Ascendas Real Estate Investment Trust (ACDSF) CEO William Tay on Q2 2022 Results - Earnings Call Transcript

Ascendas Real Estate Investment Trust (OTCPK:ACDSF) Q2 2022 Earnings Conference Call August 2, 2022 5:30 AM ET

Company Participants

Yeow Kit Peng - Head, Capital Markets & Investor Relations

William Tay - Chief Executive Officer

James Goh - Head of Portfolio Management

Conference Call Participants

Mervin Song - JPMorgan

Nicholas Teh - Credit Suisse AG

Jonathan - UOB Kay Hian

David Lum - Daiwa Securities

Dale Lai - DBS

Yew Kiang - CLSA

Tan Xuan - Goldman

Brandon I. Lee - Citigroup

Joy - HSBC

Yeow Kit Peng

Good evening, everyone. Welcome to Ascendas REIT First-Falf FY’2022 Financial Results Briefing. Okay, we are pleased to report 6.3% growth in distributable income to S$330.7 million and a 2.8% increase in DPU to 7.873 cents. Total investment properties as at June, increased 4.4% to S$16.6 billion. Gearing is healthy at 36.7%. Ascendas REIT has a high level of natural hedge for our overseas investments, which accounts for 40% of our total investment properties, so that was out to be S$6.6 billion. Operationally, portfolio occupancy improved to 94%, leases that were due for renewal during the first half achieved 9.4% positive rental revision.

So let's take a look at the financial performance in detail. Gross revenue increased 13.7% in the first half of 2022 versus the first half of 2021 and this is mainly contributed by new acquisitions in 2021. So that would include Galaxis, which is a Business Park property in Singapore. The 11 data centers in Europe and 11 logistics properties in Kansas City, U.S. MPI increased by a lower 7% due to higher net utilities expenses from the properties in Singapore. Total amount available for distribution increase in tandem with the increase in NPI, all in with a higher number of applicable units, DPU increased 2.8% to 7.87 cents.

When we compare first half 2022 versus the second half of 2021, gross revenue increased 4.1% to S$666.5 million and this is mainly driven by the two logistics portfolio in Kansas and Chicago in the U.S., which were acquired in November 2021 and June 2022 respectively. NPI is flat at S$476.9 million, due to higher net utilities expense from the properties in Singapore. DI increased 3.7%, mainly due to the absence of performance fee. DPU increased in tandem with DI at [Technical Difficulty]. For the period of 1st January 2022 to the day of June, a DPU of 7.873 cents will be made, you will be receiving the dividends on the 5th of September.

Okay, moving on to investments. In the first half of 2022, we completed several acquisitions, redevelopment and AEIs, worth S$72.9 million. Under acquisitions, all the three acquisitions we made in Australia and in the U.S. are logistics properties and all 300% occupied. NPIU [Technical Difficulty] pre-acquisition, [Technical Difficulty] 5.1% to 5.8%. It is our strategy to steer our portfolio towards the growth factors and the logistics segment now accounts for a sizable 25% of our AUM.

Under redevelopment, this is one of our redevelopment success UBIX. After repositioning into a high specification industrial property, UBIX is highly sought after by a wide range of companies given its high quality space and close proximity to the UBI MRT station. Within six months from completion, occupancy rose to 51%. So after the repositioning, we have also signed tenants in at higher rents of above S$3.50 per square foot per month. And the lease tenures are long, you know, three years, five years.

So yes, since this slides, so I skip the slides, so moving on to capital management. Gearing is healthy at 36.7% and on the lease expiry profile, we have a total debt of S$6.4 billion and the majority days are very well spread out as you can see in this chart. In the first half, we expanded the majority to 3.9 years, one quarter ago it was 3.5 years and this is after the issuance of a seven year Sing dollar bond and also coming out with some five year, six years AUD loans during the period.

Okay, and today, green financing totals S$1.5 billion, accounting for about 23% of our total borrowings. The financial metrics are at very healthy levels by exceeding the required minimum level set by bank covenants. First half, we took average interest costs remain low at about 2.1% A3 Moody’s rating is maintained. So this provides us with strong financial flexibility and also strong access to capital. So we have here the sensitivity chart -- table on DPU for the variable debt portion that we have.

So currently 80% of our borrowings is fixed for average term of 3.7 years. So based on that 20% proportion of variable debt, then you can see from this table, if the rates move up by 100 basis points, for example, then the impact on DPU would be a minus 2%. So if the rates move up by 150 basis points, then the impact would be a minus 3%. Okay, so to minimize any adverse impact, right from exchange rate fluctuations, we maintain this high level of natural hedge. So at a portfolio level, it is 75%.

