Mapletree Industrial Trust (OTCPK:MAPIF) Q2 2023 Earnings Conference Call October 25, 2023 9:30 PM ET
Company Participants
Melissa Tan – Director of Investor Relations
Tham Kuo Wei – Chief Executive Officer and Executive Director
Lily Ler – Chief Financial Officer
Conference Call Participants
Derek Tan – DBS Bank
Mervin Song – JPMorgan Securities
Tan Xuan – Goldman Sachs
Brandon Lee – Citigroup Research
Derek Chang – Morgan Stanley
Krishna Guha – Maybank Kim Eng Research
Melissa Tan
Good morning, everybody. Thanks for joining us for MIT’s Second Quarter Financial Results for Financial Year 2023/2024. My name is Melissa from Investor Relations. We have the management team of MIT with us this morning. Kuo Wei, our CEO; Lily, our CFO; Peter, our Head of Investment; Serene, Head of Asset Management; and Khim, the Head of Marketing. We have uploaded results presentation last evening, which we’ll be using for this discussion.
Without further ado, I’ll pass it on to Kuo, who will just go through the key highlights and we’ll proceed on to Q&A. Kuo Wei, please.
Tham Kuo Wei
Okay, good morning. I hope you can hear me because we don’t get any feedback. Hopefully this is not the [indiscernible]. Okay, I got a thumbs up. I’ll run through the key highlights. It is actually a [fairly fit] forward for us and we will take questions after that. If you look at the first bullet point, essentially from the distribution point of view, we are able to deliver more – 3.5% more year-on-year basis for the quarter to S$94 million. DPU perspective, we see a 1.2%, which is $0.0332. The key reason is because of the enlarged unitholder base. We did previous year the first series of our equity, the distribution reinvestment plan. We had one equity fundraising exercise that we did in June this year for our Japanese asset acquisition. So that increased our unit base, 2.7 billion to 2.8 billion units, 4.8% increase, or essentially have a more unitholders share, slightly larger distribution. So that resulted in the near-term shift in DPU.
On the operating front, if you look at our second bullet point, we have registered very, I would say robust kind of results, rent revisions. We are happy to see positive across all the property segments. In fact, if we aggregate property rather than rental revisions, we are looking at 3.8%. So that’s very encouraging from the revenue side. Of course, that is reflected in the higher rental rates as well. If you look at the Singapore portfolio, the U.S. portfolio, both are getting higher rates, S$2.19 for Singapore and US$2.42 for North America portfolio. The portfolio average lease to expiration has also increased from 3.9 years to 4.2 years because of our semi-completed transaction.
As you can see the third bullet point, finally completed just before the end of the 28th of September, so we would expect distributions to start or to be meaningful from the quarter onwards. And on the capital management front, I think it’s relatively stable. 80% of our borrowing cost to hedge tenor of 3.7 years. Our leverage ratio see as a fairly healthy 7.9% level.
So I think that sums up what we have for the quarter. Maybe I can take questions.
Question-and-Answer Session
A – Melissa Tan
Thank you, Kuo Wei. My request for analyst to click the raise hand icon on Webex. In interest of time, we’ll limit to two questions first and then we’ll come back if there’s more time. Okay, sorry. The first question would be Derek from DBS.
Derek Tan
Hi. Good morning. Melissa. Can you hear me?
Melissa Tan
Yes.
Derek Tan
Hi. Good morning, Kuo Wei. Just two quick questions. First one is could you give us an update on the AT&T leases that is expiring this year? Then my second question will be on the interest rates, right? Maybe could Lily give us a sense, so where will you expect interest rates to land by the end of this financial year? Yes, just two quick questions. Thanks.
Tham Kuo Wei
Having to answer the very difficult question. [Indiscernible] always a bit hazy and cloudy. So now on the leasing of the AT&T facilities, we’re still engaging the market. So as you would’ve seen in our highlight and – have any leases. So for the Tennessee asset, which is the second largest one, I think stay closer to us reaching – very hard on that, and hopefully by fourth quarter financial year, we are able to share whatever we are able to.
Lily Ler
I think you’re a bit muffled. You see you’re floating in and out.
