets are meaningful to us in the longer term. So, if the value continues to decline, not because of cap rate expansion, but because that market demand will be weaker for that particular submarket or the attributes are not as relevant in the space we're operating in. And we anticipate a constrained valuation figures in the years to come, I think it's something we look at. So, maybe a short answer to that is would we divest below valuations? We will consider. Of course, that won't be our first position when we go out to the market while knowing that for some of the assets, we have a fairly sizable downshift in valuation.I think as some of you read through the details. Some of you might have noticed, the largest downshift is our 250 Williams asset, [ $302 million ], down by USD 83.6 million or minus 28%. So that one other than a cap rate expansion of 1 percentage point -- the bigger issue is that about half of the building is commercial office space and the demand for commercial office usage is extremely low in U.S. and in several developed economies because most of our people working from home or most of the staff from these large organizations are working from home.Will that trend change? It may moderate ripe in terms of that work from home allocation. But we get back to the good old days when everybody in office, client like because I believe some of you might be sitting in your kitchen, bedroom or your study, we are participating in this. So that will become a new phenomenon. So because of that reason and because it is more stark in the U.S. market for this financial year, we have seen a fairly significant downshift in values for assets that have the large office component for this case. But as I said, long and short, we consider selling below current valuation. Yes, we will look at the medium to long-term prospects and it is a meaningful direction for us to take for some of the assets, we will do that.

[Jian Hua Chang, analyst]

More defensive strategy. Okay. So my second question is on interest rates, right? So, I think we kept interest rates really low, below our guidance of 3.5%. So, I'm assuming there are some hedges as yet to roll off. So, I'm just wondering, could you give us a refresh guidance for interest rates for this financial year?

[Lily Ler, executive]

I believe my previous guidance was it should be -- it should remain below 3.5%. But at any rate, if you look at going forward, we have about $220 million of debt that will be due -- sorry, interest rate swaps that will be expiring in the financial year -- in the coming financial year, of which about -- most of them are actually Sing dollars, about 70% are Sing dollars. And the expiry tends to be towards the end of the financial year. I think the U.S. dollar is about SGD67 million, and that's expiring somewhere in mid-2024. But having said that, I think as you recognize, the hedge rate, there will be a difference from the current hedge rate vis-a-vis the replacement rate. So that is going to have some -- that's likely to have some impact. But because of the quantum, I don't think the impact will be too much. So I hope that we still can try to keep the interest rate as low as we can. But nonetheless, as I said, I don't really think that we are going to shoot beyond the 3.5%.

[Hwei Leng Tan, executive]

We have Dale.

[Dale Lai, analyst]

This is Dale from DBS. Just 2 questions from me. I think the first one with regards to what you mentioned about divestments. Just wondering if there's any quantum that you have targeted or at least based on the noncore assets that you've targeted for divestments, what is the quantum looking like?

[Kuo Wei Tham, executive]

Well, we don't have a very, very specific number. But I think anything between SGD 200 million to SGD 500 million would be a good band to shoot for. Some of our assets we have are relatively chunky. If you look at the -- our Business Park Buildings in Singapore, for example, aggregate slightly more than SGD 500 million. So if we -- I mean, last year, we tried to see whether there's interest when we package everything together, not successful in getting a strong interest in that space. So, we have to see if we can do one down there, maybe another one asset in the U.S., maybe in aggregate, we might hit the lower end. So, this is a kind of period where we don't have that clarity because we have not reengaged the market.But we are also not working on our business contingent on being able to divest because we are not under pressure to lower our leverage, strengthen our balance sheet at all costs. So, we look -- we'll still be a bit more opportunistic, but we would engage the market a bit more closely. But the SGD 200-or-so million might be that lower bound and could be meaningful to us that will provide a reasonable kind of share of capital that we couldn't deploy elsewhere.

[Dale Lai, analyst]

My second question is on your Hi-Tech Park at Kallang Way. And I understand that occupancy is gradually creeping up. Your rental rates are holding firm. But just wanted to understand versus your earlier projections, your IRR calculations, how is that trending versus what you had earlier projected for this redevelopment?

