Manulife US Real Estate Investment Trust (BTOU) Earnings Call Transcript & Summary

Okay. So I think we can start. So a very good morning. And today, we have with us, Jen, who is actually all the way in North America. So she's doing the call from there. She is able to fly in, but Manulife has put a ban on all travel into Asia so that will be extreme, but we are an insurance company after all. So Jen is from her part of the world taking the call. And over in the Singapore side, we have Jill, our CEO; Robert, our CFO. So Robert has just passed his probation. He's just been with us just over 3 months [Technical Difficulty] from another REIT in Singapore. We have Chia Yee, who's our Financial Controller. I'm Carol, the Head of IR, and I have Brenda and [ Siri ] from the IR team with us today on the call. So what we will do today is you have the deck of slides that we have put out on SGX this morning. So we will let Jill do a 15 minutes run through on the presentation. And then maybe we will open up for Q&A. So maybe without further ado, over to Jill, please.

Yes, good morning, everybody.

Just one more housekeeping here. Can I just request all of you to mute your phone, wherever you are. Thank you.

And thank you, Carol, because I'm about to ask everybody to do the same thing. So good morning, everybody. Great to have you on the line. Team here, as Carol has described. So if you could please turn to Page 5 of the presentation. This last year was actually the best ever for MUST's unitholders. The TSR was up 42.1% to the end of December 2019. We had 2 more extremely accretive acquisitions in top Class A properties. We also gained entry into the EPRA Nareit index, attracting more institutional investors. And this had a positive impact on the price of the units, the AUM and the market cap. We can talk about this later. We also, last but not least, were recognized by the market in terms of governance, sustainability and Investor Relations, and you can see those accolades here below. If we move on to the next page and the highlights, if you like. First of all, just in terms of financials, there are a myriad of good numbers here. Our year-on-year DPU grew by 7%. And our NPI increased by 22.2%. And as you'll see later on, this is a, particularly, a good statistic because you will see that we have diversified the source of our NPI, and that is very important to us going forward. We've also had some extremely solid, I would actually say extremely good occupancy rate. We can see here that at the end of 2019, 95.8%. We have said many times before that in America, Class A properties are around 88%. So 95.8% is a very, very strong number indeed. Also, we've been maintaining the length of our tenancies. The weighted average lease expiry. And so both occupancy and WALE, these are both very, very critical and important to riding through the cycles of turbulent times. Obviously, our AUM is increasing step-by-step very nicely. And we are going to be talking about ESG, this fast-growing area of importance to investors and to companies alike. On the next page, which is the divider page as we go on to the specifics of the financial highlights, I just wanted to draw your attention to one particular number, and that's the standout of our gearing which at the end of 2019 was 37.7%, right staying in the middle of our internal range of 35% to 40%, but well below the current regulatory limit of 45%. And that's despite 6 acquisitions, including 2 last year in this last 3 years. So I think that is quite an achievement. And obviously, we've been paying some particular attention and concentration on that. On Page 8, we come on to the DPU increase, which I've already said, increased year-on-year by 7%. Now in terms of, as you move down this page or this table of numbers, the gross revenue, the net property income, the distributable income and the DPU, on the right-hand side, the year-on-year numbers, were all higher due to the accretive acquisitions. Now that's not just last year, that's also from Penn and Phipps from the year before from Centerpointe, which took place April, May last year. And then higher recoveries in income, in particular, from Peachtree and the Phipps buildings. These were partially offset by the lower rental income, and that's mainly from Michelson. And also some higher property, finance, interest rates and current tax expenses, nothing unusual in those. Equally, in terms of the adjusted 2019 DPU year-on-year. This is the flip side, if you like, lower rental income, mainly from Michelson, higher finance, current tax expenses and also the drag from timing differences between when the equity was raised for our Capitol acquisition in September, October. So that had a partial drag in 2019. Obviously, that is not likely to occur, as far as we know, in 2020. And I'd say as far as we know because we don't know what acquisitions we'll do in 2020. So this is partially offset by the accretive acquisitions. Looking more specifically at income, we have been delivering robust income through our fortified portfolio. Overall, our NPI, as we saw earlier, was up 22.2%. So we've had strong NPI growth. This was driven by the acquisitions, both of 2018 and '19. But it was partially offset by this lower income at Michelson. But besides Michelson's lower NPI, our other markets and properties have been very strong. For example, in Atlanta, which is the capital of the southeast of the USA, that has been powering on. And even as we've entered this year, 2020, we have, for example, seen a lease-up of -- in a tenant by tenant, a new tenant actually and a rental reversion of 10%. There are other markets as well, where we're seeing strong movement that would suggest that we can continue with this NPI growth. Balance sheet on Page 10 and proactive capital management, very strong indeed as we were -- as it were, very well spread debt maturity. As you can see on the right-hand side, of this particular page on Page 10. Also, as we like to point out, our fixed-rate loans, which, if you like, protects us from the vagaries of the interest rate market is 95.1% at the end of last year. We have, of course, one of our loans, mortgages coming due this -- middle of this coming year. We have no issue with that at all. I think we're very confident. And I think it's just worth pointing out that, that was for one of the IPO buildings, Peachtree. And at that point, it was Brexit, gosh, history keeps repeating itself, doesn't it? 2.46 we paid for that loan in 2016, that mortgage. And we have been thinking that we would be paying about 3 50 this year. But as you will have all seen, interest rates have been falling, they are still extremely low. And as we stand at the moment, it would be possible to get to 2.8%, which is frankly not very far away from the 2.46. So that is, of course, I would say, rather tempting and certainly a lot better than we had thought. Moving on to the portfolio itself. I think every quarter, since we launched, we've been emphasizing the importance of a high-quality portfolio in order to remain resilient in times of market turmoil. A fortified portfolio of Trophy and Class A assets, creating strength from diversity. You can see the map with our 9 properties stretched across America. You can look at them on the video. If you want to queue in on that little queue there. But most importantly, in these times, you want to be thoroughly prepared and our diversified income, our NPI that on the right-hand side shows you how far we've come, as I say, in diversifying our NPI by property. And that is going to stand us in very good steads moving forward. Also, what's going to stand us in very good stead, as always, is a long weighted average lease expiry. And also, our expiry profile for this year, and this will help us ride out this current turmoil. The total weighted average lease expiry by NLA for the portfolio at the end of 2019 was 5.9. But I'd also like to add that for our top 10 tenants by GRI, it's 6.7 years. And if you were to look at what we did last year in terms of leasing, the leases last year averaged -- weighted average lease expiry was 7.9 years. So we've really been pushing out and that, as I said, will stand us in very good stead. Already, and I've alluded to this already in 2020, we have renewed 41,000 square feet in the Plaza building. And so we are easing away very rapidly at this year's expiries. So on Page 14, in 2019, there really was strong leasing momentum, high-quality tenants signing long leases and that was 445,000 square feet. We had 76% of tenant retentions. We had new tenants, we had early renewals, we did a bit of everything. And if you were to look through the numbers, you would see that our rental reversions were up 12.1%, if you exclude the Michelson building where that particular building saw some slight