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

Good morning, everyone. Welcome to Manulife US REIT's first half 2024 results briefing. My name is Wylyn, and I'm from the investor relations team. So this morning, we released our first half results. And all the materials, the financial statements, including today's presentations, can be found on the SGX website as well as our corporate website. Today, we have analysts and media representatives joining us in person and we also have participants logging in online via the Zoom webcast. So thank you very much for taking time to join us. Please note that this session is being recorded, and we will publish the recording on the website for investors' reference. So we have management team here with us today, and allow me to introduce them. First, we have our CEO, Mr. John Casasante. John also has a dual role. He is also our Chief Investment Officer. We also have our CFO, Mr. Mushtaque Ali; and Head of Finance, Mr. Choong Chia Yee, [ okay ]? So for today's briefing, John and Mushtaque will start off with a presentation, and after that, we will open for Q&A, right. So now let me hand it over to John.

Good morning, everyone. I'd like to welcome everyone to the first half financial results for the Manulife US REIT. I'm very excited to be here, and I'm looking forward to our future. As a reminder. There are 3 phases to our plan, stabilization, recovery and growth. We are currently in the stabilization phase and our high-level strategies consist of the following: risk management; capital markets; asset-level strategy; portfolio construction, which includes hold-sell analysis. These strategies have not changed and will be consistent throughout all phases, allowing us to be innovative to create a path to maximize unitholder value. It has been a relatively short period of time since Mushtaque and I have joined, and I think we have made good progress on these plans. I will now move into the slides. Page 5, some key highlights. I will touch on some key high-level points with more details later in the presentation. Some of our key highlights and the #1 priority for us is dispositions. Our disposition plan is on track, with 3 assets currently on the market, and again we'll elaborate more on that as we go through this deck. Occupancy rate has been stable quarter-over-quarter. We have a positive WALE which lengthens to 4.7 years. We continually have prudent capital and liquidity management in a highly constrained environment. Our portfolio is currently at 78.4%. We've executed 428,000 square feet of leases. And our -- again our portfolio WALE is 4.7 years. I will now hand it over to Mushtaque to go through the financials.

Thanks, John. So we'll go through the financial performance of the REIT. On Slide 7. As you can see, the gross revenues of the REIT on same-store properties were $86.7 million, which is 8.1% lower than the same period last year. And this is primarily due to drop in occupancy compared to first half of 2023, so although our property occupancy remained stable quarter-over-quarter -- but when we compare to the first half, we recorded a drop of 6.7%. Of that, 3.7% drop is attributable to one large lease, TCW Group, that vacated 188,000 of square feet at the start of the year. And this was also highlighted in past few meetings. The other 3% reduction came from downsizing of Children's Place at 500 Plaza for 78,000 square feet and a financial institution tenant that vacated 73,000 square feet in Exchange tower. Aside from these known vacancies, the remaining portfolio has remained quite resilient with a very insignificant volume of negative net absorption on a year-over-year basis. During the first 6 months, the REIT has earned adjusted income available for distribution of $0.0129 per unit. This is 27% lower primarily due to 6.7% reduction in same-store NPI; disposition of 2 assets, Tanasbourne and Park Place, in financial year 2023; and increase in interest expenses. However, as you know, that we do not plan to pay any distribution. As part of our recap plan, the REIT has halted its distribution to unitholders until 31st December 2025 or unless early restatement conditions are achieved. Next slide. This table provides a breakdown of REIT's net property income; and further categorize it by Tranche 1, 2 and 3 assets. It is important to highlight that Tranche 1 assets reported the largest drop in NPI by 33%, followed by Tranche 2 assets by 14%, whereas the Tranche 3 assets remained stable and reported a slight growth of 1% in the first half of 2024. The NPI performance of these assets and tranches provides further reassurance about our classification of these assets into the respective categories. And as we dispose of our assets, this reassurance gives us comfort on our strategy. Next slide. The fair value of our portfolio was $1.43 billion, which remained consistent with December 31 valuation. We have reviewed the assumptions that went into the December 31 valuations. And those remain broadly consistent, so there has been no significant change in the valuation, apart from regular capitalization of cost on the carrying value of our investment properties. The REIT carries a healthy cash balance of $95 million after repayment of $50 million of debt in accordance with MRA. The cash balance also includes $18.2 million held in interest reserve account, which covers 6 months of interest payments held as security. Excluding this reserve account, we have $77 million of cash available to use which is sufficient for our existing capital commitments; and FY '24 budgeted leasing, capital and operating requirements. As part of our stabilization efforts, we have adopted a disciplined approach on capital spending to improve the liquidity. And this will allow strategic deployment of capital on specific leasing activities to improve occupancy in our Tranche 2 and 3 assets as well as using any excess cash to repay the debt and delever our balance sheet as we look forward to move to recovery and growth phase. Next slide. The REIT has $131 million of debt maturing in 2025. The successful completion of our asset disposition milestones would allow us to repay our debt obligations on or before their scheduled maturity. In the current stabilization phase of our strategy, we will remain focused to delever our balance sheet and reach a portfolio that sets the stage for recovery and the growth phase of our strategy. During the 6 months, the REIT fully remained compliant with bank facility covenants, with an ample buffer to withstand any potential adverse impact of valuation decline or decline in EBITDA or increase in interest expenses. The aggregate leverage of the REIT was -- under the current MAS guidelines remained at 56.3%, which was slightly improved from 58.3% at the beginning of the year. And as you are already aware, MAS has proposed new guidelines, for consultation with stakeholders, to revise the aggregate leverage to a maximum limit of 50%, with a minimum ICR of 1.5x. We believe that, when MAS enacts these new guidelines, it will be beneficial for Manulife US REIT and will help accelerate REIT's transition from stabilization to recovery and future growth. The weighted average interest rate as at 30th June 2024 was 4.58%. This is higher than (sic) [ by ] 61 basis points compared to 3.97% at the start of the quarter. This increase is primarily due to $143 million of expired interest rate swaps in the first half of 2024 that lowered our fixed ratio from 96.5% to 80.2%. The income available for distribution remains sensitive to SOFR. And we have estimated that a 50 basis point change in floating rate would increase or decrease the adjusted distributable income by $0.9 million. At the moment, 20% of the REIT's floating-rate debt is unhedged, which will benefit as the SOFR goes down from the expected reduction in interest rates. And this will contribute positively to the financial performance of the REIT. We have also adopted a new policy to manage our fixed and hedged portion of our debt and to keep it within a band of 50% on the lower side and 80% on the higher side of the range. And as part of our strategy, with interest rates expected to go down and the REIT pursuing its disposition program, we will target to remain on the lower end of the hedge ratio. With this, I end the financial comments. And I'll now pass it back to John for his slides.

