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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hi. A very good morning to all analysts, media and those who are joining us live from the audio webcast. Welcome to Manulife US REIT FY 2020 Financial Results. I'm Carol, the Head of IR and Chief Capital Market Strategist.
I think many of you would have heard us say last year that we would totally do now, which is why we're getting everyone on the outside meeting physically, and it's so nice to see so many familiar faces today.
Thanks for taking the time to join us today. This morning, or evening, we have Patrick Browne, our CIO, who's joining us from New York. I'm not sure if he's on the screen. Pat joined us from Swiss Re in December last year. He has more than 15 years of real estate experience in direct investment, acquisition and leasing. We are extremely pleased to have him on board, yes, there he is, as we hit to new frontiers for the new year.
For today's briefing, we will have Jill Smith, our CEO, present the highlights of the financial results, after which I will invite Robert, our CFO, to join us on stage for the Q&A session.
So without further ado, Jill, please.
Am I live? Thank you. I've unmasked, ladies and gentlemen, because otherwise, I shall start coughing. And thankfully, I'm safely distanced from the person in front of me.
Good morning. It's really marvelous to be here in person with those of you who have come to the auditorium today. And also, I'd like to thank those who are joining us via webcast.
Well, it hardly needs saying that 2020 was a year like none other. We entered it at MUST on a high, expecting to be able to improve leasing and make significant accretive acquisitions, but it became a challenge. However, MUST weathered the storm. And now in 2021, with that behind us and with the fast U.S. rollout of the vaccine and what we perceive as the rapid reopening of U.S. business, we can see that we can look forward to improving leasing and outcomes on a path to growth.
So let's just make a brief comment about 2020. Well, first of all, we managed to maintain a high occupancy of 93.4%, and that is way above the U.S. Class A average, which fell from around 88% to 84%. Equally, while subleasing in U.S. office surged, and you can see this on Page 27 of the presentation, our subleasing actually declined and stood at 3.3% at the end of the year. We also had very strong collections at 97%. And on our deferment of 0.6%, we have already started to collect those.
However, despite gross revenues, higher NPI and distributable income all performing creditably, fiscal year DPU was down minus 5.4% to 5.64%. The decline was mainly due to a couple of factors: lower property income and provision for expected credit losses from the second half. Furthermore, over 2020, there was a further reason, and that was lower car park income. This was one of the main areas of decline, and this was because 7 of Manulife 9 properties receive income from car parking. Some of it early car parking from central locations like our Figueroa building down -- in downtown Los Angeles from entertainment and sporting venues. And quite clearly, they closed up, under lockdown and other reasons.
Secondly, there was lower rental income due to higher vacancies, and those were mainly from the second half, particularly from our Michelson and Peachtree building.
Thirdly, and out of prudence that you would expect from Manulife, as the year came to a close, we decided to provide for expected credit losses. Now half of those credit losses were from a retail tenant, and the majority of the rest was from F&B. However, I am pleased to say that in the past week, that retail tenant has reached and agreed to settle the arrears in full. So that is behind us.
Equally, as we look forward to a rapid reopening of America and American business, not least because of the vaccine, we do expect our car parking revenues to start to climb through the coming months and -- days, weeks and months. And of course, many people returning to work will still prefer, where they can, to travel by car to drive into their office rather than to take public transport.
Just to note on this next page that we will be paying out 100% of our fiscal year 2020 distributions. And I would say, again, at this point, we intend to do the same, 100% distribution payout in 2021.
In terms of capital markets, we took great advantage last year, as you would expect, from the very low interest rate environment and refinanced our first green loan, too. Now our 2021 financing is at a very advanced stage with a sustainability-linked loan planned. This will be for 5 years. And just as a reminder, we have 94.5% of gross borrowings secured on a fixed-rate basis. We've deliberately done that, providing cash flow stability. Why would you not take advantage of these very low rates for 5 years? Once the 2021 loan is completed in the next couple of months, the weighted average interest rate will come down to somewhere around 2.9%, and our weighted average debt maturity will increase to 3.34 years. I think you can see that, that is progress.
