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Edited Transcript of ME8U.SI earnings conference call or presentation 23-Oct-19 1:15am GMT

Q2 2020 Mapletree Industrial Trust Earnings Call

Singapore Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Mapletree Industrial Trust earnings conference call or presentation Wednesday, October 23, 2019 at 1:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hwei Leng Tan

Mapletree Industrial Trust - VP, IR

* Kuo Wei Tham

Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd.

* Lily Ler

Mapletree Industrial Trust - CFO

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Conference Call Participants

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* David Lum

Daiwa Securities Co. Ltd., Research Division - Regional Head of Banking and Finance

* Derek Tan

DBS Bank Ltd., Research Division - VP

* Mervin Song

JP Morgan Chase & Co, Research Division - Research Analyst

* Nicholas Teh

Crédit Suisse AG, Research Division - Research Analyst

* Vijay Natarajan

RHB Research Institute Sdn Bhd - Analyst

* Yew Kiang Wong

CLSA Limited, Research Division - Research Analyst

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Presentation

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Hwei Leng Tan, Mapletree Industrial Trust - VP, IR [1]

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Welcome to MIT's 2Q and first half financial results for the financial year '19-'20. It was quite an eventful quarter for us. I would let Kuo Wei bring us through the results and share us the update during the quarter. Kuo Wei, please.

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [2]

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Hello, good morning. Welcome to this briefing for our second quarter and first half of financial year '19-'20. I'll run through our usual 5 segments. You can see the coverage on Page 3 and the key highlights on Page 5. You can see the first 2 points on there, distributable income for the quarter, we have delivered 12.1% better results year-on-year basis, $63.5 million for second quarter. And of course, that gave rise to a 4% increase in the DPU to $0.0313. And overall occupancy is 90.5% for the portfolio. I think if you can look at the details later in the charts that we have given. A small dip in the Singapore portfolio occupancy of about 0.3%. So that gave rise to an aggregate figure of 90.5%, partly due to the time gap for our 7 Tai Seng Drive asset from completion to commencement of lease and partly due to the exit of one of our tenants at the Light Industrial Buildings at the 2A Changi North last quarter. So we're seeing the effect this quarter because that exit was towards the end of the last quarter.

And the portfolio average lease expiry has increased from 3.4 years to 3.6 years mainly because of the 25-year lease that had commenced at 7 Tai Seng Drive, which is a data center we leased to Equinix. And of course, some of the more notable milestones that we have in the quarter was the acquisition of our second data center portfolio in the U.S. We have announced that just last month, so it will be the same kind of approach at joint venture with our sponsor, Mapletree Investments, for the transaction. So it's a 50/50 joint venture this time around. 10 powered shell facilities or what we normally refer to as just simple core-and-shell kind of facilities and 3 turnkey data center assets. That's in a joint venture on an 80/20 basis with Digital Realty. And when we talk about turnkey, we're talking about a facility with a little bit more fit-out in terms of power provisions and environment control equipment. So it's just a little more kind of complete, but we are still only looking at the real estate part of the data center facility.

And of course, the 7 Tai Seng Drive facility I talked about, we completed that. And we have commenced the lease with 2 months rent-free already accounted for. Cash flow started coming in from 20th of September 2019.

And the last bullet point that you see down there, capital management. Essentially, it's equity fundraise that we have done, $400 million that was of course to fund the acquisition of the data center portfolio in the U.S.

And on Page 6, our 1-page report card. On the right, you see the most recent quarter, $0.0313 in terms of DPU and of course the distributable income, $63.5 million, highest ever.

Next, we can go onto the financial performance. On Page 8, we do a comparison year-on-year basis second quarter financial year '19-'20 against financial year '18-'19, 10.5% increase in gross revenue from $92.2 million to $101.9 million. And this is of course on the back of new projects that we have progressively crystallized over the last 12 months. The 30A Kallang Place, which I think we have outlined earlier, is already fully committed. So we have all the leases building up. We have the data center facility at Sunview Drive, which is contributing fully already. And as you may remember, we have completed the transaction for 18 Tai Seng. That's the acquisition from the sponsor in February this year. So this has all started to contribute to the portfolio that gave rise to higher revenue.

Expenses, we have kept it very much under control on a quarter-to-quarter basis, just 1.1% increase, $21.6 million to $21.9 million. So that gave rise to a higher net property income level of close to $80 million for the quarter compared to $70.6 million 1 year ago.