Thank you. Thanks, Mushtaque. So we're going to jump into Positive leasing momentum. We had a very strong first half of the year with 428,000 square feet of leasing, with the long WALE of those leases at 7.3. And again I want to sort of emphasize on the strategic nature of us approaching these leases. Each one of these submarkets is different. Each one of the valuations on the buildings is going to be viewed slightly different. The buyer pools in those markets are different. And so we're being very cautious and stringent in how we're -- and, I should say, disciplined in how we're deploying leasing capital. We could easily make -- there's lots of deals that we have and negotiations that we could make. And we can definitely move up our occupancy, but we may not get paid for those deals. And I think it's significant to realize that we've already identified assets [ that are for ] disposition. And putting money into an asset that you don't get your money back on disposition is a waste of money. And in a lot of these markets, you -- it's not making a change in valuation with that amount of occupancy, so we have decided to be very strategic. And this is a very fluid process. As some of the CMBS markets have opened up, we've looked at potential options from other angles. And it's about positioning the assets in the best case scenario for the best outcome for that asset, so part of that process is going to be to make some hard decisions [ on not just single leases ], but the way the leasing market is, even though it is continually improving, there are still deals out there where they're 10-year deals and you're not getting paid back until the ninth year. And there's buyers that aren't valuing those leases with that occupancy in those markets, and so we're looking at each asset on an individual basis. So moving to our first half 2024 rent reversion, negative 10.6%. I'd like to point out that 11 out of the 17 leases were signed above market. And I think it's also important to distinguish that, in the reversion metric, it doesn't always align with market. And depending on the timing of when the lease was executed and the growers that were put with it, there's a high probability that, that lease could have outgrown the market at the point of expiration. And then if you happen to be in a softer market, which is where we are now, you're going to be re-leasing that space or renewing that tenant at a lower rate. I would also say, in addition to that, the fact that we're being prudent with our capital is also contributing that to a little bit because what's common within the U.S. is, if you give more TIs, you get a higher rent. And from our standpoint, we would rather have the cash in hand than essentially amortize that extra cash over a longer lease and take 5, 10 years to get repaid for that capital [ that we have now ]. We think we have a much more strategic deployment with the capital in hand than that slight difference in the rent. And we think, ultimately upon execution for the asset long term or short term, it's much better served the way we're approaching this right now. Let's run through. We've had several of our top 5 tenants renew. Lease terms are 3-plus years; with modest tenant concessions, again the theme there, some modest tenant concessions, conserving our capital while maintaining the occupancy. We have a very diversified rent roll with strong credit tenants and an annual rent escalation on average of 2.3%. So let's move to leasing, next page, Leasing cycle activity. We look to the far right: We have over 1 million square feet, almost 1.5 million square feet, of leases in some sort of negotiation. Again to the efforts of certain assets -- we're negotiating on deals where we have more activity than we have square footage in some of these buildings. And so it's putting us in a good position to be able to align that leasing activity with what's best for that asset and, again, trying to achieve the lowest cost of capital and completing that lease. In some situations, some of that leasing activity lines up with sale candidates. And we are also angling that to line up to where we can deliver a potential sale opportunity with a lease or 2 in hand and let the next buyer make the decision if they want to pay for it or not, without us coming out of pocket for that capital. Let's move to the next slide. Here you have our lease expirations. Tranche 1 assets account for roughly 66% of expiries in the balance of this year and 2025, so if you were to read into that, easily if 1 or 2 of those assets were disposed of, our occupancy would jump up dramatically. And so again we can achieve occupancy without having to spend large capital expenditures on TIs, and so it's kind of lining everything up. And that's one of the reasons why we broke this down this way so everyone can see kind of the way this all lines up on a property-by-property basis. Mushtaque already covered where the major vacancies occurred from last half to this half, which as he mentioned were in 3 deals which roughly accounted for about 300,000 square feet. 1 of them was a renew and downsize and 2 were move-outs. So with that, let's move to the next slide. We have 171 tenants, again, very diversified across 20 trades. Top 10 tenants have a long WALE of 6.8 years. And currently, on our rent roll, we have no significant termination options under top [ 20 ] tenants within the next 5 years. Let's move to the next slide. So let's talk about the market. We are in an election year, which is going to make it interesting in a lot of levels. I will say we have seen some positive signs. Quarter-over-quarter, we've seen roughly about 14% increase in demand and overall leasing activity. We have seen a slow absorption -- a slow to positive absorption of sublease space. A lot has to do with sublease space getting down to a short-enough term to where a subtenant can sublease it at that point. And then a negotiation typically occurs between the landlord and the subtenant, and then just buy out of the lease. Or the subtenant will find a tenant and then hand it over to the landlord to do a direct deal. So those are positive signs. There's less sublease space on the market. We're seeing an increase in demand. Rents are staying steady. Concessions haven't really