CapitaLand Ascendas REIT (A17U) Earnings Call Transcript & Summary

Good evening, everybody. Thank you for your patience. Sorry for the delay. My name is Terence, from Investor Relations. Thank you for attending CapitaLand Ascendas REIT financial results briefing for the year ended 31 December, 2022. Today's briefing will include a presentation followed by a Q&A session. Please note that today's session is being recorded and will be made available on our website after today. We will now proceed with the presentation for the FY 2022 financial results by Ms. Yeow Kit Peng, Head of Capital Markets and Investor Relations. Kit Peng, please.

Okay. Happy New Year on behalf of CapitaLand Ascendas REIT. I wish you all good health and a successful year ahead. Let's now [ comment ] on the financial year FY 2022 results presentation. Okay. Key highlights. We achieve strong results across all our asset classes despite the uncertain macroeconomic conditions. The portfolio occupancy hit a 10-year high of 94.6%, and we achieve high rental reversion of 8% for leases renewed in the financial year FY 2022. So together with our proactive and disciplined approach to capital management, DPU rose by 3.5% to $0.15798. CapitaLand Ascendas REIT is 20 years old. So since our listing in 2002, we have grown our AUM from under $1 billion to $16.43 billion today. We have expanded beyond Singapore and have a sizable presence in 3 other developed markets, namely U.S., Australia and the U.K., Europe. The portfolio is well diversified and resilient. On a same store basis, property valuation is stable at $16.1 billion. So let's dive into some of the details. So FY '22 versus FY '21, gross revenue increased by 10.3%, driven mainly by full-year contributions from the 75% stake in Galaxis, Grab HQ in Singapore, the 11 data centers in Europe, U.K., the 11 logistics properties in the U.S., and, of course, a better performance from our existing properties in Singapore. NPI rose 5.2% to $968.8 million despite cost pressures. Total amount for distribution rose in tandem to $663.9 million. DPU rose 3.5% to $0.15798. This is second half versus first half financial year FY 2022 performance. Gross revenue is 2.9% higher driven mainly by contributions from the 7 logistics properties in Chicago, U.S. Net property income grew in tandem with gross revenue. Distribution income is stable at $333.2 million, despite an increase in borrowing cost. DPU is stable at $0.7925. So this is second half. Versus second half of the previous year, gross revenue increased by 7.1%, and this is largely driven by the logistics portfolio in U.S. So this is Chicago as well as Kansas City, and better performance in Singapore properties. Net property income increased 3.5% to $491.8 million despite higher utilities expenses. So second half DPU increased 4.3% to $0.7925. Distribution, we adopt a semiannual distribution frequency. So for the period of 1st July to 31st December, 2022, a distribution of $0.7925 will be made. You will be receiving the dividends on 7th of March. Moving on to investment. So the highlights for the year. So on the acquisitions front, we continue to adopt a cautious approach to ensure that we only acquire good quality properties with strong tenant base, and have promising long-term potential. So during the year, we completed $223.4 million of acquisitions, and all 3 acquisitions are in the robust logistics sector in the U.S. and Australia. The logistics portfolio is currently sizable at about $4.1 billion and represents a significant 25% of our AUM. Next, we completed a redevelopment. This is UBIX in Singapore. It is a premier industrial property, costing $38.2 million. The new 5-storey property enables us to secure a higher base rent when we compare to the original 2 light industrial properties prior to the redevelopment. And during the year, we also completed 2 AEIs. Post the financial year, in the first Q this year, January, February, we completed 2 acquisitions. The first one is a high-tech industrial property at Toa Payoh, and the second one is a cold storage facility at 1 Buroh Lane. NPI yield for the 2 acquisitions is estimated at about 6.8%, 6.9%. Capital Management. Gearing is healthy at 36.3%. So our emphasis is to ensure healthy gearing levels during this uncertain business environment. We have a total borrowings of about $6.3 billion. So during the year, we proactively [ term ] out $1.3 billion of debt with [ such ] tenure of 5 to 10 years. So we have extended the debt maturity to 3.7 years. And this -- you can see it is very well spread out such that less than 20% of our debt should come due for renewal in any 1 year to minimize refinancing risk. The