Borrowing cost of course would have risen correspondingly upon the gradual progressive completion of our projects, 10% increase, $10.3 million to $11.3 million. But if you look at our actual borrowing cost on a percentage basis, very much the same. And in terms of the profit for the period, it checks the net property income line fairly closely, 13.8% increase, $56.3 million to $64 million. And of course, if you look at the declaration by the joint venture, that is our first data center portfolio that we acquired in 2017 December. It's fairly stable, around the $4 million level. About $3.95 million 1 year ago, about $3.85 million this round. And that of course gave rise to, in aggregate, a 12.1% increase in the amount available for distribution, $56.7 million to $63.5 million this quarter. And of course, that gives you that 4% increase in the DPU to $0.0313.

On page 9, we compared the performance on a 6-month basis for the first half between financial year '19-'20 and financial year '18-'19. Similar kind of profile that you will see. Also close to 10% increase in gross revenue, 9.7%, from $183.7 million to $201.4 million. So property expenses, as I've outlined earlier, very much under control. A marginal 0.3% difference, which is a little lower actually from 46.7 to 46 point -- $43.7 million to $43.5 million.

So net property income, similar kind of observation as well, 12.8% increase from $140 million to $157.9 million. So similar kind of profile that we see as well for borrowing cost as well as the amount declared by the joint venture, which is the data center portfolio. So DPU level, we're seeing a 3.7% increase, $0.0601 to $0.0623.

Going on to the next page, we compare the quarter-to-quarter shift from first quarter to second quarter this financial year. Of course, you see a smaller increase in the gross revenue, 2.3% increase from $99.6 million to $101.9 million. Same thing, property expenses were under control, 1% increase. Net property income, 2.7% increase. You see of course a more muted kind of amount available for distribution, 0.4% increase, $63.2 million to $63.5 million. So that gives you that 1% increase in the distributable income from the previous quarter of $0.0310 to $0.0313 this quarter.

On Page 12, for the balance sheet, very stable. The average tenor of debt is 4.2 years. Our aggregate leverage ratio has come down from 33.4% to 29.2%. This of course is mainly due to the proceeds we have received from the equity fund raise exercise end of September. That is of course in preparation for the acquisition of the new data center portfolio. So in the interim, we have utilized the proceeds to pay down existing debt but wherever we can do meaningfully. So that has of course resulted in a slightly lower leverage level.

And on Page 13, that's the picture that you see as at 30th of September. Weighted average tenor of debt, 4.2 years. As you can see, it's very well spread over almost the next 9-year period. For this financial year, nothing due to be refinanced. And we only have a very small amount, $100 million, in financial year '20-'21. So I think as far as recent exposure for funding is concerned, from our point of view, very, very small.

On Page 14, we outline the kind of risk exposure we see for our balance sheet. The amount of debt that is already fixed, about 88%. So we think that will protect us from much of the volatility. As far as the weighted average hedge tenor is concerned, it's about the same as our debt tenor, so it's about 4.2 years as well. So as I've mentioned earlier in the presentation, the weighted average all-in funding cost still very stable. Of course, our total borrowing cost has gone up because our portfolio had grown due to the completion of the new projects. But weighted average cost is still about 2.9%, very similar to what we have 1 quarter back, which was 3%. So interest coverage is fairly strong at 6.6x.

And on Page 15, distribution details, of course in conjunction with the equity fund raise exercise we have done and advanced distribution. So for this quarter, out of the $0.0313, $0.0293 had already been distributed. So we had a balance, $0.002, which is just for the stub period of 5 days for the quarter. So we will be distributing this together with the third quarter distribution because it's not meaningful for us to carry out an exercise just for a few days of distribution.

On Page 17, that's where we start going through the portfolio update. And on Page 17, this is of course a picture as of now. It does not take into consideration the acquisition effect yet. Total assets under management, $4.8 billion. In terms of data center exposure, 17.8%. That has shifted a bit mainly because of currency effects. So we are still at the present moment in 90/10 split: 90.8%, Singapore; and the balance, 9.2%, U.S.A. And of course, you would've found that Hi-Tech certainly has become the largest contributor to the portfolio.

On Page 18, we have portfolio overview. As I outlined earlier, the 0.3 percentage point drop in occupancy for the Singapore portfolio, you see that being carried through to the overall portfolio from 90.5 to -- 98 point -- 90.8% to 90.5%. The U.S. portfolio of course remains very stable at 97.4%. But as far as lease expiry profile is concerned, on Page 19, we think this is practically a business as usual profile for us, just 7.2% due to be renewed for the balance of the financial year. And of course, the weighted average lease expiry has increased compared to the previous quarter. Now it's 3.6 years because of the 7 Tai Seng lease commencement.

