Mapletree Industrial Trust (OTCPK:MAPIF) Q2 2022 Earnings Conference Call October 26, 2022 9:30 PM ET
Company Participants
Melissa Tan – Director of Investor Relations
Kuo Wei Tham – Chief Executive Officer and Executive Director
Lily Ler – Chief Financial Officer
Siok Khim Chng – Head of Marketing
Conference Call Participants
Derek Tan – DBS Bank
David Lum – Daiwa Capital Markets
Mervin Song – J.P. Morgan Securities
Tan Xuan – Goldman Sachs Global Investment Research
Nicholas Teh – Credit Suisse
Brandon Lee – Citigroup
Derek Chang – Morgan Stanley
Melissa Tan
Hi good morning. Thanks for joining us this morning for MIT’s 2Q and First Half Financial Year ’22-’23 Financial Results. We had uploaded our announcements together with presentation deck last evening, and this morning we have management seated in the office to do a virtual presentation of the results. We have Kuo Wei, our CEO; Lily, our CFO; Serene, our Head of Asset Management; Peter, the Head of Investment; and Khim, the Head of Marketing myself Melissa, and William from the IR team.
So without further ado, I’ll toss on the mic to Kuo Wei who will give a short intro to the financial results.
Kuo Wei Tham
Oh you mean, I’ve been, oops sorry. Can you all hear me? Probably I’ve been spouting nonsense and got cut off by the police woman. So anyway, I said I was standing and the rest were sitting down. Yes, thanks for joining us. I will run through the five user segments that we present at our results release. First, I would go through the key highlights, that’s the first segment and who is controlling the…?
Okay, now if you look at the Slide number 5, you can see the operating performance continues to be fairly robust despite margins being squeezed by inflation effects and also higher utility cost and the distributable income actually had been fairly stable, $89 million on a year-on-year basis for the quarter 0.7% increase. DPU, you can see that effect coming down. This is of course partly due to the dilution effect from the series of distribution reinvestment plan we have in place. And I think going forward we continue to see more pressure coming from borrowing costs so-called increases.
Now looking at the second set of bullet points, if you look at our portfolio performance, especially for the Singapore portfolio has been very encouraging. Our occupancy level on an aggregate basis has gone up 0.3% to 95.6%, which is, if I could say highest ever we have recorded for the Singapore portfolio ever since we listed the platform. So the market, I think, continues to be helpful in the occupancy front. And even on the rates, as you would have seen in the details we have outlined, we have seen an increase in average rental rate as well, 2.13 to 2.15 [ph].
So rent revisions are also positive across most of our property types. In fact the effective aggregate increase is positive 2.6%, which is the fourth consecutive quarter of increase. So that is also another welcome sign. That said, we have seen a small dip in the occupancy level for the North American portfolio because we have asset, fairly small, 0.4% of the portfolio revenue as of last year on a relative basis at Leonia. We have a tenant that’s moving out. So now we are of course, in process of engaging interested parties to take out the space.
On the capital management front, the third set of bullet points, we are happy to report that the hedge borrowings we have managed to shift that up a little, 74.2%, almost 2 percentage points from 72.3% in the previous quarter, and the weighted average four years. So that gives us a bit of a protection, but not full protection against the onslaught of the interest rate [indiscernible] adjustments and the DRP continues to be a good source of funding for us, especially when we still have our ongoing development project at Kolam Ayer 2. So last quarter, $40.2 million received a very good take up rate of 42.9%. Of course, as you know that is contributed mainly by the participation of Mapletree Investments as our sponsor is about 25% of that 42.9%.
And the last bullet point as a kind of a measure against the increasing so-called pressures we anticipate in the next couple of quarters from costs so-called increases and also borrowing costs upshift, we will plan for the release of the $6.6 million that we have withheld earlier over the next three quarters. So that will help cushion some of the negative impact that we anticipate. So I think that around some of the key highlights.
But if you look at the chart that we have outlined on Slide 6, the DPU profile as well, you can see we have outlined a dip to $3.36 for the current quarter. And we of course we will work hard in keeping our occupancy levels healthy, and then try to retain our tenants as far as possible keeping a close eye on our margins and costs going forward.