healthy leverage of 36.3% as well as a high proportion of fixed rate debt of 79% enable us to moderate our interest expense, despite the significant [ rise ] [Technical Difficulty] interest rates. Cost of debt is 2.5% for FY 2022. And the finance are at very healthy levels far exceeding what is required by the bank covenants. For example, ICR is 5.2x. This is about the 1-odd or 2x threshold, okay. AAA Moody's rating is maintained, providing us with financial flexibility and very strong access to capital. This is an interest rate sensitivity table. So about 79% of our debt is fixed. So the balance 21% is on floating rate. And based on that 21% proportion of variable debt, 100 basis points increase will result in a 2% decline in distribution. And then, if we were to assume a 200 basis points increase, then this will result in about a 4% decline in distribution. Natural hedge. So to minimize the effects of any adverse exchange rate fluctuation, we have a high level of natural hedge of 74% for our overseas investments. Okay, revaluation. As at 31 December, 2022, CLAR owned 227 properties was $16.4 billion. So on a same store basis, there is no significant change in the valuation of our property portfolio. It is stable at $16.1 billion. In local currency terms, higher valuations were achieved for our properties in Singapore, Australia and U.S. Although the valuations for data centers in the U.K. and Europe declined, these data centers accounted for about 4.4% of the total AUM of $16.4 billion. So this is a strong demonstration of our acquisition strategy over the past few years. Our portfolio is well diversified and resilient. Our tenants businesses are spread across more than 20 industries. This will reduce exposure to any one industry and lower customer concentration risk. So when one industry is challenged, another industry may be doing well. Portfolio occupancy. Overall, the portfolio occupancy recorded a 10-year high of 94.6%, driven by improvements in Singapore and Australia in the fourth quarter. So Singapore improved to 92.1%, so higher than the island-wide occupancy rate, and this is due to higher leases at some logistics and high-specification industrial properties. Australia increased further to 99.4% due to new leases in our business space properties in Sydney, and these tenants have signed up for pretty long leases of 5 years, 10 years. U.S. occupancy remained healthy at 94%. U.K., Europe also very high at 99.4%. So based on new leases signed in the fourth quarter, the biomedical engineering, IT and data center sectors were the largest sources of demand by gross rental revenue. For FY -- the whole year FY 2022, then the largest sources would be engineering, logistics, IT and data centers, okay. We have here for the international portfolio -- In the fourth quarter, the logistics, IT and data centers and education and media sectors were the largest sources of demand by gross rental revenue. And for the full-year, so tenants from logistics, biomedical, retail consumer sectors accounted for the largest portion of the new demand. Okay, rental reversions. Overall, the portfolio achieved an average rental reversion of 8% for the full-year. So this is in line with our guidance. You can see that the rental reversion for Singapore is 7%; Australia, 14.2%, U.S., 29.2% and 11.7% for U.K., Europe. So looking ahead, we expect the rental reversion to continue to be positive mid-single digit range. Okay. We're stable at 3.8 years. Okay. So we have the portfolio lease expiry on a portfolio basis here. So we have about 21% due for renewal in this financial year. So this is quite a normal level. And in Singapore, it's about 26% coming due for renewal. In the first bar, you will see a darker shade of gray, and you will see a 3.8% there. So this refers to the 5 single lease properties and many of them are likely to renew. Australia, 16.4% coming due, U.S., 9.2% and U.K., Europe, 9.4%. There are 5 ongoing projects with $617 million that are undergoing development or redevelopment, AEI, and convert-to-suit, that will help us to improve on the returns of our existing portfolio. They are expected to complete between 2Q 2023 and 2Q 2025. So to conclude, we continue to face challenges from the rising interest rates, inflation and global economic uncertainties. These issues may have some impact on our tenants businesses, as well as on CLAR's operating costs, but we are confident to overcome all these challenges. And we're well positioned to leverage on our strong financial position to take advantage of any growth opportunities should they arise, to deliver a sustainable return to unit holders. So with that, thank you very much.

