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

Good morning, everyone. Welcome to Manulife FY 2021 full year results. [Foreign Language] I hope that everyone has some form of Chinese New Year get together in your own small ways. Today, we are very pleased to bring our full year results presentation. So we have a presentation that I think you have in front of you. Jill will present the slides for about 15 or 20 minutes. And after which, we will open up the floor for questions. So we have 2 groups of people with us today. The analysts and the media are actually on teams. So we will request that during your Q&A later, if you can just switch on your camera or at least switch on your voice and ask the question versus typing the questions to me. For the guests that we have on the open writing platform, welcome to our briefing. We will be taking your questions on the webcast. You can type in your questions. But just to note that assist analysts and media briefing, priority will be given to the analysts and media, and we will be addressing some of the questions even replying privately. So just bear with us. And have a quick introduction before I hand on to Jill. So for today, we have with us Jill Smith, our CEO, which all of you will be very familiar with. We have Patrick Browne, Pat, who's based in New York. So good evening Pat. [Foreign Language] Pat is our Chief Investment Officer; and we have Robert, who is our Chief Financial Officer. So me, Jill and Robert, we are based in Singapore with Pat who is based in New York. So without further ado, I'm going to hand the mic over to Jill for the presentation. Jill, please?

Right. Good morning, everybody. Well, 2021 was a year of stabilization, recovery and kick-starting growth momentum at MUST. Every area of MUST was busy generating better results and creating a base and the momentum to carry MUST forward into 2022. And here are some of the highlights of those many achievements, particularly in the second half of 2021. First of all, on the top left-hand side of the first page, Page 5. Although the DPU was definitely under pressure in the second half year-on-year, we saw an increase of 1.5%. In terms of the financial achievements, where we were very busy there are taking advantage of lower interest rates, and we saw an 11.3% year-on-year decrease in the average cost of our interest rate to 2.82%, which was tremendous. We'll talk about that a bit more in a minute. Also, we increased our green sustainability and sustainability-linked loans. We took new loans and put every effort into greening our loan book so that at the end of 2021, some 45% of all our loans are green. In terms of the portfolio, we're working hard. We were very laser-focused on the leasing, and we executed 652,000 square feet, which is 12% of the portfolio by NLA. And these were quality tenants who remained at our buildings and new tenants, so the interest and attraction of our traditional office does not dim. We can see this also because of the high occupancy in our buildings, 92.3% at the end of the year. That was up from the midyear and well ahead of the average for Class A traditional buildings in the U.S. office buildings, which is 83.2%. On subleasing, we have never really had an issue with subleasing right the way through the pandemic. But it was, again, very pleasing to see that minus 27% year-on-year drop in the subleasing in our buildings. And again, I think it shows the strength of our credit tenants that their businesses are doing well, and they've actually been taking back any subleasing space that they might have had because they want to use it because their businesses are going very well. But of course, above all in the end of 2021 in the fourth quarter was the fact that we acquired 3 high-growth properties -- properties in high-growth areas. This was after a drought of 2 years, and we managed to achieve this with an accretive -- as an accretive acquisition of 2.8%. So we were really very excited about that. But although there were many achievements, if we move on to Page 7, there were many achievements in 2021, particularly in the second half of the year. The year-on-year DPU did let us down. And it let us down by 5.5%. And there were reasons, obviously, for this not only the continued impact of toward. But in particular, the higher rental abatements of 1.4% versus 0.5% in fiscal year 2020, lower car parking income, and we had hoped to see some high car parking income earlier on in the year, but it didn't materialized in 2021. Lower rental income arising from some higher vacancies, although all of this was partially offset by the net reversal of some provisions for expected credit losses, which actually helped to moderate. However, there was some reprieve in the second half of 2021. And here, you can see, as I say, we were -- had an increase of 1.5% and the reason for that positive news was the high car parking income of 36%. The lower provision for expected credit losses. But again, this was partially offset by the lower rental income arising from higher vacancies. If we move on to Page 8, we can see that indeed the portfolio is stabilizing. If you look deeply into the NPI numbers, you can see that very slowly we are stabilizing. In terms of the strong balance sheet, we have a very strong balance sheet still, and we're making a payout of 100% of our distribution. If we move on to the financials, they'll find what the that team have been up to...

Can we just ask those who's on the phone, right, to just mute your phone [indiscernible] someone typing away.

