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

Hi, a very good morning. Welcome to Manulife One Half 2021 financial results. This is Carol, the Chief IR and Capital Markets Officer. So for this morning, you have seen us releasing our results before market opened. There's a couple of attachments, including our valuation, financial statements and also the independent market report on the market that we have. So it's unfortunate that we can't get to meet all of you for today because that was definitely the plan that we had. So with all the changes with the COVID variants and all, I think it's sad that we can't do a physical briefing. But now that we have kind of got our vaccine passport of sorts for those who can meet and if you can't and for those who are not vaccinated, happy to meet you guys at a coffee shop. So I'll definitely be reaching out to catch up with some of you once we can do that in a couple of weeks. So for today, what we will do is we will be getting our CEO, Ms. Jill Smith, to share the presentation that we have. That should take about 15, 20 minutes, after which, we will proceed to Q&A. [Operator Instructions] So with that, I'll just pass it on to Jill.

Thank you, Carol. Good morning, everybody. Well, year-on-year, we've borne the full brunt of the pandemic and we have weathered the storm. MUST occupancy stands at 91.7%, and we have slowed the rate of decline to almost nothing. We're still way above the market Class A average of 80.9%. We have had strong rental collections at 99%. And we've executed 6.5% of the portfolio in terms of leases by NLA, that's 305,000 square feet to the end of June and more since. Our weighted average lease expiry remains at 5.3 years. We've also enjoyed notable successes in sustainability such as the 5-star GRESB obtained and the first sustainability-linked loan for MUST. But whilst we will pay out 100% of the USD 0.027 per unit in DPU, there is a decrease of 11.5% year-on-year. And so first and foremost, what you want to know is what caused this decrease, and even more importantly, what we have done and we are doing about it. Year-on-year, this DPU decline was due to 3 main elements: lower rental, lower car park income and rental abatements. Now because our occupancy fell from 96.2% to 91.7% year-on-year, rental income has declined. Three buildings were the main culprits. Michelson, which declined by -- from 90.1% to 80.4%, and Centerpointe and Capital were also hurt. Centerpointe's tenant renewed at a lower market rate, that was the main reason there. However, when we look at Michelson, we do have reason to believe that occupancy will increase in the third quarter to 87%. The second largest hit came from car parking. During the pandemic, lockdown and working from home reduced our car parking income very dramatically. You can see that it was down to $3.6 million in the first half. But in the second half, as we still expect tenants to return to the office, some 60% of them, obviously, we expect car parking income to also continue to recover. And indeed, it has already recovered this year from last year. And by the end of this year, we expect it to increase even further possibly to 3/4 of the prepandemic level. But of course, I would caution that, that will depend on Delta. The third element was the rental abatements. And there, we saw a 2.4% due to 1 retail tenant, 1.7% to 2.4%, and then F&B tenants. The retail tenant was due to a contract renewal. It was part -- the rental abatement was part of that. Perhaps the good news is that F&Bs are opening and we see the retail -- the relief rather in terms of rental abatements tailing off. But again, I would say to you, particularly in F&B, although it's only 1% of our portfolio, the Delta resurgence in the pandemic may have an impact. Of course, our DPU decline was offset -- partially offset through the reversal of provisions for the expected credit loss, and I think you can see the details on the presentation. On the next page, you can see in the first half of 2021 quite naturally we were still battling to return to the pre-COVID-19 levels in our NPI. Of course, the tough times in the past year had to be seen in NPI for obvious reasons. And indeed, the decline was the same reasons as for the DPU decrease. So how are we reversing the situation that will lead to higher occupancy and ultimately to better NPI and DPU. It's all about the leasing. And here you can see on this page, on Page 8, that we have been reducing the expiries. We've been renewing early renewals in the first half and new leasing. Indeed, in the first half, we achieved 305,000 square feet of leasing, 6.5% by NLA, as I've already said. And we did that with rental reversions of plus 1.3%. We do expect for the second half of the year, rental reversions to be still in single digits. So you can see that overall, we have reduced our expiries from the beginning of the year, which was 5.7% to 2.3% now. And due to our forward renewals for 2022, which I know you will be interested in, we have reduced from 18.1% to 13.1% by net -- by NLA. I think it's worth mentioning that in terms of subleasing, we have a really relatively low level at 3.2%. And indeed, in some buildings, for example, in the Exchange building, some subleasing has actually been taken off the market by tenants as business has picked up and I think this demonstrates the overall strength of our tenant base. The good news that I've already alluded to is that our leasing momentum is actually accelerating. It's accelerating quite fast into the second half, i.e., the third quarter. Indeed, 127,000 square feet is expected to sign in the third quarter. And I can tell you that we have been concluding and signing leases in the last few days that amount to 94,000 square feet of that 127,000 square feet. So I think that is a pretty good achievement and I think that gives us good cause for optimism. It is important to note that the renewals include forward renewals and that is derisking the future. And again, I think that's a good thing. Better still, of course, is signing new leases. And that's what starts to increase occupancy and ultimately flows through to DPU. So it's good to see that our expectation for the third quarter, that 127,000 square feet, has up to 18% of new leases in it. I have to say that we have good reason to believe in our better leasing both over the last weeks since the end of the quarter and going forward. We have obviously intensified our leasing efforts. And you can see here on Page 10 what that composes of. Greater leasing flexibility. So we've accepted shorter-term leases. We've also provided attractive concessions for longer leases. We've proactively signed forward renewals. We've been refreshing our third-party leasing agents, and we've embarked on property rebranding. A whole plethora of new digital tools have increased the online traffic, whether digital tours, photo gallery, whatever