CapitaLand Ascendas REIT (A17U) Earnings Call Transcript & Summary

Good evening, everyone. This is Wylyn from the Ascendas Reit Investor Relations team. Thank you for joining Ascendas Reit's First Half FY 2021 Financial Results Briefing. Today's session will include a presentation followed by a question-and-answer session. Please be informed that today's session is recorded and the recording will be made available on Ascendas Reit's website after this briefing. Without further ado, we will start off with a presentation of the first half results by Ms. Yeow Kit Peng, Head of Capital Markets and Investor Relations. Kit Peng, please.

Yes. Hello, everybody. Good evening. Thanks for dialing in. We are pleased to report 18.2% growth in distributable income to $311 million and a 5.4% increase in DPU to $0.0766 in the first half of financial year 2021. Total investment properties as at June increased by 15.7% to $15.9 billion. Gearing is healthy at 37.6%. Ascendas Reit has a high level of natural hedge for our overseas investments, which currently accounts for about 38% of [ AUM ]. Operationally, portfolio occupancy improved to 91.3%, and we achieved a positive rental reversion of 8.9% on leases that came due in the first half. Financial performance. First half FY 2021 versus first half FY 2020 year-on-year, gross revenue increased 12.4%, driven mainly by contributions from new acquisitions that is the 11 data centers in Europe, the 2 San Francisco office in U.S. and the 2 -- and the suburban office in Macquarie Park, Australia. Net property income and the total amount available for distribution increased in tandem with the increase in the revenue. All in, and with the additional units issued in November last year and May this year in anticipation of the upcoming acquisitions, DPU increased 5.4% to $0.0766. When we compare this half of this current financial year with second half of FY 2020, gross revenue at $586 million is 10.9% higher driven by the same reasons as mentioned in the previous slide, that is contributions from the newly acquired 11 data centers in Europe, the 2 San Francisco offices and the suburban office in Macquarie Park, Australia. So as a result, NPI and DI increased in tandem. Again, all in and with the additional units issued in November, December 2020 and May 2021 in anticipation of some of these upcoming acquisitions, DPU increased 3.3% to $0.0766. For the period of 1st Jan this year to 13 May, we made an advanced distribution of $0.0563 due to the equity fund raising exercise in May. Therefore, for the remaining period of 14 May to 30 of June, another $0.0203 will be made. You will be receiving the dividends on the 3rd of September. So despite the uncertain COVID-19 business environment, we were able to acquire a total of $1.7 billion worth of properties in the first half, given our strong financial position. In the previous slides, you saw how some of these new acquisitions posted our best half DPU growth by 5.5% year-on-year. It is our strategy to build a strong and resilient portfolio. So in the first half, you can see that we continue to acquire quality properties in good locations. We came back here, Galaxis, the 11 data centers in Europe and 1-5 Thomas Holt Drive. The post-cost NPI yields for these acquisitions are attractive, ranging 4.8% to 6.1%, and they are DPU accretive. We also increased our data center business to account for 10% of our AUM now versus 3% previously. So our total investment properties now stands at $15.9 billion. After the first half in the third quarter, this is hot from the oven. Just last Friday, the Grab headquarters in Singapore has been completed and handed over to Grab. So we are pleased -- very pleased to welcome Grab as our new tenant. Costing about $185 million to build, this build-to-suit is quite sizable with a GFA of 42,310 square meters. It is beautifully designed. We went to visit the property just last week. It has got 2 tower blocks that are connected by a sky bridge. The property will be leased to Grab for a long lease period of 11 years at attractive NPI yield of 6%. This property has a Green Mark Gold certification, which brings the total number of properties with Green Mark certifications in our portfolio to 44. In the top 2, 2 logistics properties were divested in Brisbane for a total of $104.5 million at about 12% above the book values. Gearing is healthy at 37.6%. And our emphasis to ensure healthy gearing levels and adequate liquidity during the uncertain business environment has enabled us to secure the acquisition plans quite successfully, and we are well positioned to seize any new investment opportunities as they arise. We have a total debt of $6.3 billion, and the maturity dates are well spread out. In the first half, we extended the debt maturity to 3.7 years with the issuance of a 7-year Eurobond. The Eurobond debut was very well received. It was 3.2x oversubscribed and anchored by high-quality institutional investors. So this Eurobond issuance will enable us to lock in attractive interest rates of 0.75% and reduced interest expense for the trust. This is also in line with our long-term strategy of building a diversified funding source, right? And to align our financing needs with our sustainability objectives, we set an additional $811 million worth of green USD and AUD loans in the first half. The loan periods are for 5 years to [ 5.75 ] years. To date, green financing totaled $1.2 billion worth of green instruments in the form of bonds, protection securities and loans or about 18% of our total