Q2 24/25

Oct 23, 2024

Summary

Gross revenue and NPI declined year-over-year due to China’s weakness and FX headwinds, but portfolio occupancy remains high at 96%. Interest costs are expected to rise, though recent rate cuts may moderate increases. Divestments and acquisitions continue, with strong ESG progress.

Very good morning. This is Yun Mai here. Welcome to MLT's second quarter results for the financial year ending March 2025. I will now hand over the session to Xiao Mei, who will kick off the presentation. Hi, good morning, everyone. Quickly to go through the key highlights for the quarter before going into details of the financial results. Key highlights. For the quarter, our gross revenue is 1.8% lower year-on-year at SGD 183.3 million. NPI is 2.1% lower year-on-year at SGD 158.6 million, and DPU is 10.6% lower, 2.027 cents. Portfolio occupancy remains stable at 96%, with an average rental reversion of a negative 0.6%, mainly due to our China portfolio. Excluding the China portfolio, our rental reversion is a positive 3.6%. WALE remains stable at 6.6 years. Asset leverage at 40.2%, higher than 39.6% against last quarter, mainly because of the strengthening of the JPY as well as lower fair value on our financial derivatives. Our debt hedged into fixed rate, 84%, that is debt maturity of 3.6 years and income for the next 12 months. 37% has been hedged into Singapore dollar or derived in Singapore dollar. We have three properties in Malaysia where we announced divestment and pending completion, a total of about SGD 50 million. What we completed during the quarter would be one property in Singapore and one property in Malaysia. We also proactively issued SGD 180 million of PERPs at 4.3%. This is with the intention of redeeming the SGD 180 million, which is at 5.2% at the end of September. The SGD 180 million at 4.3% was issued at the end of August, while the redemption was at the end of September. You would notice in our financial results that there is a one-month overlap, which resulted in the distribution of PERPs being higher quarter-on-quarter. But in the meantime, between that one-month overlap, we had achieved temporary use of proceeds to pay down loans of similar interest rates. Moving on to 2Q versus 1Q WALE results. Gross revenue was lower, mainly due to lower contribution from China, absence of revenue contribution from divested properties, as well as currency weakness. This is mitigated by stronger performance in the rest of our countries, as well as contributions from acquisitions completed at the end of last financial year and the beginning of this financial year. On a constant currency basis, gross revenue would be flat and NPI would have declined by 0.3%. Borrowing costs increased mainly due to higher average interest rates on our existing debt, where we replaced our expiring or expired IRSs at higher rates. Incremental borrowing to fund 1Q FY 2024 and 4Q FY 2023 results. The increase is actually partly mitigated with loan repayments and proceeds. So out of the 8.2% increase, which is about SGD 3 million, about SGD 2.3 million is due to incremental borrowings to fund the acquisitions. While the remaining is actually whatever increase in our IRSs is actually offset by interest savings on the loan repayments proceeds from divestments as well as our proactive capital management. Accordingly, our DI is 8% lower, SGD 109 million versus SGD 118 million, translating to a DPU of SGD 0.0202, 10.6% lower than SGD 0.02268. Excluding the DG of SGD 6.1 million in this quarter and DG of SGD 8.8 million in 2Q last year, our adjusted DI would have been 7.2% lower and the adjusted DPU, excluding the effect of divestment gain, would have been SGD 0.0907 versus SGD 0.02091 last year. For the one half results versus one half last year, the reasons behind the gross revenue and NPI investments are largely the same as what I have mentioned earlier. Borrowing costs also similar trending as what I mentioned 2Q versus 2Q last year. Amount distributable to unitholders is 7.5% lower than last year, translating to a DPU which is 9.8% lower than last year, SGD 0.04095 this first half versus SGD 0.04539 first half of last year. Excluding DG, our first half DPU would have been 7.9% lower, SGD 0.03861 this first half of FY 2024, 2025 versus SGD 0.04191 one half last year. Quarter on quarter, our gross revenue is 0.9% higher, 2Q versus 1Q. This is mainly due to higher contribution from our same-store assets in Singapore and Australia. Full contribution from the acquisitions made in 1Q this year, partly offset by lower contributions from China due to currency weakness. Really, the increase in gross revenue is mainly due to the acquisitions made last quarter. Otherwise, whatever shortfall or lower contribution by China would have been offset by better sales performance in the other markets. NPI is 