In terms of our portfolio performance, well, this clearly was against the background of economic tumult and business tumult. And again, you can see this very graphically, GDP and unemployment and the damage, if you look at Page 24 and 25 of this presentation. However, our leasing was solid. We executed some 279,000 square feet in 2020. That's 5.9% of the portfolio by NLA, and that was mainly in the real estate, legal, information and finance and insurance sectors. So solid traditional sectors. I can also tell you that 35.6% was new leases, 58.7% was renewals and 5.7% was expansions.
Rental reversions were more or less flat at plus 0.1%. But if you were to take away one particular large lease, which was taken at the end of the year and was from a tenant who had been in the building for a very, very, very long time, taking those high rental escalations each year, they were marked back to market, not below market. And had it not been for that one tenant, our rental reversions would have been plus 4.7%.
Our buildings remain attractive. I've mentioned that there are those that are expanding into our buildings. So for 2020, I would say what is done is done. For 2021 and beyond, we are working super hard with our new CIO, Pat, on expiries, vacancies and early renewals for 2022. The allies in our efforts are the vaccine rollout, bosses urging and wanting workers now to return to their workplace and the quality of our existing portfolio.
On Page 14, I point out that there's growing evidence that the U.S. will experience a rapid reopening for business. And you can see this, an example of this is the drop in unemployment. We have some 16 different trade sectors. We have pursued diversity with a balance of traditional strong sectors and growth elements. And while this diversification undoubtedly has stood us in good stead and protected us in 2020, MUST -- at MUST, we are changing, and we are going to gear up to concentrate on growth sectors and locations going forward.
As I say, we're on the right path. And actually, I'm very pleased to see from our top 10 tenants that there are a number who have emerged winners from this horrendous pandemic, whilst there are others who are looking to bounce back in 2021 and beyond. There are very good examples. Even in the baby apparel sectors, 2 of our top 10 tenants, they are expecting to see big boom times as people in America start to come out and enjoy themselves. Quest Diagnostics, my very favorite tenant of our 176 -- 180 tenants, they, of course, have been doing all the diagnostics and, if you like, written themselves a ticket into the future, and they came out with absolutely stellar results last week. Even Hyundai Motor, we have their U.S. corporate treasury headquarters in our building in Michelson. And there, they are on -- they're working with Apple to create electric cars. And someone like Quinn Emanuel, a big law firm, is once again expanding. We've heard of a number of offices that they're expanding to across the rest of America. So growth is coming.
Now one factor is that, of course, we have seen lower valuations, and you might be wondering, with the quality of our buildings and so forth, why that is so. Well, this is due very simply to higher vacancies and leasing costs. But more importantly, it's really to look forward again. And as the economy stabilizes and businesses stabilize and the outlook begins to really show growth, then we would expect to see our valuations start to improve, too. Our next valuation, of course, is at midyear. That's when we'll have our next health check on that.
We like to look at supply and rent growth. Now in terms of supply, nothing really much has changed. You've heard me say, many of you a number of times, that it would be a brave developer, CEO, who would put a spade in the ground and start to build during 2020. And really, in many respects, that position hasn't changed. You can see on the right-hand side that there are 3 locations where our buildings are situated, where there's new properties. The space in Washington, that is Trophy. We are Class A. And anyway, we're at 99% occupation. In Buckhead in Atlanta in Georgia, again, there's some space coming due. We're 100% occupied. In Midtown in Atlanta -- and Atlanta is a thriving city under any -- from any point of view, there is some space that's 40% preleased. So I think we are in a very comfortable and enviable position.
In terms of rent growth, undoubtedly, the last 12 months have not been great, but the great news on this particular table is that it shows you that for Irvine, Michelson; Midtown, that's Peachtree; Hudson, that's 10 Exchange; and Sacramento, that's Capitol, you can see there is an uptick expected in rental growth and that in those areas is going to be -- expected to be above the national average. So that bodes well for our portfolio.