retracing of steps. But even so, the whole portfolio saw positive rental reversions. As I've already said, this year has started very well, very pleasing with 70,000 square feet, that's 1.5% of portfolio, NLA has been rented out. Plaza, Peachtree, Figueroa, right across the board. And so that will mean effectively since then today that our occupancy will increase to 96.4%. So we're very pleased with how the year has started. And I hope that, that will give you all some form of confidence as to how we feel the year is going to develop. Again, on Page 15, here, we have the diversity of our trade sectors, all types of businesses like being in our buildings. We have a large number of listed companies and headquarters, particularly in our top 10 tenants, but we have a great many credit tenants. And we've made a conscious effort not to aim or concentrate on one particular trade sector, but to follow as many different areas as possible, the best companies from those areas. And we've been following the trend, for example, with tech. Our tenant that one I was alluding to earlier in the Peachtree building is actually a tech tenant, health care. One of the reasons why we were keen on Sacramento last year, finance and insurance. And I think it's also important to note at this particular juncture given what's going on in the world is that we have a large propensity of domestically -- U.S. domestically orientated companies. They're not globally orientated. They tend to be domestically orientated in their businesses. And that's the legal, the finance, insurance, the consultants, the government tenants. So you can see that we are not as exposed as perhaps some others to the international situation and concerns at the moment. On Page 16. Well, it's been a very, very long property cycle. People are constantly reminding us of this, but it all seems to be going extremely well. And certainly, if you look at the valuations, for last year, we, as many of you will know, we value our properties each half year. And the valuations have remained very strong. And it's probably no doubt is the reflection, not only of the strength of our buildings, but also that the economy remains good. Unemployment at a 50-year low, skilled labor force very, very short supply and employers seeking the very best buildings to attract tenants. And I think, again, Atlanta, where we have 2 buildings is a very good example of that, where lifestyle, technology savvy, educated workforce is in short supply. And again, this is why there's been a demand for the better quality buildings, such as ours. If you move on to Page 17. Here, we show the strong growth market and limited supply. These factors bring benefits. And so we have concentrated as we've been acquiring properties on these locations, where they are, they have a strong pathway to growth, catalyst for growth, and there is limited supply. The top bar chart, show the rental growth potential. And that, for us, remain for most of our properties between 5% and 10%. So 5% to 10% below the market at the moment. In terms of occupancy, well, we are really very strong. The best of the best come through. And by that, I mean, if you look at the box on the right-hand side here, you will see best-in-class properties exceed market occupancies. And so for example, in Meadowlands and in Fairfax, where the local numbers look -- the vacancies look quite high, our buildings have very, very low vacancies. So Plaza, for example, in New Jersey, is 98.9%. And Centerpointe, in Virginia, is 98.7% in terms of occupancy. So we are doing very well because we have the best buildings in the market. We're certainly amongst the top buildings in the market. So I mentioned, as we move on, I'd like to move on to another topic now. Each quarter, we have introduced a thought leadership piece. And this quarter, we are focusing on ESG. In recent months, many, many investors have been asking about our ESG. And really now, investors are looking for overall sustainability of companies. And we believe that this is really, really critical as we move forward. So what is ESG? Well, we've put a little statement here. This is the MSCI ESG Research that classifies it as -- it is defined as the consideration of environmental, social governance factors alongside those important financial factors in the investment decision-making process. And for us, there are -- and for most people out there, there are 4 principal areas, sustainable properties, human capital, external relations and ethical corporate behavior. And what -- so you would say, okay, that's fine. And you read the different parts of this. But what's MUST's strategy in terms of ESG. Well, first of all, to minimize the environmental impact, to increase cost savings that's on energy, water, greenhouse gases, to understand the trends, investor preferences with changing regulatory landscape, so governments and to support strong, stable long-term returns. And ultimately, all this helps to build trust -- a trusted brand. One of the best ways on Page 20 to gauge how MUST's and others are faring is to look at various benchmarks. And one particular benchmark or measure that many investors look at is the Global Real Estate Sustainability Benchmark, GRESB. And here below, we've shown you how we've been faring in 2019. And on the right-hand side, you can see that our rankings really are very, very good indeed. For example, third, out of 12 listed U.S. office REIT. If you look on the left-hand side, the ESG breakdown in 3 major categories of environment, social and governance, we're higher than the average. And there are other top strengths identified here. And I'd like to point out that we are also very fortunate at Manulife to be supported once again by our sponsor, the Manulife Group who has long been forging ahead in the area of ESG. So we feel particularly gratified at this particular juncture to have that support from our sponsor, who will once again come in and help and champion us as we move our ESG forward. Some of the accolades that we've won in 2019 are shown on Page 21. And I'd just like to highlight one, and this is to do with our buildings, where 5 out of our 9 buildings have LEED awards. In fact, the LEED Platinum at Capitol building, the building that we bought at the end of last year, that was actually the first building in Sacramento to actually be awarded LEED, and we are very pleased to take that on. We also are seeking LEED certification for others of our buildings and at the moment, Penn is undergoing that certification. So we are working hard at these ESG practice. So now looking forward, and we can open up to those all-important questions. I think I'd like to just begin here by acknowledging that, clearly, the coronavirus is clearly something that is on all of our minds. Now it's the very last page, on Page 38 of this presentation, we have included a piece by our global economist that was put out yesterday. So it's part of the press, if you like, on what the coronavirus means for all of us investors, for investors and companies alike and I would just urge you to read it. Obviously, this has taken us a moment in time, and the situation is developing clearly, we take it seriously, both in terms of our staff here in Singapore, but also our business continuity plans for our buildings in America, which you can imagine from an insurance company are pretty tight. So I would urge you to have a look at that last page. So all in all, I would say that we see ourselves as a safe haven investment, on the right track. We've achieved no loss over these last years for the new decade. We've done that, and we're doing that through our basic principles of high-quality buildings, and we're sticking to the Trophy and Class A because as we've always said, that they provide strong income in up cycles and remain resilient during market turmoil. We've got to be able to ride through market economic volatility with a fortified portfolio. And you've seen those elements, the high occupancy, the weighted average lease expiry, the minimal expiries this year and indeed next year. And a focus and intensity on sustaining DPU. We now have through our [Audio Gap] REIT many, many more institutional investors, and that promotes stability. It also gives us the agility to grow and that will help us in terms of speed to market when we're seeking opportunities in what we all know to be the largest and deepest office market in the world. And of course, we will be paying special attention this year and beyond to growing responsibly with a strong focus on ESG, and this will help us grow in the future. I would like to say that it's very much for us business as usual. Safe haven investments riding through with a highly attractive yield in a low interest rate environment. I'll leave you with that thought. Thank you.