1.2% higher accordingly. Borrowing costs increased by about SGD 1.4 million, mainly due to incremental borrowings to fund 1Q acquisitions. Otherwise, whatever higher interest we have in terms of IRS replacement that is offset by savings from the repairing down of loans with divestment proceeds. DPU is 2% lower, SGD 0.0202, SGD 0.027 versus SGD 0.02068. Excluding DG, it is SGD 0.01907 versus SGD 0.01954, 2.4% lower quarter on quarter. Moving on to the balance sheet and capital management ratios. NAV is at SGD 1.33 versus SGD 1.37, mainly due to two key reasons. One is translation losses, and the other would be lower fair value on our financial derivatives because I think at the end of September, because of the interest rate movements, I think generally all our IRSs are of lesser fair value as compared to the 30th of July 2024. Gearing picked up to 40.2%, 0.6% higher than 39.6%, mainly due to the strengthening of JPY debt as well as the lower fair value on our financial derivatives, which decreased the total asset base. Our debt duration remains at about 3.6 years. Interest cover is 3.5 times, and I think I am glad to share that we have managed to keep our interest rate stable at 2.7% for the third quarter already. I think moving on to the debt maturity profile. Okay, I think our debt duration remains healthy at 3.6 years. We have more than sufficient credit facilities of SGD 987 million to refinance whatever is coming due for the rest of this financial year as well as next financial year. Moving on to our hedging strategies. At the end of the quarter, our total debt that has been hedged into fixed rate is 84%. Out of the remaining 16%, we only have unhedged portion in JPY and SGD. JPY because of the low interest rate environment, and SGD because we needed the flexibility to par down loans with our divestment proceeds. Similarly, for FX, 77% of our DI for the next 12 months has been hedged to USD and SGD. I will now hand the mic over to James to walk you on the portfolio. Good morning, everyone. The portfolio update on this slide, it shows that from last quarter to June our portfolio is split by developed markets and developing markets, 70% and 30% remains similar by AUM and gross revenue. Next. In terms of portfolio occupancy, we closely continue to manage this as well. This is mainly due to a factoring of space in these countries like Vietnam, South Korea and Hong Kong. Overall, the portfolio occupancy remains pretty robust and stable. Next. In terms of rental divergence, we discussed the negative 0.6% drop in the overall portfolio rental divergence. This is mainly due to China's negative bookings and negative diversion of 12.2%. Overall portfolio was 3.6% up if we exclude China. From the top you can see that Singapore's diversion remains pretty healthy and strong, mainly due to the robust demand for grade B warehouses. Japan is flat, Hong Kong is 0.2%, South Korea 0.2%, Malaysia 2.9%, and Vietnam we had about 4.1% and same for India. Next. In terms of lease expiry, we managed to return as of September 30. Most of the lease expiry is due for this year, leaving only 3.7% due for the second half of this year. This is coming mainly from China and from Korea. For top 10 tenants, this chart remains very stable at 15. A quarter ago it was CWT. We managed to par down the concentration risk from 4% to 3.4% as of June this year. Again, this is mainly due to the conversion of one of the master lease to a MTB property to sign directly with the tenant underlying tenant strategy. In terms of portfolio rejuvenation, we have now started to date three acquisitions. Three acquisitions are in Malaysia, two are in Vietnam, and one in China. These are in growing markets, emerging markets, which offers high-yielding assets to be accretive to our fund. Next. These are some of the ongoing AEI initiatives we are doing in Malaysia and Singapore. For Singapore's case, this project now is due for completion in the middle of next year. Next. We also have selected divestments. So far, we have announced and completed eight divestments in our portfolio, five in Malaysia, two in Singapore, and one in China. This enables us to free up capital to be deployed into our high-yielding and modern assets in our portfolio. That is all for my updates. Okay. I will quickly give you a quick update on our ESG journey. You recall, MLT is committed to achieve carbon neutrality for Scope 1 and 2 emissions by 2030. This is, of course, in line with the Mapletree Group's longer-term target of net zero by 2050. Growing our solar capacity as well as green building certification is two of the key focus areas. Pleased to update that as of September, our solar capacity, self-funded one, has already grown now to 44.8 MWp, which puts us well on track to achieve this year's target of 45 MWp. As well as, of course, we still are driving our