Thank you, Kit Peng. We have also representatives from the management on today's panel. May I invite William, CEO; Koo Lee Sze, CFO; and Mr. James Goh, Head of Portfolio Management. And before we proceed to the Q&A, I would like to invite William to say a few words. William, please.

Thanks for coming. I just wanted to make a few points, just to summarize what Kit Peng has presented. The first point is, it's a very strong set of results, and DPU has grown 3.5% against last year, and we actually hit 10-year high in terms of occupancy. You also can see in terms of occupancy and the resilience that we have in our assets. Rental reversion is 8%. In 3Q, we were about [ meet ] 5-plus. Guidance was mid-single digit. We are happy that we actually hit that. Second point I want to make is that, despite all the global uncertainty, carrier expansions, worry and interest rate rises, valuation has been strong. It's been stable. In terms of same store, slight decline, about 1%, but all store is increase. And third point I wanted to make to -- known is that, last year, we actually celebrated 20th anniversary. We went overseas for past 8 years. The main thing that I wanted to make known here -- raise there, we have actually good knowledge from Singapore and we transfer very good operational capabilities from Singapore to overseas, which is why we are able to maintain very strong performance across all our asset classes. And the last point is, as we look forward to 2023, there are still uncertainties around the macroeconomic environment. We will continue to safeguard and expand our business, but we will also definitely [indiscernible] a very cautious approach as we navigate this environment. Thanks.

Thanks, William. We will now proceed to the Q&A session. [Operator Instructions] Okay, I have Mervin.

No wonder you guys were [ beaming ] before the start of the presentation [Technical Difficulty] Consensus and occupancy continues to improve. We haven't seen these occupancy levels for such a long time. How -- do you think you can sustain these levels or are you seeing some weakness? I mean, we're hearing job losses from the tech sector, I think, see maybe some leasing on space. Something you can touch on that? And second question I have is in terms of borrowing costs. Any guidance for this year?

These are a good set of occupancy that we achieved, especially for Singapore. Moving forward, as we look at an environment [Technical Difficulty] because of the construction delay in terms of COVID. 2023, I think about 1.8 million square meters of space coming up. Next 3 years falling after that is about 2.2 million, average demand less than 1 million. But we're also hopeful that we can still capture all this good leasing demand that's out there. Primary reason is because of the quality assets that we have. As for where we can maintain the occupancy, I think we definitely want to maintain this lead. In fact, if you look at logistics across, all our markets is full. I think it's no surprise. We're not the only one that's having full occupancy across all space. So even for logistics, any new supply will be very well absorbed. High-tech space has been in good demand. In fact, you see that our industrial has been growing quite strongly. The other challenge, of course, then is business park space, which leads to your second question about [indiscernible] tech space, shadow space, layoffs. We find that we are comfortable with what we are seeing in terms of the leases that we have with the tech tenants. They are committed. Any of the shadow space that you hear in the market, majority -- on a fortunate side, majority are not with us. There are some space that, for example, [ she ] talks about and yet they are not coming up from our space. So we are comfortable that they are continuing to be obligated to the leases. Other than that, in the big tenants that we have, like Grab, there's no news of that. Overseas, we are exposed to Pinterest, [ Stripe ], Microsoft, Oracle, all these days are very well. In fact, I think they are all still expanding, which is why I wanted to put up a slide on international new demand. If you turn to that slide, you will see that new demand is still strong across different industries. And that is the strength of a diversified tenant base as well as different asset classes that we own. Last question is borrowing costs, yes.

Kit Peng will take that.

Okay. So we do have some refi coming up, but they are all in the second half of this year. The rates for these few refis will be higher, right. But the total refi amount is about less than $700 million, and our total borrowings is [ $6 billion ]. So this is like 10% of our total borrowings. So the increase in the borrowing cost should be more gradual in that sense. And also, we mentioned that 79% of our debt is fixed. So there's some exposure, the 21%. But overall, because we have the high level of fixed and a lot of this refi is only like 10% of our total borrowings, so that should help us to manage the interest expense.

Of course, other [indiscernible]

Probably. It depends on where the benchmark then all moves, how it moves. But yes, probably [ 3% ], 3-ish.