Okay. So I think that is a quick snapshot of what we have. The rest, I think are fairly standard kind of components of what we normally update. We don’t have anything really exceptional to highlight. I think there’ll probably be some burning questions some of you might have, so we can take them.
Question-and-Answer Session
A – Melissa Tan
Thank you, Kuo Wei. Just some housekeeping rules. Okay. Request for and let’s do keep your questions to two for each round. So of course, if there are more questions you’re very welcome to ask some more. If you can raise your hands via the WebEx platform you can also contact us or via the live webcast. So we will take few questions from the WebEx platform. Can we have the first question, please? Oh Derek from DBS. Please go ahead.
Derek Tan
Hi, good morning. Thanks Melissa. Hi Kuo Wei, good morning. I’ll just ask one question. Essentially, it’s on your refinancing, right? So could you give us more color because I noted there’s some expiry next year and looking where base rates are in the U.S. it appears that things could spike up quite significantly. So maybe could you just share where you expect interest rates to land and this $350 million, how should we think about your interest rates?
Kuo Wei Tham
Okay. The color we have is orange. So okay, I’m just trying to pull a fast on you. Yes, so Lily will shed some light on that, but I assure you it’s still orange.
Derek Tan
Okay.
Lily Ler
I’m wearing green today hoping to get some office invite. But anyway okay, let’s address the refinancing for this current financial year. If you look at the presentation slide on 13, we do have about $350 million of debts that is maturing in January. Okay? The good thing about this refinancing is in terms of the benchmark rate, we have already done the hedges for it. We have extended. If you recall, last quarter, I did mention that we have no re-pricing with respect to the interest rate swap because we have already extended the interest rate swap that’s expiring in January. So that part is kind of locked up, right? We are currently negotiating with the banks with respect of the loan renewal itself. I think because it’s still in negotiation, I’m afraid I can’t say too much in terms of the pricing, et cetera. Okay?
But I think we are hopeful and we are trying our best to keep the incremental costs to as low as possible. We don’t think it’s going to be very significant looking at what we have locked in ahead of time. I think for all intents and purposes, I think the risk that we’re really facing here is the rate hikes that the U.S. set that has been putting on and that basically impact the benchmark base. I think in terms of the margin, the risk is not as high as compared to where the market interest rate will go. Okay? So I think for this refinancing that is coming due in January, because we have already done our extension of interest rates swap, the risk is very much mitigated. Right?
The next year you’ll find that we have about $175 million of MTNs paper that is falling off. And this typically you are looking at them somewhere maturing in middle of the financial year and end of the financial year. Okay? So I think that still gives us some breathing space. But nonetheless, the team will continue to look at how we can address the refinancing each year. Okay?
Derek Tan
Okay, yes. Really just to summarize what you mentioned, right? So we should expect that the increase in interest rates for this particular tranche should be much lesser than the base rates that we see increasing. Is that the right assumption? Because you had already hedged your already line, essentially you’re putting the hedges…
Lily Ler
Yes. Yes, yes. Yes.
Derek Tan
Okay. Okay. Sounds excellent. I see a long queue, that’s all from me. Alright, thank you.
Melissa Tan
David, can you please ask — go ahead with your question? David Lum from Daiwa.
David Lum
Yes, good morning everyone. I have a question on the accounting or treatment of your hedges because you’re seeing a pretty significant gain this financial year and how should I interpret this? Is this just accounting? It actually increases your NAV? So is there any way you can monetize this to offset the rising interest rates or should these hedges just unwind on maturity and we should not even look at your gains on those derivatives?
Lily Ler
Okay. For the derivatives under the accounting standard we are expected to do a mark-to-market. So of course the IRS system was taken on a few years back, definitely is in the money now if you look at the interest rate environment, and that is also the reason why the derivatives value has actually increased. Whether do we want to monetize it, we can. But then the question is, the moment you monetize, you lose your protection going forward. So I think that is why I think typically corporates don’t really actively look at unwinding their hedges. I think the hedges are there for a reason, for your protection. So question then is, do you just want to remove that protection just for that, you know, just to monetize it. Right?
So I think the other point I would like to highlight is also that such mark-to-market has no DPU impact whatsoever. Okay? I think you will get the benefits when you do your realization and you are right, you will unwind, you basically then unwind a point of maturity. Does that answer your question?