Tham Kuo Wei
The reason why I’m floating in and out Melissa, maybe Butterfly, you remember our friends, Mohammed Ali. But I won’t sting you, don’t worry – pacing anyway, so I’ll stay – I am. So essentially for that particular asset is Tennessee asset is closer to us reaching some form of agreement and it is a long process, but we – that’s why I’m saying hopefully by fourth quarter we’ll be able to share some of the specifics. The other – and the lease for the Tennessee asset will be expiring. So we still have a bit of a rent income in time. One thing to note that even if we are able to procure a lease, generally we go for leases with fairly long to allocate – free tenant incentives. So that is a bit of [indiscernible].
Derek Tan
Okay. Thank you. How about the interest rates? Hello?
Lily Ler
Sorry. Hi, can you hear me?
Derek Tan
Yes. I can hear you again.
Lily Ler
The system doesn’t want me to speak. Okay. So as I was saying, the interest cost for this quarter is reported at 3.2%. It is definitely lower than last quarter simply because of the addition of the debt and borrowings. So that mathematically kind of bring it down. So if you look at the rest of the year, we don’t think that the interest costs will change very significantly. So we probably can look at it to around the – between the 3.2 to 3.5 range. So of course, that depends on where the interest rate goals and what the Fed decides to do, I guess, to hike or not to hike. That is the question, right? So I think for next, but I would say for this financial year, we don’t have a lot of hedges that will be expiring. So they’re actually quite small percentage and the effect of which is not expected to be that significant. So I think that’s not so much an issue.
For the next financial year, we do have some close to about S$200 million of debt of hedges that will be falling off. So those, I think if we were to do a replacement, again, the impact shouldn’t be too significant. But I think the bigger risk that we have here is really the replacement of the hedges that is reported at the joint venture level. Okay? So at the joint venture level for this financial year, we have about US$120 million of hedges that will be up for renewal. So we have actually done some forward – some hedges ahead of time on forward start basis.
So I think the impact is not – will be quite nimble. So I think for this financial year, the impact may not be that significant. Coming next financial year, we would expect to see the full effect of such replacement. So we should be expecting the interest cost to go up. And if you can recall, the joint venture was actually acquired back in I think 2020. So the interest rate – general interest rate level at the point of time is relatively low. We are looking at around the 1% level. Today, if we were to go out and hedge, I think the two, three years rate would be hovering around 4.5%. So we can expect quite a bit of the impact rising from this replacement. I hope that answers your question.
Derek Tan
Yes. You gave me good color on that. All right. Thank you very much. That’s all for me.
Lily Ler
I think we have a – just a request to repeat the last part of AT&T explanation because I think that was muted accidentally.
Tham Kuo Wei
I was muted accidentally.
Lily Ler
Last part, maybe last…
Tham Kuo Wei
Anyway, I kind of repeat [indiscernible] assets, the second largest, which I mentioned earlier, Tennessee 20%, Beijing, we expect very closely. Hopefully, by fourth quarter, we’ll be able to share specifics on whatever we are able to close up. This existing lease of AT&T expiring in November. So we would’ve still a little bit of rental income in the meantime. But the fact rent-free for any new tenant would be – to be taken in. So from a cash flow perspective, even if we are able to get lease in place, that we have a year or so or zero cash flow. So that is a practical consideration from a pro forma perspective.
Melissa Tan
Okay. We have the next question from Mervin.
Mervin Song
Yes. Thanks for the opportunity. Yes. Congrats on those strong rental reversions. Maybe you can touch on divestment gains. How much do you have left in the kitty? Because some of the surprise that you have divestment gains from 2017. And in terms of managing DPU, would you also increase the proportion management fees paid in units going forward to temper any impact from higher borrowing costs? And my second question is related to Slide 13, for FY2025, about 544 million. How much of that is U.S. dollar versus Sing dollar? And do you have a borrowing cost guidance for FY2025? Thanks.
Tham Kuo Wei
Yes. Okay. Now first, let me share with you we have no kitty, no finance. So the reason why we have this distribution this way was essentially a sequencing consideration and essentially whatever we have available, so we try to distribute. Now we look at the capital distribution this quarter that we also apply to next quarter coming from all areas, the first S$4.2 million from 65 Tech Park Crescent divestment. At that time, we were still waiting for clarity. The tax treatment only recently get that clarity and with us having that certainty, we proceeded with the divestment or rather distribution of the divestment gains. Of course, one consideration four years back was we have done a bit of distribution while setting aside a bit of the tax treatment, but the amount becomes very small and cannot be that meaningful unless you have seen. Soon after that we have the 26A Ayer Rajah Crescent investment done for Data Center that we built for Equinix. So that is relatively material. We could see that with eight quarters with the distribution of S$4 million to S$16 million. So we decided not to co-mingle this various – this was put aside till we have that clarity.