happens to be in that digital world. And that, of course, ultimately leads, and as you can see, is leading to more physical tours. And that, of course, as [ my color ] today, we hope translates and indeed is translating into leasing conclusions. In the market, on Page 11, behind our leasing efforts, how is the leasing market doing in general? Well, again, this is encouraging for us because office leasing in the U.S. has or is beginning to stabilize amid the U.S. reopening. And here, we can see some of the supporting facts. So for example, the U.S. leasing has rebounded by 28.7% from 1Q to 2Q 2021. There have also been longer leases signed so that previous quarter, 7.1 years, and now 7.4 years for the average. And I think there has been a great deal of talk about shorter leases. And indeed, we have been willing to provide those ourselves. That was to give tenants breathing space while they try to cope and decide on the future given the pandemic. But I think, as I say, this increase from 7.1 years to 7.4 years is a really very encouraging sign. We've also seen stable average market asking rents, plus 1% quarter-on-quarter. And in the second quarter, 2021 for Class A, net effective rent, NER is up 5.2%. I'm going to say another -- something else about this in a second. Of course, one of the things is the cost of tenant improvements and free rent has and is still high in the U.S. But that has started to moderate in the second quarter, and we'll see where that goes for the rest of the year. And I say that because NER is, although it's better quarter-on-quarter, it is still well below the pre-COVID level. But overall, I think we are seeing a very good evidence, as I say, that mid -- the U.S. reopening that office leasing is improving. The background is improving. We like to do a checkup with you on Page 12 on supply levels and rent forecasts. In terms of supply, supply, I think, is very, very limited. It hasn't really changed for us in terms of our locations. If we look here in Atlanta, in Buckhead, first of all, a building that had actually -- the space is being taken out of the ground. They were not going to build it. They managed to find for a new build a basic client, 28% for their building. And so that has started at 340,000 square feet. But we think that, that is going to be at a very good rental. So actually, that could provide some -- draw some interest to our area. And as I say, it's not going to be delivered until 2022. And of course, in our building in Buckhead at Atlanta, we have a very high occupancy rate. In Midtown Atlanta, the 679,000 square feet delivered this year is actually already 100% full. So actually, there is limited -- very, very limited supply now, obviously, in Atlanta and particularly in our area. In Washington, D.C., the supply that's on offer is Trophy. We are obviously a Class A and so that doesn't affect us. And after this Washington supply dries up, there really is very little. So it's going to be very interesting to see how there is a sort of supply crunch perhaps in 2022. In terms of the rental forecasts, I think these have been moving quite fast. And we can see overall that MUST's markets projected 12-month rent forecast has actually -- although it's still negative, it has declined from 2.5% projected in April 2021 to 1.2%. So we do believe that this is going in the right direction. Clearly, obviously, the Delta could be a setback. But we know that companies are busy deciding on their space for the rest of 2021, and more importantly, into 2022 and even 2023. And so we believe that there is still -- there's good reason to believe that there will be some rental -- pressure on rentals and that will be in a positive sense. We just show on Page 13 that we have a very, very diversified tenant base. Our top 10 tenants are majority headquarters, listed government companies. Many of our top companies are finance and legal paying top dollars and they served us very well in the pandemic. However, as we've indicated in the last few quarters, we want to go up a gear and we want to go into higher-growth markets, and I'm going to talk about that in a minute's time. On our financial performance, obviously, we continue with our proactive capital management, it's paid off. All our refinancing for 2021 is concluded with savings. Weighted average interest rate down from 3.18% to 2.99%. And that's -- so that's great. Now although -- I just want to mention on gearing, although our appraisals were slightly lower and we are paying higher TIs and free rent, which I've mentioned, and we're doing all of this leasing, which is at these higher TIs and free rent, our gearing, I believe, is really very stable at 41.6%. So really barely moved since the end of last year. And also let's not forget that in capital management, also the team is holding down costs such as CapEx as much as possible. On Page 16, I referenced valuations down 1.1% at this half year. Some valuations have actually increased, reflecting some better data. But some have lost ground, some more than others due to particular aspects of those properties at this time. But I think as we've seen that these valuations, at accretive valuations, we saw a relatively high level last year for obvious reasons due to the pandemic. And clearly, we're seeing this tailing off as well in terms of the decrease. So it will be interesting to see where we are by the end of the year. We have a strong balance sheet, Page 17. I think that's just to note. And I'd like to move on to ESG. Over the past years, we've all come to recognize the importance of ESG and it has to be integral to everything that we do to ensure a sustainable future. So despite a pandemic, in areas such as environment, we have made numerous achievements and we've met various targets -- that we've set various targets. In environmental, we have been leading the way, if you like, with our first sustainability-linked loan. And also we have achieved in terms of GRESB, 5-star rating. We were 4 out of 15 of U.S. REITs in this area. In terms of our key targets for environment, we are aiming for net zero by 2050, reducing our 80% of our greenhouse gas submissions by 2050 and also intend to achieve 100% green buildings for MUST portfolio by 2030. In terms of government -- governance, we have achievements in terms of our 100% of our employees, pay is linked to MUST sustainability performance. That's important. And also in our targets, we are adopting frameworks and benchmarks as listed here, such as Carbon Disclosure Project, CDP, and also TCFD. As regards social, well, we believe that we have made quite a few achievements even during the pandemic. We did it, we have nurtured stakeholders and communities. First of all, in terms of those achievements, you can see that we have met with and talked with some 1,700 analysts, media and investors for fiscal year 2020. And again, you can see a picture of us, as we