All right. Thank you, Jill. So let us now open up the floor for questions. So anybody who wants to be the first?

Okay. I got a question on your fair value loss for the year. I understand that it's brought down lastly by leasing cost and CapEx. My understanding is CapEx are capitalized. But could you just give some color on that front?

This is Robert here. Okay. The loss as a result, yes, you're right, spending on CapEx and leasing. Now just to give you a bit of color, the CapEx that was incurred this year is largely centered on 2 buildings as attributed to the lobby upgrade. So those spendings will not have kind of an immediate cash flow contribution to the properties. So yes, in a way, the valuation increase does not factor that into account. But perhaps later down the track as we make our buildings a bit more attractive, we should be able to fetch a decent rental down the track, and the valuation should adjust accordingly. So -- but if the spending is related to tenant incentives that we provide and leasing costs, that should be reflected in the revenue that we're going to drive out of it, and it should flow through the valuation. In this case, it's largely to do with the nonimmediate income-generating CapEx.

I see. Okay. But in terms of -- yes, I'm just wondering whether in terms of leasing costs, right, what's the percentage of leasing costs that you typically pay in the U.S., I understand it's much higher than here in Asia, but could you give us a sense?

Around 2%. No sorry...

Leasing costs, I think we...

Leasing costs.

Commissions?

Commissions?

Derek, you are talking about leasing costs/ commissions?

Sorry, it was commission.

Oh, commission?

Yes.

Maybe Jen, you can give some color on the leasing commissions in U.S.

Sure, no problem. So I'm not overly familiar with Singapore, but within the leasing market now will vary across the particular markets that we're in. But it's typically between 3 weeks per year. So typically, we get 6% gross revenue for the first year and then 3%.

Sorry, Jen. You need to speak up a bit.

Sorry. So it's -- typically, it is 6% per this gross -- or sorry, net revenue for the first year and then 3% thereafter, which works out to approximately 3 weeks for 1 year and then 1 week for the years thereafter.

I see. Okay. Just 2 more questions from me. Do you mind if you talk about the supply outlook for Atlanta and Washington. I mean, just wondering for Atlanta, specifically. The tenants, I think we're looking within the submarket itself. Are you seeing an absorption into the submarket, especially for, I think, between the 2 submarkets here in Atlanta and also for Washington, should we be worried about rental reversions going forward?