borrowings. The financial metrics are at very healthy levels, far exceeding the required minimum level set by bank loan covenant. Interest cost is a lower, 2.4% versus 2.7% 6 months ago. To minimize the effects of any adverse exchange rate fluctuations, we have a high level of natural hedge of more than 80% for our $6.1 billion overseas investments. Earlier, we highlighted the 7-year Eurobond issuance, which helped to extend the debt maturity profile and to save interest costs. Here, the Eurobond also helped us to achieve a 100% natural hedge for our EUR 300 million investments in Europe. Asset management. Q-on-Q occupancy rates improved at a portfolio level as well as the country level. Portfolio occupancy is 91.3% in June versus 90.6% as at March. In Singapore, on the left-hand side of this slide, it is 87.9%, 100 basis points higher than the previous quarter. Australia, at 95.8%, is 90 basis points higher. For U.S. and U.K., they are stable and high at 92.8% and 98.2%, respectively. Singapore. Occupancy improved to 87.9% due mainly to this full occupancy achieved at 31 Joo Koon Circle. The tenant is in the biomed pharma industry and has signed a long lease of 20 years. Australia, the improvement is due to one lease in a logistics property in Sydney. The tenant is in the engineering construction business and has signed a 3-year lease. The U.S., as mentioned, remains high at 92.8% and stable. U.K., 98.2% In the first half, we saw some demand from the biomed-related tenants. This is in blue in the right-hand donut by gross rental income. So other than the large pickup by a biopharmaceutical company in 31 Joo Koon, there were 3, 4 other tenants in the same industry that took up space in the business park and Science Park properties. IT in orange. Here, we have new tenants in the IT business that took up some space in Galaxis and Aperia. In 2Q, the portfolio achieved an average rental reversion of 8.9%. If I may refer you to the column that is boxed up in orange, so Singapore, you will see that we are able to renew leases at higher rents for all clusters as set IDAR. And regarding this 3.1% negative reversion for IDAR, these are actually 2 very small leases of less than or about 200 square meters of space. In the U.S., a positive rental reversion of 26.3% was achieved in Portland and Raleigh. Actually, Raleigh accounted for the bulk of the renewal. So not only are the renewal rates higher, but we have also signed quite a long lease for the larger ones, as long as 7 to 10 years with embedded rental escalation of cost. WALE, portfolio WALE is stable at 4 years. So on a portfolio level, only 5.8% of rental income will be due for renewal for the rest of the year. The bulk of it is in Singapore. So that will be [indiscernible] of Singapore's rental income. SLBs, there were 4 single lease buildings that were due for renewal this current financial year. And the 2 larger ones which account for 70% of the total GFA that was coming due for renewal this year, they were renewed by another 2 to 5 years. And otherwise, the smaller -- the others are quite small, and we are in discussion with the prospect. So looking into FY 2022. This SLB renewal or nonrenewal is going to become a smaller and smaller feature over the years. This next coming year, only for SLBs are due for renewal. And in GFA terms, these 4 properties have a GFA of less than 50,000 square meters or no less than 1.2% of the Singapore portfolio. So the next couple of slides show the lease expiry for Australia, which is left with 1.6%; United States, 2%; U.K. left with about 2.5% for renewal. Ongoing projects. About $389 million worth of projects are undergoing development and redevelopment for the purpose of asset repositioning enhancements in order to approve -- improve the returns of the existing portfolio. So this comprises mainly of $251 million worth of development in Australia and $119 million of redevelopments in Singapore. Now regarding Australia. To date, we have made steady and positive progress over the years. Not only has our AUM more than doubled to $2.4 billion in Australia since our first entry into the country about 5.5 years ago, we have continuously acquired high-quality and well-located properties. We have also enhanced the portfolio mix with Sydney now accounting for 53% of the investments versus, say, 43% 5.5 years ago. So it is our objective to replicate and improve on this success wherever the opportunities may arise. COVID update. So last year, a quick recap, we successfully navigated through the difficult COVID period with limited impact. We supported affected tenants with $17.8 million worth of rent rebates. And this accounted for 1.7% of the gross revenue and we did not withhold any dividends at any point in time. FY 2021 year-to-date, as you are aware, there is some discussion by the Singapore government to introduce some support measures. We do not have the details as yet. However, we are confident to provide the necessary support in line with the government's program. To recap, Ascendas Reit is in a strong position. Operationally, our portfolio occupancy rate is high and healthy at 91.3%. Financially, our cash flow is stable and we have ample liquidity and strong access to capital. So far, all the signs indicate a better overall performance for FY 2021 when compared to FY 2020. With the higher rate of COVID-19 vaccinations around the world, we are cautiously optimistic as the various economies gradually reopen step-by-step, and businesses returning to normalcy. With that, I end my presentation. Thank you.