know, in slightly better times when we were all able to meet at the beginning of this year for the results. We've also achieved in terms of our staff, we have been very keen to make sure that every single one of our staff members understands and have some inkling of ESG. And so 100% of the employees have received a 1-day training in the second quarter. And of course, we have continued to support local communities, social enterprises, the socially sourced corporate gifts and events. And in addition to that, of course, we have in the pandemic been applying digital strategies to engage stakeholders. So for example, we are going to be engaging very soon through LinkedIn and also through other thought leadership forums and you should watch out for the opportunity to join those in the next few months. So looking forward, we come to the future. Well, who has the crystal ball in terms of the U.S. Obviously, on the back of fantastic vaccination success in America, they may feel it's not enough yet, and that's fair enough, but it has been a great success. It enabled the U.S. to open and to get back to business. All the states are open and are expected to remain open despite the Delta resurgence. 58% of U.S. population over the age of 12 is fully vaccinated and 68% received at least 1 dose. These, of course, statistics change every day and for the better and that is encouraging. But there is concern. And to carve the spike in the Delta variant, in particular, states and cities are starting to introduce, and I think this is just good reason, things like vaccine passes and masks. Now this current resurgence will, of course, run its sad course, but people will return to work. I think it's also very, very encouraging, and certainly we expect this to continue, that there has been a very strong economic recovery in the U.S. We've seen these great GDP figures again for the second quarter, plus 6.5% led by consumer spending and government stimulus. The government continues to provide support and is out there almost daily talking about new support such as the $1 trillion infrastructure stimulus package that has been agreed on bipartisan terms. For the rest of the year, for the whole year, GDP forecast is plus 7% and who wouldn't want that. That's a really enormous number for this leading economy of the world. We've also, of course, seen other positive information recently. The positive unemployment trend continues. July numbers, and of course, there were elements of the surge in coronavirus baked into those July unemployment, was 5.4% down from December 6.7% figure. So that is good. Against that, of course, over recent weeks, there has been talk of higher inflation. And then actually, last week, people were talking about stagflation. So which should we worry about? Well, what we do know is that the Fed confirms its intention to keep interest rates low until at least late 2022. And I think that's what we need to keep hold of right now rather than concentrate on inflation or stagflation or whatever it's going to be. That is most important and that, of course, is key to our refinancing next year. Overall, the progress in the economy underpins the optimism that we have for the second half and even more importantly into 2022. So what about office itself, what's our view for the second half in 2022? Well, I think we need to just stand and recap for a second. Prior to the pandemic, 54% of workers in America were eligible to work from home. Recent surveys have shown that 74% of business plans to bring back its workers, whether it's from September, whether it's October or whether it's January next year. So office is still relevant. The federal government, of course, is leading the way with getting workers back into the office. Obviously, the Delta variant poses uncertainty. And as I've just pointed out, some companies could delay their reopening. But I think, again, at the back end of all of this, we have to recall that as we move into 2022 and past COVID, the U.S. economy continues to grow. And central to that in terms of that growth is office-using industries, which are driving future U.S. jobs gains. And so as that increases, so that will mean that there will be a greater need for office. The office may be different. It will be different. It's probably going to be the hybrid model. And is that all bad, no, because the hybrid model probably means that certainly in the first instance you need more space, not least for social distancing. And what's happening in our buildings? Well, all our 9 buildings remain open. Thirteen out of our 15 F&Bs open, I mentioned F&Bs earlier and the reason that we feel more optimistic that there'll be fewer rebates in the second half. And again, based on our internal surveys conducted this last June, we expect occupancy to reach 60% from September and higher we expect at the end of the year and certainly into the new year. So that is encouraging. And here, you can see a few of our tenants, our major tenants, who have made statements about the future and these are right up to date. So to finish, as I said, what are we doing to move MUST forward? Well, first of all, we are reaffirming our constants. The constants are that U.S. office remains core to MUST portfolio. That scale matters, we absolutely must grow and we are going to grow. At the back, we have our strong sponsor support from Manulife. And of course, we are obviously focusing on superior total returns. We are strengthening performance by our intensified leasing. More, more, more. We're further sharpening our capital management, focusing on essential spending and maintaining our gearing. The big issue, as I've already alluded to, is that this is a tenant market and this has led to higher leasing costs. So in order to try and rectify that, we are exploring numerous, a variety of opportunities to reduce that cash flow variability. So what might those be? Well, those are in the third column here of seizing growth imperative because out of uncertainty, there is always opportunity. Now we have said to you before that we are gearing up, it's going up a gear and we want to change. And when we get the opportunity to acquire accretively in office, we are looking for the magnet cities, the knowledge economy, the technology companies, the health care companies. Those are the sorts of tenants in locations of high growth that we've been targeting, and we continue to start to target. But we are also looking at different growth sectors as well. And as part of this, we are exploring, again, we've said this before, joint ventures, M&A, capital recycling for growth. So that could include disposition. And as part of this, we are working with parties internally like acquisitions and our sponsor, but also externally with experts and advisers. We are looking at all types of office that give us and propel us forward, and we're also looking beyond that to other sectors. Thank you.