Okay. Let's go back to the actions. So there was proactive capital management. During the year, we were -- as I said earlier, we are busy taking advantage of the low interest rates in 2021. You can see that over the year, our weighted average interest rate declined from 3.18% to 2.82%. Also, the finance team was very busy unencumbering the portfolio, now 70.4% unencumbered. And that, together with some move in terms of changing the fixed rate loan proportion down to 86.5% is giving us a great deal and providing us with a great deal of financial flexibility, not just last year, but going forward. For 2022, we have refinancing that is well underway. And we will be moving those mortgages into trust level loans. We already refinanced the acquisition bridging loan from the end of last year, successfully out to 2027. The one point I want to make to you is that our gearing at 42.8%, that is still well below the 50% regulatory level. But we are, of course, focusing on this and he's our aim and reassurance that we will be doing everything to contain that level in 2022. Moving on to the portfolio performance, starting on Page 12. We have increased our weighted areas expiry. It's 5.1 years. Again, reflecting the better times. Our lease expiry profile at the end of December showed that our expiries in 2022 are only 8% by NLA and in 2023, at 12.9% by NLA, and that's an improvement, very much an improvement on what we saw during last year. So again, proving that we've been working hard. And indeed, our 2022 expiries are 2.1% below market rents. Our in-place rental escalations that we see every year are still strong and healthy at averaging 2.1%. We were obviously a little bit disappointed with the rental reversions because overall, we ended up minus 0.8%. But if you strip out and exclude the deals that we did at the Michelson building actually, our rental reversions would be plus 3.3%. And we expect a similar positive level in 2022. And just as a reminder, there are no Michelson expiries in June in 2022. So what's the background environment like in the U.S.? Well, the U.S. macro indicators, of course, have continued to demonstrate a broad-based momentum in the U.S. economy. And the U.S. office has been really strong -- has shown a really strong recovery momentum particularly in the fourth quarter of 2021. That's despite the fact that many firms -- many big firms in particular, were still working from home and also because of the surge in Omicron. So here, you can see a great group of really encouraging numbers. For example, on the top left-hand side, the higher leasing volume and that has increased by 13.8% quarter-on-quarter. The 10-year also continues to increase. Of course, we've seen that reflected in our own portfolio. In terms of TIs and free rent, we continue to see these ease after they really reach quite a high level. And obviously, in particular, the TI is down 11.4%. Of course, it is still a tenant's market. There's no doubt about that. But as I said, at the 3 -- third quarter operating update, certainly, the pendulum is swinging back towards landlords, and we enjoy that relief. In terms of base rents and net effective rents, again, we're seeing improvement. 2.2% on the base rate, we see on the top right-hand side chart and the net effective rents NER plus 6.9%. And I've already mentioned subleasing, which continues to decrease. As I said, it was never a problem for us. I would just ask you, we have posted on the SGX, Investment management report and [ INN ] report by JLL. And in that, you will also see improvements in leasing activity and also a better net absorption, positive number for the first time since the onset of COVID. So really the background environment is very strong indeed. Now in similar fashion, if we move on, you can see that with a stronger background of recovery in U.S. office generally, we too have seen improvements in loss portfolio, particularly in the second half of 2021. On the left-hand side, you can see that our new leasing has increased that has come. And of course, that is really important because ultimately, it is really the new leasing that's obviously also increases in rental reversions for the exist -- for the new leases for renewals, we are seeing a good strong increase. In terms of the weighted average lease expiry, I've always said that, again, demonstrating the confidence in the future of our buildings. We're seeing our net effective rent signs of improvement. And perhaps most pleasing of all on the right-hand side, our valuations have turned positive at the end of the year for the first time since the onset of COVID. And we're going to have a look at this in more detail. And so I would ask you now to move on to Page 16. So here, we see more detail of the improving valuation scenario. This takes pressure off our gearing if our valuations are positive, and obviously, over 2022, we are indeed with the improving background. Generally, we're looking forward to further recovery and improvement in U.S. office and hence, in our valuations. So here, you can see in the middle that really most of our valuations have shown a good increase. And you can see that we have an increase of 0.4%, not much to start, but it is a good start. And some of the buildings are really showing some very strong improvements indeed. In terms of the cap rates, those also are stable. More good news on Page 17 for mass markets in terms, first of all, of rent growth. Over this year, over last year, rather, we have seen that the rental -- the projected rental growth has turned from negative -- very negative in April at negative 2.5% to 1.2% in July to 0.4% in October. And by the end of the year, the 12-month rent growth forecast had turned to 2 plus 2.1%. And again, if you look down in the bar that has been -- has the dotted line around it, you will see now that there are really some very, very positive swings to projected rent growth in the next 12 months into 2022. Of course, this is also embellished for us by these very strong projected rent growth numbers for the 3 markets where we have recently made our acquisitions. So that's very exciting indeed. There's also been -- there's really no pressure on new supply. We've often talked about this before. Most of the new supply is either in high class or different classes of assets. So there's nothing at all really to pressure us here. So as I have just said, the highlight of our year without doubt, was the first acquisitions in 2 years. And as we all know, after establishing our quality traditional office, we said that our strategy was to pivot to more growth markets, and we've delivered on that promise with the acquisition of 3 buildings and accretive acquisition totaling plus 2.8%. So we are entering into our next phase of growth. And we are clearly heading in the right direction as the -- as these line graphs show on the left-hand side of this page, Here, you can see growth markets, which include, for example, Phoenix, which is one of the markets that we bought to buildings at the end of last year, showing a very, very good growth trajectory and also MUST own markets showing a 45% number here, again, showing a very good trajectory, all well ahead of the overall U.S. growth