effort to reach the 2030 target of 100 MWp. For green buildings, we have also grown it to about 45% as of now. This will be in line with our end-this-year target of 50% of our portfolio by GFA to be green certified. Of course, our longer-term target is to grow it to 80% by the year 2030. For green financing, we continue to make good progress, and we procured about SGD 395 million of new green loans and credit facilities year to date. Currently, in total, green or sustainably linked loans amount to about SGD 966 million. For green lease, we are also pleased to update that since last year, where we ended at about 22% of our portfolio, the leases have all incorporated green lease provisions. That statistic has now grown to 40% as of September. Okay, now I hand over the session to Jean to conclude. Hi. Morning, all. In terms of the outlook, we continue to see these macro headwinds with these rising geopolitical tensions that is affecting the business and the consumer sentiment. We are actually monitoring the current economic situation closely, particularly on China. I think for China, despite the current weak property market and the weak domestic consumption, it still offers a very healthy fundamental. We have a large population base, rising urbanization, a high savings rate that offers actually a very significant demand potential. As you can see from some of the reports, we are seeing that the analysts are actually anticipating some property market turnaround in the second half of 2024. With that, we have also seen that China has entered into a rate cut cycle, and they have this low interest rate that is likely to continue in the medium term. Because we have our asset in China, we are actually able to benefit from this low interest rate as it offers us a very attractive interest rate, being the second lowest in our portfolio after the Japan debt cost. If you look at the reversions in China, this quarter, we reported a negative 12%. On the other hand, we are actually seeing that 90% of our leases have been marked down to market. In terms of the negative double-digit reversion, we expect it to persist over the next two quarters. Barring any further unforeseen circumstances or any external shock, we should hopefully see it trending down, meaning in a negative reversion in a single-digit zone instead thereafter. The other thing is, despite the high vacancy rate that is happening in the China market, our team continues to follow our tenants very closely. We have a very strong and experienced local team. With that, we are able to achieve a high occupancy of 93% as compared to our peers, which is mainly in the high 70s to 80s range. If you ask me in terms of the signing leases, the WALE is still short right now. Our tenants are still signing short at around 19 months. I think it also means that we can capture the rental rebound when the market recovers. I think that's what I want to say for China. For the rest of the markets, I would say it remains resilient with our diversified portfolio. As you hear from James, we have a high occupancy rate of 96%. In terms of the reversions excluding China, we are looking at a positive rate of 3.6%. In terms of the financial performance, as we have heard from Charmaine, we have also sustained a stable performance in local currency terms. For the first half, you have seen, in terms of the gross revenue and NPI, we grew by about 1% to 0.5%, respectively, on a local currency term. With our proactive capital management, we actually managed to maintain 2.7% average interest cost for three consecutive quarters, despite the higher interest rate environment. We have actually refinanced more expensive debt with our CNH borrowing. We have also done things like cross-currency swaps from currencies like Australian dollar, Hong Kong dollar, US dollar into a CNH. Of course, I think Charmaine mentioned earlier, we have done a PERP that actually gave us a 90 bps savings in terms of the interest cost. Despite that, we still foresee that our financing cost is still expected to rise. As Charmaine mentioned, our replacement loan and hedges will be progressively go off. This will be entered in a higher rate because, as you are all aware, we entered the earlier in a cheap debt during the COVID years. The high borrowing cost will continue to hit us. In terms of the portfolio rejuvenation effort, you have seen us acquire about SGD 220 million this year. We are also actively on the lookout for equity acquisitions. We continue to see potential opportunities in emerging markets like Vietnam, India, and as well as some developed markets like Japan. As you are all aware, it is still no doubt that the interest cost has risen, and it still offers a positive yield spread. As for Korea, Australia, I think we are still watching the environment closely. Korea, there's still a gap in terms of