David Lum
Yes, yes, yes. That, that’s pretty clear. Thank you. That’s all from me.
Melissa Tan
Thanks David. Marvin?
Mervin Song
Hi guys. Yes, this is question in terms of the non-renewal in the U.S., just trying to understand the reason for tenant moving out and also you see other non-renewal risk outside AT&T over the next 12 to 18 months? Thanks.
Kuo Wei Tham
Okay. For this tenant, I think the activity level has been fairly low in the premise, so it is not a key location for his operations. So he decided to move out and anyway, it’s not a very large asset. As to other renewal so-called discussions I think the more prominent still remains the group of three AT&T [ph] as we don’t have any other very large one in coming say 12 months or so.
Mervin Song
Do you have any of these smaller ones that could come out?
Kuo Wei Tham
Smaller ones, I think we have a large, a what we call hyperscale user at the Northern Virginia asset, but on a relative basis is a smaller part of our portfolio that’s having the lease up for renewal at the beginning of 2023. So that one I think is in the joint venture vehicle we have with maybe three investments and also with digital. So digital is funding that engagement with the tenant now. So we do not know at the present moment on the renewal kind of intention, but we are hopeful and hopefully by November or December we will get some clarity on that.
Mervin Song
Okay. Thanks. I’ll join to the back in queue.
Melissa Tan
Tan Xuan, you have a question?
Tan Xuan
Yes. Hi good morning. Just one question on the debt currency profile, the proportion of U.S. borrowing is significantly higher as compared to your asset base. So is this a deliberate policy and with refinancing will you look to bring that down?
Lily Ler
Okay. I think typically when it comes to the depth currency profile, the reason for the higher percentage in terms of U.S. dollars is more because you are also trying to ensure that there is a natural hedge with respect to the capital value, right? So at end of course, plus the fact that for the U.S. dollars borrowings that are taken on shore in U.S. itself we actually are able to enjoy the tax deductibility when it comes to us having to pay the tax, et cetera. So there are certain benefits in us having a higher percentage of the U.S. borrowings.
But having said that, I think in terms of the impact the U.S. borrowings, we have a large part of our, how should I put it? Sorry, yes. Our hedge ratio okay, is about 74%. Right? And that also means that the U.S. borrowings is quite largely hedged. So I think we only have about 25% thereabout of the U.S. debt that is not — that is unhedged and therefore facing the risk in terms of the higher interest rates. So I guess you can say, yes that composition is deliberate because we were looking at the natural hedge as well as taking advantage of the onshore tax deductibility of the interest expense.
Tan Xuan
Okay. So with the refinancing this and next year, we shouldn’t expect this ratio to change, right?
Lily Ler
I don’t think so. Yes.
Kuo Wei Tham
Fairly unlikely unless you are able to get a lot more say, exposure or kind of projects in non-U.S. geographies and you see that ratio adjusting. Because if you look at the nature of our, so-called fundraising exercises is almost entirely in Singapore dollars or equity. So whatever equity that we raise would normally be used to pay down existing Singapore debts that’s a lot more direct and so-called less cumbersome to execute. I don’t think we are going to try to be inventive and then take the Singapore dollar equity funds convert into U.S. dollars and pay down our U.S. dollars debt for the time being, because we still have a fairly decent level of [indiscernible] by having a slightly elevated, which is a level of 60% when we first started of debt for the U.S. portfolio.
So, as with most kind of, in the instruments, there’s no one instrument that is going to be suitable for all seasons. So that kind of a profile, with the profile that we have, had been helpful, very helpful for over the last five years. But of course, the tradeoff is that you see more exposure, more direct exposure to U.S. rate hike cycles, so that’s what we are seeing now. That’s is certainly helpful that we have a big part, there’s already hedge away than the small balance of our quarter would be still having to experience the current volatilities.
Tan Xuan
Okay. Got it. Thank you.
Melissa Tan
Thank you, Tan Xuan. Brandon, do you have a question? Brandon of Citigroup? Okay, maybe Nicholas you can ask your question first. Nicholas from Credit Suisse.
Nicholas Teh
Yep. Can I just ask on some of the leasing progress, I just want to understand on the AT&T although it’s still early, any color on like the back filling or inquiries that you’re getting on the spaces and also the leasing up for Kolam Ayer 2?