number. And of course, we do expect on the right-hand side, we see here the positive impact to last from our new exposure to more tech than health care and to the growth markets. And here, you can see the GRI growth sectors increasing by 32% with these acquisitions and the AUM in growth markets increasing by 38%. So some very strong movement there. And of course, now, I would say, using the pilots of the last year, we need to boost stuff by finding more accretive opportunities, but not putting gearing -- pressure on gearing. We make that very clear. So in 2021, we worked hard to demonstrate MUST commitment to ESG and its stewardship in ESG. We were not wanting all lacking. Here we see on the left-hand side, the E, the S and the G, the building resilience. We obviously did better in all of the areas of utilities. But how does that shape up versus the market? Well, if you look at the GRESB environment building score and that combines 13 U.S. peers of ours. We were plus 7.8% above those peers. So we actually outperformed in that respect. We very much put people first. And so we have spent a lot of time over last year on training of our store our engagement scores, which are calculated by an independent external provider, Gallup, will also increase during the year. And of course, we have continued very much in terms of the CSR contribution contributing to the community in whatever ways we could, particularly in a time of COVID. In terms of the governance, we've been driving our sustainable growth. Again, the first sustainability linked loan last year, that greening of the loans that we talked about earlier. We have very good board diversity, 50% of our independent directors on our board are female. And again, last year, despite COVID, we were able to talk to and engage with analysts, media investors, plus 27%, some 2,170 of you were targeted by our IR team and by the whole team. And here we are today doing the same thing again. In terms of accolades, I think it's just worth saying that we have retained our 5-star GRESB. We've actually increased our MSCI ESG rating that AA, which is great. And also, we have some extra measures now, in terms of the fitwel measure, which is an important measure in the U.S., our first building to get the fitwel star and was actually Michelson. But we're also doing other things. This Wired Score helps with things like bandwidth and the IT side of things, ensuring and enhancing the tenant experience. And we've been busy, as I said, engaging our stakeholders in a purposeful manner but also engaging in some serious pine. And if you look over on the left-hand side, we've started this feel last Friday for employees once a month where you attend the training in the morning and then you recharge in the afternoon. And here, we see somebody who I seem to recognize he's been baking some scones. I think that's me. That was what I did in the afternoon on my fuel up Friday. We've also been very creative with our tenants, rolling out things like you can see here, this was a mask competition, which I thought or was very creative. And we've been, as we say, linking up with our investors. We launched our LinkedIn page and you can -- please, if you haven't already linked in with us, please connect using the QR code here. We're nearly at people on our LinkedIn site. So please join the throne because we do send out interesting information and important information through that link. And of course, we have continued to support the community in whatever way we can. You can read more about our ESG targets for 2022 when our sustainability report is published in April 2021. So let's look forward now. And what's a different picture to this time last year on Page 25. Well, the U.S. is very much back in business. And you can see this because you've seen this extraordinary rebound the outlook for the U.S. on the left-hand side, strong economic recovery. I think that's probably a British understatement continues despite the COVID-19 surge of Omicron. We've seen this huge fourth quarter GDP number plus 6.9%; and fiscal year plus 5.7%, led by healthy jobs growth and consumer spending. And indeed, the GDP forecast is another strong number for 2022. Again, amongst those numbers, the strong numbers, unemployment at 3.9% back at pre-COVID levels. office using unemployment even stronger. And I think that's something very much to bear in mind. And all this indicates that the U.S. is back on a growth trajectory and riding high. But I'm just a word of caution, of course, that the economy is, to some extent, running hot. And so we have seen this rapidly rising inflation rate, recently posted 7%. And so we know that higher rates are imminent. Now will this stop the party? Well, I would say that actually, at the moment, probably rate hikes are probably a good thing because what we want to do is can be excesses and not stop the party. Now we are at MUST. We've already looked at many of the positive factors as we go forward, and we are well positioned to take advantage of the rejuvenation or the rebound, if you like, in the U.S. economy and how that is feeding through into positive office trends. And the trends that we are seeing really are other than, obviously, the return to work, which we are seeing, and we've just seen some very good numbers for our own buildings of people returning physically just our latest numbers out this week. The trends we're seeing is a flight to quality buildings, newer buildings and green buildings. That's what the market wants and the continued influx to the Sunbelt and the magnet cities. That certainly doesn't diminish. It's going to go on. It was a trend before COVID. It accelerated in COVID, and we can expect it to continue. So MUST, are we on trend? Well, we believe we are on trend because we have those high-quality Trophy and Class A buildings. We have some newer buildings and of course in -- when we bought our buildings in December, we bought our first new building, which we're very pleased with. And also 90% of our buildings are green. So we are definitely on trend. We've also been pivoting to the higher-growth markets and tenant sectors to provide sustainable returns. And so I would say we are on the up. And indeed, on Page 26, we are stepping up portfolio rejuvenation through accretive acquisition. We've already seen some of that. And obviously, we have the background, as we've just been saying, obviously improving our office market, the surge in leasing, the first positive net absorption, transactional volumes up an office is still very much relevant. That's why people are busily now returning to their offices. Obviously, we will be continuing a laser focus on improving leasing and driving income. We must do that. We will be very busy everywhere. We will be future grouping the business through rejuvenation and green buildings. We must maintain the momentum that we have gained at the end of 2021. We will, of course, conserve spending, stable valuations contain gearing very, very important to us, continue to explore joint ventures and M&A and capital recycling for growth. To summarize, we're working hard to capitalize on opportunities. We have created positive momentum and so we see brighter days ahead in 2022.

