Mapletree Industrial Trust (ME8U) Earnings Call Transcript

Good morning. Thanks for joining us this morning's second quarter financial year 2026-2027 results briefing. MIT has released its results yesterday after market closed. We will begin with key highlights of the results. [ With us today are ] Mr. Anand Chandran, CEO; Khoo, Geng Foong, CFO; Ms. Serene Fong, Head of Asset Management; [ Siok Khim Chng ], Head of Marketing; and Ms. Sara Wayson, Head of Asset Management, Data Centers U.S. Now I'll pass to Geng Foong to bring us through the [indiscernible].

Thank you, Mui Lian. Good morning, everyone. Thank you for joining our financial results briefing. I'll bring you through MIT's second quarter FY '26-'27 financial performance and I'll give you some update on our capital management position. Thereafter, Anand will go through the portfolio update and color on MIT's outlook. This slide shows the year-on-year comparison for second quarter FY '26-'27 against last year. NPI, our net property income has reduced by 3.5% to $119.8 million. This happened in the past 12 months, we do have some nonrenewal of leases in our North American portfolio, and we also divested the three Singapore industrial properties in August 2025. These nonrenewals and Singapore divestment has caused our net property income to increase year-on-year, partially offset by renewals as well as new leases in our Singapore portfolio. We have used the divestment proceeds to pay down loans. So with the interest savings, lower interest on unhedged floating rate, our borrowing costs has decreased. The effects of this were partially offset by higher borrowing costs from replacement hedges. Cash distribution from joint venture increased year-on-year due to utility credits received and higher rental income, net against higher borrowing costs from repricing of green interest rate swaps. Overall, MIT distribution per unit for second quarter FY '26-'27 is at $0.0297, which is about 6.6% lower than prior year. Moving on to quarter-on-quarter. Net property income decreased mainly due to nonrenewal of lease at San Diego. Higher Singapore property operating expense was partially offset by higher contribution from [indiscernible] and new leases from Singapore portfolio. Borrowing costs increased mainly due to effects of higher interest costs from replacement hedges and absence of interest savings from temporary repayment of loans with proceeds from the new perpetual securities in first Q. The distribution to perpetual securities holders is lower this quarter as we have impact of overlap of new and previous perpetual securities in first quarter FY '26-'27. Overall, the DPU for the second quarter of $0.0297 is lower than prior quarter by 4.5%. On the capital management front, overall, our financial position still remains strong at aggregate leverage ratio of around 37.7%. This still provides us with ample debt headroom to capture growth opportunities. Our hedge ratio remains at relatively lower, close to 73% as compared to prior years of about -- of above 80% to provide us the flexibility to pay down loans with divestment proceeds when divestment materialize. Average borrowing cost for the quarter stands at about 3.3%. We do have about $600 million of interest rate swaps due in each of financial year '26-'27 and '27-'28. These will lock in when interest rates were lower. If we were to reprice these maturing interest rate swaps with current interest rate today, we expect our borrowing cost to increase to around 3.5% to 3.6% for FY '26-'27 and slightly below 4% for FY '27-'28. Our team continue to monitor the market and be nimble. We will continue to enter into replacement hedges in smaller tranches when there is a slight dip in the market. So I mean, for example, we do monitor the market. If you look at the 5-year USD rates 2 weeks ago, about 4.8%, but it came down slightly to maybe about 4.5%, 4.6% level. So we will continue to monitor the market and be nimble on that front. For some of the hedges, we will also lock in on staggered basis with some slightly shorter tenure. And of course, if we are able to divest some of the properties and we can use the proceeds to pay down loans, this will help to mitigate the impact of the higher interest rate. Maturity profile. Our debt maturity profile remains well staggered with weighted average debt duration at a healthy 3.5 years. [Technical Difficulty] Sorry, we had some technical issue there. Our debt maturity profile remains well staggered with duration at a healthy 3.5 years. On the FX front, as much as feasible, we try to borrow local currency loans to provide natural hedge for our overseas investments. This helps to protect FX fluctuation to our net asset value and DPU. For example, about 52% of our U.S. portfolio are funded dollar loans. So one, our exposure to the U.S. by AUM is about 46%. But if you were to net off the onshore borrowings, our distributable income exposure to USD is about [indiscernible]. So for sensitivity, if you look at for every 5% depreciation in U.S. dollars, the impact to our distributable income is only about 1.2%. For the remaining distribution in foreign currency, we entered into FX forwards to hedge the income into Sing dollar. Currently, close to 91% of our distributable income for the next 12 months hedged or derived in Sing dollar.