Same consideration for the Loyang compensation as what we have written down there. It was from the compensation from the government for taking a small sliver of land for the MIT works. So not a lot of money, so it’s not that significant also relative to the earlier set of distribution gains from 26A Ayer Rajah Crescent. So now that we have completed distribution of the more materials from 26A Ayer Rajah Crescent, the DPU think, which is probably in a need for some level of support. We have that available and is time for us to continue that distribution, but it’s not a lot. If you look at the effect, it’s only two quarters, this quarter and the next quarter, subsequent quarters not have anything program off schedule. So the question on the S$545 million, I think we can do that.
Lily Ler
Okay. I think in terms of the currency, part of the S$544 million is actually the Jap yen loan that we have taken on a short-term basis. So currently at this point for the Jap yen, as you all know, we have done long-term bonds covering about 160 million. The balance is actually to be done through bank loan. We are now in the process of – the documentation should be completing this quarter or this coming quarter. And currently for us to do the completion, we have actually drawn on short-term loan. So the bulk of your S$544 million is actually on a short-term loan basis. I hope that answer your question.
Okay. The rest of the power is actually a mix of Sing dollars and U.S. dollars, but if you are trying to figure out how much of these are hedge, I’ll say a large part of them are hedge is just that when we manage the hedges, it’s managed on a portfolio basis. So as I said earlier, in terms of the hedge expiry, we have about a 150 million to 160 million of hedges that is due. And so the impact is not so significant.
Mervin Song
What’s the absolute dollar amount for U.S. dollar borrowings of the 545?
Lily Ler
Absolute dollar detail, I think we’ll take it offline, Mervin.
Mervin Song
Yes. Sure. Then just my – so just back to my first question to go away, you don’t have any things in the kitty, but are there any other properties that you divested before that you’re still waiting for tax treatment clarity and also the proportion of fees paid units? Will you be lifting it to temper the impact of higher borrowing costs?
Tham Kuo Wei
Yes. I forgot to answer your other question of fees in units. Right now, we don’t have any plans yet. So if you look at the – our past portions on this essentially, either run by use transactions, essentially acquisitions where we have fees in units. The arrangements or issue units or through the distribution reinvestment plan. So right now, we don’t have any – we have plans to reactivate that.
On your question on whether there’s any residual elements. Yes, if you look at the rather the divestments that we have done the – all the four ones, the 26A Ayer Rajah Crescent, I mentioned earlier where we have done distributions of the gains for eight quarter. The tax treatment part still unknown. So we get the clarity – the tax treatment essentially our engagement with the tax authorities will probably be able to distribute it up. I think amount will be large. It’s just a small residual part of uncertain tax treatment. While other than that, don’t have any, we call significant divestments that would result in us having gains whether pending tax clarity or not. If we look at our two, we have only four divestments done, two other divestments, this 19 Changi South and also the Southfield facility, Michigan. The gain is relatively small, it’s actually very marginal. So we don’t think we’ll be able to any kind of gains distribution there.
Going forward, look at what else we can divest in any of the assets that are probably less relevant in our longer term strategy, we can divest and if we are able to crystallize any divestments then we can look at the possible distributions. Now, it’s still at a – we’re still at an early stage. As I have shared some of our conversations as well gauging the market and trying to get some sense of interest assets. So there’s some level of interest not that interesting yet. Maybe we will be able to know look at the one or two kind of possibilities. But I think – will be large, something that we will continue to manage in terms of the portfolio profile.
Lily Ler
Thank you.
Mervin Song
Thanks very much. Yes. I think when it rains even a small umbrella makes a big difference.
Melissa Tan
We have Tan Xuan. Question please.
Tan Xuan
Yes. Hi. Good morning. My first question is on reversion rate, 8.8% for second quarter. Can you share what is it for first half? And for full-year, are you still guiding for low single-digit?
Tham Kuo Wei
Okay. We will work out the mathematical effect on the first half. I don’t think it’s as high actually. Our third quarter number is actually, we’ll say a relatively challenging number. Going forward, I think the market and growth might not exhibit. And I think low single-digit will probably be [indiscernible] in the next full quarter.
Lily Ler
I think, we may not provide a six-month rental revision number, but portfolio rental revision for 1Q was 5.3%.