moved much. Free rent has not been a huge issue or -- just in general. The key [ of the ] concession standpoint is the cost of TIs, which are just wildly different market to market. And just to give an example of Downtown L.A.: It could be $150 to $200 a year. And in other markets, it could be $60 to $80, to $100, depending on the term of the lease, so we see a huge variance and between markets, which again just from a strategic standpoint, if you were to look our vacancy and if you were to put a number against increase of occupancy, you would want to focus on the cheapest occupancy. So you can get 5% occupancy for a lot cheaper, let's say, in Atlanta then 5% of occupancy in Downtown L.A. right now given the cost of TIs. So one of the way that we're looking at things from an occupancy standpoint. Let's move to the next slide, just some basic economic information here. GDP rose 2.8%. CPI is at 3%. Unemployment was at 4.1%. That's moved slightly, which we can maybe talk about that now. There's -- as I'm sure everyone saw, the jobs report came out recently. Unemployment [ looked up ]. It's still under the 5% sort of average, so I would say it's nothing alarming. I would say, if we were to look at a silver lining in that information: As unemployment starts to increase, it will put more power into the employer's hand versus the employee's hand. And it will, hopefully, get us back to a position where we're in a more normalized back-to-office situation. Part of the struggle in the U.S. with getting people back in the office was it was such a very tight job market. Employers were afraid of losing employees, hence being way more generous in allowing out of office. So I think there's going to become an equilibrium here where we're actually going to see this helps us get people back in the office. We haven't seen across the leasing side any retractions other than what we've already normally seen in the market, but I think in general we're seeing some industries starting to look at expanding into more space. And I think the question has been -- for them to pull the trigger, I think they had to have some level of confidence that their employee base will actually be in the office. No one wants to make an executive decision to take on an extra half a floor and extra floor and then someone comes to the space and there's no employees in it. So I think that -- as we move back to a better protocol for back in the office, I think we're going to see the leasing activity pick up with that; and again it possibly tie into the presidential elections as well, depending on who wins. So I think things are moving in the right direction, as far as back to office, I guess, is the long-winded point in that. Right, next slide, just some basic information here which is kind of interesting. Again as I mentioned before, leasing volume is up quarter-over-quarter by almost 15%. Net absorption has improved from negative 20% to negative 9%. And then if you look at the total occupancy -- which of course, we always aim to outpace the market, but we are at market right now for our occupancy. And again depending on a couple of strategic dispositions, our occupancy could shoot up pretty dramatically. Let's move, next slide. So this is our -- the phases that I referenced before, stabilization, recovery and growth. This is going to be a consistent message that you see as we get to our growth cycle. We've spent a lot of time on this and we're very focused on this. And so right now within the stabilization phase, we are focused on asset dispositions while maximizing sale proceeds but with the understanding that liquidity has a price. And there's nothing we can do about that, but the key right now is to find liquidity. And we'll have to see where the prices come in on that liquidity, but I think that was the design of having multiple tranches and differentiating the assets within those tranches. So again, liquidity comes at a price, but we are very focused on asset dispositions and to the point that we are looking at things from multiple angles on the disposition side. We currently have 3 properties that are on the market. We currently have another property that is being marketed off the market, and we've had some off-market tours of our assets as well. And we've -- also have had some conversation with some alternative transactions as it relates to the assets, so we're angling this from all different positions. We're not just putting all our eggs in one basket. We're allowing ourselves to have some flexibility. And as time goes on as things start to materialize, the goal is it gives us some optionality. And the optionality will allow us to pick and choose versus potentially being in a position where we have to just go with what we have. So if everything kind of comes together as we hope, hopefully, it will put us in a position where we have some optionality to be a little more strategic, in addition to what we're already doing on the disposition side. So to get more specific. I think I've already touched on the dispositions. Portfolio management, this is very important. This ties into what I said before about making sure everything is accretive. And it ties into the hold-sell analysis of an asset to make sure we're spending capital wisely and we're putting the asset in the best position possible for the strategy of that asset. We are very focused on occupancy. And we are going to do our best to be able to maximize occupancy with -- in alignment of the broader plan of the disposition side, so -- and it all kind of needs to come together, which we look at on a continual basis. In addition to that, we have very stringent capital controls as well not only from the standpoint of leasing capital but also in building capital as well. If we're doing any sort of repositioning or renovation, it needs to be very clear that there is going to be a payback in a relatively short period of time. Or upon an exit of an asset, we would also get paid for that. And the capital and risk management. We repaid $50 million of debt in March of 2024. We are progressing on our milestones of the MRA and looking to delever and advance to recovery stage. We've also put in place a hedging policy as well with acceptable risk tolerance. [indiscernible]. [ All right ].