Thank you very much, Jill, for the comprehensive presentation. So we have a couple of hands that already up, even before you finish. So okay, the first one we have. Rachel [Foreign Language] Do you want to take the first question, and maybe we'll limit each question to 2 questions first, 2 or 3. Then we can go back again if there are further questions that you want. Rachel?

Great to hear good enthusiasm for the part of the year. It's very encouraging. So my first question is probably just wondering, is this really an inflection point? And in terms of the recovery that you are seeing in the leasing market, how does that compare when we were coming up from the delta period versus now fully coming up on the Omicron period, yes.

Okay. Well, obviously, I would say that we are at an inflection point. And again, I think what we've tried to reflect is that although frankly, Omicron had a dent in sort of occupancy, and everybody held their breath at the end of last year. Actually, the numbers suggest, as you can see in the fourth quarter, that actually the market and particularly U.S. office and leasing have powered on, and I'll just ask Pat to just add a few comments to that.

Yes. I think that's spot on, Jill. I think that there's 2 lenses in which you can look at it through and on one hand, the Omicron and the Delta variant. Certainly, led to disappointing numbers in terms of the physical occupancy of your actual tenants. We saw a steady increase in those numbers to start the year. I think the beginning of 2021, the physical occupancy in our building was on average about 10% to 12%. And by June, July, it was in the mid-20s and on an ever margin way up and then Delta sort of foil plans and Omicron obviously came. And so those numbers stayed in the 25% to 30% range, unfortunately. But on the other side of the equation, I would say that leasing momentum didn't stop. And physical tours increased throughout our portfolio, market leasing numbers increase, the percentage of new leasing that we did in the portfolio increased our net effective rents increase. Like it's a pretty marked difference between first half 2021 and second half 2021 and what we saw in our portfolio, and I think that's reflected in some of the numbers that Jill recited in the presentation that happened in the market.

I would also add, Pat, to that, it certainly didn't stop the treasury from renewing their lease in the very tail end of the year and others. And indeed, it hasn't stopped touring about buildings in any way, shape or forward. People are still making plans this year and the years ahead.

Okay. Sounds good. Just 2 detailed questions. Coming to your U.S. Treasury, I did see that they have renewed their leases and -- but this time, it seems like it's a little bit shorter less than 5 years. So could you give us -- remind us what was the lease before and why is a short-term lease this time ? And what was the...

Yes. Well, the rental reversion was happily a positive 9.5%. So that's fantastic news. And yes, you're correct that this is a 3.5 year extension. And it's due to sort of the sickle animal that is the U.S. government and how they manage all of their leasing nationally across all the various entities that they have. And it just so happens that we're in a cycle where they're timing up some of their big lease signings with the next administration that might be coming in, in 3.5 years. So it's just a nuance to the way that they were doing business at this point in time. The first lease that they signed when they originally entered the building with a 10-year lease, and we expect that in the coming 12, 24 months, we will begin discussions with them again, but this time, it will be sort of for a longer-term lease proposal than the 3.5 years. But positive rent reversion and it was good, certainly good to get this done.

Okay. Just following up on the U.S. Treasury, is the reversion gross rent or net effective?

Gross rent.

Okay. So if it's effective? Net effective rent, is it still positive?

It's also very -- they were virtually -- to be honest, they're virtually -- this is one of the beautiful things about doing a short-term lease in nature with a large tenant like this is that there's virtually no cost associated with it other than a minor leasing commission. So no free rent, very, very minimal, if any, TIs immaterial type numbers. So it's just the gross rent number and net effective rents were certainly positive, giving these virtually no cost of free rent associated with it.

Sounds Good, sounds great. Just one last question from me. Just some details on car park income. Could you remind us pre-COVID, how many percent of car park income was that? And we did see second half car park income has improved. What is that as a percentage of growth or rentals?

Yes. I'll just take this one. I think pre-COVID is about 7-plus percent of GRI. So this year, although the second half is improving, it's still about below 5% of GRI. But signs are second half is improving. You can see from what we put in our results is a 36.4% improvement.

Yes. So just on second half alone, how many percent is it of GRI?

Just -- just...

Come back with you yet. I will send you later. Terence, you want to go ahead?

My question is, is it the case that you guys have quite a bit of committed occupancy, which has not started their income contribution yet?

Yes. Pat, do you want to just some color on that?

There are a few tenants certainly that, that is the case. We did 654,000 square feet of leasing in 2021, which was -- I think it's 2.6x improvement over all the leasing that we did in 2020. So that's outstanding. A large percentage of that was renewals. So those renewals shouldn't necessarily impact the income all that much unless there's a little bit of free rent associated with their deals in some instances, there are. But for the new leases, that is true that when we sign leases, there's typically front-loaded free rent to varying degrees in terms of months that are offered that could be trickling into 2022 based on when they take formal occupancy in their building, which staggered over the course of the second half of 2021 and into early 2022. Does that answer the question?

Yes. Got it. I'm just trying to see if I got the nuance right in that. Is it the case that the cash contributions start when the tenants move in, so that could be potentially being pushed down in the case of, I guess, late last year's leasing being pushed out to perhaps, I don't know, second half 2022. So basically, I'm also trying to understand when to expect this kind of cash contributions from the new leasing that you guys are catering.

Yes. And Robert, if you have any further color? What I'm trying to say is that there were about 122,000 square feet of new leasing deals that we did in the portfolio in 2021. The lion's share of those, I think it was 98,000 of the whole of the 122,000 was done in the second half. of the year is that's when the leases were signed. And those leases, depending on the tenant will take occupancy in the building at different times. Some of them were taking occupancy later in 2021, some of them maybe not until early 2022. And then even after they take occupancy they may have a few months of free rent on top of that after they take occupancy. So those cash contributions, you're correct, will phase in over the course of 2022, is what I would say.

Vijay, happy New Year.

I have a couple of questions, maybe I'll take it one by one. My first question is, how much was the write-downs this year and the expected credit loss in 2021? And can you compare it with 2020? And also, can you give a figure on write-backs from 2020?