Thank you, Jill. Thank you for the comprehensive presentation. So now we have come to the Q&A portion. And I think just to share who else is on the line joining us today. So from New York, we have our Chief Investment Officer, Mr. Patrick Browne. He's joining us late in his night to take the questions and answer. And we also have with us in Singapore side, our CFO, Chief Financial Officer, Mr. Robert Wong. So I have a couple of questions that really come in. So I'm just going to kick off the Q&A.

So the first question that we have is, could you give more color on the occupancy decline of each property and give some color -- even some clearer details on the rough breakdown how each of them were caused by? Is it due to closure, COVID or downsizing? So maybe, Pat, you can take the first question.

Yes, sure. Thanks, Carol, and thanks for joining, everybody. So I think the question, if I understand correctly, is geared towards sort of year-over-year declines as opposed to what we've experienced during the first half alone. And the decline year-over-year really stems from a few properties. First, I would say is Michelson, which is one that we've highlighted to you all, both on past calls and again tonight. And that's due to the departure of 2 tenants that we've discussed in the past, Bryan Cave and LA Fitness giving back space. The next building is -- so that went from 90%, 90.1% occupied to roughly 80% occupied. The next one is Peachtree, which last year was 98.3% is now 90.4%, and that's due to -- mostly due to the departure of 1 tenant, IDI, which was 45,000-square foot tenant. But there are also a few smaller tenants here or there that departed as well and resulted in the vacancy drop. And the next tenant -- the next building is Penn, which we actually experienced a decline earlier -- just this second quarter because of a tenant left, [ Oath ]. And so that brought that building from 99% -- or 100% last year to about 90% -- just under 94% now. And the last building -- or the 2 more buildings, I'm sorry, that resulted in would be Centerpointe, which went from 98.7% to 91.6% year-over-year. And this was due to 1 tenant that left due to -- actually, it's the only tenant that we've lost this year due to COVID and that will tie into the answer to the next question and a few smaller tenants. And then the last building is 400 Capitol, which has gone from 94.1% to 85.4%. And that is due -- primarily due to the departure of big legal tenant, Kronick Moskovitz, which relocated. So those are the main drivers of the year-over-year occupancy declines. And with regards to the why -- or the rationale for these tenants not renewing, the vast majority of it is just standard business decisions. It's corporate relocations, reshuffling of offices and combining into different offices. Like Kronick, the tenant that I referenced that 400 Capitol moved from 400 Capitol to a suburban location. So there's a number of things like that. The only tenant that we can highlight to this year is the 1 that I already mentioned at Centerpointe, the American Society of Cataracts, I believe. And they decided earlier this year that they were just going to move to a work-from-home model and they're really the only tenant in the portfolio this year that has cited COVID as an issue. Everybody else is sort of standard business decisions that is just the normal shuffle of corporate life cycles.