[Kuo Wei Tham, executive]

Okay. Well, of course, for an income platform and for REIT, we use IRR as a reference, it is not a threshold that is sacrosanct. Now with a slower leasing up, the IRR because of the recent effect on the IRR computation would result in a bit of a drag. But as of now, I think we should still be able to clear our intended IRR and the steady-state occupancy levels that we are pushing for remains the same. We're talking about 90%, 95% level. And our current rent levels are holding. So, we will reach that and from the accretion perspective, we think we will be able to deliver as promised. But what you have observed very accurately, there will be a drag on IRR because of this over leasing up. Some of you may remember whenever I'm pressed to come up with a time frame, I always say 6 to 9 months, right? Because 3 months is too short, 1 year, some of you may not except. There is a realistic kind of time period where we might be able to do something meaningful.Like for our Kallang Way asset, yes, we are -- of course, getting our leasing folks to work extremely hard, but we are also adjusting our commission structure and incentive structures as well. Hopefully, that will grow more tenants, more prospects and some of our external agents to work a little harder to move up the occupancy. So, I think they were invariably several questions on where we wish to steady-state. I think I would model it down our earlier kind of trajectory. Realistically, looking at this kind of a small incremental tenants that we are able to commit, we will probably be looking at 65%, 70% occupancy level by end of financial year, which is 31st March 2025. So that, I think, is a more realistic and meaningful trajectory for us to shoot for.But I say this, of course, I think our leasing folks are working hard and they are certainly trying very hard to exceed this kind of a trajectory so that we can have some pleasant surprise at the end of the financial year or towards the end of the financial year. And the big driver at the end of the day would be large users, very large users because the incremental ones we push a little other we can get there. But we need those 50,000, 100,000 square feet kind of tenants, you need 1 or 2 big ones that would provide a meaningful kind of improvement to the figures. So, this kind of animals, they are present in the rain forest, but not easy to find, right? So, we have to find a little harder.

[Hwei Leng Tan, executive]

We have Brendon. Brendon, would you like to ask next question.

[Brandon Lee, analyst]

Can you hear me?

[Hwei Leng Tan, executive]

Yes, we can.

[Brandon Lee, analyst]

I just want to ask on the U.S. occupancy, right, at 86.2%. It's really rather low. Do you think this is a bottoming kind of stage? Or you think that there could be more pressure for FY '25?

[Kuo Wei Tham, executive]

Well, I would not want to promise you that this is the bottom. But we think this is near the bottom because the effect that you see is driven by us accounting for the exits of the 2 AT&T -- rather the exit for the 2 AT&T assets at Brentwood, Tennessee and Milwaukee. So, it's fully accounted for this quarter, 86%. But in many of our conversations, I think we talk about us being close, very close, and very, very close to getting a replacement tenant for Brentwood. And we are indeed very close. The promise I get from [ shareholders ] is that you'll be on the platter very soon. Okay. The long and short is we receive work that we have received a go, a go ahead from the tenants, committees. So hopefully, we're just at a very large stretch.The very last yard for the 100-yard dash to get the paper work across. So yes, we just need to get that done. And this tenant somehow has very traditional practices. And one of the tricky parties they need to collect other graphs from all the relevant signatory. So hopefully, that is the final bid. So with that in place, our occupancy should go back up beyond 90%, about 91%. So that will give us a bit of a reprieve. But of course, the challenges continue to be ahead of us because we do have some expiries coming up. The larger one being the San Diego assets from AT&T. So, we will be keeping a close watch on that. But we are happy that we are able to close up this Brentwood lease soon, then at least we have a bit more room.

[Brandon Lee, analyst]

My second question would be on your NPI margins, right? So if you look at this quarter, I know that it's relatively low. It's [ 34% ], then we saw quite a bit of decline in most of the asset cost. Is this what we should be looking at into the modeling for FY '25 or you think there's a one-off because of the lower occupancy?

[Kuo Wei Tham, executive]

Yes, talking about an aggregate basis for the whole portfolio, right?

[Brandon Lee, analyst]

Yes. On the aggregate it's 33.7%, but we even look through the different segments, except for like Business Park and Hi-Tech, right, a lot of the other stages kind of came down and especially the U.S. data center side. So, I just wanted to know like from a modeling standpoint, is this a normalized number? Or you think that there are some one-offs or sort of occupancy-related items in there?