I believe, Derek from DBS has a question.

Just a few questions from me I think. Firstly, I would just like to understand a bit, given that the global backdrop is a little bit more modest in 2023, while you see good demand last year, I was just wondering if you focus on, let's say, economies where there's a more modest outlook or recessionary outlook like in the U.S., may be in the U.K.? Could you give us more color on what you are seeing? And if any of the tenants at this point in time, be it logistics or in the business park space, could seem a bit shaky? So that's one part of the comfort that we'd like to get. Second thing is on valuations. I see that valuations are quite steady. But I know we're also hearing on the ground that carriers are expanding. So I'm just wondering whether if in terms of acquisitions this year, you have capacity? I'm sure in time, the market will support you. But what kind of level of activity should we expect this year, which markets and what kind of asset classes? So [ any ] broad-based, some thoughts on that.

Because of the assets that we have, if you are focused on U.S. and U.K., let's put logistics aside. I think logistics in terms of demand continue very strong. In fact, I think the outlook for logistics across the 4 markets that we have is very positive. We also expect strong rental reversion in those -- in logistics space. So set that aside. If you are looking at the other asset classes, so U.S. [ biz ] park, and of course, U.K., Europe is DC. A [ biz ] park, in terms of U.S., you will see that there is still some challenge in terms of occupancy. We have experienced lower occupancy in Portland and Raleigh, but San Diego has actually shot up. But yet, leasing activity in Portland has increased since 3Q, which we are hopeful that we will be able to capture some of this demand. And we are not just focused on the tech tenants. We are focused on various industry, which the new demand has shown in terms of 4Q as well as 2022 for international market. For Australia, in terms of [ biz ] park, our business office, we left very little space in Brisbane. Sydney is full. First time I see our College Street at 100%. Activities are coming back. They are coming back to work. So less worried about Australia [ biz ] park than the Europe DC. Europe DC, in terms of when we bought the portfolio in Europe, there are some vacancies. They continues more vacancies. In fact, I only left with 2 [indiscernible] 500 square meters and 700 square meters, very small. Demand is strong. We have -- actually regearing new from 7, 10 and 15 years -- sorry, 7, 10 and 12 years. All 3 are on a lease. So this actually shows that demand is strong. Our supply is -- continue to be very tight. And we're also trying to work with authorities and consultants to increase our electricity capacity that will allow us to be able to provide more for our tenants. Shaky or not, I think there will be industries that continue to be under stress, but we are hopeful that there continue to be demand coming from various industries. On your second [Technical Difficulty], Singapore is probably the odd one out. Compression -- slight compression about 4, 5 bps. U.K., Europe is probably the largest, 69 bps expansion. Australia is small, U.S. has been very stable. So you're talking about acquisition, I think it will show that perhaps across all landlords, asset owners, the valuation will probably be also very stable. Small expansion, but they are likely to be very stable. So moving forward -- but acquisition is a different story, whether you're prepared to sell at what buyers like us demand. So we've been quite consistent given the high interest rate and where we are trading. We probably demand something between 6%, 7% yield. As such, even looking our own valuation assets that we own, assets that any of our vendors own, is probably still trading 5%, 6%. So in the past 1 year, I would say that, perhaps the mismatch in terms of pricing gap is between 100 to 150 bps, but we do see that in the last few months, it has actually narrowed down to perhaps 40, 50 bps, which means that sellers have to take a discount of their valuation, assuming the entire -- the markets that we are in, the same experience. Some carrier expansion but supported by rental growth. So valuation will be quite stable. But if they want to divest or if they want to sell, they have to take a discount, given the fact that buyers like us would expect certain level of returns. So I don't know whether I answered your question. If you're looking for numbers, I hope to do better than last year.

Brandon?

Just back to the [ carrier ] question, right. I think given that now the market seems to be thinking that rates have peaked, do you think that this 40, 50 bps gap between vendors and buyers like yourself could actually start to result on you taking, [ buttoning ] the bullet to buy? I mean, provided I know you can still get in some form of accretion?