And on Page 20, the only meaningful change was the increase in representation by Equinix. Because of the commencement of the lease, it has gone up. So now it's 4.1%. The rest, I think fairly similar to what you see in the previous quarter. So still very, very diversified portfolio of more than 2,200 tenants. Top 10 tenants, just a little above 25%, 26.3%.

And on Page 21, of course that outlines the spread we have in the portfolio across all the different industry segments. And over time, you see higher and higher representation in the blue part, which is InfoComm. That's where we account for data center tenants as well. So you probably see this profile having larger changes in the next 2 quarters as we complete the transaction for the U.S. data center acquisition.

On Page 22, that's the picture we have for the Singapore portfolio. Occupancy has drifted down 0.3% as I've outlined earlier. And the rent level remains very stable at $2.10 per square foot per month. And the details, you will be able to see on Page 23. The Light Industrial Buildings part towards the right, that's where you see the effect of the exit of Aureumaex from our 2A Changi North facility. But that of course was done in the previous quarter, but you see the full quarter effect this round. So that's come down from 91.3% for this property type to 81%. But as the impact to the portfolio is not that large because it's only about 1.6% of our portfolio.

The other thing I would highlight of course is Business Park Buildings. It has gone above 80% from 79.3% to 81.9% for occupancy level. But as far as committed occupancy is concerned, we are already 85%. And as at end of the quarter, it is at 85%. Of course, this is an average number that we are reporting for the quarter. So we think the business park space is probably getting reasonable traction in terms of demand crystallization, and we think -- that, I think, is a positive for us.

So if you look at Page 24, you see that the before/after renewal comparisons, a little bit more stable though you still see that lower kind of renewal numbers for Business Park Buildings. That's mainly because of some of the initiatives that we have taken on to retain some of the tenants to keep the occupancy reasonably high. And for new rents, you will also observe a fairly low number compared to our passing rent for Business Park Buildings as well as aggregate, $3.22. That's because we have secured a fairly large tenant, about 10% of the space at our Strategy Business Park Building for that -- registered for that quarter. And the rent, that is slightly above $3, that is the reason why you see this low aggregate number. But I think it is a considered decision where we have made to boost the occupancy. So that is probably the kind of effect we will see only this quarter or so.

As what I have outlined earlier in our discussions and briefings, we think we probably would have turned the corner this quarter or next. And we will try to gradually move rent up now that we have gotten the occupancy more or less under control.

And on Page 25, our retention profile. About 2/3 of our tenants staying with us very -- for very long periods of time, is consistent in what we have outlined earlier. That's the pie chart on the left. Retention rate is still fairly healthy this quarter, about 84.3% for the entire portfolio.

And going on to the next segment, we talk about the investments that we have outlined. That's on Page 27. So this is a 50/50 joint venture we have with our sponsor, Mapletree Investments, for 13 data centers. The 3 fully fitted hyperscale facilities, what we refer to as turnkey facilities, would be done together with Digital Realty. And the 10 powered shell we acquired outright 100%. Of course, that's 50/50 between us and Mapletree Investments.

So in aggregate, we are looking at SGD 1.9 billion total. So our part, the 50%, is about $950 million in terms of purchase consideration. So that's the reason why we have done the $400 million equity fundraising exercise in preparation for this portfolio acquisition.

And on Page 28, we show the locations of the assets and attributes. This one I think we have outlined briefly as well when we made the acquisition announcement. We are very confident about the quality of the tenants we have in our portfolio. As you can see in the table at the top, more than 50% of the revenue contribution come from some of the largest tech companies in the U.S., 100% occupied, of course, for all the facilities. A very long WALE, this is very helpful, 9.1 years, and with rent escalations more than 2% per year for more than 92% of the leases. And of course, the attractive attribute for us, 94% of the facility on freehold land. The only one that is not on freehold land is the one at Phoenix for 64 years.

On Page 29, of course we show the picture of how our portfolio would look like after the transaction. The chart on the left will be before as is presently. After the transaction, the portfolio will be about SGD 5.8 billion. And in terms of hi-tech facilities, we will cross the 50% level, about 53%. And for data center representation, 31.5%. And out of which, U.S. will be 24.3%. So if we look at this, this becomes a 1:3 kind of ratio: Singapore about 75%; U.S. and Canada, because there's one facility in Canada in the new portfolio, that's about -- then we get the 24.3% non-Singapore and mainly U.S. exposure.

On Page 30, the recent completion that I have mentioned earlier as well, 7 Tai Seng Drive, that's leased on a 25-year basis to Equinix and fully completed within budget and within schedule. So this will start to contribute to the portfolio fully from the next quarter onwards.