[Kuo Wei Tham, executive]

Well, you are absolutely right. There's one element of the occupancy kind of effect. But for the U.S. data centers, as I mentioned earlier, with the AT&T leases being so-called expired, we don't get revenue, but we have expenses like property taxes. So that one for the larger assets is relatively big and it has resulted in the drag in the NPI. So would we be able to see an up-shift in NPI margin this financial year, we don't think so. Because until we are able to get the revenue contributions coming in, the cash coming in, we won't be able to kind of reverse that effect. So for modeling purposes, I think you will be prudent to continue adopting a similar kind of profile until we have the reletting clarity.For the Singapore-based assets, I think, of course, the downshift is a little less, I would say, pronounced. We see an improvement this financial year. Unfortunately, I'm not able to say with certainty. Now, the few big moving parts, property taxes not coming down. Utility charges, while there are some quarters that had been expecting or anticipating maybe downward adjustments, we think at best is going to be stable, maybe moving up with them because we have on aggregate basis, larger utilization, especially when we have slightly higher occupancies for our Kallang Way assets. So our landlord part, we will see larger consumption, all things being equal.And the other effect, which might not be a pattern is that Kallang Way being a fairly significant asset in our portfolio in Singapore, we had temporary occupation permit set in March 2023. For 1 year or so after completion, the property would be what we call under the [indiscernible] liability period where the maintenance cost is taken on by the contractor or the providers for the services and equipment. So, we don't see that represented in cost. But from this year onwards, as all these kind of provisions for, we will need to account for the maintenance cost of this asset. So in all likelihood, we would expect the NPI margin to be at this level or shift down a little because of this effect.

[Hwei Leng Tan, executive]

Thanks, Brandon. Joy, would you like to ask your question? I am mindful of the time. So, I think we have online, Joy, Tan Xuan and Terence to round out the session. Joy, please.

[Qianqiao Wang, analyst]

Just 2 questions for me. First, going back to U.S. on the brand new asset. Is there any CapEx required to sign this lease? And also just on this portfolio broadly, do you foresee sort of CapEx for occupancy improvement in [ '25 ]?

[Kuo Wei Tham, executive]

We have -- of course, our friend, Sara, who is Head of Asset for Data Centers in the U.S. She's sitting right in front, putting up a hand and I want to address your question very and truly.

[Sara Wayson, executive]

So, there are no tenant improvement capital expenses associated with the lease. There are several landlord capital items that would need to be done to the building as a shell. We're anticipating approximately $5 million to $6 million in completion of those within the first 12 months of the lease.

[Qianqiao Wang, analyst]

And Kuo Wei, if you can just comment on the sort of overall CapEx expectation for 2025?

[Kuo Wei Tham, executive]

Okay. I think in aggregate, we are looking at roughly USD 20 million. And a lot of this relate to roof, water proofing replacement works. And these are essential for our buildings to continue to operate optimally.

[Qianqiao Wang, analyst]

And this is for the U.S. portfolio only or inclusive of the Singapore...

[Kuo Wei Tham, executive]

Yes. U.S. portfolio only. For the Singapore, we don't anticipate much, only a few million dollars here and there. And because we have been improving our buildings over the years incrementally as you might have followed, the lease upgrading, [ product ] upgrading, [indiscernible] upgrading works have all been done progressively over the years. I think the only other large projects that we're taking on is the solar panel installation and this is our third phase. We have completed 2 phases and we should be completing that this financial year. And that will give us now in aggregate, slightly more than 10,000 kilowatt [indiscernible] of solar energy.

[Qianqiao Wang, analyst]

And then my second question, just on the divestment. If you look at the bid-ask spread, Singapore versus U.S., what sort of bid-ask are you seeing? And what sort of buyers are you looking at in the market?

[Kuo Wei Tham, executive]

Well, I think you might still see maybe 50 bps delta between what we can get from the market. And hopefully, this gap closes, and we will be able to find a good point where a transaction can occur. The buyers, I think, very varies. Now Singapore assets, we have shared earlier, a lot of these are investors, I think financial investors, not end users. For the -- one of our assets, the single user building, 26 Woodlands Loop, we are engaging the market as well. So, the type of buyer for that asset, I would say you see more end user type of buyers.For the U.S., I think it's also a fairly broad range. As I've alluded earlier, there are a couple of smaller ones or smaller assets that we have, that we have some indication of interest from existing tenants. So, these are end user sitting tenants requirements, whereas for the rest, it's more -- a bit more difficult to read. It could be data center operators. It could be developers. So, a fairly broad range. But as far as we are concerned, as far as they can pay, we are not allergic to any investor type or buyer type.

[Hwei Leng Tan, executive]

Thanks, Joy. Tan Xuan, would you like to go next?

[Xuan Tan, analyst]

Can I ask about the divestment. If I'm not wrong, the guidance last quarter was $100 million to $200 million and now it's $200 million to $500 million. Can you share a bit more about what has changed?