So moving on to our operations. Occupancy rates for all our markets are high at above 90%. Singapore is 91.9% occupied and this is a 190 basis points increase Q-on-Q. Australia is stable at 96.6%; U.S. is 95.3%, 130 basis points higher; U.K., Europe is 97.7% and that's 100 basis points higher. So altogether, at a portfolio level, it is a 94% occupancy, so an improvement of 140 basis points. So let's look at the countries individually, Singapore so occupancy rate here rose to 91.9% and this is due to the full occupancy that we achieved at one Changi South Lane, which is a logistics property after three tenants moved in and they have signed long leases of five to 10-years.

Australia, highly occupied at 96.6% very stable and high. U.S., it is boosted by the seven fully occupied logistic properties in Chicago, which were acquired in June 2022, okay? Now even if you were to strip that out, the U.S. portfolio occupancy was also an improvement at 94.2%, okay. U.K., and Europe, the higher occupancy is due mainly to the leasing up of a logistics property in U.K., and the tenant has signed up for a 10-year period.

Okay, saw some new demand in the first half, we saw tenants from a wide variety of industry, particularly in the engineering, logistics and electronics industries. Rental versions, so in 2Q, the average rental reversion achieved was 13.2%. So as you can see in the first column, that is boxed up in Singapore, we were able to achieve higher rents for all the clusters. Australia, a 15.25 for logistics properties. In U.S. a positive 15.3% for Portland Business Park, and in U.K. 11.7% positive rental version for a data center in U.K.

We will stable at 3.7 years. At the portfolio level, we have another 10.2% to work on for the rest of the year. In Singapore about 9.5% or -- of the gross revenue will be due for renewal and this was out to be about S$68 million. Okay, Australia, 5.7% or about S$7 million worth. Many of them are actually renewing and given the record low vacancy rate, the team is reasonably confident to fill them up even if they are not renewed. This is U.S. 18.9%, due for renewal for the remaining of 2022. There are 20 leases there. In the U.K., 7.2% of rental income or about S$8 million will be due for renewal. And there are three leases here and generally the renewal rate is looking good.

So on ongoing projects, we are working on about S$566 million worth of projects, the undergoing development or redevelopment for asset positioning or enhancements to improve the returns of the existing portfolio. So this comprises of S$161 million development in Australia, S$300 million of redevelopment in Singapore. So this quarter, we have a new addition. This is the Alpha located in Singapore Science Park 2. So we'll be spending about S$15.5 million to refurbish the main lobby, the lift lobbies, common corridors to enhance the overall tenant experience. There will be new meeting rooms, working pods and a nice and big foothold with service counters to meet the needs of the tenants.

So on market outlook, as you can see in the first half, we have achieved strong results across our markets. While we have delivered DPU growth consecutively for the past three periods, since first half 2021 and prospects for our business remain healthy. We are closely monitoring the ongoing uncertainty in the global economy.

So with that, I end my presentation. Thank you.

Question-and-Answer Session

A - Unidentified Company Representative

Thank you, Yeow Peng for the presentation. Now let's start with the Q&A session. Before we begin, let me introduce the panelist today. First, we have Mr. William Tay, our CEO. To his right, we have Ms. Koo Lee Sze, CFO. And to her right, Mr. James Goh, Head of Portfolio Management. And last but not least, Ms. Yeow Kit Peng, Head of Capital Markets & Investor Relations.

For the participants here joining us today, please raise your hands and one of my colleagues will pass you a microphone to ask you a question. Please do state your name and your organization before asking the question. For those of us -- for those participants joining us virtually, please use the Q&A function to submit your questions. So I see Mervin very eager to ask a question. Mervin go ahead.

Mervin Song

Yes. Mervin from JPMorgan. Thanks for the presentation. William and team, I think you're scoring a lot of goals in this result. Maybe we can start with occupancy side looks like James is driving the occupancy closer to renewals at Ascendas, India, like close to full occupancy. But Singapore seems to be continuing to improve from the 90%, which was quite hard to achieve previously, but maybe you can touch on that. Is that sustainable? We're hearing a lot of tech companies may be cutting jobs or having from hiring freezes. How are you seeing demand from the tech side?

And second question is rental reversions, if I think I noticed properly, you've increased your guidance from low single-digit to mid single-digit. Maybe I'll go through the reasoning for that increase. Is that 13% expected to continue for the remainder of second half this year? And then in terms of third question, acquisitions, obviously, some risk of carry expansion. Are you seeing that? Is your strategy to just wait for categories to expand or then buy or are you looking to do more redevelopments in green field projects? Thanks.