Sure. So I'm going to start with the Atlanta question. So within Atlanta, what we've seen within that particular market is really a flight to the cities. So more of an urbanization across the whole city. So that those submarkets that were more suburban in nature are now are losing absorption to the cities, and the cities would be -- would include the Buckhead as well as the Midtown Atlanta submarket which is where both of our buildings are. So our buildings are actually seeing an influx of people coming downtown. So much so that there has been several build-to-suit opportunities happening within the market where companies that were formally located in the suburbs, want to come into the city, and they're actually building their own buildings to be able to attract the best talent because the talent is really what's driving a lot of leasing decisions that are happening within actually across the -- all of the U.S. where it really wants to capture the millennial population, which is becoming more and more of an urbanized population, especially trying to capture the city -- sorry the employees coming out of Georgia Tech, which is one of the strongest universities within the country. So with that, we've actually seen very strong rental reversions across our properties within Peachtree, we see high single-digit, low double-digit reversions, and we've been seeing that for the last couple of years. So the demand is -- continues to be strong within Atlanta -- or sorry, within the urban centers of Atlanta, and we have a couple of buildings that we -- that are being built. However, a lot of them are being pre-let before actually coming online. So completing their certificate of occupancy. And we don't really compete directly with those ones. And the market rents that would -- that the developers are looking for about $5 to $10 higher than what we have for the properties. And again, with both our Midtown and our Buckhead locations, we really have some of the best-located buildings within the property. So we have seen strong leasing in both of those properties, the Buckhead property at Phipps, that's one that Manulife actually developed. And I wish, I had more floors of that building. It's constantly in demand, and it's 100% leased, same with Midtown, we've seen strong growth there and strong rent reversions. So that's the Atlanta market. Within the Washington, D.C. market. Now this one is more of a nuanced market, and that for the majority of properties across the U.S. Class A and Trophy are kind of lumped within the same bucket. In Washington, D.C., there is a distinction between Class A and Trophy and all of the buildings, the supply coming online within D.C. is being built to a Trophy quality. So these properties are -- would -- the rents would be about $20 higher than what we would be commanding at Penn. So we do not compete with those properties. We compete solidly within the Class A space. And again, this property, we don't have any space actually to lease. We've been fully leased. We've done very well with this property in keeping the rents where they are and basically getting the benefit of the rental escalations within the property.

I see. Okay. If I may, just one last question on the Michelson. Will we expect to see more of the leases when it comes to a reset close to market? Or do you think that Michelson can continue to command a premium?

So we still believe that the Michelson, well, it still is one of the top 3 buildings within the market. And there's definitely that premier place to be and is a lot of strong attributes going forward. It's the tallest building in the submarket. It's down the street from a plethora of amenities and food options. It has a 10,000 square-foot gym down the street. It's located on the 405, which is one of the most traversed highways in the U.S., that it sees more than 300,000 cars per day, which makes the signing opportunities of that building quite strong. As we've been saying, I guess, now for years that there is a -- we are expecting to see a 5% to 10% over rented for Michelson, and that would be a surprise to no one that comes out in the numbers for this particular year, we did have a very high role within the property. However, we were successful in being able to renew the majority of the tenants within there. Going forward, we don't have large roles to this extent for the next almost 7 years. So we do expect to see not all tenants, but some will have the market rent -- mark-to-market.

Maybe Jen, just add on to Derek's question on Michelson, and to give the rest of those on the call, some color on Michelson. I think for the current vacancy that we are seeing in Michelson, I think is good to share that we were quite close to inking a deal and then what happened, I think in the last quarter was that didn't come through. So maybe you can just give some color on that.

Yes. So within -- as I was mentioning that Michelson is one of the top buildings within the market. So it's obviously sought out by premier tenants who want to create or expand a foothold within the market. And that's to Carol's point exactly what we've been doing. We were negotiating. And actually, quite close with a large co-working provider and hesitant to name names, but it is the largest co-working provider and within that one, we actually made the active decision based on the troubles a particular company was having from a credit perspective to not go forward with the lease at this time, subject to us actually having space and them increasing the credit of the company, we would potentially look at that down the line, but we actively turned that negotiation off based on the credit of the company for that. So we continue to see strong interest within Michelson. We have a lot of tours and people understood, so confident we'll be able to lease it out. But unfortunately, that particular road we were going down, we decided did not have the wherewithal that meets with our credit requirements that we have across the portfolio. So we decided to walk away.

I'm sure you all can guess who is it, right? Okay. So Derek any more questions from your side.

We are good.

Okay. We have someone else. Next?

Su Tye, here, Maybank Kim Eng. Okay. So just a couple of questions from my side. First one, just understanding in terms of the top 3 clients -- top 3 tenants that you have in the portfolio, how are they doing? Second question is that cap rate is actually down at Figueroa and Phipps, and actually, what's driving that? Third question I have is the leases that are coming up, 2020 after the Plaza renewal. So what are the rates on these that you think you could achieve? And I think Jill mentioned earlier, that's my fourth question that Penn is undergoing certification for the ESG side. What other buildings are you possibly looking at certifying for ESG? And lastly, just on acquisitions.

Gosh, that's a bundle of questions. That's not 3 questions, but okay...

I'm going to start with some of those at the end, and then we'll work backwards. And maybe I'll invite Jen to us. On the ESG, yes. Obviously, we are looking at the other buildings and whether they can be Energy Star or LEED accredited. But it's going beyond that. We will be, this year, looking at all the buildings to see what other forms of ESG we can push on to obviously improve our sustainability. So it's not just LEED. But yes, we are looking at other properties. In terms of...

Sorry, I just wanted to give some color, just add on to what Jill has shared about Energy Star and LEED. In Singapore, I think we are valued into Green Mark. So you'll hear that this building is Green Mark, that building is Green Mark. In U.S., Green Mark kind of like is not, and so they look at what we call Energy Star. And Energy Star is given to only the top of the 25 percentile of the buildings in the entire U.S. So you must be in the quarter, 25%, top 25, then to be given the Energy Star.