Kuo Wei Tham
For the AT&T facilities, as of now, we don’t have any additional updates that we can share. So we are still checking with the market and getting the brokers on board. It’s about a year from now when the leases expire. So we would certainly update the community when we get some so-called interest from prospects. So at the present moment, nothing yet.
For the Kolam Ayer 2 redevelopment we are discussing with the prospect for two floors in the middle block, block 163. So we of course have not sealed up the lease document yet. So we are optimistic, but still working at it. At the same time, I think we are reaching out to a couple of interested entities, but not as close as this tenant was picking up two floors. That two floors is roughly 27% of the NLA of that building. So if you speed it up here, you will get another 8%, 10% to the occupancy level. So you would have crossed 30%, you include the first block of 24.4%.
Nicholas Teh
Okay. And just one quick follow up, in terms of the timing for the Anchor tenants lease, when does that start or when do they start paying?
Kuo Wei Tham
Okay. Effectively for us, after the rent free, will be in March or early April, 2023. So for, yes ease of I think modeling 1st of April, 2023 would be a I think a good date to pin the start date after the expiration of the rent free period.
Nicholas Teh
Understand. Thank you.
Melissa Tan
Thank you, Nicholas. I think Brandon has been trying to ask a question. Brandon, are you able to speak?
Brandon Lee
Yes, can you hear me?
Kuo Wei Tham
Yes, we can hear you.
Melissa Tan
Yes we can you hear you.
Brandon Lee
Yes thanks, fantastic. Yes thanks. Hey, thanks. Just two questions, right? The first one is with regards to the $6.6 million that you are returning, how should we be reading it? I mean, because you are going to distribute it over three quarters, why not four quarters, when not five quarters? Is it because you think that the next three quarter is going be quite bad, or you’re trying to engineer a DPU growth for the full year? That’s my first one.
The second question would be, can you explain the year-on-year fall in NPI margin across several of your segments this quarter, especially on the USDC as well as the Hi-Tech space ex-DC? Yes, thanks.
Kuo Wei Tham
Okay. The mathematics behind this is extremely complex. It’s like, you know, designing for a trip to Mars. So, but anyway, that was of course said in just is not a precise kind of or exact science that we have. We think the release of the $6.6 million is timely, partly of course because of the increasing pressures that we anticipate in the next couple of quarters. But I think more specifically, should we do in two quarters or three quarters, there’s no exact science to it. Our sense is that do you split it up to so over too many quarters it will be inconsequential and you’ll be too dilute in terms of the effect.
And we also do not want a concentrated kind of a release in one quarter which I think may not be helpful over at least the next couple of quarters, because we see that continued pressure from at least inflation and in borrowing costs that will continue to feature for some time. So of course the debate is two quarters, three quarters. At the end of the day, we decided to spread it out a little more to three quarters, that would at least help us tide through that next couple of months of greater uncertainty. And if you divide $6.6 by 3, $2.2 is a reasonably helpful quantum that we think would at least give some material help in terms of the profiling.
Lily Ler
I think the questions on NPI margins, I think for the Singapore or the U.S. the reasons are quite different. For the Singapore portfolio, I think as you all know utilities expenses have hit across the board, especially for the Hi-Tech, I mean, for the air conditioned buildings, including Hi-Tech and we see this hitting the margins directly. For the U.S. if you notice Q-on-Q, actually the NPI is the same. For the U.S. the treatment is a bit different because for whatever expenses we incur for the property, there is a claim back. So you’ll see that cost of revenue be higher in some quarters if there are books there to be claimed from the tenant. So I think for the North America data centers the effect is largely mathematical and not so much because of any increase in property operating expenses.
Brandon Lee
Right. Got it. Hey, thanks so much. Thanks.
Melissa Tan
Okay, thanks Brandon. I think we have [indiscernible] from OCBC. Would you like to ask your question, please?
Unidentified Analyst
Sure. Thank you. So I have two questions. So the first one is, I think there’s still a right of first refuser on data center portfolio that is held at the sponsor level. So just wanted to get a sense of what your thoughts are on acquiring this given the current funding environment? Then the second question is on data centers, has Mapletree Industrial done some kind of valuation on the data centers on an alternative use basis, say if they no longer use as data centers? Yes, that’s all, thanks.