Okay, thank you very much, John. So we'll move on to the Q&A session. Priority will be given to the analysts and media joining us here in the briefing in person. So please introduce your name and your organization before you ask your questions. [Operator Instructions] If we are unable to answer your questions due to time constraints, we will get back to you separately. Okay, so maybe, Jovi, please.

Not that -- enthusiasm.

Yes.

I'm Jovi from The Edge Singapore. So I just have a few questions. My first is just can we assume Figueroa is among the 3 [ assets up for sale ]? And based on NPI variance, [ based on ] occupancy rates, heavy marketing, Diablo, off market, but openly, [ you're seeking buyers ] [indiscernible].

Yes. So I can't answer that. And I'll explain why is part of the marketing process needs to allow the brokers to have their ability to market the assets that we've selected. Any comments that I would make in any specific asset would undermine those efforts and ultimately hurt the negotiation process, which would ultimately lead us to a less, a lower purchase price, so I can't give any indication to what that asset would be. Sorry.

Okay. No worries. So my second question, just trying to get a sense of the meaning behind marketing these assets for sale. So you've mentioned earlier about angling leasing talks with potential sale [ talks ]. So have you re-approached buyers with this, or is this a strategy to be implemented in the coming months?

So no, no, no. This is undergoing right now. And so there are assets that are being marketed by professional brokers. There are relationships that we have with people in the market that have reached out and expressed interest on certain assets. In some cases, it's a neighbor who owns a building next door who wants to add another building. So there's lots of different scenarios. The key is we're exploring everything. And so as an example: I received a phone call with someone that wanted to tour one of our assets. I jumped on a plane. I met them out there. We spent 3 hours touring it, and it goes from there. So I think the ultimate message is we're not going to leave any rock unturned. We're finding a way to meet our objectives under the MRA.

And my final question is management previously stated targets asset sales of USD 100 million by second quarter or third quarter of the year. So is this [ sharing ] you're referring to whether this person -- decision, plan on track -- this is [ actually the second or ] third quarter. And because you are nearing [ the midpoint of the third quarter ] and based on what you said, [indiscernible] marketing these assets for sale -- so can we still expect this to come to fruition [ in September of the year ]?

Yes. We're sticking with that plan, by year-end. And maybe we pleasantly surprise [ people ].

So year-end [indiscernible].

Yes.

Maybe Derek.

Yes. Derek from DBS, yes. Just a few questions [ just in ] questions surrounding your asset position. I'm just wondering. What hurdles are you facing from buyers? i.e., is it pricing hurdle? It's funding hurdle or -- and how long do you think it will take for you to close the deals?

Yes. Those are all great questions. I'll just start with it's kind of all of the above, right? It just depends on the market. I will say we've been very optimistic -- I should say, very enthused with the level of activity that we received in the beginning stages of this process. So in any down market -- and again I'm not speaking specifically to our assets but just as an example. In any down market, when you put something on the market, the worst thing that could happen is no one shows up. Then you're kind of left in a bad spot. Then what do you do? Then you take it out and then everyone knows. [ You see to it ]. So I will say we've gotten really, really good interest in the assets that have been put on the market. And so that's the first step. And then as those offers come in, the more offers you have, it allows the brokers to work the offers to work up the pricing, right? So you can create more of a competitive situation the more offers you have. So that's kind of the process we are in now. Given that we've had some really, really good turnout of interest on the assets, it allows us to be able to take that next logical phase in an on-market disposition process. Then you have one more question. I forgot...

No, it's okay. In general, you -- will you say that the buyers [ are freeing with you in a range that you've got asset ]?

Yes. So that's another great question. So each market is a little different, but I want to answer your questions in more detail than just telling you that. So there are some markets that there's private buyers. And private buyers look at things differently than institutional buyers. Private buyers are basis buyer. They're focused on how much capital they're going to put into it and how much capital is going to cost to lease it up. And then they look at some historical milestones; and everyone looks at different -- replacement costs, high watermark. And they look at what [ they're all into to ] those numbers because they're not so much return-driven as they are appreciation, right, on the back end of the sale of the asset. So there's those buyers out there. We're starting to see the operators come in the market that are finding equity for more quasi-institutional types or family offices. And the operators like this sort of office profile because they can come up with a plan to spend a lot of capital, right? And the operators get fees for all the capital they spend. So if [ your building is not perfect ] and it was 95% leased and the lobby was just redone and there are amenities, you would not get that buyer because the operator wants to find the more core-plus value add to where they can say, "We spent $40 million in the lobby. We need to do this. We need to do that." And if their capital goes along with it, they're going to be able to see all of those improvements. Does that make sense?

Yes. Okay, so at this point [ now ] do you think that there is still a gap between what you want and what [ they're ] offering. You are just waiting. You're waiting for [ competitive or institutional come to ]...

Yes. I mean I think I don't want to get too deep in that because this is -- we're in negotiations. All I will say is that we've had more interest than we originally anticipated, which allows our brokers to negotiate harder in the pricing because you can somewhat compare -- if someone is -- you can get a competitive situation, but I will say liquidity still does come at a price. So I mean I think that's sort of an overarching thing right now is in some markets it's just a little tougher, but there's still interest there. And so it's very [ hopeful ] when you have people show up that have made offers. So we have something to work with, which is good.

Got it -- sorry. I just have [ 2 more questions ]. So I think the other comment question -- other question is how long do you think [ you can include ]...

[indiscernible].

Yes, [indiscernible].

So I would say, if someone is an all-cash buyer, it's probably 30, 10. So 30-day due diligence and a 10-day close, maybe slightly compressed, but I will say that's kind of the average. If someone needs to place some debt on it, it could be 30 plus 30 and maybe even another 30 as an option, but they should really only need 30 plus 30. And so -- and I say that because, in the vetting process of choosing a buyer, you figure that out [ upfront ], all right? So the brokers will vet out if they really need a 30 plus 30, plus 30, right? So 30-day due diligence is pretty typical, and another 30 days to put financing on; and so we will be hesitant to go with someone that needed another 30. We might give them an option for another week or 2, but it's simply -- a lot of things come into play too. Because if that person's price is significantly higher than someone's else, maybe you make a business decision to roll the dice a little bit and go that route. If you have an all-cash buyer that's just slightly less -- again, liquidity comes at a price. You may choose to go with an all-cash buyer and have no risk.

Got it, got it -- sorry. Last one for me. You've mentioned that you have 3 assets on market, 1 off market, right? I'm assuming that everything [indiscernible]. So it's not [indiscernible]. Is that a right assumption?

Yes, I don't want to answer that because that will -- that narrows it down too much.

Okay, but it's [ quite good ]. And Tranche 1 [ is part of the ] [indiscernible]...

Yes.

[indiscernible]

My name is [indiscernible]. [ What did you pay out from ] $50 million of debt in March? And between now and 100 million [ distributed, you're looking ] to make any more further debt repayment [indiscernible] does that mean making compulsory [ debt repayment ] [indiscernible]?

Do you want to take that?