Over and above the U.S. vaccine rollout, one of the other positive developments, which I've been alluding to this new year, is the push to get back to work in America, the push by bosses to get their workers back to the office. And this is a very interesting PwC survey that we present to you here, where it's quite clear that bosses are urging people to get back to work. Very interesting that Bill de Blasio, the Mayor of New York, about 10 days ago, called for the workers under his control to be back in the office by May. We've heard that JPMorgan wants to see its people back. And even Tiffany has said over the last week that it wants to see all its workers back in the office, presuming that they're seeing people wanting to go out and get blinged up, I suppose. But it's a good sign. Every part of America is taking part in this return to work.
Now what form will this return take? That's obviously critically important to space. Well, all the evidence seems to point that the preference is for hybrid, and hybrid means working in the office 2 or 3 days a week. And on that basis, the bosses are going to have to have more or less the same space as they had before. So that is great news for our buildings.
What is also great news for our buildings is that as people return to work, we believe that MUST buildings are actually poised to capitalize on the themes that have emerged out of this horrendous COVID pandemic. So for example, 52% of our AUM is exposed to tech, all forms of tech, entertainment and cloud security and also to health care. We put some examples here. And I think one that I like particularly is Los Angeles, where our Figueroa building is, which has become the streaming capital of the world. I mean who hasn't been watching Netflix? I'll talk to you afterwards if you haven't.
Equally, another big theme is population migration. Now that's what's happening before COVID, but COVID has accelerated that. And people want to be in lower dense -- de-densification. They want to be in affordable live-work-play environment. And this, of course, is all playing to our particular properties.
But what else can we do looking forward? What's the plan for 2021? We've got to accelerate leasing and seek accretive acquisition growth. It's all predicated on the vaccine rollout. We've seen Joe Biden said 150 million doses in 100 days. They were up to almost 40 million doses when I looked on the oneworld data last night. There'll be a rapid reopening in America, and this drive back to the office. We're going to be involved with our companies -- with companies feeling more confident about the future. We're going to be chasing them to sign on leases, chasing occupancy, and we're going to be approaching this with very flexible leasing options. In terms of capital management, I've already said that we're on the road to further savings this year. With our institutional base, our high institutional base of solid investor base, this will assist the second part of our 2021 plan, and that is transformational growth. We're going to aim to enhance the portfolio by acquiring at least 20% high-growth tenants. I've mentioned business parks and areas, sectors, tech, health care, new entertainment, retail, online and so forth. And we're going to be looking West to East, the Sun Belt, and we're going to include business parks. We're also not shy of seeking joint ventures and M&A.
The message is clear: rapid recovery from the existing portfolio and on to new frontiers for more. I would just point out that there is a link on this last page to an IMR, to an independent market report by JLL, and we've attached this, and I would urge you to have a look because it paints a very interesting story about America and, in particular, about our locations.
And finally, I'd just like to say that last week, someone wrote about MUST. That we are a stock likely to shine, I'd say, brightly. In 2021, we're working to be a post-COVID recovery stock. Thank you.
Thanks, Jill. I will now invite Robert to come on stage to join us for the Q&A, and we will put Pat big on the screen so that Pat -- I think he can't see you guys because his camera faces Brenda. But all of you can see him, right? Hi, Pat. Hello.
Hi, everyone. Hi, everyone.
Okay, that's set. Okay. Just a couple of housekeeping before we start the Q&A. So the reason why we will need you to speak into the mic is because this is a live audio recording so the question can only be heard by those joining us online if you speak to the mic. So I know some of us have naturally loud voices like me, but we still need to speak to the mic.
[Operator Instructions] I will get [ Stella ] to help pass the mic around.
Any first questions? [Operator Instructions] All right. Thank you. First question?
I'm Su Teng from Citi. My question would be with regards to DPU, what would be the adjusted DPU after you take into account the rental relief given?
What was the last bit after the...
If you take into account all the rental relief that we've given, which is quite little, the abatement and the deferment, what is the impact on the DPU? That's the question, right, Su Teng?
Yes. So I wanted the adjusted one if you were to consider the release. Yes.
Yes. So just to give you a sense of scale, I think Jill has mentioned that -- the 3 impact area. One is the car park income. Now car park income, just to give you a sense, for 2019 results, it's about 7% of our gross revenue income. So in 2020, actually, we took a 25% hit on car park income because many people are not coming back to work. Our building is only about 15% occupied. And Jill has also mentioned that there are surrounding venues that does rely on the car parking space.