All right. Thanks, Pat. And I think the next question, I think we have a couple of questions on Michelson. So maybe I would just ask on Michelson itself. So regarding Michelson, when do you expect the 87% to be hit? And which sector is the tenant from? And what are the rents that you are signing the new tenant? And any other color on the rest of the vacancy in Michelson and how fast we would bring that up to a higher level?

Yes. So what I would say about Michelson and it's funny because if you guys ever remember, if you were on this call previously earlier this year we cited Michelson as an interesting opportunity. Obviously, unpleasant to experience a big decline in occupancy, but we also viewed it as opportunity because we're sort of the best game in town right now for any tenant that want to be in a Class A space because our competitors are full. And so it presented a little bit of an opportunity for us. And unfortunately, we're in a very, very tenant-friendly market, as Jill alluded to. So not the best time to have space, but at the same time, we're the best game in town. So we do have a number of leases in the pipeline, some of which are signed post quarter end and some of which we expect to be signed very shortly that we would -- that would bring the occupancy of the building from 80% to 87%. And one of these tenants that we're not -- not signed with yet, and I can't give too much information on it because it's a very sensitive topic for them, but they would be a full floor tenant, which is a big win for us in this environment. So about 43,000 square feet of leasing in the pipeline, including a full floor tenant that we hope to get done before the end of the third quarter that will bring the occupancy to 87%. In terms of rents, we've actually done pretty well on like a face rate perspective where we've held the face rent where we believe market is or as close to pre-COVID and that's in, on an annualized basis, in the high 40s, call it, $48, $49 per square foot per year, which is fairly consistent with where things were pre-COVID. But one of the things that we've also highlighted to you all in the past is that of all of our buildings that we felt we may experience where we're above market is Michelson and it was probably the one where we're prone to potential rent reversion or most prone to negative rent reversion. And so while we have had positive rent reversion on the whole across the portfolio, Michelson is sort of the outlier in that rent reversion for some of the leases that we got done just on a face rent basis is down for some of them between 3% and around 10% on a rent-reverting basis at Michelson. But given where in-place rents were relative to market, this isn't a huge surprise. And the last thing I would just touch on is that net effect of rents, as Jill alluded to, are down. And so we're doing our best to increase occupancy and drive the market. And we feel that with each lease that we sign at a property like Michelson, we increase the odds that we'll see better economics on the next lease that comes across the desk. So net effective rents at Michelson are below what we would hope to achieve pre-COVID, but we're working hard to fill the remaining 13% of the building. We're working as hard as we can to get that done as quickly as we possibly can. I can't give a time line as to when that will be, but all I can say is we're hopeful.

Okay. I'm going to give Pat a break for a while. Just a couple of questions on leasing itself. We'll come back to Pat. But maybe just moving on to Robert. So Robert, I think there's a question asking about the NPI itself. So why has the Plaza's NPI increased by 27% despite a drop in occupancy of about 2%?

Right. Yes, that has to do with the reversal of a provision for credit loss that Jill mentioned in the initial slides. This is for retail tenants where we make provisions in the second half of last year. And since they paid out, we did a reversal of that. So there's a distortion -- a bit of a distortion when you compare last year result of this building and first half. And just to add on, as part of the deal for them to pay out their arrears is that we also provide abatement, which we have also indicated in a slide to them. So there's a net-net kind of offset.

Okay. Thanks, Robert. And moving back to leasing itself. Pat, what is the expected rental reversion for the rest of the year? And also what is the actual reversion for 2Q alone? And I guess the last part of the leasing is could you give a bit more color on the leasing activities and overall I think in the markets that we are in?

Yes. So rent reversion for the year, we continue to feel that it's going to be flat to modestly positive. We -- so far through this year, we've seen 1.3% positive rent reversion and 1 lease weighs that down. We did a 1-year as-is renewal with 1 tenant that weighs that down. If we exclude that particular tenant from the calculation, we have a positive rent reversion of 3.3%. And this is consistent with the messaging that I think we've provided previously and how we feel that our current in-place rents across the portfolio for the most part with the exception of Michelson, which I've already touched on, are modestly below market rents. So we think flat to modestly positive on a rent reversion perspective moving forward is going to be the game plan. And -- so Carol, if you could just start -- what's the next question again? I'm sorry, what was the next one.

I think the leasing activities in the market and the 2Q's rental reversion.