Yes. There is no compulsion to pay anything before the maturities. And the '25 maturities are also partly in May and then followed by in August. So $98 million is in May and the rest is in August. So as I described in my strategy, we are putting a healthy liquidity in place to make the capital available for strategic uses but then be ready to use that capital or use that liquidity to our advantage when we come to the milestones under the MRA. So we will keep those options open, but at the moment, there is no compulsion to repay [ early ].

[indiscernible] question is because the change in [indiscernible] appear to be somewhat [ a little positive for you ]...

Yes.

Can you give your thoughts on what will this change also mean?

Yes. I think it's a great development. We are watching it. And I think, as I mentioned in my comments, it's going to be beneficial for REITs like us who are dealing with higher leverage at the moment; and as well as the interest rates remained elevated for [ an expectedly ] long period, but I think there is good news also coming on the interest rates expectations, so as well as what MAS has done is a very right step in the right direction which will allow REITs to take some -- give the breathing space as the markets recover, as the leases go back up and there is more stabilization of income. So the current cash we have is not enough that we can bring it down to 50%. We -- so that's why we stay focused and remain on the asset disposition plan, but as I said, that this liquidity is critical because it can be used to our advantage when we have to fill any gap as we go into the next year and come close to the milestones under the MRA. So it's part of the strategy, to keep that cash and deploy it very strategically.

[ P K ]?

My name [indiscernible]. I have a couple of question. My first question was again in terms of the interest you have seen [ from last time ] you mentioned. Is this more of a value-add opportunistic-driven interest from buyers who are looking at [indiscernible]? Or is it more of a cash flow-driven [ investors ] who are still [ aiming for safety ] in the next few years? I say this because, if there is more of a value-add kind of investors, that could be -- signal some sort of [indiscernible], right?

Well, it depends on the asset, right? So if you look at the profile of certain assets, I think it's going to be more of a value-add buyer, based upon the roll and based upon the occupancy and based upon where it sits in the market. So again without -- I can't get into asset specific. If -- I would have to get asset specific to directly answer that question. So in general, I guess, if we want to talk in general, I mean it just depends on the market to what the buyers [ are ], right? So if it's -- if the asset fits the profile of the value add, then you're going to end up with a value-add buyer, I mean. And that's [ fund what you already know ], but if an asset has 80% to 85% occupancy, that's going to be more your core-plus buyer. And your value-add buyers are not going to probably be interested in that. And then you have some markets where it's just -- it's high-net-worth individuals who are buying these buildings [ for their ] kids. And then it's a completely different evaluation of it because now you have personal preferences that come in place, prior ownership, wanting a certain building; and so that changes value a little bit. Now in that scenario, capital is a key component of how much capital that needs to be put in that building. So it's there's not enough velocity in the market to be able to sort of broadly talk about anything right now. You have to look at each specific submarket, what the buyer pool looks like in that submarket; and kind of go from there. So unfortunately, I can't make any broad strokes. I mean there are some submarkets where buyers are underwriting 20% static vacancy; and then you go to other submarkets, and they're not. They're doing 8% of static. So each market is going to be a little different.

My second question is you mentioned that valuations have been stable [indiscernible]. Is this based on internal measure? Have you checked with external valuers on this? And earlier, you [ guided ] that we will not dispose an asset 90% below the value. Let's say some buyers offers [indiscernible] [ some ] 89%. What will you do in that case? Would you still go ahead and dispose? Or you'll wait for a better offer to come.

Well, let me take the first part. Then you can jump in. Obviously there's a difference between a valuation; and spot value, as we call it. And spot value is when you sell something at that moment in time, versus a valuation which is a more broadly rear-looking metrics that get put into that. And so it's hard to compare the two. There's definitely a distinction between a spot value and a valuation. To answer your second question: If there was a scenario as you mentioned, we would look at the broader picture of where that asset sits within the portfolio and to see if there was additional value to disposing of that asset beyond just the disposition price.

That would mean you'd still go ahead and dispose if you think that is the right...

Yes.

You will call can EGM on that price and explain [indiscernible].

So you could have a situation where the value is as you're describing, and then you'll look at future capital. And you can have $30 million, $40 million you've got to put in that building, or more. And then when you figure, "Am I better selling at this price?" and having certainty of putting in $40 million, $50 million into a building and not having certainty on exit or even getting paid for that exit, I think I would make the decision to sell it and conserve capital. And in a lot of these markets -- no, I shouldn't say that. Some of these markets have a long road to recovery. And even recovery isn't necessarily worthy of spending $50 million, so it just depends on what's going on in each market. I mean we dive in very deep even on our wholesale analysis. When we put our sensitivities in, we talk specific to people in that market on how that market is reacting, how those buyers are reacting. What is sort of the new trend for buyers buying buildings? Then we address it that way versus using generalities across the country.

And my other question on valuations. Is this internal [ list ]? Or you have checked with external valuers and the values have been stable.

Yes, we -- there was -- we weren't required to do an external valuation, based upon [ there have been no ] material changes that we saw.

My last question is in terms of market outlook. It seems to be things are changing a bit in terms of rate cut expectations [ with -- around recession, important sets about ] recession. If you had [indiscernible], what would you prefer? Would you prefer a interest [ cut effect ]? Or a [ recession ] is a better scenario for an office outlook perspective in your overall outlook and sales and execution portfolio strategy.

That's a good question. It's hard to say. It's hard to say. I mean there's been so much conversation in anticipation about the rate cuts. I'm not sure how that would translate, if the market would immediately start -- I think you need more than just the rate cuts. I mean the rate cuts are the first step that help things move in the right direction. Back to office is a critical component of this. And then the debt market is opening up, so you could have a scenario where, if rates are cut and the debt markets are still constrained -- and we're not seeing debt. And you can see a situation where the rates aren't cut that much, but the debt markets start to loosen up and debt becomes available. And leasing improves, continues to improve back to office; and so that gets you to a value too. So there's a lot of different variables that will come into play, so it's hard to answer that question. I would just tell you we look at things [ on a daily ] basis and have these conversations, so we're trying to get ahead of the curve, but until a couple of these things start to happen, it's kind of hard to get -- predict what's going to be in the future. But a great question, by the way. I like that question.