William Tay

Thanks, Mervin. In terms of occupancy probably I have seen the numbers they're all stable or positive. You've noted about the nine industrial and data center, we're actually the first time we crossed the nine, so it’s 90.9% right now. And overall in Singapore, as you mentioned hitting 90% above is not easy. We have experienced that since two quarters ago we have hit passing the nine, and we are sustaining this. Given the fact, as you mentioned, there are challenges in certain industries, whether the tech are hiring freeze hiring or any changes in their business plan, but the tech are not driving the demand here. The new demands are mainly from bio, R&D, engineering, electronics and of course logistics. The bio continued to give us very good rental version and demand for space, I think that's driving the occupancy for Singapore.

Rental reversion, we’ve up our guidance to mid-single given the fact that this quarter came in the double-digit. But moving forward, you probably also will ask why then single-low, I mean, mid single-digit, I think this is one exceptional quarter. We have capitalized very much on this and push rental up as high as possible towards acceptable and but given the fact that actually the entire market has moved up. So that's so helpful for us. From the point of inquiries, you probably will realize in terms of execution when we give a renter to our tenants, they look at numbers, that will look at it -- it's a increase. And all our competitors are all issuing the same rental proposal to the tenants. So naturally, there will be a lot more inquiries in the market, which means that any of our property can be a potential for the relocation. So I think generally the market has moved up inquiries have strengthened. And we also seen that these companies, when there's a good business in their underlying business, they do expand. They cannot set these rental -- higher renters.

In fact, this is probably one of the first quarter that only logistics we had 2% of our leases came in as negative. All other asset classes in Singapore and overseas are all positive renter reversioned. So overseas as well as you've seen previously is all double-digit. But our guidance towards mid is because I think moving forward, other than this quarter moving forward, we still be expecting the 4% to 5% rental reversion in Singapore, which is quite typical. And given the fact that economy is still growing, I think we should be able to hit account numbers. Maybe I'll just ask James, if anything to add before, I talk to answer your question on acquisition.

James Goh

Thanks, William. Just to add, if you look at quarter-on-quarter, how we improved from March to June. There are two main factors which were already highlighted in the slides. One is one Changi South Lane. That’s a warehouse, that's almost close to a quarter of a million square feet. So that moved our numbers quite significantly almost by 80 bps, I would say to our portfolio -- our Singapore occupancy. I think second piece UBIX, so we are seeing very good traction as Kit Peng had mentioned earlier, is a redevelopment. And we have since moved our occupancy to just about half, just slightly over half. And we are still seeing very good traction and pipeline for the remaining space that we have. So we expect that to help to boost our occupancy going forward.

The last point I would just like to add is that if you look at our WALE, we have another -- about 10% of leases that are up for renewal in the second half in Singapore alone. And those leases we are trying as far as we can to renew them, to try and support the occupancy that we currently have right now.

William Tay

Yes. Just to add, I mean, UBIX, when we turn online, we hit about 18% in the first quarter. And we actually updated that we have about 45% precommitted, we think to be signed. In fact, now we have hit about 51%, which is actually exceeded our expectation. Rental wise also exceeded our expectation and underwriting. So the point of our acquisition, yes, I don't think the carrier has expanded substantially in the market right now. Deals are still being done in a very small proportionate are done with perhaps very minor changes to the cap rates. The investment climate now will probably be holding up, but bidders will probably has thin out, probably take longer to close. So this -- what we are experiencing in the market right now.

But for Ascendas REIT, we are still very mindful of what we are acquiring. We want to focus on tech and log, which essentially are the thematics around the growth industries. And you have heard me mention about these specific countries as different drivers. And these are asset classes that we'd like for each of these countries that we've identified and invested.

We are prepared to do deals, as I previously mentioned, we continue to be very active on investment front. But given the climate, we are not in a hurry to do deals, probably small chunks, small bikes, that's what we have seen in our Chicago deal. This will probably be what we'll be doing. Primary reason is that when it's a portfolio deal, a huge set of billion dollars deal, it takes very long time to do due diligence, that's one. And then we've that kind of timeline, we required to do due diligence, interest rate was never been able to lock in at a point of pricing. And expectation for portfolio premium will still be there by sellers. So you will see that a lot more deals actually broken up right now in the market in the past, maybe a big portfolio, but they may come out in a small chunk in order to move the assets if they want to divest. So we are still in the market looking for inorganic growth, but it will likely to be more smaller channels.