Oh, the 2Q rent reversion. Yes, 2Q rev reversion, that was the one I knew I had to answer. So 2Q rent reversion was -- 2Q alone was minus 3.7%. And the reason for that is we signed -- the 2 leases that I referenced at Michelson that had a negative 3% and a negative 10-ish percent rent reversion sort of weighed that down to negative 3.7% in 2Q. But as I referenced for the year, we're at positive 1.3%. And if you exclude the big lease that I discussed earlier, a positive 3.3% for the year of leases that we've actually inked. And then in terms of just market activity broadly, it's still -- we're encouraged by activity -- like some of the stats that we provided in the presentation that Jill walked you through a little bit is that there's definitely an increase in activity in the market. There are more tenants touring, there are more proposals being issued and we're direct beneficiaries of that across our portfolio on the whole. It's definitely not as robust as pre-COVID levels and renewals are still sort of dominating the leasing volume. But we're seeing more groups willing to sign 5-, 7-, 10-year leases across the board at where we have proposals being traded in all of our markets. And we're just seeing more activity. So it's been slow. It's definitely not back to pre-COVID levels, but sublease states that's being added to the market is declining, the rate of vacancy increases is declining. And we're just generally seeing more positive activity across the board.

Thank you, Pat. We have a question from Credit Suisse. Could you share more color on the 94,000 square feet signed? Which buildings do we see the improvement in occupancy? What sectors they belong to? And I think for Michelson, I think you really answered that because there was -- okay, sorry, still for Michelson, when should we expect the renting for Michelson to commence? Is it going to be this year or next year? Reversions, what are the reversions going to look like, I think that has also been answered. So I think mainly on -- and then the last 1 is the cap rate for Exchange and Centerpointe why the cap rate increase?

All right. So I'll try my best to -- yes, you'll have to guide me back if I don't cover everything. But the first thing is the question about the leasing that we've inked post quarter end that Jill alluded to. And if you look at the presentation, I think we say that we expect to sign or have signed 127,000 since 30 June. And I think Jill referenced 94,000, but it's actually 69,000, but we still feel good that we're going to get to 94,000 and beyond that, to be honest, to 127,000 that we've referenced to you. And so we've signed 69,000 square feet of leasing since 30 June. This is -- there was 1 new lease at Peachtree of just under 10,000 square feet. We did a renewal at Peachtree with a 14,000-square foot tenant. And we just inked a forward renewal at Phipps for 31,000 square feet that extends the tenant out an additional 11 years and improved the WALE. So that was a good win for us. So other than those -- so -- and then we did a renewal at 10 Exchange, excuse me, and we did a renewal at Centerpointe. So those are the beneficiaries of the leasing post quarter end and that 69,000 square feet. And we still have about 57,000 or 58,000 square feet of leasing that we're confident we'll get done. I've talked about Michelson already, which we know we do have a new lease that we're negotiating with a prominent tenant at Capitol that we hope gets done. It's a little under 10,000 square feet, and we have a new lease at 10 Exchange that we're actively negotiating right now and we're hopeful to get done. That is also in the plus or minus 10,000-square foot range. So that's the summary of sort of the leasing pipeline at the moment and what we've actually signed post quarter end. So Carol, I just stood off a lot. So if you could either tell me if anything I missed or what the next question is in the queue.

Yes. Sorry, are you able to give some color where these tenants are from, in which sectors they are from. Just group them like together. I think they are from real estate...

Yes. We have some real estate tenants. We have some insurance tenants. We do have a health tech tenant. We've got a tenant in the logistics sector. We've got some accounting firms. It's a wide range is what I would say. There's no sort of -- it's not dominated by any one sort of industry is what I would say. It's a diverse range. It's consistent with the makeup of our existing portfolio.

Okay. And I think there was a question on Michelson. It's great news that it's going to be creeping up to 87% for the occupancy, but when will the money start coming in?

Yes. This is most likely going to be at 2022.

Okay. Do you want to give a bit more color? Is it at first half? Second half?

It's a mix. But it's -- there's a few tenants in the mix and they're most likely going to be signing in third quarter. And when you sign, you still have a bit of time before your lease actually commences and you take occupancy. So then you're looking at sort of fourth quarter, early Q1 2022 sort of occupancy start, particularly for the big tenants that we've referenced. And there's going to be TIs that we have to issue and some free rent that will be issued. So it's really a 2022 -- late 2022 event where the material dollars start flowing in. But for some of the smaller tenants, it's probably an earlier in 2022 type event. But the big tenant will be a little bit later in the year.

Okay. And I think the last question from Credit Suisse was the cap rate increase for Exchange and Centerpointe. Can you give a bit more color?

Yes. This is -- I think we're looking at the direct cap rate for each of the properties and this would just be appraiser's view on these particular properties of what they've seen in the market. There was nothing sort of that was super property specific that resulted in their view of widening the cap rate at 10 Exchange or Centerpointe, but more just some trends that they've seen in the market that resulted in modest cap rate expansion.

Okay. Just moving on to questions from DBS. So there's quite a few questions. So let me break it up. So from DBS itself, I think similar to I think what we were talking about the dollar and the TIs and all, how should we think about TIs in the second half of this year for renewals in terms of per square foot of overall quantum. And for new tenants, should we expect that TIs will increase, and we need to do that to attract tenants. So that's the first question. Maybe you -- we want to take that because the second one is on gearing.