No, no, no, that's a very good point, Carol. And the other thing is I think that it's quite interesting that we are getting the certification for Penn because remember, Penn is -- was built in 1964, and yet such an old building can achieve this certification. So I think old building both Singapore and Asian terms, I would hasten to it. But I just think it's quite an interesting factor. Moving on to acquisitions. I think, obviously, we had a tremendous year, last year we were $2.1 billion in AUM and $1.6 billion of weighted average in market cap. We would like, obviously, with our secure investor base, obviously, a very large proportion of our investor base these days is like institutions. Obviously, we would like to take advantage of all the circumstances to grow further. We, as ever, accretive acquisitions, right buildings, right time, there's no desperation to grow. It's -- we are looking all of the time. Jen is busy with our Head of U.S. Acquisitions, looking at properties all of the time. But it has to be the right thing. And particularly, I think given the background environment at the moment. But we're very confident. This is the largest, deepest market in the world. As I say, very low interest rates, and we mustn't give up everything, as I said, it is business as usual. So that's what I want to say for the moment on acquisitions. We can talk a bit more about that in some greater detail if you want. If you ask another question, but going back now to some of the other questions, maybe I might ask Jen to pick those up, although I'd be very happy to answer about the top 3 tenants. But anyway, I'll let Jen do it.

Sure. Thanks, Jill. So I'm going to continue to work backwards as well. So talking about the leases that we do have coming up in 2020. So to Jill's point earlier, like, it really is a stable year for us coming up. We don't have a large role happening within this -- in the year. And within the $5.2 million in gross rental income and the $4.8 million that we have remaining for the year by NLA, that really is a cross-section across all of our portfolios. It's -- sorry, all of our properties. It's not weighted towards one particular property. And for the -- for all of our properties with the exception of Michelson, we are expecting to see between that 5% to 10% under rented. So we expect to see that bump within the property -- or sorry, within the leases that we expect to be -- that we're working on renewals for right now for that. And then just moving to the top 10, the top 3 questions -- or sorry, top 3 tenants. So again, I'm happy -- I'm really happy with the diversification here. As you can on the very right-hand side of the chart, the percent of GRI, like our largest tenant is only 5.9% of the portfolio. So as we continue to grow, we do keep a strong eye on increasing the diversification of the tenant. So if there were -- was an issue with really anybody the wherewithal, the portfolio would be able to take it. In terms of the top 3, so William Carter is our top tenant. This is actually their headquarters. It's in the Buckhead building within Phipps. They've been a long time tenant of Manulife. So before they were actually in another property of us before the Phipps Tower was being built. And this is the -- one of the largest children's clothing companies in the world. So they own OshKosh, which you might know over in your side of the world, but they actually have Carter Stores, it's sold within our large department stores as well as stand-alone stores, and they've been doing -- they're not a public company, but they have been doing well. Obviously, the population within the U.S. is still growing, unlike some of the European and Japanese -- or Japan. So that one continues to go well there. And the other thing I would mention about this particular tenant is they are about -- I think we've said this before in press releases, but they're about 30% under rented. So if they were to come to us and talk to us about potentially giving space back, which they have not, we would welcomely take that back because I'd be able to get the bump from this tenant immediately. And as I said before, the demand in Atlanta is quite strong. For the TCW Group, this, again, is a large financial outfit based out of L.A., so this is in our 865 Figueroa building. They, again, have been a long-term tenant with us. So we've had them in the building for more than 20 years, and we've never had an issue in terms of paying rent or renewing the leases or whatnot. And their business is obviously focused towards wealth management, and we don't expect to see any sort of strains within that operator. It's a long time operator, long time standing in terms of with the clients. And then the third one is Kilpatrick Townsend. So this is a legal firm, again, headquartered in our Atlanta property within Midtown. This is a very large legal operation. They have operation -- they have offices all over the U.S. as well as in China and in Europe. So this particular tenant, we don't see having any sort of financial difficulties coming up.

Thank you, Jen. I'm just going to add to this. And we have -- both Jen and I have spent some considerable time, obviously, over the last week to 10 days, looking at our tenant list. And just thinking naturally and out of the box as to who possibly could be impacted longer term by, obviously, the current health issue, the coronavirus. And that was why I mentioned the domestically orientated element of our tenant base, and Jen's alluded to it there. I think, obviously, for children's apparel and children's goods makers, both Children's Place and -- actually it's the fourth largest in the list and William Carter, they do have businesses in Asia, manufacturing businesses, but they have spread all over Asia, it can be Bangladesh, Vietnam, et cetera. So again, I think we think that the risk really to these businesses is very low. And anyway, as Jen's already pointed out, for example, with William Carter, this is their headquarters, the oldest, most revered, I think, of the children's apparel makers and goods makers. And so we feel we're very strong indeed. And the same, obviously, for the other 2 that she's already mentioned. Carol, you wanted to add something else?

Oh, yes. No, I just wanted to -- I wasn't sure whether you guys have heard what Jen shared earlier about on Plaza, the lease that we have done earlier, just a couple of days ago. So I think for those of you who have been following us, you will know that about 100,000 square feet of Plaza will be expiring middle of this year. So out of which 41,000, which is close to half has been signed. But the remaining actually should be signed in the next couple of days or weeks, I hope. I think that's what we have been targeting. So we are quite confident that, that entire lot should be done. And I think -- so that question was also on how the new leases for, I think, 2020 in terms of the under-rented or not. So I think for Plaza, there is definitely going to be a positive rental reversion. I think we have shared like 70,000 square feet has been renewed just in January itself, and all those have registered positive rental reversion.

Yes.

Yes. Maybe you want to move on to the next question?

Yew Kiang here. Can I ask 2 questions?

Yes. Yes, yes.

Yes. So the first question relates to mostly on your acquisition front. I'm looking at the last 2 acquisitions that you've done, the Capitol in the range of 7% to 7.8% cap rate. But going forward, what should we be expecting? Would you still be looking at this kind of quality of assets? Or are you looking at something that is similar to the initial portfolio, given where your gearing is? And the second point is on your capital structure. Is there any intention to bring down the percentage of fixed rate, which is currently 95%, right?