Operator

Nicholas?

Nicholas Teh

Yes. Just a couple of questions from me. Wanted to ask on the utility side for Singapore. Any details in terms of how much it increased with the timing of when it was renewed? And in some sense, for the Singapore portfolio, what portion of the expenses is the utilities?

Unidentified Company Representative

If I just -- yes, sorry, go ahead.

Nicholas The

Yes. And then the second one is just, cap rates have stayed quite stable. So any thoughts on more so on the divestment side? How keen would you be to divest any sort of targets or countries in that sense?

Unidentified Company Representative

I just want to add on, there are some questions related to utilities online as well. So could you share how a REIT is managing higher to utility costs across your markets? And also can you give the dollar amount of utility increase in first half? And are you planning to raise service charges?

William Tay

Utilities costs, so you had some questions about when you it was contracted. It was contracted, renewed for this year in October to December last year. The last time I mentioned to you that we have locked in this the rates for this year, so we have lock in rates until December this year. And we are in the process of getting the tender up for the next two years. For utilities, it's within the range that we have guided 2022 versus ’21, it was to be between 50% to 70% higher. And first half is still within that range. In regards to percentage based on 2021 numbers, OpEx is about 20% -- utilities is about 20% of OpEx, but 8% is related to landlords consumption, tenants consumption is actually passed through. And in this half, we have seen that possibly because of reopening consumption has gone up, so overall, total utility is about 23% of OpEx, 6% relating to landlards costs.

So in terms of utilities, I think we are managing very well in terms of the increase given the fact that we're only experiencing 50% to 70% increase for year-to-year. And maybe in relation to that service charge, actually, we have informed our tenants that we will rise service charge effective October this year. So that will help to offset the increase on the landlord side.

On cap rates is in stable, in terms of divestment, we are now in a hurry to divest given the fact that we are experiencing very strong rent growth in all our asset classes, whether in Singapore, Australia, U.K., even our data center that came from renewal has actually caught up with double-digit rental reversion. We view that the overall portfolio is still good. They are in very good locations. So every year, we do wholesale analysis to determine what we want to do in terms of the asset plan for the asset, individual asset. There may be some opportunities for divestment, but it won't be a big way. In fact, we have reversed inquiry, people giving us some interest for certain properties. So we'll be evaluating those divestment opportunities.

Operator

Jonathan? Yes.

Jonathan

Jonathan from UOB Kay Hian. Two questions, first question relates to the focus on logistics for growth. Could you run through -- give us your rationale? Because near-term, there might be some headwind, for example, during the COVID, maybe there's overexpansion. And then also e-commerce, you know, the momentum seems to be slowing. So I'd like to understand your rationale for the focus? And then also which country do you see more opportunity to acquire and to grow our logistic business?

And then second question relates to Alpha. I think it is a asset enhancement rather than redevelopment, was there opportunity to enhance spot ratio and the plan for the property? Thank you.

William Tay

Thanks, Jonathan. Logistic is one sector that we believe is not just based on e-commerce. E-commerce has been strong and e-commerce forms a part of our growth in our portfolio acquisition. And our exposure to e-commerce despite this growth exposure to e-commerce is not huge. Traditionally, we still see a lot of 3PLs distributor and distributor from all walks of products, electronic products, furniture, apparel, so these are huge demand for logistics. And when we looked at logistics, we examine the countries that will benefit from the -- I mean, the growth of this logistics sector. So these are Australia, U.K., Western Europe, of course, with U. S. that we have gone in recently.

There are a few things that we looked at for logistics, first of all, we are not in the market to look at big boxes. If you look at our asset classes, they are small to mid-boxes, last mile location, whether it’s in Sydney, Melbourne, U.K. they are in Midlands. You look at our U.S. we focus on last mile like Kansas City in Chicago. They are near the main population base. Supply is limited, which means that tenants will be sticky. So this is our thesis around logistics. So we are not worried when, for example, e-commerce over expanded, because end of the day, even e-commerce require last mile footprint to bring their cargoes and their goods to the destination they don't want to go to.

If you talk about headwind, I think what it has caused currently is just in case mentality, instead of just in time. During COVID, I think, you have seen that in terms of warehouse space, there are short-term requirements, but a lot has turned long-term. And a lot more demand has come in because of just in case mentality. This is what we see across all the countries that we in. In fact, for logistics, we are pushing towards almost fully occupied. In Singapore, we only left if I mean, the occupancy numbers are mainly -- and vacany numbers are mainly ancillary office within a warehouse block. By this warehouse, it's almost pushing for occupancy for all our countries.