Good morning, everyone. Thanks for joining this call. I will really only spend time talking about 6 slides and the portfolio update and outlook section so that we can save more time for the Q&A. We'll start with the occupancy. The overall portfolio occupancy in this quarter has dipped from 90.7% to 89.7%. It was primarily driven by the data center occupancy segment, which has dipped from 85% to 82.1%. This in turn was driven by the dip in the North American portfolio where the occupancy has dropped to 79.1%. This is largely due to the full quarter effect of the lease in our San Diego asset expiring in May 2026. Nevertheless, as we shared, the post-quarter activities to relet Alpharetta and to lease out San Jose will go some way towards improving the North American portfolio. We should mention that the Singapore portfolio remains strong and resilient. I think it often gets lost about the amount of work that has to go into maintaining the strong figure. So behind this are 184 renewals and 65 new leases that allow us to retain renting level in Singapore. Also of note, Kallang Way asset as of now has a committed occupancy of 72.4%, and we are tracking confidently towards 75% by the end of the FY. [Indiscernible]. The portfolio WALE stands at 4.4 years. And within that, there is strong geographic diversification that speaks to the stability and the growth of our organic income. If you look at the long duration components of that WALE, the 13.3 years in Japan offer us the stability, short duration WALE of the Singapore portfolio of 2.6 years gives us the opportunity to find growth, which we'll speak about a bit in the next slide. And the mid-duration occupancy and WALE [indiscernible] is where we're working on to improve visibility. And if you go down to -- I'm sorry, bring back that slide please. So it's really the mid-duration WALE that we're focused on. And as we've shared in the last quarter, we had identified in FY '26-'27, 1.4% of GRI of the leases that were coming due. With the Alpharetta reletting, 1.1% of that has been addressed. And so it speaks to the point of us trying to improve the visibility of the income profile in that mid-duration WALE. So there's been good traction there. We go to the reversion slide, Slide 21. Following on from what I was saying about the short duration WALE part of our portfolio in Singapore, allowing us to capture that growth. In the last quarter, speaking to the quality of the earnings, the Singapore portfolio achieved a reversion rate of 6.9%. This was an increase over the 5.3% from the quarter prior. As I mentioned earlier, this involves a significant number of renewals, so 184 lease renewals for a total of about 640,000 square feet. I think we can expect -- we've got good visibility for the next half of the year for Singapore reversions to remain in the mid-single digits. There were no reversions or renewals in the North American portfolio in the last quarter to speak of, and that's why you see that figure there. We go to the divestment slide on Eagan, please. And I believe everyone is familiar with the disclosure, but spend a bit of time just covering the details again of the notable divestment activity in the last quarter. So the Eagan asset was divested at a sale price of USD 9.81 million, which was 9% above the purchase price and 10% below valuation. The genesis of this divestment was largely triggered by the embedded purchase mechanism in the lease that was acquired with the portfolio. So in my estimation, this was the best outcome that could have been achieved for this asset given the circumstances and have redeployed those proceeds to pay down debt or working capital. We shift now to the proactive asset management slide, please. As the slide is moving there. The proactive asset management slide, as you may have seen, this quarter, it's very U.S.-centric in terms of what we're sharing. But really, we're speaking to three themes, one being the reletting, two being the repositioning and three being the rebalancing. We've spoken about the reletting primarily to the good work that's been done to relet Alpharetta and lease-up San Jose. So I won't spend too much time there. On the repositioning piece, our diversified presence across both primary and secondary North American data center markets, while admittedly have presented us with a challenge in recent years given how fast the U.S. data center market has evolved, have also presented us with opportunities, which have been demonstrated in the Alpharetta and San Diego -- San Jose, I'm sorry, lease-ups. What we're seeing here, and we can spend more time talking about this during the Q&A, some of the early signs of AI inference in what is, as I mentioned, the fastest-growing and evolving U.S. data center market. You could say that they have come from either the AI enterprise or AI colocation market. And so while we are actively addressing any of the challenges presented to us in the North American market, we're also equally focused now and going forward on the opportunities that this diversified presence across North America presents for us. And so our portfolio allows us to observe and capture some of this evolving demand where it works for us in the portfolio. On rebalancing, as we've mentioned in several quarters before, we are focused on the quantum that we've mentioned about the $500 million to $600 million of divestment targets. The team and I are extremely focused on executing on this before the end of the FY, and we can share more color during the Q&A session. I won't spend too much time on the details in the box below. Those are information that has been covered either in the last quarter or this quarter. But I would summarize it by saying that you can take away from this that we are focused on executing the defense as well as we can across the portfolio. So not just in North America, which