So buyers like us hasn't changed, I mentioned. We expect that kind of 6%, 7%. Why it's so is because, even last year as we price any of these opportunities, we are looking forward towards the high interest costs. Sellers are not prepared to take the kind of discount last year. So I think that the price mismatch has narrowed. Yes, you are right. So we have been seeing a narrowing in the past few months. Perhaps the next few months, second half, we will start to see probably more realistic expectation of prices from the vendors. And I will say that, that actually goes back down to certain markets or -- and to the asset classes that we are interested in. Even with carrier expansion, Australia continued to be outreach for us. As you look at my valuation numbers as well, I'm still having a very strong 4%, 5% kind of cap rate. So quite outreach even for us to buy in Australia. For other countries, I think U.S. has probably some location that is worth spending more time in. The [ biz ] park has -- the deals that we see in terms of a [ biz ] park has such -- actually increased, and the 40 to 50 bps primary reasons -- I mean, primary coming up from U.S. [ biz ] park. The other one will be data center in U.K., in Europe. Our numbers has also shown that the carrier expansion is -- the valuation drop is quite significant as well. That will probably be across the board in that continent. Which means that there lie some acquisition opportunities. Singapore, despite -- I mentioned, it's a compression in my assets in my portfolio, but there are still opportunities out there as we have demonstrated buying 2 assets here in Singapore, and we will continue to hunt for good location, good assets in Singapore and Singapore being a lease. So as we looked at -- and JDC gives a 30-year lease by the time the [ more ] term ends, now they are able to transact -- You left that 8 to -- 7 to 10 years. So that makes it very attractive for us in terms of accretion.

I just want to check on the performance fees, right. Can I just check whether you kind of waive it for FY '22 because your growth is 3.5%?

The growth is 3.5%, but performance fee, we compare against preperformance fee of last year. So against preperformance fee is about 2.3%, which means there's no performance fee.

And just one last one for me, right. For the rent reversions, can you sort of share with us the reversions for Australia and U.S. if we were to factor in the TIs as well as the incentives, if any?

James, do you want to take that question?

Yes. If you look at the U.S. typically on renewals, the TIs would be half of what would be a new lease, and a lot of that will be factored into the rents as well. So I would say that this is a pretty clean reversion number that you see here. And for Australia, it's less pronounced as well going forward. So -- and many of these are happening in our Australian office rather than logistics since most of our logistics properties in Australia are single-let and hence, they are not calculated inside our table here.

We have a question from Vijay.

I have a couple of questions. Maybe I'll take it one by one. Firstly, on this topic of acquisitions. You noticed that -- you mentioned that the cap rates have expanded. So how do we think -- is this an opportunity for divestment potentially in Australia, which you can consider doing at this point of time? And maybe this year, maybe would your acquisition and divestment match together in terms of value? Is that something which you can think of?

Definitely. If there's opportunity to look at recycling some of this capital for better yielding acquisitions, that's something that we consider.

And maybe in acquisitions, would you be looking at single asset at this point of time or you think there is a portfolio opportunities in the market, which you can take on, considering the market dislocations?

We do see single assets opportunity as well as portfolio. Given its portfolio, you probably will be aware that, that may require EFR. We definitely want to look at whether ability and the window, if, let's say, we want to do any portfolio deals. I would say, in terms of -- any [ bottom ] in terms of single assets, I think it's still attractive given that the footprint that we have, so we'll be able to at least look at getting some advantage based on our footprint. If it's a portfolio, of course, the challenge is the underlying assets performance. Mix bag of good and more -- or challenging assets is something that we probably got to take the decision, proceeding with that portfolio acquisition. If there's, for example -- challenges that -- for example, vacancy in the portfolio or certain locations, maybe a few assets, but certain locations may be a bit more challenging because [ studied ] deeper into whether we can manage those challenges.

But your tilt will be towards single assets at this point of time?

Actually, both ways. We are comfortable with any of 2.

My next question is in terms of NPI margins. I noticed that half-on-half, your NPI margin has in fact increased and you said lower utility expense in the second half. Maybe can you elaborate a bit on this? And what sort of margins can we expect on a steady state going forward in 2023?