Kuo Wei Tham
Okay. The first one, I think on the right to acquire it, remains there and we are of course, keen at the end of the day is whether the pattern Mapletree Investments is ready to divest, and at what price. So I think for this asset types, the prices continue to remain fairly tight or rather capitalization rates remain very tight. So unless you get a very huge friendship discount, that is so-called out of line with the market, my sense is that, say if you take an arm’s length kind of value for the portfolio, it will not be easy for us to execute a transaction to do an acquisition.
So we would, of course, keep an eye on our cost of capital, both on equity and debt part to see whether there is a window for us to engage our parent a little more so-called on this possibility. My sense is that at least for the next six to nine months, fairly low likelihood for us to explore this in view of the market situation. But it’s something that we would continue to monitor and with the right conditions and when a market window opens we would pursue that with our sponsor.
Now, on the valuation of data centers or alternative views, as of now for most of the facilities, the highest and best use generally would be for the data center operations, say for some of the locations where we have the assets that are in say business partner type of precincts that would be the next alternative, use the so-called next alternative better use. So the valuations or probably not differ too much from what we have, because most of our assets in these kind of locations are lease on a triple net basis and may be power shower or just call and show basis. So the general kind of land levels and valuation would not defer too much from what we are getting for the data centers.
Of course, for the fitted hyperscale facilities, that’s very different. The assets purpose built and the freedom element is a lot higher. But for this group of assets we have the leases are very long and the tenants I think are relatively a lot more sticky compared to the other groups of tenants. So that in part, I think the risk of course is there after the expiration of the very long leases, but they will be something that we will need to review many years down the line.
And of course on a positive note, there are certain so called the upgrades that we see, like for example, the San Diego asset where AT&T presently did one year extension, I think we have outlined earlier to December, 2024. So that part or that part of San Diego is actually a very vibrant live sciences hub. So that represents an upgrade in the so-called the use for that kind of premise. So it is another angle that we are exploring in terms of conversion. See if you are not leasing out the space to a data center operator and expiration of the lease.
Unidentified Analyst
Thank you. That’s very detailed.
Melissa Tan
Okay. Thank you. I think I’ll ask a question from the chat, Derek from Morgan Stanley.
Derek Chang
The all in depth cost of 2.9%, what would this be after refinancing the $251 million in loans due? That’s the first question. The second question, the Kolam Ayer 2 redevelopment is completing in the second half of 2022, first half of 2023. Is management worried about leasing progress so far as it’s just been committed by the anchor tenants, any further updates?
Lily Ler
Okay. On the, or in that 2.9% okay is what is reflective of what we see in the current quarter, right? As for the refinancing, I think just now I’d say that we are trying to make sure that the incremental is not as high and with us locking in the hedges ahead of time, we actually managed to lock in at a rate that is comparatively attractive compared to what we are looking at now. Okay? So I think even if it does increase for the refinancing, we hope, we are hopeful that the incremental will be less than 50 bps.
I think that’s something that we are trying to do and we hope to achieve. But as I said, unfortunately I can’t give you guys too much details on that because we’re still negotiating. Hopefully we have some good news later on, right? So as to how it will change the 2.9%, I think if you recognize that the $350 million is only about 12% of my total debt, I think the impact may not be that significant as well if I’m talking about incremental. Okay? I hope that answers your questions.
Kuo Wei Tham
Okay. The next question on the leasing of Kolam Ayer, we are absolutely confident in our ability and reach of our leasing folks, and they’re working very hard and they have been assuring me that they would be able to convert many of the prospects they’re talking to. So if you look at the track record of their delivery, we remain very positive. So there will always be some challenges in the market especially when the environment is so volatile. But we have a good product. We have a brand new facility; we have specifications that are relevant to the industries that we are targeting. So we are positive. So you may take a bit of time in terms of leasing up in terms of getting the tenants in place.
And as I’ve outlined earlier, the block in the middle block 163 we have — we are very close to the signing about slightly more than a quarter of the space to a good brand name tenant. So momentum is there, we will continue to work on that, but practically I think if your question is on the contributions, when we see the revenue streams coming, I think you’ll be towards the end of 2023 that we’ll see the kind of revenue streams being recognized because by the time, say we complete the development by middle of 2023 even if you can get a tenant to commit, then you have feed out and a rent free period. So invariably most of the contributions will probably be back-ended towards the end of 2023 and early 2024.