And the other initiative that we have outlined in the quarter, that is on Page 31, the redevelopment of Kolam Ayer 2. Of course, at the table, you can see before/after reincreasing the plot ratio from at least 1.5x to now 2.5x, giving us the largest-ever redevelopment project we have, 865,000 square feet. This is a little larger than our build-to-suit project for Hewlett-Packard, about 5% larger. So we can claim that it is the largest we have so far. And the pictures that you see at the bottom, on the left is the before picture, a little drab partly because of cloudy conditions. On the right is how it would look like. And of course, the facilities that we have already secured. The build-to-suit commitment, this one long building on the left is about 25% of the entire precinct. So we have already commenced the [development] process. As you know, we have existing tenants in the facilities of 2 buildings, 2 flatted-factory buildings. We have 108 tenants presently -- or rather when we did the announcement. So right now, we have about 59 other tenants who have committed to move to our other facilities within the Mapletree Industrial Trust portfolio. So that has been very helpful. And that is very similar to our experience in managing the first development exercise for the Hewlett-Packard build-to-suit project at Telok Blangah. So that certainly has helped to mitigate any kind of drag on occupancy levels and revenue contribution to the portfolio when tenants move out.

And of course finally, outlook, that's on Page 33, still very uncertain. The Singapore economy, I think based on the last set of data released, only 0.1% growth, similar to the previous quarter. So we think that we are still not out of woods yet. There's still a lot of challenges, not just down here, everywhere else. Our friend, Johnson, is also having his set of problems down there. And he also have these problems that we have. We have things to do down here, too. But as far as rents for industrial space is concerned, you would have seen a positive uptick, positive 1.7% for multiuser space and a positive 5% for business park space. That looks good, but that is only confined to this current period compared to the previous quarter. But if you look further back, actually there was a dip in the previous quarter. So we are just going back up to near where we were, even for business park space is lower than the previous, previous quarter.

So at the end of the day, it is still a little uncertain. We are still seeing some up-down shift in terms of rent levels. So the market still remains challenging as far as industrial space is concerned. But for the U.S., we remain very confident about the demand. It's a very large market for us. And we continue to see good tick-ups for data center and good demand for data center. And based on 451 Research information, we are looking at compound growth continue to be fairly strong in terms of the supply and demand, 4.6% and 6.5%, respectively. And certainly with this strong kind of figures, we are confident that the data center space will continue to be important and relevant segment for us. We don't think of course there will be any short-term kind of issues. Anyway, all our leases are locked in for long periods of time. And for our first portfolio, we are already engaging in initial discussions on forward renewals with some of our existing tenants. So I think that continues to be very encouraging.

So as far as we are concerned, we remain focused on managing our portfolio well, and we'll be disciplined in looking at the investment opportunities while keeping an eye on what else is happening around the world.

So finally, our strategy is the same. That's what you see on Page 34. We are keeping the portfolio stable and resilient. We certainly would want to make sure our balance sheet is strong and flexible. And as what you have seen, we have raised equity successfully to help us take on new initiatives and growth opportunities. And that's of course coming from redevelopment, developments and also acquisitions, that's what we have outlined on the right. And that should continue our trajectory over time.

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

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Hwei Leng Tan, Mapletree Industrial Trust - VP, IR [3]

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May I request for the analysts to state your firm and your name and online participants to submit your questions via the webcast.

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Questions and Answers

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Hwei Leng Tan, Mapletree Industrial Trust - VP, IR [1]

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Mervin?

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Mervin Song, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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Mervin from JPMorgan. Maybe this -- Kuo Wei, I mean good set of results, but maybe you can touch on occupancies going forward and signing rents. Do you think the signing rents will continue to drift lower or it may kind of bottomed out thus far?

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [3]

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Okay. For occupancy, I think -- we think this is probably as low as we can get. We have all these new initiatives or new projects that are completed. So that should start to give you that stable base for occupancy level. I think we are certainly confident of the kind of support level from the newer facilities. We are only guiding against any unforeseen kind of exits of tenants for the existing portfolio especially for the older facilities. But if you look at our -- or rather leases that are due for renewal for the balance of this financial year, 7.2%. So as long as we don't see any exodus of groups of tenants away from the portfolio, we think the occupancy will probably be very supportive of this level. We hope we'll be able to see the upward shift going forward.

We think the segment for the multiuser space, especially the flatted factory space, will probably continue to hover around the present level, staying about 88% because the -- a lot of our tenants in these facilities are still the small and medium enterprises facing a great deal of challenges in the industry transformation and in the trade uncertainties. Business park space, now that we have crossed over to 80%, as I mentioned, we are committed to 85%, ended the quarter at 85% occupancy level. We think we have some flexibility in -- and latitude to shift occupancy up a little more confidently, and then also raise rents a little bit more than what we have outlined earlier. So we think new rent levels will probably be certainly higher than the low 3s that we have seen for the business park space. And for the multiuser space, I don't think we would be seeing anything that is significantly above $1.75, $1.80 per square foot as far as new rents are concerned.