The other big hit there is the credit loss provisions that we made. So it's mainly on the retail tenants and F&B. Now Jill has also mentioned that the retail tenants have already -- well, we already struck an agreement with them to pay out all the arrears. So that, in a way, the credit loss provision is like half strength.
If you were to wind back the car park income and the credit loss provisions, the DPU would be higher than last year, right? If, say, half strength of the provision for credit loss will be just about the same level as last year's -- of 2019, to be clear, 2019 DPU, right? So we hope that this is just a one-off as we move out -- as we kind of move out of this situation. Yes.
My name is [ Brian ]. I'm a broker, but I am also a shareholder. Okay, I have 2 questions. My first question is based on the year ending 31st of December, Phipps in Atlanta in flat cap rates has increased from 5.4% to 6.5%. This is quite high given the -- I mean, the range within the Atlanta Trophy's -- given it's a Trophy's asset class, 6.5% is ranging pretty high as compared to, I think, the JLL report that was shown earlier this morning. Class A assets is between 5.2% to 7.2%. So my question is given that this is a Trophy plus asset, why the impact cap rates of 6.5% is pretty high.
Pat, would you like to take the question? Do you manage to hear the question, Pat?
Yes. I did hear the question. Can you all hear me? I have a little loop on my end. Apologies.
Yes, we can hear you.
Yes. So the Phipps cap rate, I would have to go back and just confirm exactly the 6.5%. But Phipps is a stabilized building, and it's a Trophy building, as you noted, in Buckhead. And I think that the reason you might see the implied cap rate bump a little bit is because there is a floor that we are expecting to get back in the near term that would lead to higher vacancy. So the appraiser may have seen that lead to a little bit of higher vacancy and a little bit of a higher cap rate in the near term. But over the longer term, I think that the cap rates that they would apply to this building would largely be aligned with the Trophy-quality assets on -- when they assume an exit cap rate or something like that, would be closer to the 5.5% rate that you referenced. If that -- does that answer the question?
Yes. And so just a follow-up on the next question. I think 2 of the Manulife's competitors on the pure office REIT in -- listed in Singapore, they have mostly concentration in the West side. So I think the Seattle, Texas area there where the tax space is growing. And they are more concentrated on that area, which is why they have been doing better, I guess, from -- during this COVID period. So any comments on that one with regards to the more diversified portfolio for Manulife?
Well, I think, first of all, we share -- I should be on this mic. We share a number of locations with those other 2 REITs, and we're delighted to do that because they actually entered some of our locations after us. So that's an endorsement for the locations. We have locations on the West Coast. We have them on the East Coast. We're in the North. We believe that that's -- those particular buildings have particular attractions. They play to the particular criteria and themes that we're pursuing. We wanted greater diversification because we believe that, that diversification is a more successful route longer term than concentration. And we don't know yet how one of the REITs has performed in the fiscal year results. We've only had one out.
Clearly, for one of our competitors, tech has been very successful for them. They've concentrated there, and that's tended to be South. And that's fantastic. And we are also enjoying the benefits of tech as well.
So I'm always delighted to see where people are going. I mean where we're going next is probably not unsimilar, if you like. I did mention earlier that the Sun Belt is -- and that is right across America. It's not just on the West. But clearly, with the migration trend as well, that's clearly somewhere where we're all heading. Hopefully, we won't be competing for buildings. We got slightly different approach to the buildings than they have because of diversification.
This is Rachel from DBS. It's good to see everyone here. A few questions from me. I think, firstly, we saw that portfolio occupancy sort of has declined, especially in your key assets. So just wondering if you could give us some color. And looking into FY '21, do you expect the occupancies have already bottomed and turning outwards? Or what's some color of your negotiations or discussions with your tenants?