Yes. Yes, yes, sure. So I'll just start on the first part on acquisitions. I mean, obviously, the cap rates you're quite right for last year for those acquisitions, and they were extremely attractive, accretive acquisitions, 3.3 and 2.3 accretion for those 2. Looking forward at what we can do further out. Obviously, I've mentioned in my looking forward piece that we've got quite a lot of flexibility now. And that is, of course, because our -- of where we stand in terms of our yield somewhere between 5.8% and 6%. So that is clearly going to -- when you do the math, it's going to give us considerably more options, either for single buildings or perhaps for something even more ambitious in the coming year. And we're looking obviously for more options. Somebody is typing loudly in the background, please don't, and let me first answer the question. But -- so that's really what we're looking at and all the same criteria as we've mentioned before, in terms of the locations, great parts in those locations, 'Live, Work, Play', occupancy, we're going to stick to our netting basically in terms of retaining strength in the portfolio. But we are looking at a number of different options. And again, taking advantage of the low interest rates. And at that point, I think what I might just segue into Robert to talk about fixed rates. And anything else you want to talk about on rates?

No, I think [Technical Difficulty] 95% hedge. These fixed interest rates do have some time to run. Yes. I mean, we have a refi coming up in July. We can take that into consideration, whether we want to maintain at 95% level or a tad bit lower, but as you're aware, I think, currently, the short rate is still trading higher than the longer rates. So you ask me today, will probably still make sense to fix a higher proportion of your interest costs. But yes, generally, the longer rate has settled down much lower compared to the start of this year. So I think at the start of this year is about 5-year swaps at about 160 plus. Today is back down to 140 range. Just to give a sense, the short rates are about 160, 170 at the moment. So to be decided, we'll come around to that in due course.

Vijay from RHB. Maybe can I ask 2 questions?

Vijay, you need to speak up a bit louder, a bit soft.

Is it better now?

Yes. A bit more louder.

I think I have some difficulty with my phone. Okay. I think I have just 2 questions. Firstly, on the operating performance. I think I noticed that Michelson's occupancy has dropped close to 6 percentage points this quarter. I mean, is this due to the Boardwalk, which is being completed? And what is the occupancy of Boardwalk now? And is this occupancy drop because of 1 tenant or a couple of tenants leaving this building? And what can we expect for this occupancy going forward?

So I can -- I'll take that one. So on Michelson, as I have stated before, it does have a lot of strong attributes that we obviously still believe it makes it highly attractive. So this is actually the result of 1 tenant. So what we've seen within the entire Orange County and more specifically the Irvine submarket is we've seen a lot of consolidation between locations, and we've also seen a move, and this is not actually specific to Irvine, but we've seen some companies as they come to the end of a 10-year lease, they're really looking to rightsize their space and really looking to decrease the footprint and decrease their real estate costs. So the -- across all of the occupants -- sorry, all the tenants that were up for renewal this year, most of them did renew in the same footprint. So it really speaks to the strength of the building. One tenant decided to shrink its size by half. And that's a tenant that decided to go -- they did go to Boardwalk. However, we still have a very strong occupancy. We still have a higher occupancy than Boardwalk, it is at 85% in that building as -- for those of you who don't know, so we are one of the top 3. Boardwalk is another one of the top 3 competitors, it came on line. So it was announced. It was being built in 2016 and it came online in 2017. Over the last 2.5 years, they've brought it up to -- sorry, to 85%. We do compete well with the property. We have a better location from the amenity standpoint, we have a better location from the -- obviously, the egress and ingress onto this, the 405 and the transportation of our building is much better and more prominent. We do have the tallest building within the market. However, when the tenant does decide to make a drastic shift in their footprint, they typically do move buildings because it's cheaper for them to build the space new than to try to chop their space in half in the existing footprint.

Okay, got it. I mean, if I may just ask, what's the asking rent of Boardwalk compared to Michelson and how different it is? I mean, are they actually much lower than your property?

No. So they're not. They're actually right on top of what -- or maybe like $1 to another rate on top of where we are asking for in terms of rates. However, because it is a new build, they are giving higher TI's than we are in higher more months of free rent.

Okay. Okay, got it. So do you think this occupancy, I mean, you can bring it back to the normal steady state of 95% maybe in this year or so? Is it possible...

We've actually seen -- yes, we've seen in this past quarter and the past 3 months, we've seen a significant uptick in the tours and the demand for space. And that's probably actually a function that we actually have space to show now, whereas previously, as a well-leased building, there's no room to put anybody. So yes, I'm confident that we would be able to move the needle on the occupancy and get it back to a more regular -- what you've been used to occupancy for the market.

Okay, got it. And again, on the Peachtree, I think there was a 4 percentage occupancy drop, although I note this has been brought down -- brought back to 99% in this January. Maybe can you just give some color on who was the tenant, who left? Or what was the reason? And who are the new tenants who are coming into this building?

Sure. So within Peachtree, that was a drop that probably only lasted -- well, it did last less than 30 days. So that really speaks to the strength and velocity of the Midtown market in Atlanta as a whole. So again, that was the result primarily of just 1 tenant. And it wasn't actually tenant that was leaving, it was a tenant that was more rightsizing their space. So they did have a giveback option, which they exercised as they rightsized their current space. So we got a floor back, and we leased it out almost immediately. So the floor we got back was coming out of a law firm and then we've relet it to a technology firm.

Okay, got it. And the rents are still better than what it was before, right? What it...

Yes, we're still -- so we saw a low double-digit rental reversion on that.

Any other questions?