I think we still like this given the fact that actually the second reason is to be resilient, diversification in our portfolio. If you look at our construct, we are still about 50% exposed to business park, which is a growth sector by itself for life science and technology. But we still like the other half, which is logistics, industrial and data center. So this will actually be resilient to entire portfolio. So you mentioned about which country we will stay focused to the countries that we're invested right now, okay?

Alpha, I think, let James mention – explain.

James Goh

Thanks Jonathan. On Alpha, it's purely AI, it's not a redevelopment. There is additional untapped plot ratio. We are aware of that. And potentially, there is sufficient space within the existing land plot for us to build like a next building, that's not something that we're going to activate. It will probably be more of a build to suit, if we do find a single tenant that has certain space requirement, that would meet the building parameters there, then that's something that we would activate.

William Tay

So the building plans are there. We have some plans in regards to how we can leverage on the higher plot ratio to build a next block. In fact, in terms of business development side, we have been engaging customers with a pool of our assets where we can't redevelop or construct to their specs, which if you have seen that we have done that for Schneider Electric, where we actually construct according to the specs, but based on a brownfield location. So we have a pool of assets that we believe is beneficial for the new economy, new requirements, where there is a higher specs -- high specs building or even for this park space. So we are approaching tenants with a variety of options. Okay, thanks, Jonathan.

Unidentified Company Representative

David?

David Lum

I have two questions. The first one is on with regard to costs. I didn't take a look at your results because I don't have -- didn't have time, but I assume that the Singapore NPI margin may have come down in the first half, because of the rising expenses. For the second half of the year, do you think the margin will be similar or do you think it could improve? Or do you think it might worsen? I'm not going to hold you to it, but if you have a strong view, it would be useful for the second half?

William Tay

The margin for this half --

David Lum

Yes, yes, the second --

William Tay

This is mainly due to utilities. In fact, the margins has stable -- stay stable for the rest of our countries that we are in, in asset classes. You compare next half to two half chances are you being impacted by utilities, right? The challenge will be how can we offset that with better occupancy and rental, and we still continue to work on our top line front. As you have seen in this quarter or this half year's result, while utilities has gone up, we are pushing towards better occupancy, better reversioned, and we are trying to get in higher top line, so that this can be offset not to mention as well that we are increasing our service charge in the third quarter -- fourth quarter of this year. So that will help to push it.

David Lum

Okay, got it. Okay, the second question is with regard to the -- yes, I guess the Singapore operations, if you ignore the news flow and what's happening reported in the media and the markets. And just look at your underlying portfolio, is there any evidence that we're entering a recession? I mean does the outlook look like it's still positive, but below average, average, or above average. I just want to feel just forget about, like, you know, the news and everything, but just is there any [Multiple Speakers]

William Tay

Well, I think you're right in the reported.

David Lum

Yes, yes.

William Tay

Yes. Maybe James can add, I will give what we are seeing right now overall. I think there will always be challenges, uncertainty. I mean, there's always, I mean, you seek to ignore, but the fact remains that, for example, Europe in the midst of a Ukraine war, there will always be worry and concerns. But in terms of logistic tick up, data center renewal, it continues as per normal. Possibly because of the asset class that we are in, so it may not be very acute for us to see whether there is entering into a recession. I suppose we are still in early stages, we are just came from a pandemic this year, we just really opened up. Businesses are back on track. I will say possibly from an -- the numbers speaks for itself, right? It doesn't seems to be recession. But what is beyond these numbers?

On an inquiry front, every one inquiry that we have for logistics and high business park, we have three or more inquiries for high specs, right? Where are they coming from? Chances are new demand, additional expansion, our retention is continue the same trend at 50%, 60% to the higher certain sector at 90%. So if you ask at this current results plus the inquiries for our follow-up next quarter or next half, there seems to be a growth and there seems to be a strong interest to expand. But we do want to note that it's not across all sectors, right? We still see sectors, for example, I was asking James, for example, we lost a oil company, but the consolidator is not as though they downsized and disappear. I was worried that they -- because oil business is so good, now they went to CBD office. But they were still very prudent, they consolidate it, right? So even though it's expansion of certain industries, I think businesses are still very prudent, right?

If there's a fundamental growth, I think they will take up more space. And you have seen in our numbers in terms of occupancies, occupancy are real numbers to see whether they -- I mean, there will be companies with downsides, there were companies who expand. I don't know whether that helps. I'm not an economist. James, anything to add.