you see here, but seeing the active asset management in the Singapore portfolio with the reversions and the occupancy. I would say also that as it relates to utility exposure, we're also doing our best to increase the utility hedging in the Singapore portfolio. We can share also more in the Q&A if there are questions. But what about the offense. So the offensive actions that we must take in the existing portfolio will include U.S. re-leasing, as we've shared, will include us scanning the portfolio in North America as demand evolves for us to identify in conjunction with industry partners where we can find redevelopment opportunities. And also, let's not forget the Japan portfolio where it is steady long WALE portfolio. But in 2024, we had acquired that asset where we stated that there was redevelopment potential. So the teams are working in the background to work through those predevelopment work streams to ensure that we have a path and a plan towards that redevelopment asset to capture the upside. We are focused on the defense and the offense on the as-is portfolio and our income profile today. Maybe lastly, I just wanted to speak to a slide in the outlook section. If you go there, please, on the strategic direction. And I think after this, we will segue into -- on this slide, I think there were really three main messages that we wanted to speak to. One is the combination of the existing portfolio. So being very active as portfolio managers and asset managers where we are today in Singapore, U.S. and Japan. Within that, it is the top business deliver on the execution of divestments in the North American portfolio. We will, at the same time, equal weight the growth initiatives that are embedded in the portfolio. So we will focus and have been spending time widening the aperture to look at growth avenues in the industrial -- broader industrial segment as well as the data center sectors. Where will we focus? We are spending our time naturally in our existing markets in Singapore, U.S. and Japan first. These are already advanced, resilient economies with deep advanced manufacturing and high-tech basis, including those in digital infrastructure. What more, we see a durable occupier demand where the tenants are, of course, of top priority for us, and we will spend time looking at opportunities across those sectors. In the process, it's very important for us to be clear internally but also externally about what Mapletree Industrial Trust identity is. We will remain a general industrial REIT with the ability to go down deep into specific verticals where we have strong conviction as we have evidenced over the last 12 or so years in the data center space. This will continue to give us the opportunity across the portfolio and the optionality, but we must and always will form strong points of view that we will ensure we communicate to the external environment as we identify and execute on these growth opportunities. Under capital management, I think the main message is that we will be disciplined in terms of our capital recycling and reallocation. We're all aware that we are already in and moving into a high interest rate environment, certainly across our three advanced economies where we are present. So where it makes sense for us, we will redeploy capital into growth. But of course, where it makes sense for us to shelter from the macro environment, we will do so as well. Lastly, speaking about strategic growth, I am telling you in this seat, but -- and I won't be on this call spending too much time fleshing out a detailed growth strategy because I do want to spend time with the leadership team in the business to identify this. But suffice to say that we are being active in identifying how we can unlock will have to be inorganic growth. The organic growth, as spoken so far, we will definitely try to maximize. But it is really inorganic growth that we will look for going forward. And the question is how we will access this identified inorganic growth. You can broadly say this into the channels on which we will be going to have proactive discussions with business owners, capital owners to find these growth opportunities. And this would generally lead into look like sale and leaseback transactions, redevelopment opportunities, leasing opportunities in our existing portfolio or straight acquisitions of assets and locations where we have a high conviction. I would just summarize this before moving into the Q&A by emphasizing that when it comes to growth, we will very much be equal weighted on the defense as well as the offense. If you think about this in terms of investment terminology, we will look at both the beta and the alpha. The beta is what we have to face in the macro environment. We will make sure that we manage this prudently without giving up strategic upside where we don't have to. But it's really the alpha where we will focus on being proactive to position ourselves proactively to find growth opportunities. And we will take a tenant-led focus when we're doing this. So the tenant is ultimately the most important feature for us in our portfolio because that leads to us being able to develop long-term relationships. And the real estate solutions that we can try and solve together with these tenants will be something that we try and solve thereafter. But the identification, the communication, the engagement with existing and prospective long-term tenants is really what we're focused on in terms of our proactive conversations for now. In my assessment in the short time, I think there's great potential in the people, the presence and the platform of MIT, let alone if we can extract stronger advantages through our sponsor relationships. So we will be focused on spending our time trying to leverage as much of this potential as possible. I'll end there and maybe we can segue into the Q&A.