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Yew Kiang Wong, CLSA Limited, Research Division - Research Analyst [4]

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Yew Kiang from CLSA. Previously, you guys -- the Digital Realty deal, right, I mean I remember that it was mentioned that they are trying to engage more developments on their own, right? So -- and then they're selling some of their completed, stabilized assets. So does it mean that there's more returns in development business? And would you consider doing development business in U.S. together with your parent? Because maybe there's more returns in that segment rather than on the stabilized side.

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [5]

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Yes. Okay. I think if I were to characterize the kind of exposure we're looking at, stable assets naturally would have slightly lower kind of use because those are really -- at a fairly lower risk -- or fairly low risk kind of profile, okay, fairly low-risk profile. Development projects by their nature -- by their very nature, you need to take on, say, land banking risks. You need to take on construction development risks. You need to take on leasing risks. And you need a couple of years for the facilities to be stabilized at full occupancy or near full occupancy.

So the kind of returns level which the Digital team had shared before as well for development projects between 9% to 12%. So that's fairly significant. But certainly, you need a lot of so-called capability to be built up. You need capacity. You need the readiness and also appetite to be able to take on those development opportunities even if they would've surfaced. So at this stage, we think we want to be a bit more careful. Certainly, it looks interesting from the returns perspective. But we do not have a very established kind of presence in the U.S. or in some of the other new markets yet for us to go committing ourselves in other development projects at this stage yet. But it is something that we would continue to look at later on probably in the medium term.

And certainly, if we were to do another transaction in some of these markets, it'll probably be an acquisition instead of development project. We need to be able to have a good level of comfort on the kind of landscape in these countries first. But it's certainly something that we as a group within Mapletree will be prepared to do as you could've seen in our other product types and in our other geographies once we have established a presence, we get comfortable with the environment. We will probably be prepared to take on a little bit more risk but not immediately.

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Derek Tan, DBS Bank Ltd., Research Division - VP [6]

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Derek from DBS. I just like to focus on your top 10 tenants if you may. Any tenant that you think needs to be renewed in the next couple of years?

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [7]

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The top 10 tenants on Page 20, and I don't think any of them would jump up. I think the one of the larger ones, AT&T, which is in our U.S. -- first U.S. data center portfolio, I think coming due in about 3, 4 years from now for some of the facilities. So we would have that engagement with them. For people like Sivantos, I think you could have seen in our earlier presentations for the acquisition of 18 Tai Seng, that is the largest tenant we have at 18 Tai Seng facility. And I think their lease is probably coming up in 3, 4 years' time as well. But from what we can see, it's probably a business-as-usual engagement with them.

Beyond that, I think most of the leases, I think, contribute 1% or less, so we think the lease is fairly minimal. And by the time our portfolio gets to this kind of scale, we have to be prepared for tenants who move in and out as what we have experienced in the past. And as long as we plan ahead, I think we should be well prepared to take on any risk. So that being said, we don't have anyone in the horizon in terms of renewal kind of risk.

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Derek Tan, DBS Bank Ltd., Research Division - VP [8]

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Specifically on your first U.S. portfolio, I'm just wondering whether -- you mentioned have started initial discussions, but any sense that the tenants would like to maintain your footprint? Or are they likely to expand?

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [9]

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Okay. I think the -- it's a mixed kind of reaction from them. Some will probably remain in terms of the kind of space that they have taken on. And there's one that is thinking of taking more, and there is another one thinking of shrinking. So it's fairly business-as-usual kind of discussion, and most of them are talking way ahead of time. So we still want to continue that engagement and to see whether we get a bit more visibility on the future plans. And certainly, if some of them could make the decision and then give us commitment, we'll be happy to lock in some of these ahead of time.

The tricky part is more on cash flow management for some of this kind of transactions renewal or new lease transactions in the market down there, the agencies. If they are involved, charge you their commission upfront before the lease commence. So from the case of matching the cash flow, say, if your renewal is only due 1, 2 years from now, but you get all the commitment locked away now, the agents will ask for the money. And the commission fee in some of these locations are a bit higher compared to what we see down here, and sometimes it's pegged to the entire lease period. Instead of us limiting to 1 month or 3 years -- 2 months to 6 years or 10 years, that kind of convention we have down here. So while some of this is part and parcel of doing business and doing transactions in these locations, but from a cash flow perspective, the moment this gets crystallized, you get that effect on your cash flow. So of course, for some of these tenants or leases, we will probably see some of this effect later on even if we were to be able to secure advanced kind of renewals.