the buyers and the sellers. For Australia, I think there is still quite a tight yield that they are expecting. That's on the acquisition side. On the divestment front, you have seen us announce and completed about SGD 130 million to date across eight assets in three countries, Singapore, Malaysia and China. We continue to have a pipeline to divest. I'm pleased to say that we are actually halfway mark there. I have identified about SGD 300 million of assets to be divested, and we are right now close to a halfway mark there. Because at the same time, while we want to accelerate on the execution front, we also need to balance against the tenancy expiry, the time taken for the regulatory to review, as well as for some of the assets that we are looking to divest, we are waiting out for a macro market recovery for better pricing, particularly in the China and Hong Kong assets. I have talked about the divestment. In terms of the AEIs, as Charmaine and James have mentioned, we are expecting our Benoi AEI to be completed by around May, June next year. We are actually based on the current team feedback that we have, we have been receiving pretty healthy level of inquiry from a broad spectrum of industries such as electronics, industrial goods, and consumables. We hope to be able to secure some pre-commitment ahead of completion. Prospects would like to generally view the space and view it before they would like to commit. Hopefully we can have some traction by early next year. I think that sums up what I want to share on this. I will hand over to Eme. Okay, now we will open the floor to questions. Mervin, you are always first in the line. Please raise your first question. Thanks, Eme. Thanks, James and team, for the call. Maybe you can go through all the bad stuff first, and then hopefully we end on the call on a positive note. China is terrible. In terms of the negative rental reversion, double digits, so they will be still around that 12%. Sorry. Mervin is a bit mouthful. Yes. Can you hear me now? Yeah. Okay. Can you start again? Yeah. Maybe we can start with all the bad stuff first, get it out of the way, and then end the call on a positive note. Just on China- Sorry. Yeah, China's terrible, clearly. But in terms of the guidance on the negative rental reversion, double digit for next two quarters, will it be around that 12%, or will it be worse? In terms of leasing inquiries, are you seeing a pickup in interest or is it starting to slow off? Are these sponsors we're talking about buying properties from MLT, is there anything imminent? The second question I have is for Japan. It seems rather weak on the NPI basis, quarter-on-quarter and year-on-year, even if I adjust for FX headwinds. What's happening there given the occupancy has been somewhat stable? Thanks. Yes. Well, thanks a lot for your two questions. The first one, I will take it. In terms of reversion, the Chinese reversion, yes, it's a negative this quarter to the last quarter. But based on our on the ground and the feedback on the ground, it's likely to remain around this level, in the next two quarters, in the next six months. We don't see that, what do you call it? All of the things will get significantly worse than this level. It should hold around this level for the next two quarters until such time that the effect of the monetary stimulus and all these factors has filtered to the ground so that it will be. We think that it will take about six months or so, and then everybody is crossing our fingers and feeling optimistic that things will turn around after that. That is for China. The second question is related to, you said Japan? Yes. Japan seems a bit weak. What's happening there? Yeah, I think for Japan, in terms of the NPI, because we acquired the larger assets like Koana and Kobe. These are MTB in nature, and typically, on a quarter-to-quarter basis, there will be movements in the occupancy. We view it as a more frictional kind of movement, mainly due to Koana and Kobe. Okay. Kobe is hard, but we had some frictional in between. Okay. Then the- Yeah China divestments, any progress there or that is still more next year? Okay. For China divestments, we are in negotiation on one asset in China. That is currently under exclusivity. On top of the China divestment in Xi'an that we have announced earlier, we are working on another one that we hope to be able to announce- announce before the end of- yeah, sometime in- 3 months or so yeah, in this quarter. We hope to be able to make some announcement this quarter. Okay, excellent. I will hand over to the rest. Okay, next on the line is Barry Tan, DBS. Sorry. Yeah, DBS. Yeah, sorry. Yes. Hi. Morning. Good morning. Can you hear me? Yeah. Yes, Barry. Hi, Jay. Hi, Barry Tan. Just going back to China, right? Yeah I thought that the negative reversions were quite in line with what you were