Anand, so we will now turn to Q&A. We ask each analyst to limit yourself to two questions. [ Bill ], would you like to ask the first question?

On my two questions, the first one I wanted to ask is with regards to this target divestments, right? How are we coming along the first half of this year? And also, I think earlier in the slides you mentioned of potential redevelopment of some older assets. Could you also give more details on that?

I'll take it and then my colleagues feel free to jump in if you wanted to. So the first part of your question on the divestments everybody would have read in the news, I guess, most recently about the 22 asset portfolio. That forms part of the funnel for us to achieve the divestment content that we've spoken about. So while we can't divulge specifics at this stage, we are -- and I am also directly involved with Sara, who's here today. And our U.S. team in trying to certain about the parties we are talking to, the parts of the identified divestment portfolio that we are speaking about and the time lines that we're holding ourselves to. So I'm confident and we are in specific discussions with a handful of parties on different parts of the divestment portfolio that we put up for identification, and we're holding ourselves to a target of executing on these divestments, a good amount of these divestments by the end of the FY. I'm sorry that I can't be more specific about that. Certainty in -- we would all like to have certainty in the divestment quarter. We will try to control what we can in terms of dealing with parties that we believe can close our best to preserve the divestment valuation targets that we are trying to target and having these time lines, things to do with the parties needing time to assess the sites and us needing time to negotiate the documents. We're trying our best to make sure that we close within 31st March time frame. So we are working in 31st March timeframe. So we are working in that quantum to try and close that amount in this FY. On the second point on redevelopment, I would say line of sight for us in U.S. where we haven't yet identified specific redevelopment opportunities. But as I said, part of having that diverse geographically and by asset type and by deployment type data center portfolio across North America from the West Coast to the East Coast in what is the biggest data center market in the world will allow us over time as the market evolves to identify redevelopment opportunities. So while we have been pressed to be in a defensive posture divest because of the change in the market, I really want to stress with the team, and we are doing this for us to create the conversations with the ecosystem because that's what you have to do to identify redevelopment opportunities. Are we speaking to the end users? Are we speaking to the operators within our portfolio or in the market about what they see in our portfolio. As real estate owners and landlords, we will have limited visibility ourselves to identify these opportunities. And that's why we have to have an ecosystem conversation to identify that. So if this ends up in a screening exercise of some sort with a handful of identified potential partners to identify that redevelopment potential, that's what we will strive for. But at this stage, it's still early days. And the other is in Japan, right? So as I mentioned, the asset that we bought in West Tokyo, when we transacted in September, October 2024, it was a stated intent for us to work on the redevelopment into a data center. It is a highly desirable Tier 1 market strain. So the fact that we have a foothold in this asset with some of the early critical success factors is a good sign for us. It's not something that we will reap rewards from in the next FY or so, but the planning has to go into it. So the teams are actively involved in the planning. And this is a holistic team that's working on this. So MIT team, working with our country teams, working with the external environment for the demand conviction of the site, working with local authorities and regulators to make sure that we line up redevelopment work streams to extract that potential. Your second question is really those two pathways that we spend more time to get more clarity on, and we'll make sure that we communicate this when the right time.

