CapitaLand Ascendas REIT (A17U) Earnings Call Transcript & Summary

Good evening, everyone. Welcome to Ascendas REIT First Half FY 2022 Financial Results Briefing. Okay. We are pleased to report a 6.3% growth in distributable income to $330.7 million and a 2.8% increase in DPU to $0.07873. Total investment properties as at June increased 4.4% to $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 works out to be $6.6 billion. Operationally, portfolio occupancy improved to 94%. Leases that were due for renewal during the first half achieved 9.4% positive rental reversion. 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 the 11 logistics properties in Kansas City, U.S. NPI increased by a lower 7% due to higher net utilities expenses from the properties in Singapore. Total amount available for distribution increased in tandem with the increase in NPI. All in, with the higher number of applicable units, DPU increased 2.8% to $0.0787. When we compare first half 2022 versus the second half of 2021, gross revenue increased 4.1% to $666.5 million, and this is mainly driven by the 2 logistics portfolios in Kansas and Chicago in the U.S., which were acquired in November 2021 and June 2022, respectively. NPI is flat at $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 3.6% to $0.07873. For the period of 1st January, 2022, to 30th June, a DPU of $0.07873 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 AIEs worth a total of $272.9 million. Under acquisitions, all the 3 acquisitions we made in Australia and in the U.S. are logistics properties and all 3 are 100% occupied. NPI yield post cost for the 3 acquisitions range 5.1% to 5.8%. It is our strategy to steer our portfolio towards the growth sectors, and the logistics segment now accounts for a sizable 25% of our AUM. Under redevelopment. This is one of our redevelopments success, UBIX. After repositioning into a high specifications 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 6 months from completion, occupancy rose to 51%. So after the repositioning, we have also signed tenants in at higher rents of above $3.50 per square foot per month and the lease tenures are long, 3 years, 5 years. So you have seen this slide. So I keep the slide. So moving on to capital management. Gearing is healthy at 36.7%. And on the lease expiry profile, we have a total debt of $6.4 billion and their maturity dates are very well spread out, as you can see in this chart. In the first half, we extended the maturity to 3.9 years. One quarter ago, it was 3.5 years. And this is after the issuance of the 7-year Sing dollar bond and also coming out with some 5-year, 6 years AUD loans during the period. Okay. And today, green financing totals $1.5 billion, accounting for about 23% of our total borrowings. The financial metrics are at very healthy levels, far exceeding the required minimum level set by bank covenants. First half weighted average interest costs remain low at about 2.1%. AAA 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 an 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 the 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 all together at the portfolio level, it is 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 1 Changi South Lane, which is a logistics property, after 3 tenants moved in. And they have signed long leases of 5 to 10 years. Australia highly occupied at 96.6%, very stable and high. U.S., it is boosted by the 7 fully occupied logistics properties in Chicago, which we 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 out of a logistics property in U.K., and the tenant has signed up for a 10-year period. Okay. Also, 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 reversions. So in Tokyo, 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, 15.2% for logistics properties. In U.S., a positive 15.3% for Portland Business Park. And in U.K., 11.7% positive rental reversion for a data center in U.K. WALE is stable at 3.7 years. At a portfolio level, we have another 10.2% to work on for the rest of the year. In Singapore, about 9.5% of the gross revenue will be due for renewal, and this works out to be about $68 million. Okay. Australia, 5.7% or about $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 $8 million will be due for renewal, and there are 3 leases here and generally the renewal rate is looking good. So on ongoing projects, we are working on about $566 million worth of projects. They are undergoing development or redevelopment for asset positioning or enhancements to improve the returns of the existing portfolio. So this comprises of $161 million in development in Australia, $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 $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 ports and a nice and big food hall 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 3 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.

Thank you, Peng, for the presentation. Now let's start with the Q&A session. Before we begin, let me introduce the panelists today. First, we have Mr. William Tay, our CEO. To his right, we have Ms. Koo Lee Sze, the 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 and 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 your 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 a -- Mervin very eagerly to ask the questions. Mervin, go ahead.