Okay. I'll start off with talking about the provisions that we made back in 2020, second half, we made a provision of $3.6 million. 80% of that is reversed out in the first half 2021, because we managed to struck a deal with respective tenants declared the arrears, right? But with that for one of the retail tenants, there is some trade-off as we collect the arrears there was overdue in 2020. We gave away some rental abatement, but not that much. So all those are contained in the first half of this year. That's why you can see, relatively speaking, the provisions that we made for 2021 are mainly related to F&Bs. So those are the tenants are still if I may say, under stress because the physical occupancy of the building has not recovered in a quick way back to pre-COVID days. So that provision, so it's lightening. Abatement as well is getting lesser and that car park income, we mentioned earlier is also improving in the second half.

Because I see in your slide, there is a higher rent abatement of 1.4 percentage for FY '21 compared to the tough 0.5 percentage for last year?

Yes. So just to explain, like I said earlier, there was one particular retail tenant that as in exchange for paying out the arrears, we gave them some abatement. So if you strip that out, that means new provisions, new abatement that's given to F&Bs are just a very small amount. So there are not a repeat. So this is like a one-off deal with that particular retail tenant.

In the first two.

In the first half.

Is it possible to give some dollar amount for this year? And in terms of abatements and ECL?

So the first abatement that was given is about -- no, ECL is $1.2 million, expected credit loss. Abatement is about -- how much again -- abatement is about 1 point -- Yes. abatement is about $2.4 million, $0.9 million of that is relating to F&Bs. The lion's share is that retail tenant that I mentioned about relating to last year or years.

And do you expect this to continue in this year? I mean especially with Omicron going around, do you think you will need more abatements and the rent payers?

If there will be, it will be basically related to F&B tenants. There is no more than 2% of our GRI, just to be clear. So the on collection rate is at 99%. All the other tenants are fine, except the F&B. And you could understand because the physical occupancy is low for our buildings. Yes?

Okay. So this is likely to taper off in 2022, and it should be much lower?

Yes.

Okay. Okay. Coming back to occupancy of some of your assets, maybe can you give us some color in terms of occupancy drop in figure over and Phipps backlog occupancy seems to have dropped about 5 percentage points. And also the progress on Diablo -- are you ramping up the occupancy or asset?

Yes. I think I'll take that one. So I'll start with Phipps. So as you know, we have a very large tenant in Phipps, one of our top 10 tenants in that building that's got a long-term lease in I think we've mentioned this in one or 2 of our calls in quarters past that they had a division in this building that was IT focused and was even pre-COVID, a largely remote division and not a lot of usage of that division on the floor. And then post COVID, they had a termination right on a particular floor that they chose to exercise as a result of this restructuring to say this particular IT group that they have under their umbrella will then be fully remote, and they don't need the floor anymore. So that's why there was an occupancy drop at Phipps, but I think that this actually presents -- just to be clear, I think, in our view, a really interesting opportunity because this is a trophy building in a very strong market, and the floor is an absolutely excellent condition. And so we're -- we think we're well positioned there to actually realize positive leasing momentum. And sort of diversify the tenant base of that building a little bit. So it's a unique opportunity, which we're excited about. So that's Phipps. Figueroa, there were just a number of moving parts within the building. There's no one answer like I just gave for Phipps. There's a few renewals that we executed. One of them was -- came with a downsize and there were a few small tenants here or there that did move out over the course of the year. and that resulted in the net-net occupancy decline that you've referenced. And then in regards to Diablo, yes, we think that, again, like Phipps this is opportunity. Phoenix is one of the strongest markets in the country and this particular asset is located in the Tempe submarket, which is an extremely strong submarket, a lot of tech tenants around, it's right near Arizona State University, which is a really vibrant hub of tech talent and young talent. And so we think that there's upside with this asset to take it from the 85.7% to a higher number in the coming months. There's nothing that we've signed yet today that we can announce, but we're certainly working hard and we've had some we have some lines in the water. And it takes time to get to the finish line, but we're working through some things that we're hoping we'll end right. But net-net, I think this is a great location, and we'll do well here.

Got it. Okay. One last question, I think, on the balance sheet front. Probably, I see that your floating rate proportion of loans has increased compared to the end of the last year. Maybe can you give a thought process on that? And the second point is can you give a sensitivity in terms of 10 basis point increase, what would be your impact on the DPU for 2022? And also, what is the interest cost you see in the market right now compared to 3 months back?

Okay. This is on Slide 10. So the first question is, I think Jill has mentioned this a year ago that we want to create some flexibilities in terms of hedging. So this is what we've done, and it's event driven. So when we look to fund the Trio acquisitions, we took the opportunity to increase the float portion of it. I know it seems like quite a bit of the movement, 96% to 86.5%, but 86.5% by no means it's low. If you compare to the peers that -- for the [indiscernible] in the office sector, this is still one of the highest, 86.5%. We see as low as 83%, right? Now with this kind of a flow of 13.5%, it gives us some flexibility in terms of what we envisage to do this year, which is portfolio rejuvenations, right? It gives us some latitude to opportunity for us to rebalance the debt side as we keep it into the high-growth sectors, right? Now on Slide 10, we show you that every 1 percentage point increase in the interest rate would only have a negative $0.078. So your 10 bids, it's 1/10 of them. This is based on 86.5% hedging level. Is there another question?

3 months REIT versus now.