Okay. Got it. Okay. And then can I move to my second question on the interest rate swaps. I just wanted to check what interest -- how much of the interest rate swaps remains to expire for the rest of this year? And for the next financial year, what kind of -- what is the cost of this interest rate swap that expires? Just wanted to get a color on guidance on [indiscernible] cost.

Okay. I mentioned earlier that when we look at the average borrowing cost for FY '26-'27, expected to increase to about 3.5% to 3.6%. So this would have taken in the $600 million of IRS in this year. To date, about $260 million has expired, some of it which we have phased or extended. The remaining will be over the next 2 quarters equally. For next FY, the other $600 million in terms of the increase in -- the differential in the interest is slightly lower than this year, but it is still quite a big gap compared to today's 5-year USD rate. We are looking at maybe about 150 bps or so. So for FY '27-'28, we are looking at average interest rate of about 3.94% level, below 4%. So but if we are able to divest some of the properties that we have identified and pay down loans, we are looking at average about 3.6%, FY '27-'28.

Okay. Okay. Got it. So just to confirm the guidance for end of this year that 30 bps [indiscernible] that IRS expiring [indiscernible].

Yes.

Can we have Mervin to ask the next question?

I am Mervin from JPMorgan. Congrats, Anand, on the backfilling. I'm just wondering on Alpharetta and San Jose, just wondering whether you can share with us the amount of rent-free period that you may need to provide? And how do the signing rents compare to prior leases before expiry? Second question I have is in terms of updates for some of your properties which are vacant or low occupancy, for the likes of San Diego, 250 Williams Street, 7337 Trade Street, as well as Rancho Cordova. And then the final question would be, I mean, the DPU has been on a downward trajectory over the last 5 years. The share price is now at 2017 levels. There's been an enormous amount of wealth destruction. So for upcoming divestments, including the 22 U.S. data centers, would the MIT consider waiving its divestment fees until the DPU stabilizes, to better align with unitholders and restore confidence in the management of the REIT?

Thanks, Mervin. I think there were three buckets to your questions. Just remind me in case I missed any of them. On your first question on Alpharetta and San Jose, the rent-free period -- so Alpharetta is a longer lease, about a 15.5-year lease; San Jose is a shorter lease, about 5.3 years. There will be some rent-free period because, as we've mentioned, these start to speak to the AI inference demand that we're seeing in the market, and so you can expect that those tenants will require some retrofitting to the asset. So for the longer 15.5-year lease, there is effectively about a 9-month rent-free period, and for the shorter 5.3-year lease, there is about a 3-month rent-free period. These leases all come with escalations, low single-digit escalations, which is good for us. The reversions, without going into specific figures, were lower than their previous rental rates, but honestly, we have to look at it from the perspective of what is the highest and best use that we can get out of the asset. Are we better off sitting on vacant, non-let assets or are we better off securing leases from the emerging demand that we see in those locations? The decision that it was better for us to have those assets occupied and have the ability to observe this new evolving demand type in the market. I think your second question was speaking about the other assets in the North American portfolio that are either vacant or have low occupancy. I think you mentioned San Diego and then 250 Williams and Rancho Cordova. Naturally, those will have already formed part of our consideration in terms of divestments. We take a very clear view, that doesn't mean that the team -- Sara and the team in the U.S. are not actively trying to find income-producing solutions for those assets. But we will have to take very clear-eyed views about whether or not, based on what we see, we are the highest and best user of that asset, or whether or not there is another owner in the market that is positioned to get higher and best use out of it. So what I can say is that they definitely form part of the consideration on the divestment portfolio, but that doesn't mean that we've taken our foot off the gas in terms of trying to lease up or improve the income profile of these assets while they sit in the portfolio. Your last question is a little bit harder to answer, to be honest. You've spoken about the decline, the share price decline. We acknowledge that, I acknowledge that coming into the seat. I know it is something that we will work with the team to try and turn around as soon as we can, and we'll be proactive about that. On the specific question of whether or not the divestments, when they happen, we will waive the divestment fees, I don't think we can say specifically at this stage. It is premature for me to say so, but how we look to reserve and optimize income to unitholders in the form of DPU and the share price is certainly top of mind for us. But I won't say right now that it's something that we can commit to in relation to the divestments.