This is Rachel from DBS. I think just now there was a question on the cap rate expansion. Just wondering whether you can give us some color why the cap rate expansion, especially in Figueroa building?

Sure. So I've said this before, but repeating here. Cap rates when you're looking -- so cap rate is your first year NOI divided by the valuation. And when you're looking at an office property that's being valued within the U.S., it's not really an appropriate or doesn't really capture everything that's happening within the property. So you can see from June to December for Figueroa, the cap rate actually widened by 30 bps. However, the price also went up by almost $8 million, which is kind of a disconnect. So it's a function of the fact that most of these properties, the primary way that it is valued is based on a 10-year cash flow model. So what's happening here is it's actually -- it's a nuance on how the models work, but it has to do with the vacancy assumptions that are being used within the first year NOI and that's what's actually creating -- it's more of an arbitrary difference between the 2. So the value is going up as the cap rate also going up. You really need to look at the 10-year cash flow as well as the discount rate that's being used to see if there's any volatility within that. So the building's worth more, however, the cap rate can be misleading.

The other question that I had was on the Exchange building. I just thought on the passing rents have kind of slightly weakened. I'm just wondering whether you could give us some color on that location?

Passing rents for the market? Repassing rents.

Yes, Rachel, you are talking about the passing rent for the market or for Exchange versus the market or...

The passing rent of Exchange.

You noted, you have come down from where?

Just slightly low, yes. Just wondering whether you could give us a color on that market. Is there any risk in the market?

From the costs on our slide and I think she is referring to the cost -- quarter-on-quarter slide that we shared.

Yes.

Okay. So that would be a market spend. Okay. So that would just be more of a quarterly nuance between the data. So there's a lot of reasons why you're going to see a fluctuation between the market rent for Class A buildings fluctuate. So it -- and quarter-on-quarter, it really is noise unless there is some sort of dramatic shift within the passing rents over that time. But we haven't seen anything major happening within the market that would pull down Class A rents, like we are still seeing strong rents within Exchange, we're still being able to push rents. Exchange was actually our strongest performer from a rent reversion standpoint this year. We do have -- there is actually, as I know, as I speak, we do have a competitive property next to us that has been struggling with some occupancy that might put some downward pressure on the overall market Class A rates that are being achieved, but we don't compete with that property. We have -- we're almost twice the size of the building in itself. And we have the commanding views of southern -- or sorry, the southern tip of Manhattan. So we haven't seen that reflected within our own leasing efforts in the building or the valuation.

Just to understand a bit more. How -- why is the building next to you is not really competing with your building? And how does your building's rent compare to the asking rents that you are asking?

So I guess see, what I would say is that the -- it is more -- if it's a lower rise building, so it doesn't have as many floors, about half the size. It's an older vintage as well than our property and it hasn't had a lot of money put into the property. So it doesn't really show well. Now, they've -- the management that -- the owner of the building has very recently put in -- is ongoing to put in a significant amount of capital to rephase the retail portion of this particular property, including most of their food uses within there. However, it doesn't have the same views that we have. It doesn't have the same presence that we have. It doesn't have the same management. And one of the things that we are really cognizant of is being able to continuously invest within our buildings to make sure that they do attract the top tenants and really have the prestige, the type of tenants that we're trying to attract hence, the large lobby renovation that we're almost ready to complete or is almost completed within Exchange. So between those reasons, that's really why we're able to command the higher rent here. And it's the -- the delta is not huge, but it's enough that we would stand out from the crowd.

I totally agree with absolutely everything that Jen has said. And actually, one of the divider pages towards the end of the presentation actually shows the water hunt. And I think you can see really clearly from that photograph. The 3 low-rise buildings to the left of our top-class building, looking at. And I think Jen's point about, our car park is up to the seventh floor. All our tenants are above that. They've got -- if you look at that, if you imagine putting a line across to the 3 buildings next door, which are the ones that she's referring to, our tenants have got really enviable views across the Manhattan, across to the Statue of Liberty to the right. This is an unsalable location in terms of its view and its prominence. And as Jen said, we are in a much better position. I'd also add that we look at all the different market data. And you can see some quite variable differences between what CoStar said is the market rate, which is about $42 and what some of the others like REITs are saying for the market rate, which is $45 for this area. And I can tell you that we are doing very, very well compared to the CoStar data that we show on our last 2 leases that we made in our Exchange building. We've done very, very well indeed. I just don't think there's any comparison. As Jen said, they've been struggling, we actually turned that building [Technical Difficulty] their buildings. And yes, as Jen said, so they're having to spend a large amount of money. We're keeping our's fresh with the lobby as well.

Any other questions?

Carol, it's [ Melvin ] here. Yes. Okay. And I got a question for Jen. This market, particularly Slide 30, I know quarter-to-quarter, there is fluctuation, just absorptions. But just noticed that compared to the previous quarter's slides, net absorption has gotten more negative for Hudson Waterfront in Washington, D.C. and for Washington D.C. the 12-month rental growth has actually gone from minus 0.2 to minus 1.8. Just wondering, generally, your thoughts on what's happening in the market. And on the rents for Washington, D.C., if the new Trophy buildings are coming onboard with higher rents, why is the market rent falling?