Thank you, Kit Peng. For the question-and-answer session today, we have our CEO, Mr. William Tay, as well as the rest of the management team on the line to take your questions. For the analysts and media joining us via MS Teams, please use the Raise Hand function and wait for me to call your name. For participants joining us via the online webcast, please type your questions in the text box at the bottom of the web page.

Okay. We'll start off now with some questions from the analysts. David from Daiwa.

With regard to the Grab lease that you just handed over, when do you actually start receiving rent for that?

Thanks, David. They are currently now in -- on rent-free period for a few months, profit out. So rental will -- rental commencement is early next year.

Can you be a little more specific, like which -- first quarter?

Yes, first quarter, early next year.

Okay. And last question, is the positive rental reversions in the U.S., is that sustainable or is that just a one-off for those cities?

I would say, if you recall, the acquisition for the U.S. portfolio, the first portfolio, there are fixed escalation in the portfolio as well as certain cities are under rented. And depending on each of the leases that comes due, we do see a variety -- a range of positive reversion. In fact, the last one -- last few that was done, there were 6 leases, all came in positive. We have a mix. For example, Raleigh have a medical company that gave us more than 30%. We have a defense company in San Diego that give us 20%, but all the leases are positive so far. So far, the -- in terms of the impact, the base rent in U.S. for new leases will probably be quite stable right now. Incentive has gone up. But in terms of renewal, we do see most of our properties are still under rented.

Thanks, David. Next, we have Mervin from JPMorgan.

Just trying to get your thoughts in terms of rental reversions in Singapore considering the heightened alert that we had recently and upcoming supply. Should we start to ease from that 3.4% level from here? Second question I have is in regards to the Science Park redevelopment. Any updates there? And for the U.S. portfolio, maybe can you remind us in terms of how under rented is the portfolio and your thoughts in terms of the Apple campus coming up in Raleigh and how that will impact rents going forward.