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Derek Tan, DBS Bank Ltd., Research Division - VP [10]

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Sorry, just 2 more questions on the U.S. portfolio. I'm just wondering whether -- I mean just asking on what you can ask about development, right, given that some of your tenants there potentially could, let's say, take it, do you think that you could relook at redevelopment there like what you did in Singapore?

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [11]

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First, that is always a possibility, something that we can look at. We say it's an option as an approach to managing these properties, we, as plan A, want to retain our tenants first. We wouldn't want to look at the doing -- or jumping into the development kind of moat all the time.

First, if the facilities are still relevant and still kind of giving us meaningful returns, we want to be able to extract the best we can out of the assets first. And second, we would need to know whether there are other constraints, further development constraints and downtime and the rest of the effects coming into play. Same thing that we would have for the Singapore portfolio. Certainly, there are some clusters we have in Singapore that are quite well located but there's a lot of other considerations. In Singapore, we have land tenure issues but U.S., less so, in some of these geographies, but there's always a downtime consideration. There's always a case of us comparing -- keeping as is or redoing the entire facility or increasing the amount of leasable space. So it is, as what I've outlined earlier, an option. But I don't think we would look at that as the first thing that we immediately do the moment you have, say, a tenant moving out. We will always want to try to see whether we can find a suitable replacement tenant first.

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Derek Tan, DBS Bank Ltd., Research Division - VP [12]

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Sorry, just last one. Have you renewed the onshore debt in the U.S. really, and you reckon -- would there be any savings if you were to renew it?

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Lily Ler, Mapletree Industrial Trust - CFO [13]

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The loan is actually not due yet, so we still have another 2, 3 years to go, right? But there's nothing to stop us from looking at refinancing it. Although it will be a bit difficult because it's a JV, but it's something that we are definitely looking at.

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David Lum, Daiwa Securities Co. Ltd., Research Division - Regional Head of Banking and Finance [14]

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David from Daiwa. With regard to the Kolam Ayer redevelopment, the tenants that are moving to your other premises, what type of rents are they paying versus what they were paying previously?

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [15]

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Okay. We are giving them preferential rates. I think it's pegged less to the original rents they were paying at Kolam Ayer. And we calibrate that based on the new premises they go to. So generally, we give them discount off whatever these new facilities are going to. Whatever those sort of market rents are there, we give a small discount. So I would say typically in the range of roughly 10% level to make that transition a little -- I wouldn't say painless but a little more less uncomfortable because they will have to talk about their own downtime, their own relocation cost and set-up cost as well.

So we have taken a similar approach for our earlier build-to-suit project at Telok Blangah for Hewlett-Packard. So that has worked well. And of course, when we offer the kind of facilities or premises to our tenants, we look at the mixture of central and also less centrally located ones so that we can have a good spread and mix. And we think that is certainly helpful in us keeping our occupancy for the portfolio reasonably high.

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David Lum, Daiwa Securities Co. Ltd., Research Division - Regional Head of Banking and Finance [16]

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And has any of those transactions been captured in your second quarter numbers? Is that why the...

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [17]

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No. I think second quarter, you probably won't see much. We probably see a couple of small leases that would manifest themselves in the figures. You probably see this progressively in third and fourth quarter. As we have only announced this in July, not easy for a lot of these tenants who react immediately. So most of them have gone through the evaluations, and that is the reason why we talked about 59 out of the 108 that have committed. So they have made the decision. So now is the time for execution. Some of them would take months, 3 to 6 months to prepare for the new space and arrange for the shift. So I think you'll probably see most of the effect coming in only by end of our financial year, which is fourth quarter, which is by April.

By that time, most who want to shift would have shifted. There would probably have some balance tenants that are either last-minute decision-makers. You can only be small ones or the ones that have already made plans to shift but need a lot more time to prepare for that shift. And fully we can get everybody out by July next year for us to commence our construction works.

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David Lum, Daiwa Securities Co. Ltd., Research Division - Regional Head of Banking and Finance [18]

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And a separate question. The 7 Tai Seng Drive data center property, can you give a ballpark of what the NPI margin is for that property?

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [19]

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For the 7 Tai Seng, because it's actually on a double net basis, so the Equinix is really responsible for payment of our maintenance as well as the property tax. So the NPI margin should probably be 90% to 95%. Yes.

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Hwei Leng Tan, Mapletree Industrial Trust - VP, IR [20]

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I think we'll take one question from the web. This is from Wai-Fai from UBS. Flatted factories' NPI margin expanded Q-on-Q from 77% to 83%. What drove that?