James Goh

Yes. David, I think the two points to add is, if you just look at the occupancy trend particularly for Singapore, as well as the renter reversion, I think those trends are really positive and it doesn't give us any indication right now there's going to be, like, any slowdown in the economy, at least not that we are seeing it right now, yes.

Unidentified Company Representative

I think Dale has a question here.

Dale Lai

Yes. Hi, William and thanks for the presentation. Dale here from DBS, just two quick questions for me. Firstly, for your remaining expiries in the U.S. for this year, I noted that about half is single buildings. So in terms of the kind of buildings, the kind of renewals, are we expecting any major CapEx or even incentives?

Second question is, you mentioned that deals going forward would be smallish in size. We should not expect, you know, the kind of billion dollar portfolio, kind of, acquisition. So does that mean that you are comfortable letting your gearing creep up towards the 40%, kind of, level? Or how would these smallish acquisitions be funded? Yes, thank you.

William Tay

Yes. Thank you. Maybe I'll deal with your second question. Let James take your U.S. question. I think leverage wise, we are comfortable. But when it comes down to certain deals that requires us to the an EFR, we were not shy away from it. And all day, we still want to have many other metric that we are watching. Where is it affecting our AAA rating by Moody's. I think there are many other factors that we looked at. So it will still be contextual, if I were to say, depending on a deal and depending on the market at a point in time.

James Goh

In terms of the U.S. expiry, if you look at that single tenant expiry, it’s a mix of both business base, as well as logistics that we have. We are currently engaging all of our tenants, but I think that most of you would have been aware that overall, because of the COVID situation work from home, hybrid working arrangements has become the norm. And that many companies are actually reviewing whether or not they need as much space as they currently occupy. So this is not unique to us. And it's something that we are still trying to work in terms of getting our tenants to renew. So fair to say that there will be some challenges in terms of renewing 100% of those leases as they come up for expiry.

William Tay

So I will say the logistics for U.S. continue to give us very strong confidence. Those that is single and logistics, I think it's likely to be giving us the high retention 70%, 80% type. The typical multi talented business park building. It is the same retention in Singapore 50%, 60% that probably will apply for our half.

Unidentified Company Representative

Thank you. Next we have Yew Kiang.

Yew Kiang

Hi, Yew Kiang from CLSA. You mentioned earlier that you are renegotiating your utility rates for next year, can you share some color on where the renegotiating rates on offer now versus -- what is last year and versus current?

William Tay

I can't tell you a lot. I can't tell you much, actually, because in tender process.

Yew Kiang

Okay.

William Tay

But I will share that the fuel price that they have used previously last year is about S$80, S$90. Okay, but moving forward, retailers are using S$100 as a fuel price cost. So that's a really difference. How we have actually in terms of our final price that we will get. I can't tell you more because it's in the tender process.

Yew Kiang

Yes. Excellent.

Unidentified Company Representative

Tan Xuan?

Tan Xuan

Hi, this is Tan Xuan from Goldman. Just one question on acquisition, if you look at the year-to-date piece, right, how comfortable are you to achieve S$1 billion acquisition for this year? And where do you see more attractive opportunities at this point?

William Tay

Tan Xuan that's a very good question, because I don't think we can hit a billion. It's already half a year, we left with another half and with small bites for a few deals that we are working on. Unlikely, frankly speaking, unlikely, but not to say that I won't be able to surprise you, so hopefully, we still can get in some deals in. Just now talk about cap rates, Mervin. I think for the first half of the year, the challenge is that there is no real expansion in a meaningful way to cap rate. It could be 10 bps here, 20 bps there, but all these could be attributed to location, to the size of the portfolio that's transacted in the market.

First quarter of the year, perhaps there are deals that was pre-negotiated discussed in 2021, so they were closed little hard. Just our Chicago deal, we closed in June, but we actually started much earlier. So there might be opportunities as the second half comes perhaps there may be some sellers who are prepared to be more reasonable in expectations and then we can see a possibly a meeting of minds for larger portfolio, then we will be able to push for larger acquisition. But to be honest, what we have right now, a smaller chance, which is why your question or whether we would just leverage on our debt to acquire, which makes sense. If it's small bites, I think if we can hold up, we will actually be doing that. But that could be divestment opportunity, if we need to, we can do EFR. So these are still depending on the deal size and the deal that we are looking at.

In terms of countries, honestly, we are not looking anything from Australia. There are deals coming up there, but simply because the cap rate is still very, very sharp. Even fund through that we have been acquiring in the past two years, development because of development, we could actually go into fund through to get a better yield on cost, but it has also been very, very sharp in Australia. So I will see the rest of the three places Singapore, Europe and U.S. are where we are seeing opportunities.