guiding. Maybe your thoughts on your rents currently in China, right, versus where you think you could get. You mentioned that there are still negative rental reversions, but I thought you have already mark-to-market 90%. Is there further weakness from what you have signed recently? Just want more color on that. If you give us a sense, how is tier 1 doing versus tier 2? Okay. Hi, Barry. Most of our China mark-to-market, we estimate about 90%, is mark-to-market. Maybe about 10% that is still coming up for renewal in the next 12 months or so. It is stable, is what we can say, in terms of working out. That is the mark-to-market portion that we can advise. What is your second question again? Sorry. Tier 1 versus tier 2. Oh, tier 1, tier 2. Tier 1, in this second quarter, there was about -3% negative reversion in tier 1 cities, right? Compared to -13%, -14% tier 2 cities. The negative reversion tier 1 cities came mainly due to some oversupply in the Shanghai market because of a bulk of five new stock came in the first half of this year in the outskirts of Shanghai, towards the south and west part. That is for the negative reversion in the first tier. We believe this phenomena, hopefully in the next few quarters, should stabilize in terms of the occupancy. Because occupancy is still, because of the excess supply still in Shanghai itself, we understand it is close to 20%. Hopefully in the next one year, the job market should be there, because Shanghai being Shanghai is still a core Tier 1 consumption market. We are quite confident when things move up, we should be a very strong rebound for Tier 1 cities. I see. Okay. Thanks for this color. I just have one more question. It's on your interest cost, right? I think, Jean, you mentioned that it's still expected to trend up as we approach Yeah to next financial year. I'm just curious. Yeah. Could you give us some guidance you expect to come off next year with interest rate coming off? We are stable at 2.7% now. I think previously I've guided that we will increase to about 3% by end of this year, and about 3.3% for next financial year. But I think with interest rates cuts and all that, we are looking at that reducing. By the end of this financial year, maybe about 2.8%, bearing in mind that we report this percentage on a quarter by quarter basis. Yeah. Next year we will probably trend up to about 3%. Oh, okay. So you're dialing back your interest cost assumptions, that we should be looking at slightly lower, versus your initial guidance. Yeah, that was, I think previously before Fed did the cut, 50 basis point cuts, I think, during the quarter itself. So yeah, it will still increase definitely because of the IRSs. We have stressed many times the IRSs are locked in Yeah during the really low period. So you would still see them being replaced at higher rates. Although now that they have cut the rates, it would be probably slightly lower and also proactively converting them from the AUD and HKD, which are still high to SGD borrowings via swaps. Okay. That's good news. Okay. That's all for me. All right. Thank you. Okay. Derek, no more questions, right? I move on to Rachel, Macquarie. Hi, good morning. Thanks for the call. Sorry, could you repeat your comments on the Tier 1 and Tier 2 markets? It was a little bit breaking, so I couldn't quite catch. Was it 93% of the leases signed is in Shanghai? What was the reversions for Tier 1 and Tier 2? Okay. In terms of the reversion for Tier 1, Tier 2, I think Tier 1 is about negative 3%. Tier 2 is minus 30%-40% negative. That's on the reversion side for Tier 1 and Tier 2 respectively. The question which was asked by Derek was, in terms of whether it stabilized or not. Of course, we're advising that in terms of the leases that we have renewed and signed so far, 90% already mark-to-market. We can say it has come to a level which is at the market. Leaving about, we estimate about 10% of the leases that is up for renewal. If you don't renew, that would be new leases. This 10% will renew in the next 12 months. We believe this will be mark-to-market in the next 12 months or so. Overall, we think it is stabilizing, and it should not be any much materially worse off this quarter. Okay, got it. Thanks. Probably moving on to brighter spots, I think for Singapore, double-digit reversions, is this still sustainable? Well, with new supply coming up, we believe this double-digit reversion should taper off. It should still be strong, but probably be closer to high single digit- Digit, yeah. than 12%. We are looking around this level. I think high single-digit reversion is probably more realistic to expect. Okay. By end of financial year, probably close to high single digit. Is that okay? For next year. That's right. Okay. Hong Kong, I saw reversion seems to have reduced, although it's still in positive. I'm just wondering-