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [21]

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I think it's mainly seasonal effect of us managing the cost well this quarter, but I don't think it is kind of a level that we would want to copy and paste across for the rest of the quarters. You will probably drift that down to about 75%, 76% level.

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Nicholas Teh, Crédit Suisse AG, Research Division - Research Analyst [22]

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Nicholas from Crédit Suisse. Just had 2 questions. Am I right in understanding for your expectations for rent reversions, we're looking more of it becoming sort of flattish going forward rather than seeing an improvement to significantly positive rent reversions? And -- yes.

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [23]

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Well, yes. Right. I wouldn't characterize our rent adjustments as significantly positive because we are still seeing the uncertainty in the economic outlook and it shows around as well all the rest of the geopolitical uncertainties. So I think in our earlier presentations, we have also done some look ahead. We'll probably see another 1 to 2 quarters as I mentioned then. So this quarter, next quarter, maybe you'll see us reaching the bottom end and probably be able to turn up. But at best, you'll keep seeing those 1%, 2% kind of aggregate effect in terms of rent adjustments. So the market is still not very conducive for us to be able to make big rent adjustments up. And we want to be relisting about how much rent adjustments we would be able to make meaningfully on a like-for-like basis.

So the big adjustments that we would have for the portfolio be when we change the product profile from simple generic multiuser space to high-tech facilities. Yes, that's where we can get double-digit or, for certain instances, close to double kind of rent numbers on a per square foot basis. But of course, that would involve us putting in a lot of capital expenditure in the building improvement and upgrading. But on a like-for-like basis, probably not -- if I were to again characterize that observation, probably flat, as what you have mentioned.

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Nicholas Teh, Crédit Suisse AG, Research Division - Research Analyst [24]

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And just one -- had a question on acquisitions going forward. How should we think about the pace of acquisitions going forward given that you've bumped up the data center portfolio quite sizably already? Would we continue to see that kind of pace going forward?

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [25]

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Okay. It's fairly opportunistic. As you know, the acquisition possibilities, I think they don't line up like rabbits and we just pick them off. It depends on what becomes available and whether the risk/return profile is something we could take on. So we're talking about new transactions anywhere whether in Singapore or in the other markets like, for example, this data center -- new data center portfolio that we have taken on came on only very recently, so it's fairly opportunistic. It's very difficult to program and time acquisition transactions or investment transactions. But that being said, the ones that are more visible for us now, at least, will be the parent or the Mapletree Investments balance stake in the 2 data center portfolios. The first one of course was the portfolio that we have acquired in 2017, so that's about 60%. And that, I think, is always a possibility because it's a very stable portfolio and a sponsor has the right of first refusal in place anyway as what we have outlined. So if it is something which the sponsor could consider and the sponsor wanted to divest that part, it's something that we would be able to take on fairly quickly. So that is fairly visible.

For the second one, for the present one that we are going into, that could also be a pipeline we'll look at further down the road. So if, say, the sponsor were to decide to progressively divest, this is very natural kind of option for us to look at, and I think you'll see the sponsor had been doing quite a few of this in the other platforms as well.

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Vijay Natarajan, RHB Research Institute Sdn Bhd - Analyst [26]

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Vijay from RHB. Just a couple of questions. I just wanted to get some sense on the industrial demand, which you see in your portfolio, maybe which sectors and which segments you are seeing some expansion, doing well and which sectors are not doing well because manufacturing activity seems a bit weak.

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [27]

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Yes. I think manufacturing as a segment has been seeing a lot of weakness in the last year or so. I think in the last quarter, it was negative 8%, or whatever, based on what we see. So generally, it is still a challenging picture. Within a few segments, I think the ones that have exhibited growth or propensity for growth, the infotech kind of companies, we're seeing that, cybersecurity companies, all these are related to info technology kind of business. Data centers, of course, we see that as a bright spot, and that's the reason why we have been able to crystallize a couple of these transactions. So for what we consider as manufacturing-type, medical technology products, pharmaceutical-related kind of industries, we are still seeing good demand there. Precision engineering is still growing fairly well.

So it's not a consistent picture across, some of the other manufacturing segments like semiconductor, electronics, we are still seeing a seasonal weakness in the companies that we deal with. It's not easy to be able to spot all and identify all the kind of growth sectors. So what we would want to do is to make sure our facilities are, say, well-designed, well-configured engineering, not be -- to be able to accommodate a broad range of kind of activities.

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Vijay Natarajan, RHB Research Institute Sdn Bhd - Analyst [28]

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Has there been any increase in late payments? And just looking at this chart, it seems like for this quarter, you updated range for occupancy. But going forward, you said that you would be trying to increase the rents as well as occupancy. Maybe what is driving this thought process? Or what are you seeing in the market that makes you confident of this?