Yes. Just to sneak in one more: In terms of market sentiments and market confidence, have you seen things improving quarter-on-quarter basis [ from 1Q, 2Q ]? Because it does -- seems like leasing going down. And some sort of sublease vacancies are tending to move in the right direction. Is this a kind of a definite change? Or you still think that there's some more uncertainty in the market.

I think it is definitely a change that will continue to the positive. I don't think it's temporary. Traditionally this period of time is a slower leasing time, anyway, so I feel like it's a trend that will continue. Will it continue at the same level, 14% quarter-over-quarter? It's hard to say. I will say just from a leasing momentum standpoint there's no shortage of deals that we see at a property. It's just making sense of that deal, how it fits based upon our hold for that asset and our capital constraints. They kind of all need to line up, right, because we're going to spend leasing dollars. We want to get the biggest bang we can for those leasing dollars. So I -- like I said, we have really solid leasing activity. It's just someone else in the market may want to buy that lease and pay -- and wait 9 years to get paid back. And for our strategy on certain assets, it just doesn't make sense. It doesn't play in the bigger scheme of things. And it doesn't put us in a position to create liquidity off of doing [ a lease-up bond ], which is our ultimate objective here, right, is to meet the MRA, to create liquidity where we can, create as much value in doing so but also conserving as much capital.

Just increasing -- there [ were some marginal ] tenants who are holding on the sidelines to check how the market is going to [ sign ] before signing a lease, [ will be ] getting back to office. Have you seen this [ marginal buyers ] still [indiscernible] in terms of signing the leases?

We haven't seen it over yet. I've seen people start to talk about it. And so I was meeting with an attorney that I knew. And he -- they're already earmarking half a floor in one of our buildings as expansion space, so they're starting to think about it. I think the validation for doing it comes when there's a little more clarity on back to office. Again to my previous comment, no one wants to stick their neck out and say, "Let's take another half a floor." And then the boss comes by, and where is everybody? No one is in, right? Why do you need more space?

[ John ]?

Yes. 2 questions. Firstly, on net property income. For Centerpointe and for Figueroa, I think the drop is [ really steep ]. Could you share some color on why we're seeing that size of a drop? And then secondly, in the past, I think we understand that divestment price may be around 30% of valuation. Is that still a realistic assumption? Is that doable?

Yes, yes -- he said 30%, right? You said 30%, right?

Yes, 3-0, yes.

Yes.

Mushtaque, do you want to take the...

The Figueroa drop is tied to the TCW vacate. And that vacate happened right on 1st of January of this year; so it's the entire 6 months of income, that was. And TCW is approximately 33% of the building, so -- but that was a major hit to the occupancy. I think the Centerpointe comprises of a number of smaller vacancies that would have happened throughout in 2024, but the occupancy, you can see...

I -- so on Centerpointe, we had a tenant that vacated approximately 20,000 square feet. And then another tenant gave back 34,000 square feet.

So most of this happened in the first quarter, yes, so that's why the...

First quarter of '23.

'24, '24, yes.

'24.

'24, okay, but Figueroa is 85%. Are there some other expenses that was incurred, expenses-wise?

Well, Figueroa already had a vacancy to start with at the beginning of the -- so even this trend has been continuing from the first half of 2023 and then in combination with TCW, so those will add up...

But were there one-off expenditures or things like...

There were -- no, there were no one-off expenses. The -- we can give you more specific and more details around that, that fully explains the difference, but majority of this is driven by drop in occupancy and lower revenues and recoveries.

Okay. Divestment pricing...

What about it?

Yes...

Yes. So 30% of valuation is still a reasonable assumption.

I mean I'm not going to say it's -- I mean, one, I'm not going to say it's going to be 30%, but it's -- I think that potentially could be in the range. I would not assume that's going to be on every asset. We're still at the beginning stages, so it's -- to my comments earlier, there's not a lot of velocity in the market to be able to track stuff, so what you need to do is you need to best position the most liquid asset you have in your portfolio, or assets, and run the appropriate marketing process for that asset. And then when the offers come in, as I mentioned before, we've had good activity, then the brokers get to do their job and negotiate price up, but 30% is -- I mean that feels like a pretty safe number, but I can't make any guarantees on that because there could be some variations. I think on an average it's -- or you may see some that -- in that range, you may see some that are less. It's hard to believe that you've seen some more, but we haven't fully tested the market. And where we are in the process, only 2 of the properties have seen initial offers. And one more is -- the other one is trailing a little bit. And again this was very strategic on how we set this up, so the third one is still getting offers.

[ Terrence ]...

Checking for the first half rent reversion, okay? I'm assuming it's on a [ pay rent ] basis, so on a net effective rent basis, is it also around negative 10% [indiscernible]?

I didn't get the question.

So on a net effective rent basis, is it also a negative reversion?