Tham Kuo Wei
So I mean, earlier mathematical thing, you can take a simple average and that be quite close to [indiscernible] no setting at every single rent revision. So essentially, we are quite, I would say, happy with the outcome for this quarter. But I don’t think it’s a level that we are able to really replicate initial quarter. So low single-digit or mid kind of level of 5% level is probably more realistic level.
Tan Xuan
Okay, got it. And second question is on the Park at Kallang Way. Since a bit slow, what would be the main pushback from prospective tenants?
Tham Kuo Wei
Okay. Essentially there are not that many batch users out there that are ready to go or commit. Plus for Kallang Way precinct, a lot of space that we need to lease, we are talking about close to 400,000 square feet. So our aim is to get very large space users, but the kind of demand is relatively low, most of the prospects that we’re dealing with, and they’re cutting across many, many industry sectors. More of the prospects we’re dealing with, they are looking at the smaller kind of space, needs a few thousand square feet or even a larger one, 10 or so thousand square feet. But it’s taking us a bit more time to build up the occupancy. So especially now that the economic outlook coming is a less certain. Capital cost is I think getting to be bit more – a bit higher for any businesses looking to permit to any lease – permit to any expenditures. So the companies are becoming a little more careful and therefore, I think it’s a little more difficult for us to secure much commitment. So our team is certainly working hard, engaging the market, talking to the prospects. Our sense is that in the coming months, we’ll probably be a major accumulation of more smaller users. There are a couple of very large ones that help us improve our occupancy levels. So in short, it’s a bit slower than what we have anticipated, but we’re working hard at it.
Tan Xuan
Okay. Thank you.
Melissa Tan
Thank you, Tan Xuan. Brandon, would you like to ask your questions?
Brandon Lee
Yes. Hi. Kuo Wei, can you hear me?
Tham Kuo Wei
I can hear you.
Brandon Lee
Yes. Hi. Yes. My first question would be you wanted to pull up on the divestment in Singapore, right? Can you give us more clarity on that and how far would you go in terms of the divestment or even discount, right? [Indiscernible] that’s my first question. Second one is, can you update on the walkie space?
Lily Ler
Sorry, Brandon, I think you were breaking up. We didn’t hear any of your questions.
Brandon Lee
Can you hear me now? Yes, basically just want to ask how the updates on the Singapore divestment exercise and how far would you go in terms of the discount or premium. Like for instance, are you will be willing to sell, I say 10% discount just to get this going? Yes, just want to hear your thoughts on that? That’s my first one, yes.
Tham Kuo Wei
Okay. I think the second one, we more or less get a gist of what you want. So the divestment exercise is actually a portfolio rebalancing exercise. It has this positive impact. If you’re able to divest meaningfully on positive impact on the leverage as you have seen in our current reported leverage level 37.9%, still a many healthy level. So there is no compelling reason for us to get a divestment for the purpose of managing our risk level. So I think I just maybe about 10 minutes back talk about engaging the market on our Singapore assets. So we do get some offers coming in, but some are interesting, but not all are interesting enough. So the assets that I think we have looked at essentially, some of our flatted factories in our Business Park Buildings to see whether there’s some level of interest.
So there was some initial interest in terms of pricing, probably not at a level which we think is meaningful for us to, for the sake of testing. So as to your question, we want to push for the divestment with some discounts being given. At this stage, I think is probably not necessary for us to do that. Lot of these assets as you have seen in our [indiscernible] still giving us very good occupancy levels and very strong use. So if it is a case of selling at a discount, even higher use for the – at higher use that will take on, it’s probably not a move that will take in the meantime or would be selective divestment process. And we will don’t get probably divesting at the valuation or advisors. It gives us a bit of a premium that would allow us to strengthen our balance sheet. So it is a relatively selective kind of approach that we are taking at the moment.
And for the other question, the other two assets, San Diego 1, largest facility, we have shared, the lease has extended to December 2024. So we are exploring all options whether it is a divestment, whether it is a redevelopment or rent kind of approach. So we do not have anything material as of now. So we will be moving to get all these options. Milwaukee asset the smallest one, 9%, lease had expired last month, September, so it is vacant now. We are engaging the market on all the few prospects that might be interested. So do not have something that the post will be crystallized, but all the Tennessee asset where we are already in sessions on the lease. So this will take a bit of time. So I think at least we have six to nine months of downtime before we some clarity, but we are working hard on that.