[Kuo Wei Tham, executive]

Yes. We have decided to push a little harder. At the end of the day, these are just bigger in a band of simulations that we are looking at. And some of this, of course, we need to have some basis is built up from the various candidates within our portfolio that were short listed. We look at reasonable, probably, low probability, higher probability. So it'll come out to a kind of band we're looking at. And I think to be -- I think a more direct about it. We think the possibility of us getting fantastic acquisition views this year, not high, because the market is still in [indiscernible] you get into a deal where you are in the right place at the right time and you have the right counterparty. So, the market is still in a set of flux.And the way for us to get dry powder, the way for us to move later ahead of the curve for rebalancing the portfolio, I think we need to look at a bit more divestments. So while I wouldn't describe the range $100 million to $200 million as a target, it is some kind of reference level we look at. So there's slightly higher kind of bound and as you might have noticed, it's a bigger spread. I won't say $200 million and $250 million, that means we have already 1 or 2 assets in mind, but I said a bigger amount so that we would encourage the new teams, our chaps that are studying this, there are chaps that are engaging the market to keep the mind open to see whether they can stretch the envelope a little.So, it's something that we look at. So, my point across is don't try -- try not to read too much into this kind of level. It's not us saying we must do $200 million come or high water. So, it is kind of a reference range that we are looking at. And some of you may remember, earlier part of 2023, we will ask, of course, about the divestment portfolio size, the time when we engaged the market, it was even higher, $500 million or more. So because that was how we have packaged some of the assets we have in Singapore and we engage the market. So, we will need to go through that discovery process, but will serve as a guide for us. And we will be getting the teams work harder on crystallizing the value of our assets.

[Xuan Tan, analyst]

And second question is on the mid-single-digit revision, right? Does that include U.S.?

[Kuo Wei Tham, executive]

No, it doesn't. That one is for Singapore. I think if you look at the rent revision aggregate data that we talked about earlier, all for the Singapore portfolio. For the U.S., we do not have much renewals anyway. So I think -- and for some of the cases, a typical renewal up-shift is [ 2% to 3% ] like what we have embedded in the original lease. So, I think that will probably be a reference level we take from that.

[Hwei Leng Tan, executive]

Terrence, would you do the honor for the last question, please?

[Terence Lee, analyst]

Just wanted to just clarify [ Michael's ] question. I guess for U.S. data centers, like, let's say, for Brentwood, what kind of reversions are you sort of getting and what kind of, [indiscernible] to sign the leases?

[Kuo Wei Tham, executive]

Okay. For that one, because the deal is not done first yet. And second, is this tenant is very shy. We will not be able to outline the inner perimeter. But I think just to share a little more, the starting rent for this tenant will be a little lower than the large rent paid by AT&T. But if you look at it on an effective rent basis for the whole AT&T listed and the effective rent for this tenant is in higher lease period, you'll be a little higher. So, we are looking at slightly better economics in the long term. At this time, we have 12 months of rent-free given. So that is, I would say, the more material part of the package that we have in place. And we don't have any additional tenant incentives embedded in this transaction.

[Terence Lee, analyst]

So, one more question on the JV interest rate in the U.S. Could you share what's the JV interest currently? And when is the debt due for refinancing?

[Kuo Wei Tham, executive]

Yes. Okay. For this extremely difficult question, I'll have Lily answer.

[Lily Ler, executive]

This is a very difficult question. Okay. I think for the JV, as you all know, the JV was acquired during a period where interest rate is very favorable. So naturally, you expect that there will be quite a picked up if we were to do a refinancing, okay? We actually have a first tranche of the JV loans that has already expired, I think, in early January, right? So, I think for the next 2 years, in January, we would have another $300 million that will be due for expiry as well. So, as for the repricing -- what is the replacement rate, I really have no idea. It depends on what Jerome Powell decides what he wants to do to cut or no cut, how many cuts and when he wants to cut. I hope that helps.

[Terence Lee, analyst]

So next 2 years, $300 million per annum or just $300 million, 2 years down the road?

[Lily Ler, executive]

Next year it's $300 million.

[Hwei Leng Tan, executive]

All right. Thank you so much. Thanks for joining us today. I think we are ending a bit -- we have overrun slightly. But you know where to look for us if you have any further questions on the results.

[Kuo Wei Tham, executive]

Yes, [ M Tower Level 35 ].

[Hwei Leng Tan, executive]

We all sit on 35. All right. Thank you very much.

[Kuo Wei Tham, executive]

Thank you. Have a good day. Bye-bye.