And just sorry, back on the leases, I mean, that you signed for the two properties is lower, how much lower would they be?

I'm just checking with the team.

I mean, just a range would be enough, I don't need specific like to point detail, yes.

I think in those instances, they were between 10% to 30% lower, double-digit lower than the previous existing leases. And [indiscernible] San Diego had been vacant for -- San Jose, sorry, I keep mixing the two up, my apologies. San Jose had been vacant for some time since 2025.

Based on your previous track record, I think you should be able to turn it around sometime in the future.

Maybe Sara can give a bit, Sara?

Just give, yes, just give Sara a chance since she can give more color on the North American business.

Specifically for the Alpharetta site, that space makes up approximately 55% office space, and then the remaining part is a data center. And so as this is a data center tenant, they are leasing the entirety of the building but do not have much use for that office space, which is really what caused that much lower rental rate from the previous user, who was an enterprise tenant and was using both the DC and the office space.

-- Sara. Can we have Rachel from Macquarie for the next question?

Congrats on the appointment, Anand, on your promotion. Maybe firstly, first question is on divestments, just to follow up. I think San Diego is one of the assets that you probably look to divest. I noticed that there's been a markdown in the valuations, so I'm just wondering whether, in divestments, would you be able to divest above the valuations for the San Diego asset? And maybe just to follow up also, I mean, you talked about a lot of things, that you have acquisitions, you have divestments. How do you stack? Would you divest first before you acquire, or how, in terms of ranking all your priorities, how would you rank your priorities? And then lastly, I think address Kallang Way, would you be able to give us a sense in terms of where the demand is coming from? I mean, the occupancy, leasing of the space has been quite a drag in the past quarters, and suddenly we are seeing that the leasing is coming up, so could you give us some color on where it is coming from and if demand is recovering?