Brandon Lee
Okay. Great. Thanks a lot Kuo Wei. That’s it. Thanks.
Melissa Tan
Maybe before we take the next question from Derek Chang, I’d like to take the question from one of our – from Jonathan Lim, on the web. The Japan data centers started contributing at the start of Q2 in state of actual end of Q2, would DPU still have declined this quarter despite the enlarged share count?
Tham Kuo Wei
You see our friends now scratching their head, but it is a very relevant question. My sense is that, you might – you get a bit of you like – is that the contribution won’t be large enough to offset. Some of you would’ve seen other than the operating for the – portfolio or some of the success. We still trying to lease up and some vacancies building up. But the bigger impact actually just from this cost increase, look at the quarter percent increase, for the first half, 20%. So that will continue to take on distributable income. So a best test I think is next quarters – announcement where we have one full quarter of contributions from the Osaka facility. I think one thing we would like to share or other line as well is that the Osaka Data Center is a phase completion kind of on a phase completion schedule. The completion of the acquisition transaction on 28 of September, we only have 70% of potential because it’s 70% [indiscernible] we have the balance 30% that will be finished up progressively from this year, from early part of next year. So we still have a small ramp up.
Okay. Our mathematical will be down here, say they, punch numbers into their giant spreadsheet. They say maybe marginal kind of DPU growth if we would factor all this, as you know, as if we had the asset as at the start of the quarter. I think the fact of the matter is we only got it three days before the use of the quarter. So positive effect or felt in the third quarter of the financial year. But our worry at the end of the day is the interest cost impact that we offset whatever things we get from this.
Melissa Tan
Thank you, Kuo wei. Derek – questions for Derek Chang.
Derek Chang
Hi. Good morning. Can you hear me?
Melissa Tan
Yes, we can.
Derek Chang
Hi. Good morning, Kuo and team. I just wanted to follow-up on Lily’s earlier comments on the interest rate outlook. I’m not sure if I heard correctly, but are you guiding for 3.2% for this FY and then x-FY is when it moves up to 3.5%?
Lily Ler
Okay. Currently, it’s about 3.2%. I think for the next few – for the rest of the financial year, we probably do still expect interest rate to be creep up – to be creeping up. So I think on the average for this year, we will probably be looking at a range of above between 3 to 3.5. That should be the range for this financial year. By next financial year, when you see the full set of your unique replacement of soft hedges, we saw the expiry hedges that comes through. We would expect the interest cost to increase a bit.
Derek Chang
I see. So probably closer towards the 4%?
Lily Ler
I think that one really also depends on what happened in next quarter, right? Like I said, the big question of this quarter and of the year is too high or not too high.
Derek Chang
Okay. Understood. And just – understand, it’s difficult. Next one is on Milwaukee expired in September, but is that reflected in the U.S. DC occupancy? Because I noticed that creep up actually ended in this quarter?
Tham Kuo Wei
Okay. Reason why we have that occupancy is because we have finally started the lease for our asset in the only 67,000 square feet, as where in our earlier – given – then a year back, we managed to get maintenance and finally, all these paperwork done after the resetting, I think September. So that has resulted in that small little bump up – anyway, not mentioned, I think our data center tenant. So trying to find the right category or categorization for this tenant, they provide adult health daycare service.
Derek Chang
Right. Is the Milwaukee tenancy vacancy reflected already?
Lily Ler
No. I think that has not been reflected because the lease expires 30 of September. So you’ll see the effect in the next…
Derek Chang
So what would the occupancy be if we include that?
Lily Ler
We have to come back to you on that.
Derek Chang
Okay, sure. No problem. And just lastly on divestments, the Singapore divestments, is there a dollar value that you can share for the, I guess the assets that you are – they are put on market and I guess on the inquiries, you mentioned – Kuo Wei mentioned, you’ve had a few inquiries so far, just wondering what the profile is, like an occupiers hunt or even…
Tham Kuo Wei
Okay. I think this is not something secret, when we went – very broad spectrum of potential buyers. So we have put in Business Park Buildings as possibilities. You look at aggregate valuation [indiscernible] put in a couple of our Flatted Factories and offer them. So we are talking about another S$500 million. So we look at this as possibilities. So in an ideal world, when the market is very tight, I’d say we’re able to crystallize maybe a premium, but that one is one, yes, putting out as items on our menu engagements with the potential buyers. But I think realistically case of whether you get interest or a couple of them, one or two of them, maybe a couple. So the sense we get from applications is that there’s some interest, but as I shared, some of them are looking for some member discounts and support. So it might not be as interestingly meaningful for us. Or this is a, I would say a continuous process – that we have going forward. I think the time as our garden grows need to do some pruning. So this is the regular effect with the market regular adjustments that we’re doing. So we’ll go through this process periodically and see the market is – for transactions. And the outlook we see just share a – maybe we crystallize other than we would.