Thanks, Mervin. In terms of portfolio rental reversion, we still stay guided with the single-digit reversion at a portfolio level. For Singapore, likely this kind of range will be what we do expect going forward. With some certainty, of course, that the leases will come around this range is because the renewal has been conducted way in advance. We are finalizing all these leases as we speak. In fact, now we are already in third quarter. So we did believe that you will probably be falling around this range, given the fact that certain leases in certain assets may see some negative impact. But we do expect the overall portfolio will still be in the single-digit range. As you have seen, some certain classes -- certain clusters has come in negative, but turnaround to be positive. In fact, at the NPI level, almost all has turned in positive, only with a small percentage drop in terms of high specs and IDAR. I think that's more important for us to look at. In terms of reversion, end of the day, the impact depends on the entire lease to be renewed in that year. It's actually not a huge proportion towards contribution to the next year's NPI. Okay. With regards to the Science Park redevelopment, I suppose that is one key interest since the TÜV SÜD of PSB building has became vacant this year. That is one of the nonrenewal. We know for a fact that we are happy with the nonrenewal so that we can proceed with the redevelopment. And I am happy to report that the -- we have been talking to the authorities for the higher plot ratio. The higher plot ratio has been approved. The plot ratio will increase about 3.5x to what is currently on site. So we do expect a development to the size of perhaps 1.6 to 1.7x of Galaxis. We are working on with regards to the design and trying to get our costing done as well as formalizing the documentation with the authorities for the higher plot ratio. So this will probably be one of our very interesting project that we will introduce, likely to be in the range of a mixed development or vertical campus, I would say, that covers both IT specs as well as life science. This is not very common here in Singapore. And with amenities and retail as well as directly connected to the Kent Ridge MRT. We will make no more details probably in fourth quarter, next quarter, and this -- there, we will be sharing more next quarter. Okay, Mervin, your last question is U.S. Well, you're testing my memory. Under rental, if I remember correctly, it's probably between the 10% to 20% -- 10% to 30% range in each of the -- different cities have different assets. I think the under rental is probably in the 10% to 30%. Did I address your question, Mervin?

Yes. And just your thoughts on how rentals really may progress given the new upcoming Apple campus?

Okay. Overall in U.S., Raleigh has been seen as a very resilient city. In fact, throughout the few national crises that they have faced, Raleigh always comes up strong, coming from the fact that there are institutional R&D, strong institutions learning around their good talent base. With the Apple campus coming up, I think this will actually propel further the tech focus as well as the life science for Raleigh. So we are happy to be in Raleigh. In fact, we will be hoping that we can actually strengthen our foothold in Raleigh.

Thanks, Mervin. Next, we have Dale from DBS.

Yes. This is Dale from DBS. I just have 2 questions. So I think just a follow-up on Mervin's question, right? If we're talking about the potential redevelopment of the TÜV SÜD building, what kind of development size -- I mean, quantum are we looking at? Because given your current gearing level, I'm just wondering, is this a comfortable level that you are at or you intend to do something about it? That's one. Second, I noticed that the U.K. occupancy dipped very slightly. But could you give us a bit more details on that, as well as I saw that there's quite a few SLB expiries for the rest of this year. Could you guide us through on what you expect from the U.K. site?

Okay. Thanks, Dale. You are right, it's not as easy decision with regards to the development -- the redevelopment of PSB building. The size that we are looking at is between $800 million to $1 billion, is huge to the proportion of the development limit that we have. We want to be able to have some bullets, if you like, for us to do some other development works, whether it's AI or other redevelopment in the portfolio as well as build-to-suit opportunities. So it will be one key consideration to the pace or whether we will further find solutions to see how we can reduce the entire CapEx for this project. So we are also trying to scrub the numbers right now. I'm sure most analysts and everybody will know that construction cost has gone up. We are trying to see whether we can bring in value engineering to the design and the specs that we want to introduce. With regards to U.K. OR, occupancy rate, it was a slight dip. Primary reason is because of one nonrenewal, a larger unit that was nonrenewal but replaced with a vacant unit that was leased up, a slightly smaller unit that was leased up. So there is transition of a tenant for U.K., which caused us the slight dip. The unit that is nonrenewed, we actually are talking to tenants or other prospects right now to take up the space. So these are actually transitional properties in and out of each of these developments.

Okay. Okay. But just following up. Your expectations for U.K. in terms of rental REITs?