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [29]

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Well, I think the first question you asked. So far, the kind of arrears that we are seeing or people paying late, nothing exceptional to highlight. It's actually in -- is a very kind of low percentage in terms of late payments over total revenue, it's probably below the 0.2% to 0.3%. So we don't see any kind of significant spikes for late payments. We think that is partly reflective still of the state of health, but it's also partly due to the vigilance and the kind of single-mindedness of our people going -- managing and then controlling this kind of arrears. So if we need to continue to be very alert to issues. There are some tenants who of course don't pay, but the percentage is very small. We don't see any, say, significant kind of shift compared to what we have seen in the past.

And your other question on rents and occupancy kind of trade-off. In the last year or so, we have seen our occupancy coming down actually 1.5 years, and our eyeball will be on occupancy first because at the end of the day, it is not meaningful for us to just have a high reported rent figure when you don't have the occupancy to show. So as you have seen in some of -- not just this quarter, some of our charts, our own renewal rents or even new rents for some of the segments, especially for business park segment, we have rents that are meaningfully lower than passing rent meaningfully lower than renewal rents. So we are technically, say, focusing on boosting occupancy levels. And generally, if you look at our occupancy levels, most of them are certainly now even with -- for business park on a committed basis, above 85%. When we hit the level of, say, 85%, we think there'll probably be a bit more kind of room for us to move in terms of rent adjustments. We would be able to match some of the prospects and, say, existing tenants to consider paying debt a little bit more. So that kind of shift in attention is already happening now.

Now we have gotten the occupancy level that we think we wanted. We try to move rents up a little more. So we can be a little bit more selective in all the prospects that we deal with. At the end of the day, if you were to ask us to choose, you can either have A or B, occupancy or rent, we'll choose occupancy because we are not at an occupancy level where we can comfortably cruise along. The level which we can comfortably cruise along is about 95%.

We have seen that many years back, but I think it's not easy in this market. So we will always look at a trade-off on a per transaction basis. It's not a kind of very broad kind of guideline that we have for our leasing team. So we will look at every single deal very carefully whether they are good tenants, they are good additions to the portfolio or whether they could help us anchor more kind of related entities in the precinct, for example. So all of this come into play when we deal with opportunities.

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Vijay Natarajan, RHB Research Institute Sdn Bhd - Analyst [30]

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Kuo Wei, one last question from me. In terms of redevelopment for the Singapore portfolio, can you give a rough ballpark number in terms of how much more can you do either by income or GFA or -- yes.

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [31]

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Okay. I think I have looked at this aspect before. It's not easy to pin that down. And I would say the upper bound of what we think we can realistically do is probably the -- about 1/3 of our flatted factory, balance flatted factory kind of portfolio. As you can see, our flatted factory portfolio is about 33% as of now. So we think maybe 10 percentage point out of that 30%, maybe we can do something, but that's about it.

With regards to -- the others would have land tenure constraints even if they are very well located. And the ones that I'm talking about will be Ayer, the Bukit Merah ones, the Tiong Bahru ones, very well located, but land tenures are relatively short now. So it is not so easy for us to do anything that is -- that makes good economic sense unless we get extensions. Same thing with some of the Kallang Basin ones. The one that we have done more significant work is already completed, 30A Kallang Place, which is of course 100% committed. So my sense, probably 10 percentage points.

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Vijay Natarajan, RHB Research Institute Sdn Bhd - Analyst [32]

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Just a quick follow-up, can you give me the returns -- development returns versus U.S.? U.S. is 9% to 12%, right, you mentioned. Singapore will be low teens or...

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [33]

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If we can find some that are in the teens, we will probably push ahead a little bit more quickly. Down here, the project returns, I think, we are looking at a 7.5% to 8% on new level. There are certain instances where we are aligned. We are able to get most of the stars aligned well like the Hewlett-Packard built-to-suit project, we are getting more than 10%. But I would -- hesitant to say it's teens. It's just a little above 10% for those -- for that kind of -- for that initiative. So I would think that the reasonable bound for us is probably the 7.5% to about 9% kind of level for redevelopment projects, yes.

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Hwei Leng Tan, Mapletree Industrial Trust - VP, IR [34]

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Thank you all for joining us today. I think we can take additional questions offline. Most of you have some -- another briefing to attend to. Thank you very much.

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Kuo Wei Tham, Mapletree Industrial Trust - CEO & Executive Director of Mapletree Industrial Trust Management Ltd. [35]

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Okay. Thank you.