Derek Chang
All right. But for now $500 million to $1 billion available for sale.
Tham Kuo Wei
Yes. I mean that’s the kind of items we have on menu, but it’s not like a target size or skill that we’re looking at because at the end of the day, the engagements with potential bias, either a case of us or telling them, look at our annual report, whatever that’s down there is available for sale and it becomes too broad terms of the kind of arrangement. So we decided to narrow down the narrative terms of what we are possibly looking at. So that’s how we arrive. And then I say, okay, this is a smaller subset. It might be possible to solicit kind of feedback, but it doesn’t suddenly mean that oh, yes, if, oh there’s some level of interest prepared to do 500 that is essentially I mentioned earlier, outlining what might be revenue.
Derek Chang
All right. I guess more imminently, do you think it could do maybe 50 million of mix over the next two quarters? Is that realistic?
Tham Kuo Wei
What was the question?
Lily Ler
Well, they can do 50 million over…
Derek Chang
100 million like, is it realistic? Yes.
Tham Kuo Wei
Might be 50, 100. Yes. That is, I would say possible kind of level because at the end of the day, in a market like this where it is a bit more of course, challenging and you need to find the right match in terms of whether that are able to hire and find levels, which we think that we will be able to divest. So I think that level 50, 100 might be a realistic reference level for us to look at or finally being able to match demand supply path of…
Derek Chang
Right.
Tham Kuo Wei
Yes. It is something to look at.
Lily Ler
Thanks, Derek.
Derek Chang
Thanks so much, Kuo Wei.
Melissa Tan
Thank you. We are going to take the last two questions so that we can try to target to close at the end of the hour. Su Tye, would you like to ask your question, please.
Unidentified Analyst
Yes. Hi. Thanks, Kuo Wei. [Indiscernible] from Macquarie. Just two questions. First of all just to follow-up on Xuan’s question, particularly on the Kolam Ayer asset itself. Can you give us an idea, right now, let’s just say you’re going to go out to lease to a tenant, what sort of rent you’re going get, what sort of tenant profile that you are hoping to get into right now. And then maybe some idea as to like what is going to be, what next 12 months, understand that market maybe soft, but really was the target, and then ultimately some guidance on this particular asset over the next 12 months.
Second thing is that, I think last quarter you did talk about acquisition, so I just want to ask right now, is this still going to be there. And then acquisition pipeline is this still like, some profile? Is it going to be a sponsor the party? And then is this really going to be something you look at or is this going to be selling assets right now because your balance sheet is actually okay? Yes, thanks.
Tham Kuo Wei
Well, I think the rent levels that we’re targeting still around the S$4 per square foot per month for the Kolam Ayer asset. We think our product is good as very high specifications and is at the right location. So while we recognize the thing, progress is little slower. We have fairly meaningful kind of engagements with the market. So it’s across a very broad spectrum from instrumentation companies, no tech companies, precision engineering companies across a broad, is a very broad industry segments. So we do not have any particular sector that is very prominent. So our facility is flexible enough to accommodate many of industry users who suddenly work hard in building up the occupancy. Looking ahead, 12 months, we hope we wouldn’t get to a level of 3.75% that it’s meaningful level. That is the end of term target for us.
On the acquisition front, certainly there are news popping up now and then. But if you look across the board spread over lot of capital, I would say non-existent in any markets. So unless it’s a very compelling section is difficult for us to crystallize any use now meaningfully. So we will continue to look, but I think realistic outcome is that any acquisitions will follow the part next year or beyond near-term likely for the market. We just also for your physical market assets that are at the right kind of pricing level for us to deliver appropriate level of admission, there is only few locations, if you had decent spread, it will be bad. That’s the reason why we see the opportunity, maybe share the transaction, but opportunities like these few and far in between, I think we’ll be very selective and careful the way we look at the acquisition opportunities. So as you have observed as well, the time for us to look at maybe adjusting a portfolio, a little divestment would be something that we look at a bit more. So that’s why we started this engagement process. But our balance sheet is still relatively strong. So be selective. Well, we know we adjust our portfolio.