Maybe I will take part of the occupancy question, and I'll let Pat do the 2021 color itself. So I think for this 2020 itself, I think the biggest drop all of you would have seen is in the Michelson building itself. So Michelson was doing 90% just before in the previous quarter, and it's dropped to about 85% right now. So we had one legal tenant that actually vacated during this quarter. So it was a space that I think -- it was something that we kind of knew throughout the year itself, it was due to expiry. And one of the other reasons -- the main reason for the dip was also we had a floor that was going to be given back to us. So that was Michelson.
So just to recap a bit on Michelson itself for those who have been following. So Michelson was a property that we had a huge churn and turn actually end of '19 itself. And we were going to sign a tenant, which is in the co-working space, at the beginning of 2020. Then what happened was I think the co-working tenant, which I think all of us know, quite clearly, were having some -- was in the lime light a bit too much, and we weren't comfortable. So we kind of like didn't nail it, and we walked away. And within a couple of weeks or months, COVID happened. So that has been a bit of a challenge for us because it's a big space. And usually, for big spaces, you want a big tenant. They take a longer time to decide their needs and requirements.
So the other, I would say, bigger drop in the occupancy, if I'm looking at maybe, I would say, Exchange itself. So Exchange itself dropped about 1%. We had a tenant that vacated on the ground floor. So that's more like an F&B tenant. Other than that, Centerpointe, we had a few smaller tenants. Their expiries were due. So they vacated for the Centerpointe building itself. And I think that's about it. The rest were pretty -- if I'm looking at Q-on-Q itself -- is that okay? And then maybe I will just let Pat give a bit more color on the 2021 leases. What are you seeing on the ground? And also how our -- I think the occupancy could look for this year, yes.
Yes, for sure. Thanks, Carol. So I think, first and foremost, important to say that we have what we believe to be a relatively small number of leases expiring during the year given it's only 5.7% of NLA. So we feel pretty good that we're 93.4% occupied and only have 5.7% of NLA rolling in 2021. And I think the way Jill characterized the U.S. market in terms of where we're headed with vaccinations and the country sort of being on a path to opening up is certainly true. But having said that, there's still clearly some uncertainty.
So we think that we're in a good position heading into the year. And we've certainly started to engage with the tenants that we do have leases expiring with during -- the coming year. And up to this point, about 30% of those tenants, which amounts to about 15% of the NLA expiring this year, is headed towards renewal, which we feel pretty good about. And the lion's share, however, still sort of will be renewals that will happen towards the second half of the year, and we're engaged. But it's probably a little bit premature to comment as to which way it's going.
So we feel pretty good about the renewal story. And then in regards to filling vacancy that we have, I think that right now, the U.S. market, the tenants are hesitant to commit to very long-term leases. And so what we're going to do is we're going to take advantage of that. And I think we'll start to be a lot more flexible with the tenants that we engage within the market and begin to say that we'll be willing to sign shorter-term leases that will help buoy us and work with the tenants to preserve our occupancy and grow our occupancy and grow our income. And then as we all sort of emerge out of COVID in the next 6, 12, 18 months, and I hate to use the phrase return to normal, but hopefully, put this in the rearview mirror, we think we'll capitalize reverting back to more stabilized or normal lease terms of 5, 7, 10 years plus that we'd expect for our buildings. So I do think that we're on the right footing for improving occupancy, and we're certainly focusing our efforts that way. So I think the picture is optimistic for 2021. Hopefully that answers the question, but I'm happy to clarify if not.
Yes. All right. My next question is on rental reversions. What's the rental reversions in the fourth quarter? And what is your expectation of rental reversions in FY '21?
Maybe I'll take -- I'm just trying to take the questions when Pat wasn't here, to be fair, since he only joined us in December 2020. So what has happened for the whole year itself, I think -- so basically, for 2020, we did about 20 -- 25-or-so leases that were renewed or signed. And out of that, I think looking at the rental reversions itself, the full year's reversion is about flat. If you look at -- back to our half year, half year's reversion that we did was about 7.9% positive rental reversion.
So when you look at purely just on 4Q itself, we had a double-digit negative rental reversion on the leases overall that was signed. And I think to what Jill has shared earlier, that was mainly due to one tenant that was in -- maybe I can share the building, I think it's Centerpointe, that was mark-to-market. There is about 2.5% step-up in the leases in Centerpointe itself. So after being with us for a long time, they obviously overran the rent in the market. So that was mark-to-market, and that was a huge one, similar to some -- something that you have seen similar to like a Hyundai case in Michelson. So that was for 4Q itself because 3Q, we didn't do any leases. So just for 4Q.