Yes. It's hard for me to give you dollars because each property is going to be different, each deal is going to be different and different markets have different levels of tenant improvements. But as Jill alluded in her presentation, TIs and free rent is up and the net effective rents are down. And so our net effective rents relative to leases that we were signing pre-COVID are down about 8%, and TIs have increased 10% or 15% relative to sort of the levels that we were experiencing pre-COVID.

Okay. Thanks, Pat. Just moving on to gearing itself. So related to TI, with TI gearing is also creeping up slightly. In view of the possible TI increase, Robert, will you consider a payout ratio of 90% instead of 100% to fund these TIs internally?

Yes. I think we're constantly reviewing the burn rate of the -- what is required in terms of TI. And I think we shared in a past we've been very prudent in cutting back on CapEx. You see it's not only the TIs, but there are some other works around the buildings that will require borrowings to fund, some AEI work that needs to be done. So all those we have cut back a bit quite a lot and tried to kind of defer it as much as we can just to not let the gearing creep up. As you can see from the valuations, I think for last year it's dipped by 4.9%; this first half, 1.1%. We believe that may be is kind of leveling off. So in terms of valuations, we hope that there should not be a lot more further impact that will impact our gearing. But anyway, we will look at it very closely. Well, last result could be, I'm not suggesting we will, is to cut back on distribution. But look, ideally, not. We would like to max out whatever we can pay out to the unitholders. Whatever we earn, we will distribute back to the unitholders.

And maybe just to add on, I think cutting it back by 10% does not give you a lot of bullets. It's a couple of millions. So that may move the needle much and then Robert has to redo his tax calculation and everything. Okay. So just moving along because quite a few questions coming in. So from continue questions from DBS. Let me finish up the DBS question first. So executed leases for the WALE -- the WALE of executed leases of 2.8 years seems shorter than the previous leases. So can we give some color on the ongoing discussions with tenants, whether they are still looking for shorter leases, downsizing or expansion. And I think linking to that, maybe Pat can take it together is what is the net effective rent reversion for MUST. Is it higher TIs and free rent -- net effective rent, yes, in for MUST.

Yes. So just quickly on the WALE. So yes, the WALE that we have showed you is certainly lower than what we've experienced in the past. But as I've alluded to in some of my previous answers, there's 1 tenant that weighed down the rent reversion calculation, has also weighed down the WALE calculation. And so if we remove this tenant from the WALE calculation, the WALE of the leases that we executed during the first half is actually it's 5.7 years. So a lot of the discussions that we're having with tenants are your standard lease terms of 5-, 7-, 10-year type leases. Of course, there are still some shorter-term lease discussions ongoing, whether that be for 12-month extensions or 2-, 3-year sort of extensions, and we continue to entertain those and actually like them because they come with very little upfront costs relating to TIs or free rent that they typically add to deals and buy us some time. But we're definitely seeing interest for longer-term leases as well, which is consistent with what the market is seeing overall. So that's the first answer. Carol, can you remind me what the next question was. I apologize for that.

The net effective rent. Sorry, I think we crossed. I think the next one is on the net effective rent. I think maybe I can just take that very quickly. I think net effective rent, I think, for many [indiscernible]. So we have come down about 10% to 15%, which is rather in line with how the U.S. market is looking. The next question, I think, from DBS is on the color on the FY 2022 expiries. And I think there's a couple of questions on the U.S. Treasury, what's the progress on the U.S. Treasury. So I leave Pat to give some good news on that. And I think, yes, color on the 2022 leases and U.S. Treasury.

Yes. So the U.S. Treasury, we're very -- listen, it's -- I don't want to say too much, but we're encouraged by discussions with where we're at with them. And -- that's what I can say. And what I can also say is that they're not included in the numbers that I've already given you about our leasing pipeline post 30 June. So hopefully, there's upside to those numbers, but we're confident about some of the numbers -- about those discussions. That's the Treasury. And then the next question is 2022 expiration, is that right, Carol?

Yes, that's right.

Yes. So it's early days -- sorry?

No, I'm sorry. I think it's because -- it stands out [ that the short term is 13% ]. So I think the main bulk is actually Treasury. So I think it's about the color on what about the rest of them.

Yes. Right. So the Treasury is a huge renewal in 2022 or huge expiration in 2022 and we feel good about that. And so at the moment, we think there's about 560,000 square feet of space that's set to expire in 2022. And we feel that at this point, we are very confident that at least 25% of that at this stage is ready to renew. There are a few tenants that we know we'll be leaving and will not be renewing, but that's only about 12% of the 2022 NLA. So it's not too meaningful. And then the rest is TBD. So that 60% of 2022's NLA exploration is TBD. But we're working on it. We're actively engaged. We're being very proactive.