Okay. U.K. rental REITs has been quite flat, I would say, right now. In terms of higher rental REITs that can be per month are likely more institutional grids, larger, big boxes for areas that we are in. In terms of past 6 months or so, the rental has been flattish, not because there wasn't growth. There was huge growth in the past 2 years, 3 years. The new leases that we have signed, just I mentioned about the transition of the occupancy in U.K. It actually came -- the new leases actually came in much higher than what we have anticipated when we acquired this property, right? So it's at a high level, but in terms of the market movement, I think it's been quite flat in the past 6 months. As well as the other issue that we probably would like to highlight is tenants are also looking at short-term leases right now instead of a very long lease of 15 to 20 years that we are quite used to in U.K. Short leases, demand has been there. I suppose some of these tenants wanted the short leases to be able to capture some of these southern surge in demand or contract that we may have. So we do see a fair bit of short lease inquiry and short leases also give us an ability to able to command a slightly better rental.

Thanks, Dale. Let me just take one question from the webcast. This is from Andy, OCBC. What percentage of your gross rental income in Singapore is contributed by retail-related tenants which, are likely to get rent waivers?

Actually, it's quite easy to guess. We mentioned that the first P2HA, Phase II Heightened Alert, we gave about $700,000. That was 2 weeks of rental. And we do expect that when the government do give us the details with regards to the second P2HA, we -- I mean, government, as I mentioned, they expect the landlords to match the 2 weeks. So we do see that the contribution by us in that -- in compliance to that will be a range of perhaps $0.6 million to $0.7 million. So that is on a 2-week basis.

Thank you. Now let's move on to Tan Xuan from Goldman.

The size of redevelopment of -- sorry, TÜV SÜD sounds substantial. What's the thoughts of doing it alone or with sponsor?

We are seriously considering a joint venture, which is the reason for the -- I mentioned about the size of redevelopment. This will actually help us to be able to reduce our development limit, allowing us some headroom to capture other demands.

Okay. Got it. And my second question is on performance fees. That's based on growth in DPU, right? But 2020 DPU was probably more abnormal given that if you were substantially lower. So what's the thoughts of waiving performance fee this year? How should we think about that?

So Tan Xuan, if we are entitled to performance fee, I think we will consider the various options then.

Okay. So we should use last year's DPU as a base to calculate performance fee.

That's right.

Tan Xuan, do you have more questions?

Yes. No, that's all for me.

Next, we have Derek, DBS.

Just getting back to the redevelopment, right? I mean I understand you're thinking of doing a JV. But just wondering whether, let's say, if we do a JV with, let's say, the development side of CapitaLand, would you -- how would you want to be like splitting the stake in this, i.e., you're giving the land? And I was wondering whether who would get better end of the stick in this case.

Derek, we will make known the actual details. These are still in the works, how to have a joint venture party that has a contribution, each party's contribution to the project, as well as a win-win for parties. It's not uncommon for such joint venture where there are considerations with regards to the land, with regards to the amount of plot ratio and the size and the development mix and how can we position these assets favorably to the joint venture partners and what each joint venture partners can bring to the table. So bear with me, I'm making quite a fair bit of detail for this development, but more details will come.

Okay. But we would anticipate that you would have the buyback option, i.e., everything is still on your -- it should be on our books, right, in the longer term?

Currently, TÜV SÜD is on our books, yes.

But even other redevelopment, let's say you were to sell it into a JV, you would also want to hold 100% of the completed broker-dealer, yes.

You expect me to, of course, ask for [indiscernible] order [indiscernible]. Maybe I can buy back the stake, yes.

Okay. Just I got another -- one more question. Can you just remind us what's your book cap for your U.K. and Australia portfolio?

Okay. I'll probably need some help to get this.

Get the number for you.

Yes, get a number. Do you have another question that we can go to?

The last one will be on U.K., the leasing, the expiries next year. I mean, a fair amount of leasing. Could you give us some sense whether you're confident of getting good retention? Yes, that's my last one, yes.