Lily Ler
Thanks, Su Tye.
Unidentified Analyst
Very clear. Yes. Thanks a lot. Thanks, Kuo Wei. Thank you.
Melissa Tan
Krishna, would you like to do the honors of asking the last two questions?
Krishna Guha
Hey, thank you very much for taking my question. Just housekeeping ones, first is on the operating expense. What happened, like, I think Q-on-Q it was increased by about 15%, if you can give some color on that? And then some general industry question. First is, we hear a lot of the headlines about large companies coming to set up bases here, be it in electronics, automobiles, electric vehicles, or life sciences. Just wondering if the supply chain participants of these large companies, I mean, are you seeing demand for that? I’m just trying to get some color based on your earlier comment that you see, you potentially likely see more of the smaller tenants coming into your facilities later part of the year. So if you can give some color on that. And then the last question is, that you have this divestment thing, where will you acquire, if you were to – would you be more interested in further increasing your footprint in Japan?
Tham Kuo Wei
I will answer the simpler question first. Yes, certainly in the near-term, Japan looks interesting and more meaningful to us. It also helps us improve our portfolio diversification. So in the near-term, yes, that’s where we [indiscernible]. Now I’m going backwards in terms of the question answering. So the second question, next question is on the industries, yes we have seen certain batch of companies setting up shop here, fortunately, some of these kind of speed and demands not be a good match for the products that we offering. For example, your fees and all those, those are very small – direct allocation of ground up build. So we strongly….
Krishna Guha
Kuo Wei, you’re breaking apart on the second question.
Tham Kuo Wei
Okay. So actually large industrial users, like for example, some of the EV producers say good matches or whatever products that we have, especially now where we are trying to do high spec 30 at Kallang. So the pockets of kind of demand continues to be a bit smaller. And take one observation that we have is that new corporates coming in, including Chinese corporates, I would say a meaningful representation on our prospect list. So still use generally a smaller user, not – production plan kind of demand that we are seeing, no debt of course in the other so-called Singapore, it’s not a good match or that way.
The next question is on the operating cost or margin.
Lily Ler
I think, in Singapore, there is slight increase in terms of our utility. We need to cost a slight increase in tariff rates from SP services. Also, with the commencement of Kallang Way, that has increased as well. If we do expenses for the U.S., I think it might be better to look at NPI margin. So it is referring to Q-on-Q increase. You’ll note that actually NPI margin had dropped for the U.S., in particular because some expenses are charged to the tenant at least per date. We look more closely at the NPI margins and I think that was due to rent fee period for some leases and lower pass-through income – higher expenses, therefore – and in the U.S. essentially effect pass-through income – lower pass-through income.
Krishna Guha
Right. Okay. So you are showing positive reversions, but then your rent free have also sort of gone up. Right, so phase rent, relatively kind of – effective rent kind of relatively flattish?
Lily Ler
I think the rent free is first to the North American portfolio, which tends to be lumpy because there’s just not that many leases that can be signed in a particular quarter. So I think they not really seen in Singapore portfolio.
Krishna Guha
Okay. Finally, if I just want to squeeze in just Japan acquisition, is it like – do you really like, kind of like these assets or is it more to, for the cheap JPY debt?
Tham Kuo Wei
First and foremost, we are a real estate platform, so we need to like the U.S. state attributes first. JPY thing is icing on the cake.
Krishna Guha
Okay. No, because I think you raised more JPY debt than the asset value for that Osaka asset if I remember correctly. So I was just wondering that…
Lily Ler
Let me just clarify. We did not raise small JPN debt. We raised exactly the same amount that is required for the acquisition. So basically a 100% capital hedge for the JPN. Of course, the obvious reason being that this is just a way of doing the, I think the capital to minimize any fluctuations in terms of the capital, right. And of course, the other consideration is amongst all my currency, definitely JPN is the low use. Is it like we will borrow more in JPN to fund other investments in other countries, not like U.S. debt basis.
Krishna Guha
Okay. Thank you very much for your answers. Thank you.
Lily Ler
Thank you. We are at 10:29. Thank you for spending the hour with us. If you have any more questions – it was not clear because of the audio. We apologize. Please reach out to me, if you have any more clarifications. Okay. Thank you.
Tham Kuo Wei
Thank you. Have a good day.