Thanks, Rachel. Maybe I should start by, I think I appreciate the congratulations, but it's really more meaningful after a year that we assess. I hope to be able to have brought the team and the business to a better place, and then after that, I'm more than willing to accept congratulations; for now, it's maybe a bit premature. Just on the three questions. First, San Diego, I think the valuation markdown was something that is not a this-quarter issue. But I will say that we are, have been for some time, and continue to be in one specific discussion with a large, established end-user for what is probably going to be the highest and best use outcome of this asset. And so we will commit time to make sure that we can try our best to extract this option value. It may require some time because the counterpart genuinely requires some time to assess the highest and best use they can get out of the asset. You can imagine this has to do with local diligence, regulatory discussions. But we will commit the time to make sure that we can try to extract this option value. If that outcome pans out, then I'm less concerned about having to divest meeting valuation benchmarks on divestments. So that's what I can share there; that's a specific discussion that we have been involved in and are still committed to for some time. Your second question, I think it speaks to whether or not we can sequence in an ideal way the recycling and reallocating of capital, right? You spoke about divestments and acquisitions and what my priorities are. I'll separate the two things. My business priorities, as I said earlier, top priority is executing on the divestments at PMS. If we have to take clear-eyed decisions about executing to get certainty, we will do it, because a lot of the portfolio [indiscernible] performance depends on the execution of the divestments. It will speak to everything to do with not just income replacement and acquisitions. It will speak to our ability to manage and shelter from a high interest rate environment. It will speak to our ability to manage the hedge profile in a more optimal way. So that remains the top business priority, certainly between now and the end of the FY. But conceptually, yes, if we can time the divestments, primarily in the U.S., with suitable investment opportunities to recycle and reallocate that capital in higher-yielding assets, certainly we will do that. And we, of course, have had discussions about how we can try to time them early. But none of those are at a state where they are concrete enough for us to share right now in terms of matching recycling with reallocation. The hinge is really divestment execution, which remains the top business priority. I don't know whether that gives you enough clarity, but all that is not to say -- and that's why I wanted to make sure I emphasize the message of equal-weighting defense and offense. Just because we are preoccupied with the defense does not mean we're not spending any time on the offense. So what you cannot see is the amount of activity that I'm spending with the investment team, but also the asset management team, the leasing teams, to go into the markets to have discussions about inorganic growth with prospective long-term tenants down the channels that we have identified in the three markets. So that is to me an equal-weighted business priority to identify the growth, so that as soon as we can execute on the divestments, which are here and present, we try to match that with income replacement and growth. Your third point on Kallang Way, I'll just maybe give a bit of color, and then maybe if Serene feels like she can add more color, I welcome her to. But the leasing-up activity that has been executed and that we're seeing down the pipe, if you ask about trade sectors where they're coming from, I think we're seeing that come from the semiconductor and biomedical manufacturing sectors. One significant prospect was from the optical solutions sector. It's very hard to define this specifically, but optical solutions that feed into the digital infrastructure supply chain in Singapore, of which Singapore is a crucial part of that supply chain. So we're seeing that come, and it is starting to -- we're getting confident. As I mentioned, I think we're tracking well towards that 75% target, and those three subsector buckets are maybe the best way that I can describe how we're seeing the demand.

Can we have Derek from Morgan Stanley?

So I guess I'll start with my first question on, follow up really on Alpharetta, the rent-free period of 9 months, is that all taken upfront or is that spread across the duration of the lease? And does that mean for the next 9 months, what kind of impact on DPU would that really represent? My second question is on defense. Given all that's going to happen, divestments, high interest rates, how would you ensure DPU stability? It's been sliding, sliding to the point, I think, we are now back towards 2019 levels. It's kind of unwound all of that growth from acquisitions in the U.S. How would you at least bring it to more stable levels? Financial levers you can pull, like taking more MFU, for example? Would that be one of them, or how would you basically go about that? And the last one would be on the offensive strategy. I think [indiscernible] undertaken power studies of the U.S. portfolio to see where more power capacity can be eked out. Is that still on the table, and where are we right now on that power study exercise?