Again, I mean, I don't have that number calculated, but just because it's on a net basis -- I mean it goes back to conserving capital, right? Everything is a negotiation, right? You have free rent. You have TIs. And you have face rent, right, whether it be gross or whether it be triple net. And if a tenant wants $150 a foot, they're going to be willing to pay more in rent. And if the tenant is willing to settle with $80 a foot and move in the space, they're going to want their rent to reflect that. So it's something that we look at, but right now it's not our priority. Our priority is getting tenants in the space at the lowest cost of entry, right? If I had unlimited capital, I can make that 10% much lower because I could feed people money on the TI side to bring up my face rent, so -- and that's just one component of it. The other component of it is when a lease was set in place to when it expires. So if, let's say, a lease was 10 years ago, and 10 years ago, it was the top of the market. And you put 3% growers on that and you grew that rent for 10 years. And then that 10 years happens to come in a soft part of the market. There's going to be a delta, right? I mean just we look at things -- well, in the U.S., when people lease space, it's got to be at market. No one is going to pay over market unless you artificially buy up the rent as I've described that before. So we're held to doing deals at market or maybe slightly above market if our building is considered superior, but there's not going to be a huge spread over market. Does that make sense? I mean that reversion would only work great is in a market that's slowly always going up, right, because you would always be in a reset and just keep going greater, but even with rents going up, you still have the other factor. Did it have a 3% grower on it? Did it have a 2% grower on it? And so that will get the rent to a pretty big number at the end of 10 years.

And to add to John's comments. Each lease, when we get into the lease negotiations and approval stage, will not only go through what's the reversion, but will goes -- it goes through the net effective rent has to be contributing positively. It has to meet the IRR hurdle, estimated net present value hurdle. And it has to make sense in the overall scheme of things as to what capital we are deploying and what we are returning in what time frame. So the payback period will also [ be equal in import ].

Yes. And just to add to that, even go a step further, if you have really big credit, they're going to want a lower rate, right? So big credit companies will pay less. And riskier-credit companies will pay more, so you have that factor that -- another variable that will come into play. So if you end up with a Fortune 100 company, they're going to want a deal that's slightly below market. And then you're going to have to make a decision as an owner. Is it accretive to the value by having a credit tenant in the space? And then because you're securing that rent roll with credit, all right? So if it's a 30-year rent roll, you're probably getting paid for it elsewhere other than rent, on the exit, by having credit.

[indiscernible] questions...

Sure.

Are there any [indiscernible]...

[ Yes ].

Yes. There are very -- a few tenants and not very significant in terms of the dollar amount. And those have been adequately provided for in our NPI because we follow our expected credit loss model, where we track the arrears, the age and the likelihood of the recovery; and accordingly, [indiscernible], but there are very, very few of; insignificant amount. It's in arrears.

[ More questions ] [indiscernible] assets buying [indiscernible]. Is there any chance of Tranche 2 moving to Tranche 3 move -- and Tranche 1 would move into 2?

You mean move asset from tranche to tranche...

Yes. And if you would do all that, what is the key consideration [indiscernible]?

Yes. So the tranches were created back in December, right, and there was a rationale for that. I can't speak to that rationale, but I think what we wanted to create in this slide was to kind of show the numbers on asset by asset within that tranche. And you can probably come to your own conclusions on why assets were in the tranches that they're in. And we just wanted to give that clarity. Now to move an asset from tranche to tranche -- this tranche is going to go away when we get into recovery. So right now this tranche is tied to the MRA and ultimately our plan to get through recovery and stabilization. Once we get to grow, the tranche concept is gone. It will just be on a go-forward basis how we look at things, but I think there's a lot of strategic thinking that goes into all this stuff and as far as the performance of an asset and the markets constantly changing. But we just thought it would be helpful for the audience to see things on a tranche-by-tranche basis. Does that answer your question?

Yes [indiscernible]. As I look across your tranches, some [indiscernible] they did far better -- are they performing better than [ your old destination ] [indiscernible]...

Yes. Well, remember what you're looking at here is just a snapshot at a moment in time, all right? Like I can guarantee you some of these that you're seeing that look positive aren't really positive, so we look at it from a broader spectrum, how it sits in the market; potential market growth from rents to capital markets, to liquidity. We also see downstream the capital that's going to need to go on these assets, so there's a lot of other factors that go into that. I mean this isn't -- Mushtaque and I did not create this list, but it is a list that we do think has a lot of validity. And we want to show that validity sort of in this snapshot of things, but I guess maybe what you're asking is, if something is in Tranche 2 and if -- and it becomes a good performer, could it get moved to Tranche 3. Sure, but I think, at the end of the day, what we're really saying here is this was something that was set in place as it relates to dispositions, right, under the MRA. And so we're going to be doing a hold-sell analysis on all the -- not going -- well, yes, we are. We're going to be basically doing a hold-sell analysis on everything. So if something looks good and it's a good performer, they'll be a keeper, right? We'll keep it for a longer period of time. I don't know if we need the formality of saying it's now in Tranche 3 officially, but we may make a decision. And hypothetically, if something is in Tranche 3 and something happens in that market and it's no longer the performer or something negative occurs in that market, we may make a decision to do something with Tranche 3 that's strategic for them. So we're not bound by this. At the end of the day, the underlying goal is to do right by the unitholders, create value, to meet our obligations under the MRA regardless of what tranche it's in, but there are some in Tranche 2 that are showing signs of promise. And so maybe there is a structure that we can find on that asset that would give us a longer runway -- I should say, more immediate appreciation when something else. Does that better answer your question?

Yes. Just to add. The main objective of presenting this table was to show the income generation by tranches and to isolate and show to the audience that the Tranche 1 is 33%. Tranche 2 is 14%, and Tranche 1 (sic) [ 3 ] is a growth. So as we look to the future as we execute on our strategy, we dispose of assets. If you have to take some message out of that is that our future earnings will not be as depressed as what we see in this first half of the year. So this was the primary intent. There is no accounting requirement to segment or classify our assets. This is purely an internal way of presenting the classification of income with that...

Can I ask just 2 more from me?

Okay, Derek, go ahead.

Yes, Derek from DBS. For your NPI or 4,200 million (sic) [ $42.8 million ] for first half, could you give us what -- 2Q?

For Q2 only...

Yes [indiscernible].

It's on the slide, is it not?

Yes. I won't go by my memory. I'll get back to you...

[ Yes. Perfect ].