Yes. No, that's very good question. So I'm going to start with D.C. The first thing I'm going to say is that the 12-month rent growth is actually not just for Class A, that is for the whole market. So Class A, B, C and everything there. And what we've been -- what we've really been seeing here within Washington. And you're right, the absorption has not been as strong as the other markets. And Washington really is a countercyclical market that meaning -- that means when typically the economy does not as well, people rush into Washington and when it goes really well, they kind of rush out of that. So there is a supply and demand dynamic happening here. So the Trophy buildings that are being brought online, they are emptying out like it's not -- it's -- I'm going to think of the right analogy for this, but there -- the tenants that are moving into those Trophy buildings are vacating other properties. And typically, what they're doing is they are taking a more efficient floor plate. So they might be moving out of 100,000 square foot of Class A, moving into a Trophy, but they move into 70,000 square feet. So as soon as these buildings come online and that move actually happens, you're going to see a negative absorption within the market on that. So that's why you're seeing the Class A absorption being a little bit soft here as well as the Class A and Trophy within these metrics are in the same bucket. And the same with the -- in terms of the rent growth, like I guess, we with the Trophy does have an asking rate, that's higher, it's not necessarily where they're actually striking it. And I would say that the B and C properties within here as well, like Washington really is a Class A and Trophy market, it really caters to the top end of the professional spectrum of the world. So the Bs and Cs would have a little bit more of an impact here in terms of driving the rent down that's not to say that we're seeing phenomenal growth in Class A and Trophy rents within Washington, we're not. It's relatively steady from what we've seen in terms of the demand-supply, that dynamic here.

And in terms of the Hudson Waterfront?

And then the other one, sorry, Hudson. Yes, so this one is a little bit different in that it's -- so Jersey City is part of Hudson Waterfront. Hudson Waterfront is actually a much larger submarket that captures product that is not comparable really to the Jersey City market, especially not to the tenant exchange. So while we list the market here. And the same thing is for Meadowlands, and you can see that we have these as footnoted, it doesn't really talk to what's actually happening in the smaller subset of Jersey City. So there is a little bit more noise happening here in terms of the net absorption here for the Class A. It's not really indicative of what's happening on the Waterfront, which would be the subset of that. So we do list it, but I -- we pay more closely attention to what our competitors around us are actually doing and not what the greater submarket is doing because we have seen, again, an urbanization, people moving to the cores of the cities within New Jersey. And Jersey City, is obviously, within New Jersey. The 12-month rent growth, we are seeing stronger rent growth with that -- within our property. However, this, again, the rent growth numbers are for all asset classes and not just Class A.

In terms of rental growth for Exchange into the next -- sorry, this year and next year, given the low supply pressures in Manhattan you see flat-lining from here? Or is it some risk in terms of decline, let's say, not this year but the year after?

So we don't -- so from a stand -- like a Jersey City market standpoint, we would expect to see a moderate level of rent increase. We don't really compete with Manhattan. And although we are right across the river, it's different dynamics that are happening there. So for instance, the market within Manhattan, the Midtown and Midtown South, which is some of the most expensive real estate within this -- within actually the entire country when it comes to rents. We don't directly compete with that, we have a little bit more volatility within those rents. There's a lot of supply happening within Manhattan, Manhattan South, obviously I'm not sure if everyone's familiar with Hudson Yards, which is a large development product -- project that's happening on the west side of Manhattan, which is almost fully built at the moment. So we actually kind of would see us drafting off the increases in absorption that would be happening within the Hudson Yards and the Midtown and Midtown South market. So they're linked, but it's not a one-for-one step when it comes to the market rent increases and just because the market rent might be a little bit soft in Manhattan, doesn't mean that it would be in Jersey, to a large extent. We still provide good value.

Sure. And in terms of acquisitions, the things some of your friendly peers are pushing the technology angle on just running the thoughts on that. And you're looking to maybe expand into Portland, San Diego or Raleigh in the near term?

So we are going to be measured in our approach, as Jill mentioned, for the acquisitions and really focus on increasing the diversification. I don't want to go in and completely try to skew the weight of where we are from a diversification standpoint. The markets that you mentioned are definitely on our radar, but not necessarily just because they are a tech market. We are seeing strong population growth within those markets. They have strong universities, which back the cities as well. I would just be hesitant going full into tech. Especially, like, obviously, we've had the tech com -- or the dot-com bubble 20 years ago for those of us who do remember that as well as there is more of a looming sense of regulation coming for these particular -- or this particular segment. This is an election year and the democratic, they're actually going through the primaries right now to figure out who's going to be the democratic candidate. But the one, there are a couple that are really strong in their messaging and really trying to -- not sure if they would break the tech companies, but they would highly -- or implement highly -- higher regulations on their operations and might make them break up for that. So I don't -- I definitely do not want to go all in on a sector that's really becoming a laser focus of political candidates to -- I don't want to say rock the sector, but they could potentially have some larger impacts on the top players within the market. So focus on diversification, I'd say.

So I have been actively looking at our company, but lately, but I may have missed this, but has there been any updates in terms of the tax situation in the final holding?

Tax. No. No, nothing at all, rather sadly. So we are just still waiting for wherever the tax act is, and nobody has signed it as yet. So we're just waiting, so just status quo.

So there's no update in terms of time lines, I think it was mid...

No. No. It's -- we had understood at the end of last year -- towards the end of last year that it was out of the inbox somewhere in the government's cabin's, but it's floating around still and it's not signed. So it's as simple as that. So we literally -- our tax people are on it, our external people, our internal people and obviously, we are ready, but it's impossible. I mean, we could be happy now. It's clear, see we have no idea. Unfortunately, it's as simple as that.

Is there a risk that you never get signed this year because of election and all that sort of stuff?

We're not supposed to. We can never say never on these things, but certainly, the indication is obviously, it's gone through. And we would expect to get signed at some point soon.

[indiscernible] discussed this taxing many times before.

Yes, I think it is just frustrating, but never mind.

Any last questions or anything? Okay. I think with that, we will end the call. And I thank you, everyone, for calling in. And if you've got any further questions, please feel free to drop us an e-mail or just give me a call. Thank you. Bye.

Bye-bye.