3 months REIT. Three months REIT is still very low, about 0.3% -- 0.3%. Now just to give a bit of color with 2 types of loans in place now. As you recall, traditionally, it's the U.S. LIBOR. Trio is its first software type loan. So -- but the variable rate is about the same, maybe 10 bps off. So we're still enjoying very low interest rates at the moment.

Probably, if you have to refinance the loan, which is maturing this year, what kind of interest costs are you going to expect? Is it still -- I mean do you expect 2.8 percentage to continue? Or you're going to see a more increase?

For the longer rates, if you're looking to fix out more, it will surely cost a bit more now, but it's still manageable, is about a 3% mark. If there is a 5-year fix up, to be clear, your writing on variable is below 2%.

And maybe just to remind, our 2022 loans, the rates are about 3.4%, right, so it's a bit higher than what we have currently. So depending on how smart Robert and team is, we could have some savings from that end.

Yes. But Vijay, on that front, I mean, we have been suppressing margins bank spread. So bank spread is something that we can control market rates, it depends on timing, right? Exchange implies, although we're looking at it now, we can't actually execute that because those are fixed mortgage loans. The a penalty for prepaying it. So we have to time it neatly and we take what the market gives in terms of fixed rate at that point in time. And it has elevated a bit compared to what we managed to achieve in 2020 and 2021. If you recall, P3 in 2020 is the lowest interest rates that we have gotten 1.85%. And Michelson and Penn was about 2.44%. So it's gradually inching up, but it's still very manageable.

Derek, you're next in the line. Happy New Year.

I just wanted to ask a follow-up question on the market of Atlanta. I think it's an observation that I had. It's not only for Mass, but your peers. It appears that Atlanta is a market that you're seeing tenants generally returning space. And vacancies is about maybe 10 or 10-ish percent portfolio vacancies and there was -- I think there's some supplier out there. I remember a few years ago when we went in the market is -- it's a very strong market. It's attracting people, employment, firms are setting up shop there. But just wondering, has there been really a change in how firms look at Atlanta as a place. And maybe is, let's say, a new city like San Diego really that Austin is coming up or I mean, coming in the next few years. I just want to get your thoughts on that. Yes.

Pat?

Yes, you want me to take that, Jill?

Yes, yes.

Happy to do it. Yes, I would say that I think the sentiment that you're offering, I think is true if we were talking about Atlanta 10 years ago, there was a sort of a stigma to it that maybe there is some supply and it didn't have some of the tailwinds that people expected it to have. But there's been a huge sea change in this market, I would say, over the last 3 to 5 years. It's certainly one of the strongest markets in the U.S. I would put it up there right next to Austin in terms of the growth that it's seeing, particularly from the corporates, but obviously, there's a lot of young people going there as well. And it's maybe it doesn't have the same sort of hip cachet that an Austin has due to the arts and cultural tests that Austin is known for, but Atlanta's growth is every bit is vibrant. And evidence of that is right down the block from Peachtree where a new building was coming out of the ground, Google came out of nowhere, at least 80-plus percent of it. Microsoft has taken staggering amounts of space in Atlanta. So there's a ton of growth happening in Atlanta. It's a lot of big corporates moving there. They're all tech oriented. There's very strong universities there. Georgia Tech is a major player, Emory University. There's a lot of very high-quality universities. So there's a lot of very high-quality young talent, and it's a low cost of wind location. And it's just -- it's a great place to be right now in the real estate market in terms of occupational fundamentals and pricing on the valuation side has just been robust over the last 2, 3 years. So -- and that's happened through COVID, I would say. So it's a really strong market. And I would there's probably pockets of softness for the wrong types of buildings and the wrong types of submarkets in Atlanta that every market is going to have a little pockets here or there. But we have seen very strong green shoots in our buildings. As I mentioned about is trophy building in a great market, relatively new build, strong tenancy, and we actually like the opportunity of vacancy we have there. And Peachtree is doing well, too. We're seeing tech tenants come in. We're seeing new leasing there. And we're really encouraged by the momentum and the opportunity that Peachtree has given its location and some of the things happening in the surrounding area. So we're very, very bullish on Atlanta is what I would say in short.

Okay. I'm just curious whether a strategy that you're building out spec suites be something that you'd like to work on? I mean there's some vacancy. I'm just wondering whether it's the market for spec suites.

We evaluate this all the time. And so there may be a strategy for that, that is in place in 2022. But at the same time, we have strong leasing momentum. We've done some new leasing. We've got good prospects on the horizon without spec suites. And I would also say that some of the spaces that we have vacant in that building may not need spec suites. So just because we haven't gone out on a tremendous spec suite binge there. It doesn't mean that we're adverse to it. It just may mean that the particular buildings in Atlanta that we have don't have a high need for it. And I think I mentioned Phipps before the space that we got back from the tenant that gave before back, the furniture they left us, the finishes, et cetera, it's pristine. So it's one of these things that you wouldn't go in and do a spec suite because it shows better as is and the condition that we got can go ahead and just spend money cavalierly on a spec suite program. So it's going to be very situational as what I would say.

Okay. Sorry, last one for me. Just look at your Slide 31, right? So I think Jill, you gave us opportunity to dream which are your new acquisitions. But I'm just curious, I mean, your last acquisition was very purposeful, you wanted to buy and gain exposure in tech. So is that going to be still your strategy for 2022?