Unidentified Company Representative

Brandon?

Brandon I. Lee

Hey. Hi, William. Just a few questions just back to acquisitions, right? Can you comment on your sponsor pipeline, particularly assets which are held under CLD or the things like you are doing to suit for Shopee, the [indiscernible] DC and also Ascent? Are they ready? I mean, I think back in those days, the reason why they were in CLD was because of not yet stabilized, right? But at this stage, do you think they are ready? Thanks.

William Tay

We are always keen on those asset. I know that, unfortunately, you can ask CLD those questions now since now they are private, right? Yes, I think Ascent, I mean, generally looked at the entire market in terms of occupancy and rental trend, you apply the same to CLD's assets. So Ascent, the Shopee building is fully let to Shopee on a long-term basis, so that wouldn't be impacted or benefit from the current higher demand. But you would expect the same statistics or metrics to apply to Ascent. So I believe that they are stabilize and ready, but we’ll continue to have this conversation with them to try to unlock them.

Brandon I. Lee

Yes. The second question is on the occupancy for field of few of your buildings in CBP, right? Can you comment on why they have fallen on a half and half basis? And where are these tenants from referring to buildings like your Hansapoint, 3 CBP Vista, as well as the one at Changi?

William Tay

James, you want to take that?

James Goh

Yes. Okay. Thanks, Brendan. CBP, I think, faces similar issues, structural headwinds as like the U. S. suburban office. I mean, as you are aware, CBP is where a lot of the financial institutions have their back offices. And because of the whole COVID, there's a lot of the working from home arrangements that are currently in place. And many of these tenants as their leases come up for renewal, they are reviewing their own business plans in terms of if they need as much space as they had before. And what we have seen is progressively some of these financial institutions they have decided to downsize, they might have consolidated into other offices, because – for business purposes, they might have kept, like, additional offices in the past, and which now they felt that they do not need. But nonetheless, while we are seeing this trend of declining occupancy, we are actively working to re-invigorate CBP by introducing new activities they are rethinking how we can better pitch this to a wider target segment and not just be focused on financial institutions as well.

So that's something that's currently in the works, and we hope to come up with a really exciting product that would then be able to lay out and bring in a much more diverse set of tenants into their business park.

William Tay

But Brendon, having said that CBP's occupancy overall is similar to the national ratio, I mean, that’s quite a similar trend. And we probably won't see a -- I mean, given the fact there's headwinds and challenges that we see in terms of the work from home. But I don't think it will be as bad as IBP. I think IBP has other challenges. CBP continued to have very good infrastructure. Two MRT: one already ready, the other one is coming up. It has retail, it has proper amenities, so it's definitely more attractive. I think IBP, what we need to do right now, I think you have heard our plans, we are looking at redevelopment tapping on to the new MRT station they'll be opening up. So it will bring new life to IBP. So CBP, I think we will go through the usual process of some downsizing, some expansion, new demand coming in, that could be changes in terms of industry mix as we bring in new customers into CBP.

Brandon I. Lee

Just one last one for me on your two offices in San Fran. Have there been any approaches by the two tenants to sort of, you know, put up their space for some leasing. And if there's any opportunity that comes along, we'll be opening -- opened to divesting them? Given all these work from home arrangements that you're seeing in the U.S?

William Tay

The two SF Office has long view, which is very comfortable for us. We'll be able to write through this given the fact that they are greade A office, new building in a very good location. If you're asking, yes, there is one building that has a sublease tenant right now. It's a good company that came in. We are happy to support this as the tenant requested to sublease this space. So that is -- that's for that building. Unfortunately, this is under NDA, I can't tell you more, but I think you have read them in the press. We continue to -- want to be able to engage our tenant to extend the lease that they have right now. So hopefully in time to come when they are ready to extend their leases, I think we will know whether we will do the advanced negotiation and the advanced sounding out and we'll see whether there's a right time to reconsider holding or to divest. Thanks, Brendon.

Unidentified Company Representative

Let's take two questions from the online participants. First question is, are you seeing any cost savings from green debt? And the second question is, could you share how A REIT achieved lower all in debt cost?

William Tay

Maybe I'll let Kit Peng take this question.

Yeow Kit Peng

Yes, sure. Green debt, so we have issued some green bonds, loans, perpetual as well as IRS. So some a bit, helped us save some money. But I think one key benefit would be the outreach is much better. So the tick up is stronger, okay. How do we achieve lower cost of debt? Okay, I think this year FY 2022 will benefit from some of these bonds that we issued in middle of last year, which is I'm thinking of the euro bond. This was a seven-year bond, EUR300 million at 0.75%. And if today, if I were to issue a seven-year euro bond, it would cost us about 4.4%, thereabouts, okay?