Lily Ler
Yes. But for the block that we have already committed, we expect that to come in from the beginning of 2020 – of next financial year. So that’s 1st, April?
Kuo Wei Tham
Yes, 1st, April that, I think the 24.4% is confirmed. That part I think gives us that base load as far as revenue is concerned. But the rest, I think while we work hard at the getting commitments in place, but practically as I mentioned with the so-called the commencement times being staggered, and you have your — all the fit out and rent free arrangements. So the real cash flow will probably be towards end of 2023.
Melissa Tan
Right, thank you. Can we have [indiscernible] question please?
Unidentified Analyst
Good morning Lily, I have two questions. My first question is on the service charges. I mean, there were some discussions about increasing service charges in the past to [indiscernible] to mitigate this inflationary pressures. I mean, is there something, is there still something on discussion and if such a thing would be implemented, would it be across all the leases in your portfolio base?
My second question is related to for ForEx impact. With regards to the strengthening of the USD, how did this impact your DPU for risks for the first nine months and did you strip off the USD impact, what would it be? Or is it fully mitigated by the interest payment in U.S. dollars also? That would be the difference.
Kuo Wei Tham
Okay. On the service charge part, I think we have articulated our intent to increase our service charge. We are happy to share with you. We have done that 1st July, 2022. So for our air-conditioned facilities, essentially the business part buildings are the Hi-Tech Buildings that increase roughly 10%, because we are making adjustments to the second decimal point on the service charge costs. So 10% increase, and I wouldn’t say it is very well received by the tenants. We get some complaints here and there, but they grudgingly accepted the increase. So that has helped us offset some of the margin pressures from utility cost increases.
Just to share, in our current REIT on the cost up shifts, you might remember we have shared before our utility costs increased. We anticipated roughly $10 million to $12 million for the year. And it is fairly in line, based on what we are seeing so far on the actual cost so-called taken in. So probably you fall quite well within the $10 million to $12 million anticipated. So that utility costs rather offset from the service charge increased will be helpful. Our gauge in terms of the impact from this service charge adjustment is probably one plus or so $1 million. It’s not going to be very significant, but it’s helpful in mitigating the effect.
And it’s also a signaling and then set kind of pain that, we have in place with our community. We have not raised a service charge rate for our non-air-condition buildings. In other words, the multi-user Flatted Factories, because these are not large, so-called consumers of utilities the buildings are not air-conditioned. The equipment that is so got powered by electricity would be mainly the lifts for this premises, so that the impact is not as material. And we have way the, the pros and cons of pushing ahead, that additional kind of so-called revenue, or I wouldn’t say revenue, additional so-called contributions on the service charge you can get from this bunch of folks will not be that much. And it’s extremely painful process dealing with the thousands of smaller SMEs on this front. So we have decided not to have a blanket across the board service charge of so-called adjustments.
Yes, on the exchange or the ForEx so-called the impact, I think Lily can shed some color on that. Essentially we have big part of our borrowings that are already hedged. So we don’t expect any so-called big movements down there from the ForEx impact on the distributions. We also have the hedges in place for the cash flows that we are receiving, but with different levels of kind of hedges that have been layered on over time. So I think Lily can share some so-called details on this.
Lily Ler
Okay. As Kuo Wei says, we typically look at the U.S. income stream coming in from the U.S. and we take into consideration the net after looking at the interest rate that is in U.S. dollars as well, right? So the exposure we’re looking is really net of all this. We basically hedge the net income stream by looking at FX forwards. So we do that on looking ahead four quarters. So every quarter we will actually add a little bit of FX hedge or FX forwards for the quarters coming in the next four quarters. So basically, I think the key idea here is, we do average our exchange rate that will be applied on the distribution.
So if you imagine this quarter’s distribution is probably made up of few forwards that has been locked in four, three, two, one quarters ago. And of course we have about; we left at about maybe 20% that is on a spot basis. So I think typically that is how we manage the FX exposure. So I think the key thing we have to remember that when we do all this FX hedges is to ensure certainty in terms of the distribution. Not so much of we are trying to benefits from, we’re trying to profit from it. Okay, I hope that answers your question.