Yes, absolutely. I mean you can see, as I was showing on the rental growth. I mean why would I not do that, frankly. And there's I think it's been pointed out in some of the questions, a lot of other very exciting locations, whether it be San Diego or Austin. These great markets, again, we showed trajectory on one of the slides. So definitely more of the same, please, is what I would say. And it proves that we can do them accretively. I think that's what's terribly important as well. is that in some of the markets, it really isn't very easy. But certainly, in these growth markets, we can still find these very good deals indeed and the newer buildings as well. So it's a sort of win-win, I would say, all around. And we had a target. I think you remember, we had a target for tech and health care and knowledge economy, and that was 20%. And we're at -- we're not really nearly at that yet, so there's plenty of scope for us before we perhaps take a pause on the breath and think again, but [indiscernible] what I'd say.

I think we have [ David ], who has his hand up for quite long already. [ David ], it's been a while. Happy New Year.

Caroline, Happy New Year to everyone. Yes, it's been a while. But -- if -- my question is, just one question. If I'm not mistaken, this is your second consecutive year in which you reported a negative 5% growth in DPU. And I was just wondering, if I look at like U.S. office REITs, are they showing a similar performance? And if not, why -- what's different with MUST? Or what's going on?

Well, I think that is a very fair question. It's a very obvious question. I suppose in some ways. And again, I was not trying to duck it, if you like, at the beginning when I said, obviously, we're disappointed by the minus 5.5% after a difficult year in 2020. I think, yes, in America, I think many of the REITs have been able to probably make better progress. They have different cost of capital sort of many reasons why they're able to do more than perhaps a Singapore-listed REIT is able to do. They are not under such constraints. We've also, I think, been through a particularly interesting time. And again, I don't think we've pulled any punches or hadn't anything for anybody with certain of our buildings. And this hit us if you're right, right in the solar plexus of COVID. And so what we have to do is not look back look forward, and we have to dig our way out of that, and that's what we're doing, like Fury in whatever means it can be. That's why I said -- it's right across the portfolio. And that's what we have to do. We have to -- whether it's Robert with his margins or it's pack with his leasing, whether it's spec suites or whatever and right across in every direction and new buildings and new opportunities. I mean that's why we're so keen to make an acquisition, an accretive acquisition to again, from whatever source to drive back income and value into the portfolio to take advantage when we get to the full updrift post COVID in America.

Maybe, [ David ], if I may just give a bit of color on the U.S. I think the U.S. REIT, you correctly mentioned, I think they have -- there's quite a mixed batch of office REITs about [ 20 ] of them. Average market cap is there about, I think, [ $4 billion ] or so. So the office REITs, I think it came down quite a bit. It has recovered a bit more just because they came down quite a lot. But the ones that we saw that has done really well during this period are really the ones that has, I would say, exposure in the tech sector, health care, life sciences. So those have actually been driving the office REITs in terms of their performance. So I mean, if you look across, I think, even the Singapore landscape where our peers are, I think the -- I mean, it's no secret, right? I mean they have a larger proportion of tenants in that sector, region from 25% to 45% where we only have about 12%, which is why I think during COVID 2020, we did say that we need to look at how our post-COVID investment theme will be, which is what we have been doing. We won't get that overnight. And I think having a portfolio of Trophy and Class A legal finance tenants that has stabilized the portfolio, it has given it resilience. But of course, when you don't have the growth tenants, I would say, to give you that come up, you're going to be affected because just all things being equal, our occupancy is down from pre-COVID levels from 96% to today. So that itself is going to -- it's just a factual thing. So we are working hard. And I think depending on how the market evolves, we hope that we will be able to do better for this year. Just some color on the U.S. REITs. But it's got a mix signal on how they are performing also.

Yes. And yes, please, no need to panic. I mean it's just an observation. I know you can't provide guidance for this year, but -- yes. Good luck. I mean, I hope it could turn positive this year.

And maybe we have -- thanks, David. Maybe we have time for our last question from [indiscernible] from Business Times.

Yes, so I mention quite interested in the disappointment with the rental reversions, right, that it's in the negative 0.8%. But you mentioned that excluding Michelson, it is like positive. So I haven't been following, but what about Michelson that's making so hard for our rental reversions to be positive. And could you also provide like what is the number for Michelson alone? Yes. And my other question is on wanting some color on the joint ventures and merger and acquisitions that you're looking at in 2022 as well. Like could you give us some flavor? And in rejuvenating the portfolio, what are the are the ages of the buildings are concerned at the moment?

Yes. Maybe I'll let Pat take the rental reversion question and Jill can close up with the popular rejuvenation story that we will be stepping up on.

Yes. Jill, yes, I'll hand Michelson. So that's correct that negative 0.8% for the whole portfolio, but without Michelson 3.3%. And I think the 3.3% is what we've flagged all year as sort of being the ballpark for what we expect on the whole for the portfolio in terms of being low to mid-single-digit rent reversion capability, and that's also reflected by the fact that our current expiring rents in 2022 are about 2.1% below market, and there's no expirations at Michelson in 2022. So -- that's just -- I'll get to the question, but I think setting the scene, I think heading into 2022, we think the 3.3% that we experienced without Michelson continues to be sort of our base case. So the story with Michelson is that it's a Trophy building. It was developed, I believe, in 2007, if I'm not mistaken. And it's been basically very highly leased since then. And so you've had tenants in that building for a long period of time that have had fully escalated rents, meaning they signed a market rent in '07, '08, '09 when they -- when they turned occupancy and then their 10-year leases that have had in-place escalators that have just been growing at 3% -- plus or minus 3% for the last 10, 12 years. And so their in-place rents are way above market rents in that particular location, and that makes for negative rental reversion at that particular property. So that's the reason why Michelson poses some problems from a rent reversion perspective. So I think that we flagged this in the past. And I think the good news is that Orange County is actually doing really strong and Michelson is starting to see some new leasing momentum. We've increased the occupancy from 80% to 87%, and we've got some new leasing on the horizon that we feel pretty good about. And there's no expirations there in 2022. So we -- as I said, net-net in the portfolio, I think we're looking at low to mid-single-digit rent reversion in 2022. And I think the last question that you asked is Michelson accounted for, I believe, 18% of our rent reversion figure. So we strip that out, we get to the 3.3%.