Yes. Mervin from JPMorgan. William and team, I think you're scoring a lot of goals in this result. Maybe you can start with occupancy side. It 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. We can touch on that. Is that sustainable? We're hearing a lot of tech companies maybe cutting jobs or having hiring freezes. How are you seeing demand from the tech side? Second question is rental reversions. If I think I noticed properly, you've increased our guidance from low-single digit to mid-single digit. Maybe I'll go through the reasoning for the increase. Is that 13% expected to continue for the remainder of second half this year? And then in terms of third question, acquisitions. I guess there's some risk of cap rate expansion. Are you seeing that? Is your strategy to this: wait for cap rates to expand and then buy? Or are you looking to do more redevelopments in greenfield projects?

In terms of occupancy, you probably have seen the numbers. They're all stable or positive. You've noted about the 9. In industrial and data center, we actually the first time we crossed the 9. So it's 90.9% right now. And overall, in Singapore, as you mentioned, hitting 90%, above, is not easy. We have experienced that. I mean, since 2 quarters ago, we have hit -- passing the 9 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 continues to give us very good rental reversion and demand for space. I think that's driving the occupancy for Singapore. Rental reversion, we have upped 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 pushed rental up as high as possible to what's acceptable given the fact that actually the entire market has moved up. So that's helpful for us. From the point of inquiries, you probably will realize in terms of executions when we give a rental to our tenants, they look at numbers, they will look at it. It's an 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've also seen that these companies when there's a good business in the underlying business, they do expand. They can accept this rental -- higher rentals. In fact, this is probably one of the first quarter that only logistics we had -- 2% of our leases came in at negative. All other asset classes in Singapore and overseas are all positive rental reversion. So overseas as well, as you have seen previously, it's all double digit. But our guidance towards mid is because I think -- moving forward -- other than this quarter, moving forward, we still will be expecting the 3% to 5% rental reversion in Singapore, which is quite typical. And given the fact that the economy is still growing, I think we should be able to hit the current numbers. Maybe I'll just ask James is there anything to add before I talk to -- answer your question on acquisition.

Just to add. If you look at quarter-on-quarter how we improved from March to June, there are 2 main factors which were already highlighted in the slides. One is 1 Changi South Lane. That's a warehouse. It's almost close to 0.25 million square feet. So that moved our numbers quite significantly, almost like 80 bps, I would say, to our portfolio -- our Singapore occupancy. I think second is UBIX. So we are seeing very good traction. As Kit Peng had mentioned earlier, it's 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 bolster our occupancy going forward. The last point I'd just like to add is, 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.

Yes. Just to add. I mean, UBIX, when we turned it online, we hit about 18% in the first quarter. And we actually updated that we had about 45% pre-committed waiting to be signed. In fact, now we have hit about 51%, which actually exceeded our expectations. Rental-wise also exceeded our expectation and our underwriting. So the point about acquisitions. Yes, I don't think the cap rate has expanded substantially in the market right now. Deals are still being done, in a very small proportion done with perhaps very minor changes to the cap rates. The investment climate now will probably be holding up. But bids have probably have thinned out probably will take longer to close. So these are 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 the specific countries as different drivers. And these are the asset classes that we 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 the investment front. But given the climate, we are not in a hurry to do deals. Probably, small chunks, small bites. 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, say, a $1 billion deal, it takes very long time to do due diligence. That's one. And then with that kind of time line required to do due diligence, interest rate we've never been able to lock in at the point of pricing. And expectation for portfolio premium will still be there by sellers. So you will see that a lot more deals are actually broken up right now in the market in the past maybe in 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 be more smaller chunks.

Nicholas?

Yes. Just a couple of questions from me. I want 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 proportion of the expenses is the utilities?

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

Yes. And 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?

I just want to add on, there are some questions related to the utilities online as well. So could you share how A REIT is managing higher 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?

Utilities costs -- so you had some questions on when 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 the rates for this year. So we have locked in rates until December this year. And we are in the process of getting the tender up for the next 2 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 the first half is still within that range. In regards to percentage based on 2021 numbers, OpEx is about 20 -- utility is about 20% of OpEx, but 8% is related to landlords' consumption. Tenants' consumption is actually pass-through. And in this half, we have seen that, possibly because of reopening, consumption also has gone up. So overall, total utility is about 23% of OpEx, 6% relating to landlords' cost. So in terms of utilities, I think we are managing very well in terms of the increase given the fact that we are only experiencing 50% to 70% increase year-to-year. Maybe in relation to that service charge, actually, we have informed our tenants that we will raise service charge effective October this year. So that will help to offset the increase on the landlord side. Okay. On cap rates -- in terms of divestment, we are not 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 for 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 in a big way. In fact, we have reverse inquiries, people giving us some interest for certain properties. So we'll be evaluating those divestment opportunities.