Then my last question is on the sale. So next year, I think that's a concentration that we have, yes. I'm also trying to match it to what you mentioned, that there's a lot of [ news ] but there's a fairly small amount of people who sign on. So what is the so-called feedback that you get on the ground [ to assess ] something that doesn't fit...

Yes. So -- yes, that's a great question. I mean it's that's a snapshot for a period of time, right? And office leases tend to take a little bit longer to go to execution, but more importantly, the big office leases to the 100,000 to 200,000, to 300,000 square foot, they run an RFP process. And so they'll go through the market. I mean it's a 20-page proposal that you go back and forth. And then depending on the tenant profile too, if it's a government tenant, then it takes even longer for that process. And so what's getting caught up in some of the -- there are a handful of government leases, which is great because those are big credit. They're also expensive, but it's good credit. But those take a lot longer. I mean, one of them, for example, I think we've been working on for probably at least 6 months and it's still in the proposal stage, right? So now the good news with government leases is that, when they go into leases, they typically move pretty quickly. But again, we have another government lease that we've been going back and forth with for a couple of months that we expect will eventually get executed on in another property. So it's just a snapshot. We look at it in another quarter and those could be off, but the good news is there's activity in some of that process. Now what -- next quarter, if we see the tours not pick up, well, then we internally will ask questions of our brokers and our asset managers why the tours -- you just happen to be in these -- sort of in this conversion stage where things have all kind of moved into proposal and things haven't quite caught up on the tours yet. And then eventually they'll tip over into leases. And there's also duplication -- potential of duplication within proposals as well because there could be 2 -- I mean it's not likely in this market, but there could be 2 deals looking at one space.

Got it. So the other one, on lease expiry [ for operations ]. Diablo is one big chunk that you need to address, but I'm assuming there's [ a big, medium ] -- if you've got any guidance on that in general.

I mean we have several leases that are out for signature right now, and those -- once those get signed, you'll see a nice jump in that. In markets like this, leasing is not entirely trackable, all right? It just doesn't flow evenly. I'm as optimistic as you can be that things will continue to improve. We have a very nimble footprint to get deals done. We've created a really good process to move things along. And again our focus is putting the dollars in the right spot, so if a deal shows up on something that's going to trigger something for us to give us access or opportunity or something else that we wouldn't otherwise have, all focus will be on that deal. So it's really with precision of execution that we're looking for on this, versus just broadly just doing every deal that comes to us, as I kind of mentioned before, but we could see a big surge. I mean in the U.S. the summer is typically a slow period. After Labor Day, there's usually a good rush to get leases done. And then things start to slow down right around the holidays, but this year will be a little different because it's a presidential election year. But I think things will continue to move along. I mean it feels like we've -- kind of have that momentum behind us. Capital markets is starting to pick up slightly. I mean it feels like we're moving in the right direction.

Yes. So just mindful, we are past the hour, but I think, Vijay, you have one question.

[ Just complete different thing ]. Can you give a guidance in terms of CapEx, NPI [ but maybe both in ] 2025? I'm -- judging by the leasing momentum, leasing velocity you see in the market, can you give a range of occupancy by which you will likely to -- end up this year?

I wish I was that good. I mean I'm optimistic about occupancy. I can't really give you a range at this point. I mean there are so many variables that are coming into play. If this was a more even, balanced year without return to office and all these other factors that I mentioned, it would be a lot easier to predict something, but I don't know how I can even -- all I will tell you is we're going to do as many leases as we can that make sense for the fund.

Yes. Any guidance on CapEx on the year, for this year [ at least ]?

All right, go ahead.

Yes. So we have not publicly given our CapEx number. And that was because the 2024 financial year was remain -- would have remained in flux given we were proposing and planning to sell some of the assets, but there is an amount that we have agreed with our lenders as part of our master restructuring agreement. First thing is we are under that budget. We are expecting to be under that budget, as well as we have significant liquidity to pay off all of that what we have agreed with the lenders, right? Now the reason why I'm not giving a specific amount is because, as you can imagine, when we sell the assets, that number will fluctuate. So there is a variability in that number that's expected. And same goes for 2025. The numbers have not been approved by the lender, but we have a clear idea as to where we want to be from our capital spend perspective. And as you can gauge from my liquidity [ points ], we are very strategically building the liquidity. And we're not spending on every single deal that's coming our way, with that intent that -- how we use our available capital, which is constrained, to our advantage in '24 and '25 and as the management executes on the sale plan. So hopefully, that kind of addresses your questions without giving the numbers.

I mean I will just add to that. I mean one of the real positives, I think, what should be seen, is that we're going to be at or below our approved budget, right? And so I think the takeaway with that is, as everyone knows, when you do a budget ahead of time, who knows? I mean a budget is nothing than an educated guess on what you think is going to happen. And so the fact that we are able to feel comfortable that we're going to be at or below that, I think it's quite an accomplishment to be able to do that and have everything else sort of fall in-line the way we've done. So we're seeing that as sort of the first step of moving in the right direction, but again everything is going to be done on a very strategic basis.

Yes. And the risk with forward-looking guidance on occupancy is also the sale of assets. If the sale of assets happen and at what time it happens, it will change the numbers drastically, right, so we would refrain from doing any forward-looking guidance that can change.

yes. And depending on the asset, then -- each asset has a sort of a different capital number that sits on top of it too, so depending how you sort of slice and dice it, it's going to change those numbers as well. Trust me: We'd like to know that exact number too.

[ Yes, okay, yes ]. I think, if you refer to our cash flow statement: For the first half, we have paid about [ 20 million ] of cash [indiscernible].

All right, thank you so much. We'll have to end here, so for those of you with more questions, please feel free to reach out to the IR team. And on behalf of management, thank you, everyone, for your time today...

Thank you.

Thank you for coming.

Thank you.