Thanks, Pat.

Okay. Thank you, Pat. So just working backwards on the last question you asked about the ability Undoubtedly, there is a trend, as I said, at the moment, for newer buildings and a flight to quality. And this happened after global financial closes the same way. People wanted to take advantage of perhaps cheaper rents in the classing of the trophy buildings in particular. Obviously, I'm not particularly concerned about the age, our oldest building is our pen building, which was built in 1964, so it's older than old. But it's a 150 yards from the White House in Washington, D.C. So it has the most fantastic location. It's a case-by-case basis. Obviously, we would like as we go forward, and that's where the capital recycling and growth comes in that obviously, we would like to continue to buy newer buildings. And as I said, we were very, very delighted to be able to buy a brand new building into 3 buildings that we bought in November, December. So in terms of age, I don't think it should be an incumbent. However, in terms of looking at capital recycling for growth, I think -- and again, this comes in with a general approach to looking at the future. We're very open-minded. We want to make acquisitions. I think we've got to a point in the portfolio where we're now -- this is our sixth -- coming up to our sixth year since IPO. And I think, obviously, we look at all the buildings and see whether there's any opportunities for disposal. What we'd like to do is obviously find a way perhaps to recycle in an efficient way. That's part of looking at the gearing. But we certainly wouldn't recycle and dispose and then not acquiring the other so very, very quickly, if not at the same time. And there are opportunities to do both at the same time. And that's when we say M&A or joint ventures, those could come through opportunities such as those. And all the time, we're looking and talking to various people about the various opportunities in terms of what they may have to offer, what we may have to offer. We think, obviously, we have a lot to offer. And so one way or another, we will be rejuvenating the portfolio but in a very, very measured way, and I think that's the thing I want to emphasize, no shocks that we can avoid. And really, all of the time trying as I say, to recover and rejuvenate in that recovery with accretive growth into the continued recovery and rebound in the U.S. and in particular, for office, which, quite frankly, if you look at all the real estate in America has been the tail end, Charlie in terms of recovery because people just -- even in America were just concerned about whether people would return to the office and how much of would remain a core. And as we've said on this last page, on Page 26 office still is extremely relevant. And we're seeing that, as I say, through the momentum we're seeing at the end of last year. in office. So yes, open to all sorts of opportunities. And yes, I think we'll be busy.

Thank you. I think we have a question from Rachel taking does that answer your question, I hope? Sorry, Rachel, I think you can wrap up the session.

Just a quick question. I think on valuation, I saw that Exchange and Plaza has a declining renovation, the cap rate expansion. I'm just wondering, is that reflection of those markets being still being weak and it will take some time to recover or if you can give us some time.

Pat?

Yes. Well, I'd be hesitant to say those markets being weak, I think just more of a conservative eye from the appraiser on those 2 particular assets this time around. And it's important to remember that both of these assets have been shrunk from performers for us, 96%, 97% occupied for a long period of time. And so there's no question that the market continue -- well, there are great shoots and reasons for optimism and we've seen that reflected in some other appraisals around the country in our portfolio. This particular appraiser took a little bit more of a -- just a conservative approach this time around. And tweak some assumptions. You noted the cap rate may have widened a little bit, and I think some renewal probabilities were reduced a little bit. And they just tweak things that net-net resulted in valuation declines for those 2 assets this go around. But I think for the most part, we feel pretty good about the trajectory of the portfolio on valuations.

Okay. Got it. Just one last question for me. In terms of backfilling the vacancy exit, what sort of reversions are you looking at? Are we still seeing that it could be like as high as Michelson or...

No, it's a good question, and I don't think that will be in the realm of Michelson. And I think in -- this is an interesting asset. I think that we have the opportunity to be pretty opportunistic about who we do a lease with. And we're not just going to jump in just to get something filled up. I think we've got a special space here that's in a special building in a special location. It shows really well. And so we're going to negotiate hard for good economics. And I wouldn't rule out positive rent reversion.

So the negotiations that -- discussions that you have been talking to prospective tenants, are they roughly flattish kind of reversion or...

It's too early to tell what I would say is the real answer. All I'm trying to say, though, is that I would not expect a Michelson negative-type reversion flat to positive is what I would say with hopefully some upside, but we're not going to be looking at Michelson type scenario in my view.

Great. Thank you so much, and good luck for this year. Hopefully, we'll see better numbers this year.

So I think with that, I just want to thank everyone for your time today. So for all the analyst media if there are any further questions, please feel free to reach out to myself and my team. And for those analysts who will be writing a report can I just request that you just sending across to us, too. And with that, wishing everyone a great day here and happy New Year again. Bye. Bye, everyone.

Bye-bye.

Bye-bye.

Thanks, everyone. Bye-bye.