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, 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 logistics business? And then second question relates to Alpha. I take it it's an asset enhancement rather than redevelopment. Was there opportunity to enhance plot ratio and the plan for the property?

Logistics 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 acquisitions. And our exposure to e-commerce -- despite this growth, our 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, apparels. 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 and 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, where, 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, they are all 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 are in. In fact, for logistics, we are pushing towards almost fully occupied. In Singapore, we only left with -- I mean the occupancy numbers are mainly -- and vacancy numbers are mainly ancillary, office within a warehouse block. With warehouse, it's almost pushing full occupancy for all our countries. I think we still like this given the fact that -- actually, the second reason is to build resilience, 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 build resilience to the 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.

On Alpha, it's purely AEI. 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 are going to activate. It will probably be more of a build-to-suit. If we do find a single tenant that has certain space requirements that would meet the building parameters there, then that's something that we would activate.

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 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 their 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, whether it's a higher specs -- a high specs building or even for this park space. So we are approaching tenants with a variety of options.

David?

I have 2 questions. The first one is with regard to costs. I didn't take a look at your results because I don't have -- I 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 of...

The margin for this half...

Yes, yes, the second half...

Is mainly due to utilities. In fact, the margins stayed stable for the rest of our countries that we are in, in asset classes. You compare next half to 2 half, chances are you will be 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 reversion, and we are trying to get in higher top line so the risk can be offset. Not to mention as well that we are increasing our service charge in the fourth quarter of this year. So that will help to push it.

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 the news and everything, but just -- is there any indication...

You're right, in the reported.

Yes. 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 Ukraine war, there will always be worry and concerns. But in terms of logistics 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 just came from a pandemic. This year, we just really opened up. Businesses are back on track. I would say possibly from an -- the number speaks for itself, right? It doesn't seem to be recession. But what is beyond these numbers. On an inquiry front, every one inquiry that we have for logistics and business park, we have 3 or more inquiries for high specs, right? Where are they coming from? Chances are new demand, additional expansion. Our retention has continued at the same trend at 50%, 60% to a high, of certain sectors, at 90%. So if you ask -- these 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 an oil company. But they consolidated. It's not as though they downsized and disappeared. I was worried that they -- because oil business is so good, now they went to the CBP office. But they were still very prudent. They consolidated, right? So even though it's an expansion of certain industries, but I think businesses are still very prudent. If there's a fundamental growth, I think they will take up more space. And you have seen in our numbers in terms of occupancy. Occupancies are real numbers to see whether they -- I mean, there will be companies who downsize. There will be companies who expand. I don't know whether that helps. I'm not an economist. James, anything to add?

Yes. David, I think there are 2 points to add, is if you just look at the occupancy trend, particularly for Singapore as well as the rental reversion, I think those trends are really positive. And it doesn't give us any indication right now that there's going to be like any slowdown in the economy, at least not that we are seeing it right now.

I think Dale has a question here.

Dale here from DBS. Just 2 quick questions from 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 the kind of $1 billion 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?

Maybe I'll deal with your second question. I'll 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 do an EFR, we will not shy away from it. End of the day, we still want to have many other metrics that we are watching, whether is it affecting our AAA rating by Moody's. I think there are many other factors that we looked at. So it would still be contextual, if I would say, depending on the deal and depending on the market at the point in time. James?

In terms of the U.S. expiry, if you look at the single tenant expiries, 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.

So I would say that logistics for U.S. continues to give us very strong confidence. Those that are single in logistics, I think it's probably likely to be giving us the high retention, 70%, 80% type. The typical multi-tenanted business building, it is the same retention as Singapore, 50%, 60%. That probably will apply for our next half.

Next, we have Yew Kiang.

Yew Kiang came 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?