Unidentified Analyst
Yes, Got it. Thank you. If I just may be just clarify on the first part that, just to clarify that the service charge impact has been implemented across all tenants, not just for new leases, and this is the margins which we can expect moving forward after increasing the service charge in coming quarters is my understanding, right?
Kuo Wei Tham
Yes. The service charge increase has been applied to all air-conditioned building, so the Hi-Tech facilities and the business part buildings, but not to the non-air-conditioned buildings, the Flatted Factories, stack-up ramp-up facilities we don’t have that increase in place.
Unidentified Analyst
Okay. Thank you.
Melissa Tan
Okay. I think we are running a bit on time. I’m going to take questions from those who have not had a chance to ask on the WebEx. That would be Xavier Michael and Amanda. Xavier, could you ask your question, please?
Unidentified Analyst
Hi. Thank you. Thank you for it. I just want to check your views because Microsoft, just one of the slowdown of spending, I want to know whether you foresee weaker demand as longer leases for your U.S. data centers and by extension, should we also expect a slowdown, this slow on cost spending to affect data center demand as well?
Kuo Wei Tham
Okay. I think the tech companies relooking at their growth plans, that’s it. They’re still growing probably at a slower clip. They’ll be making adjustments on their needs in some markets, for sure. You can read about them downsizing certain parts of their workforce. But I think the medium term outlook and then demand continues to be very encouraging. And for the lease up of the space we have in our portfolio in the U.S., suddenly that would have some impact.
And on the level of interest we would of course continue to monitor the market very closely and try to find the right match for our space. The Singapore data center space, I think I will characterize this as still a landlords market because the vacancy is extremely low. Whatever power that is available, already would have take us. So despite, the shrinkage in some quarters for some of the tech companies, I believe, if you’re able to offer new space, additional or other adequate power allocation for any facility, you’ll be able to find a taker very quickly because Singapore is in a situation where your supply is really or new supply is really nonexistent partly because of policy decisions taken three years back.
And as you know, there’s a moratorium in place, so it is partly an artificial kind of constraint from the supply side. So if you have any space available or power available that will be taken up very quickly. But there is also a challenge we face from REIT or from a developers perspective, is not so easy to get hold of new allocation, new approvals for such facilities. So while we are very positive about the kind of demand that we are seeing here, we might not be able to exploit the opportunities very effectively as a REIT, as a developer, as a property company compared to say data center operators or users.
Unidentified Analyst
Got it. Thanks for the detailed response. So if I were to summarize, I guess the near-term challenge, the near term challenges for the U.S. data centers are the medium to long-term outlook is still good. And as for Singapore, I guess the, as you mentioned, it’s still a landlord market, question is just whether you’ll be able to take advantage of it?
Kuo Wei Tham
Yes. That is right. As you know, there’s a CFA, Call For Application by the agencies for the data centers that is closing, I think next month, quite difficult for us to be competitive in this space. You’ll be their operator kind of a game instead of a property company or REIT or developer game.
Unidentified Analyst
Got it. Thank you so much.
Melissa Tan
Thank you, Xavier. Michael, do you have a question for us. Michael from UBS. We’ll take the question from Amanda first, please. Amanda is here.
Unidentified Analyst
Hi, thanks for taking my question. I just have two quick questions, one on rent and one on leasing demand. For the rental, are you seeing any pressures on asking when for your new research, here your new research for business for Flatted Factories as Hi-Tech Buildings in the second quarter for lower new signings and that’s my first question.
Kuo Wei Tham
Okay. This so-called the additional sense and read of the market, probably I’ll ask Khim to give you, she’s been dealing with all these prospects on a very intensive basis.
Siok Khim Chng
Right. For the Flatted Factories right, we are actually very practical in our approach because now our occupancy for the Flatted Factories has gone up. So some of the leases, the new leases, we were actually trying to get some very good tenants in terms of the profile. So that’s why we have made some adjustment, where there is smaller spaces, we actually push up the rent. So on average, it does seems that it has lower, yes. But it helps us in the longer-term. So for the stack-up ramp-up it was due to largely a few big tenants that we were trying to replace. So we tried to get them to come in earlier. So that will help us to reduce the downtime. So it’s more of a practical kind of move, but on the whole we are actually pushing the rentals.