Yes. Thanks, Pat. And maybe just to give a little bit because there's about at least 6 or 7 questions on the U.S. Treasury. So I think just to give a bit more comfort, and if I may, without saying anything to jinx it, I think we are in quite advanced negotiations. So fingers crossed, toes crossed and everything is crossed, that should bring us across the line. Yes. So let's not try to say anything else about that. Okay. Just moving on to CLSA's question. As the market moves towards reopening and the fact that U.S. office has always been a market that is not so much affected by work from home, shouldn't our valuation be higher? Can you explain the reasons of the reval losses, the cap rates -- given that cap rates used have been unchanged? And what are the cap rates in the market right now.

Yes. So well, cap rates are relatively unchanged. So cap rates, for the most part, haven't been the prime driver of valuation declines. But instead, it really boils down to the theme that we've already hammered home of net effective rent decline. And the net effective rents are declining because rents are flat on the base rate side and you're having -- you're seeing slower leasing volume, but you're seeing more free rent and more TIs. And so that's really been the primary driver of why our valuations resulted in the minus 1.1% decline. And the decline was driven really by 2 properties. It was 865 Fig and it was Centerpointe, they were the lion's share of that decline in terms of dollar amounts. And so Figueroa, the appraiser, just as we have a little bit more vacancy than we did earlier in the year and last year until we have to lease that space up and they use higher TIs and free rent and a little bit more downtime and reduced rent growth. And a similar theme at Centerpointe where they used lower rent growth and -- they used lower rent growth and higher TIs and higher free rent and that was the ultimate driver of why we saw declines there. But very little of the valuation movement was attributed to sort of cap rate movement. And then in terms of what we're seeing in the market, yes, cap rates are fairly flat. There's been a little bit of compression here or there in the market. And the stuff that is really modern buildings in certain markets and really well leased. Some things, in the middle of a great location in Seattle and leased to Amazon for 15 years, like those cap rates have compressed. But if you're in the San Francisco CBD, where there's a lot of uncertainty and a lot of things, got a lot of noise happening there and you've got vacancy, I'm sure your cap rate has widened. But on the whole, sort of cap rates have held pretty steady. So not a lot of compression, not a lot of widening across the broader swath of the market.

Thanks, Pat. We got a few questions actually on Slide 24, which is about our JV and M&A. I think the question to Jill is can you share a bit more about what do you mean by looking at M&A and JV. We have questions from the Edge. Are you in active discussions? Is this likely to involve third-parties or your sponsor?

So I think I can answer that very clearly that it would probably be likely -- it could very well be both. It could be the sponsor and a third-party. And I think that's the beauty of these sorts of opportunities. But sometimes you've got a third-party that you may want to get into some sort of partnership, whether it be a joint venture, whether it's to talk with a partner about a pipeline of properties. Or whether it's a much bigger deal, in which case you might want to see the sponsor come in and that's why we talk about sponsor support into that sort of that sort of opportunity. I mean, to be frank, we have people coming to us all the time with ideas for individual portfolios, for M&A deals, for joint ventures, for partnerships. Some of them even for capital recycling. So that could be something like swapping properties. Again, that's sort of got a pipeline element. So there really are -- frankly, at the moment, I think this is what is very encouraging. And I think from an acquisition point of view, I think it's very encouraging, certainly in office that there are now, certainly in the last month, there's been just a real surge in these sorts of opportunities coming to us. So we are talking to a few people, but then we're always talking to a few people. So I can't really say more than that at the moment.

Okay. I think we are at 10:00. I'm just trying to see this -- because I know some of you have to rush up for another briefing itself. But it's the additional question from DBS, given the increase in leasing activity, do we expect that occupancy and rent will have bottomed out in 2Q 2021. Maybe, Pat, you want to take that last question?

I hope so. I'm hesitant to make a prediction on that. But we are -- the rate of our occupancy decline has slowed. So is the markets. We're seeing more activity in our portfolio, just like the market is. And hope springs eternal, but I can't make any promises on it. And Delta is certainly a formidable foe and there's a lot of questions around it in the market. So it's really anybody's guess, but we've been encouraged by what we've seen through the second quarter. And hopefully, it continues. So I don't know if that answers the question, but I think that's the best I can give you.

Okay. Thanks. Thanks, Pat. I think you have answered that question. If not, I think the analyst can follow up WhatsApp with me if there are additional questions because now are at 10:00, so I know that most of them may have to jump off to another briefing. So maybe what we will do is for those of you who feel like you have additional questions, please feel free to WhatsApp or e-mail us the question. We will reply you directly. And for anybody else who wants to have additional calls, would have to get a bit more color, we're happy to arrange that also. So with that, I want to thank all of you for taking your time and wishing you all a great day ahead. Thank you very much. Bye.

Thanks, everybody. Bye.