Thanks, Derek. So three questions, let me take the first one. On Alpharetta, you asked about the rent-free period. Effectively, those 9 months come from across the first year: 6 months at 100% and then the next 6 months at 50%, so effectively it's 9 months. If that gives you clarity on how that is spread out. On your second question on defense, you talked about the divestment activity and how we're going to shield ourselves from the higher interest rate environment, and how that -- what those imply for DPU stability. DPU stability is about protecting and trying to enhance the existing organic income of the existing portfolio. The material that we shared, what you regularly see in these slides, speaks to occupancy, speaks to WALE for the stability and growth of the income, and speaks to the quality of reversions. I think on the occupancy front, I would say that's where a lot of the defensive actions have taken place to protect the organic income. Divesting more occupancy of vacant assets where we do not believe we are best placed to retenant them is another way of creating -- flushing out and creating that clarity and putting that floor obviously on the DPU stability. So we continue to do that. On the interest rate side, we will certainly, I think as I shared, look to optimize interest rate exposure, our hedging profile. We will certainly not veer into any sort of speculative behavior when it comes to hedging because that would defeat the purpose of providing stability in the long term. But we will do what we can within reason to shield ourselves from the capital management perspective from interest rate and FX exposure. On your question about management fees and units, I believe that's what you're referring to by an MFU. Yes, this probably relates more to growth, right, to growth, not so much to defense. Growth, those are obviously considerations that we will take into account insofar as the accretion is possible that we can show for DPU, quite evident. So yes, from time to time, as part of regular considerations, we'll look at that on the acquisitive front. On offense, I think you spoke -- you asked specifically about power feasibility studies in the U.S.. Those predate me, I'm still getting up to speed as to what we're doing. But my own assessment is that in any data center market, especially in the U.S., especially with our diversified profile and especially with the constraints that you're seeing in the news about the ability to realize new capacity in any market, primary or secondary, in the U.S., we will have to constantly be in the market, not just with the regulators, with the authorities, but also with the demand side of things. So having those regular conversations about the demand side, not just the supply side, which in my view is really what you see most about in the market. What you constantly see in the news is supply-side information, how much power is available here, which site can come to market within what horizon. But you really have to spend time talking about the demand side, because you may have supply and if you can -- even if you can eke out supply, if the demand is not there, you still don't have a commercially viable asset. So we are spending time on both. I would say we will continue to spend time assessing, based on demand conviction, where we should be looking to optimize power and then where we can optimize power insofar as the data center portfolio is concerned.

Okay. Just on that DPU stability question, I guess it's more coming along the lines of is that 2019 number of $0.1215, is that kind of a line in the sand for you in defending anchoring the DPU, because right now we are trending towards more of that level? Or are you prepared to see it come down as a consequence of all the recycling divestment activities that are ongoing, because there is a lag effect, right, for your initiatives compared to what would happen to DPU? Longer term, it may be the right direction, but shorter term, there will be financial consequences on the DPU.

And maybe I'll let Geng Foong chime in.

Yes, Derek, I think like you rightly pointed out, there could be some near-term effect. As what we have mentioned earlier, we do have non-renewals, for example, the San Diego effect and all, right? So all these, the full-year effect will be next year. And then of course then the IRS replacement, that just -- that will cost more. So there will be an impact this year and potentially next year. And when we talk about divestments and acquisitions, there will be timing gaps to replace the income, if we're able to divest some of the properties that we have identified. As a REIT, we are not allowed to give any forecast, but from that, you'll be able to adjust that inflow a bit to see what was the number.

And Derek, I'll just add to that, the easiest way to think about this is defense and offense. We will definitely do everything we can on the defensive front to protect the DPU. That's our top priority. We will definitely do whatever we can on the organic offensive front to also protect and potentially enhance DPU. But quite clear that the only meaningful action is really inorganic growth. And so we are really focused on being in the market to identify inorganic growth where it makes sense for us in our markets, because that's the only way we can try to control our fate on the DPU. We will do what we can on managing the downside, but the upside really has to come from inorganic DPU growth, which when you roll it up, has to come from identifying a pipeline that we can execute on together with the tenants that we want to partner with going forward.

We have Brandon from Citi to ask the next question.

Just three questions, right? Just going back to the U.S. divestments, could you share with us what's the floor and ceiling in terms of your divestment premium or loss that you're willing to take, especially with the more hawkish rate hike outlook? And also to confirm what you said is that you expect $500 million to $600 million to be done by the end of FY '27, is that right? So that's my first question. The second question relates to the occupancy and the NPI margin for the U.S.. I think if we look at both numbers, they are trending at a record low. Is it -- could you share with us whether that could go down further or whether we should -- we could see some improvement over the next 3 to 6 months or thereabouts? And the last one is probably more on your target split on contribution going forward as the new CEO, where should we see BC and general industrial contributing on an AUM basis?