Kuo Wei Tham
So, essentially… Sorry?
Siok Khim Chng
Go ahead, Kuo Wei. Sorry.
Kuo Wei Tham
Yes, we just wanted to say Khim is getting more selective apparently because I think the so-called situation is a little more helpful now. The supply and demand situation is more helpful for landlords, but we are fully cognizant of the fact that there will be a lot of stock that will be completing end of this year, early next year. So it is always at a state where we are looking at a tension, whether we should nudge the occupancy up a little, whether we get better quality tenants to improve the profile of the precincts that we are managing and also taking a more defensive position in view of the new stock that is coming in the market that will be competing with us. So this is striking that kind of balance, which Khim is working hard at and exhibited in some of the figures that you see in our update.
Unidentified Analyst
I see. Okay. Thanks. Then on leasing demand, what is your read on the demand on the ground currently? Are you seeing any slowdown, say from any particular tenant sector in manufacturing data or maybe any tenant sector that’s coming in strong?
Kuo Wei Tham
I don’t think we have so-called registered any material, so-called shift in the level of demand whether upwards or downwards. I think the COVID, the so-called, the issues are firmly behind us now. Everybody is working around mask-less except for a few very careful people. So our tenants, I think, and prospects are generally I would say, I would describe as positive. So I don’t think there’s any drop off in demand. It continues to be encouraging, though. Of course, you might have read in the recent reports there are certain segments that they’re seeing some so-called reduction in say industrial production or capacity semicon industries being so-called the under a bit of stress. But generally we don’t see any big negative issues across the different segments.
Unidentified Analyst
Right. Thanks Kuo Wei. Thanks Khim.
Melissa Tan
Thank you. Thanks, Amanda. I think I’ll just check if Michael would still like to ask his question, if not. Michael? Okay, I think that we might have lost Michael. Well thank you everybody for joining us for this rather long call this morning. We hope we have answered most if not all of your questions.
Kuo Wei Tham
Just one, you managed to see DRP, right?
Melissa Tan
Sure.
Kuo Wei Tham
I saw you flashed up on the screen for three seconds then it went off.
Melissa Tan
Okay, okay. So Derek’s question has caught Kuo Wei’s eye.
Kuo Wei Tham
Everything will catch my eye – drinking.
Melissa Tan
If you would like to answer this question. Kuo Wei mentioned the merits of continuing the DRP, but wouldn’t this be an expensive source of funding cost given trading use, maybe more so than borrowings. We also saw the dilutive impact of the DRP this current year.
Kuo Wei Tham
Yes. So it’s not an easy kind of calibration to do. I agree, absolutely. It is costly relative to say our position a year back. At that time, our unit price or equity cost is a lot more attractive from fundraising perspective, but it is still at the current level at a premium over NAV. So if you look at it very theoretically, it is still beneficial to raise equity at a premium to NAV, but of course on a relative basis, a little less interesting.
From our perspective, we still have funding needs for our development projects and I think just as a quick reference, we have about a third more to go in terms of payments not precise numbers. So that would require so-called, us to get capital, whether debts or equity. So if we see continued support from our unit holders and also from our sponsor, we think is helpful for us to continue for little while longer to have the capital in place to cater to the funding needs for our development project until we finish up most of it. Certainly we can take that and our leverage ratio is still at a fairly healthy level, but it is not at a very low kind of a level where we have extremely you know large head room. We are still at the 37.8% level.
So I won’t describe this as an extremely safe kind of leverage level. Extremely safe is below 30%. We have reached then that level some years back and also partly because of our application of the DRP then as well over the quarters. And when we got to that very, very safe level, we turned that off. So we are certainly not near there. And with our current leverage level is good to keep a little bit of headroom and have some dry powder in place. But we are cognition of the fact that, it is on a relative basis less attractive means compared to a year back. And also the dilution effect to the portfolio. So we are recalibrating that and we will relook at that in a quarter or two to see whether we want to continue with the DRP program or not. But I think as of now, as we have outlined in the current quarter’s release, we are continuing with this quarter first because we still have current needs.
Melissa Tan
All right. Thank you everybody. Thank you for your time. Please reach out to us if you have further questions. Thank you. Bye.
Kuo Wei Tham
Yes, thank you everybody.
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