First, I think on a higher level -- discuss for the steady state. So if you look at NPI margin, you've noted it's a decline. Primary reason is, of course, OpEx has increased. The other big bucket is utility cost. Utility cost gone -- or utility income goes up, but cost has gone up as well. So if you take that into account, the NPI margin will have a larger decline. But if I had to strip up the utility income and expense, in terms of NPI margin has been very stable, slight decline but it's just attributed to OpEx increase. So in terms of steady state, I think we're still looking at that above 70% to 80% kind of margin. That's more for Singapore. Overseas is all very high. Primary reason is because it's all pass-through. Is that what you're looking at or --?

Do you need elaboration or you're okay with that?

I guess I got the answer, yes. Sorry, my last question in terms of AEIs and redevelopments. I think U.K. started with Science Park redevelopment last year. Maybe is that something which you would consider doing more this year? I mean, has costs -- still within your range of doing the developments? Is that something which we can look forward in 2023?

Good question, Vijay, you read my mind. So we have been doing the redevelopment AEI. As I mentioned, we probably took a pause given the fact that COVID construction cost has gone up. But what we realized that flight to quality is very key, especially in this environment. So we will not stop holding back any AEIs or redevelopment. In fact, the team has been working very hard to look at still opportunities for us to redevelop especially in Singapore. We have actually -- I think in the past, as I mentioned, we have assets that have been sitting on very good location. The untapped plot ratio within the asset. So we will work towards redevelopment to enhance the portfolio. And for example, as Kit Peng mentioned about UBIX, the rental that we have achieved is very strong. In fact, I think I mentioned before, it's probably about 20% higher than our underwriting. COVID has definitely helped to bring demand into this UBIX, and the environment currently that we can command better rental. So we're actually able to capitalize on that. But we are mindful on the continued pressure on construction cost. So we got to look at how and where to spend the CapEx to make sure that it's meaningful, especially now when construction cost is actually continue to be on the rise. We want to be very -- watch our spending for CapEx. But definitely, redevelopment is one on our plate right now. And overseas, we continue to look at whether we can enhance, as I mentioned just now, especially for data center. We want to be able to increase our electricity supply so that we require some CapEx to enhance that, and that will actually help us in terms of renewal and leasing up. And therefore, overseas in U.S., there will still be some opportunity for us to look at in terms of redevelopment and convert-to-suit as well. .

Just following up. What sort of returns do you expect for redevelopments at this stage?

So for Singapore, I think we have to look at 7%. In the past 6% will be fine. So for example, our Science Park redevelopment, with capital and development, we were achieving about 6.3%. But today, in terms of this environment, we definitely look at higher [ now ].

This is [ Terence ] from UBS. Do you mind sharing what our 4Q 2022 reversions -- which segment was driving this number? And could you remind us if this is picking up against the third quarter? And for the FY '23 guidance for reversions also similarly, which sector would be driving it, or does it look broadly similar to FY 2022?

I'll just run you through some of the numbers. So if you look at -- first, we will start with Singapore. It's fairly similar trends between 3Q and 4Q, and it's largely driven by logistics because that is really the hottest sector right now at double-digit rent reversions for both quarters. I think at both business park and our industrial and data center segments, it tends to be more steady and a lot lower compared to logistics. If I move on to U.S., as you are aware, as we acquired both the Kansas and the Chicago portfolio in the U.S., one of the thesis that we had was that the rents were under market. And this reversions is proving that thesis to be right because we have actually been able to surpass our own underwriting rents when we first made those acquisitions. So that explains for the high reversion that you are seeing at the logistics cluster. It comes from a mix of both Kansas and Chicago. I would say that in the business space, it's a mix of our legacy portfolio that we first acquired when we went into the U.S. in 2019, and it comes from a diverse mix of different geographies as well. What I would like to just add is that, while occupancy has been challenging for us, I think one mitigating factor has been the strong reversion that we have been experiencing. So overall, the NPI hasn't declined, or if -- in fact, it has been more or less stable. We haven't really seen a negative financial impact from the lower occupancy up till now.

So for 2023, the reversions pattern that supports your guidance, will it look similar to FY 2022 in terms of the magnitude?