So we lock in very attractive rates. Some other issuers we did include two Hong Kong dollar denominated bonds. So those were also executed earlier before this very strong run up in the interest rates, so that will help. And of course, the key really is to have that 80% of fixed rate borrowing that is important as well.

William Tay

Yes, so we benefited from refinancing some of the debts that we have early as we looked at the interest rising interest environment.

Unidentified Company Representative

Joy, go ahead.

Joy

Joy from HSBC. Just a quick question on build to suit. What are you seeing in terms of opportunities in the market? And also you mentioned UBIX, you have achieved better than expected return. Could you share your ROI -- actual achieved ROI? Thanks.

William Tay

UBIX when we first started, we were expecting 7%, but in the cost of construction during COVID, because they went up. I think we updated in -- did we update in the last -- yes I think we had update, yes, so of 6.7 right now, in terms of the actual final costs that because of higher cost and construction costs. For build to suit opportunities, there are opportunities, we are still working on some of them. The challenge here is that I think we have -- I mentioned before, what we have offered right now is almost like an open book, where there's a demand. In the past, we take on some risk towards constructing a facility for them. So as we price in a rental risk for them, we do take in construction cost risk. But now it's come to a point that I don't think anyone would actually be prepared to take any cost risk, which is why we have an open book and say, these are the construction costs, these are the rental rates. Because of this construction costs, we will be in this together, right?

You have a view of your operation cost, whether you can assess these higher rates, because the overall cost has gone up. For them, we’ll be including utility cost and all this. So it will be a very much open book experience for our tenants right now. So we still have some interest on a table where we continue to work on them. For some, it’s a cases, a little more advanced. We have brought in contractors onto the table to be able to advise us the cost in terms of construction. So there's some opportunities, but to be honest, while we are working on them, to be fair to them as well, decision is not easy. Cost has gone up, utilities and all this, so but at least that's still at the table to discuss.

Joy

Has construction costs stabilize, you know, recently or it’s still escalating?

William Tay

Stabilized, I think, cost increase, it's still fluctuating. If we are comparing to pre-COVID, quite clearly, it's not at those level at all. It's far away from pre-COVID, we have actually gone very much higher, but these depending on the specs and the type of building that we are constructing, perhaps certain asset classes a little bit more stable right now. But if it's higher end, because of materials and all this, you will still require a little bit more how the contractors occur those materials that will affect. So different contractors has different strength, so we hope to be able to iron this as we work with the design, and then we try to do value engineering to bring this cost down. Thanks, Joy.

Unidentified Company Representative

Thank you. Maybe we take two questions, last two questions online from Derek. His first question is factoring in the increase in service charge, what would be the net increase in electricity costs from October 2022 onwards? Second question is any views on where all in interest rates will hit to by end 2022?

William Tay

You can take the next question. The service charge to offset any increase is not going to be huge given the fact that we -- net loss cost is 8%, but there are other costs that actually escalated, whether it is cleaning, security and order cost. But to look at just specific to electricity costs, I think the big part will be what rates that we lock in for next year, because it is only October to December for this year, for interest service charge. So I still looked at the 50% to 70% overall increase in terms of utility costs.

Yeow Kit Peng

So on interest rate currently as of June is that the 2.15 you saw, possibly it can approach around maybe the 2.5% level, thereabouts this year? Yes, then that could be a possibility.

Unidentified Company Representative

Any final questions from the floor here? Mervin?

Mervin Song

Yes, sorry. Just on the interest costs, I think you disclosed what the new rates are for seven-year euro bond. But maybe touch on what the rates would be for three to five year fixed for Sing dollar, Aussie dollar, British pound. Just to give a sense of how high it’s jumped from early this year.

Yeow Kit Peng

Yes, okay. So these rates will vary company to company, right? Yes, but the observation is that generally, it would have gone up 100, 150 basis points from, say, beginning of the year generally, yes.

Mervin Song

In terms of absolute amount, the Sing approaching 4% already or what's the --

Yeow Kit Peng

Ballpark, you know, the 3%, 4% is yeah, is about there. Yes.

Mervin Song

Okay. Thanks very much.

Unidentified Company Representative

Okay, then. We are close to an hour. So thank you everyone for joining us here today, as well as our online participants. Goodbye. Take care. Thank you.

William Tay

Thank you. Thanks for coming.