But I think we have a question also from the -- I think Cheryl from Citi has a question also to explain a bit more about the 0.1% versus the 4.7% positive rental reversion. So if we strip off that one single tenant in the Centerpointe building itself, the full year's rental reversion is 4.7%. So I hope that gives some clarity on that.
Yes. Can I just clarify that the tenant whose lease was mark-to-market, did they stay at the same space? Did they renew their lease?
Yes. Yes.
Okay. And probably my last question is on acquisitions. And you spoke about going into the business parks. If you could elaborate a little bit more what's your -- how would you -- what sort of mix would you like to have in your portfolio on business parks. And you spoke a bit about JV and M&A. Would you care to elaborate a little bit more on that? Yes.
So in terms of business parks, I think what we're saying is that we are going to be very flexible because we're looking really for the types of locations which are clearly going to be spread across America, which will tend towards the more, if you like, suburban rather than the CBD or urban locations. In those locations -- remember, America is such an enormous place. You're not necessarily -- you've got a sort of much greater mixture of business parks and high-rise buildings such as the ones that we have at the moment. We've looked at quite a lot of business parks, by the way, over the last few years as well.
These -- in these areas, again, you've got more of these high-tech, these newer industries, the new economy, the knowledge economy, the health care, the life sciences, entertainment, and they tend towards the higher-quality business park. So definitely, we'll be looking to the high-quality business park. We're just maybe looking for a building with 2 or 3 stories rather than a building with 19 stories or that sort of type. There's a great deal of choice across America and particular areas, where those lower-lying or business park-style buildings are very attractive and there's a great choice. And they definitely are attracting some of the sectors, as I say, that we are aiming towards.
We're really trying to push now off the base of this very solid portfolio, which has been proven, if you like, in 2020, in the pandemic. We want to just add this high-octane growth in those sorts of buildings. As I say, we've been looking at -- we've looked at buildings -- business parks all over, San Diego, Boston. I've been to quite a few of them myself. They've got to be of a certain quality. And as I said, they got to be for particular credit tenants as well. That's very important to us.
In terms of where we go from there, I think it's important to say never say never. We are at a point now where we are really large enough to take on something much bigger perhaps in terms of an acquisition. And we have seen many very attractive portfolios of a much larger amount. When I say larger amount, $500 million, $600 million. So that has made us think, well, let's be a little bit more expansive. Let's go a bit farther. And we've been approached a number of times. Again, I think out of the pandemic, this is what's exciting for us out of the pandemic. We're being approached by a number of the bigger real estate companies in America and those else around the world who are looking themselves to do something slightly different in terms of their future.
So again, it could take many forms. It could take somebody who wants to join us who already has a pipeline they perhaps like to just perhaps downgrade in terms of the amount of office property they have. And so there are many, many different forms that this joint venture M&A could take. But there's a lot of very interesting opportunities that are being offered to us. And I think it's pretty rewarding that some of these major names would even think of us, frankly. And I think -- that's not been too humble. I mean we are Manulife. But I think it's a great point in time that we, if you like, we've come to a point of maturity.
Okay. Just to follow up. So likely, it would be the third party if you're looking for JV and M&A rather than sponsor?
It could be the sponsor. It absolutely could be the sponsor. But we've always wanted to keep our options open. We've always been very lucky that we have the -- that the sponsor allows us, if you like, permits us to go outside its own pipeline and to find partners to work with. And definitely, the sponsor is very proud of this particular strategy. And indeed, I can tell you that over the last 6 months, while we've been in the pandemic -- in the grip of the pandemic, we've been strategizing, and this has been something that the Board has been very keen to consider.
Sorry, just to move back to my second question I think on the FY '21 rental reversions outlook.
Sorry? Yes.
Yes. I was going to address that one. So I think heading forward into 2021, we feel that, number one, our portfolio, the in-place rents continue to be below market. So we feel that we're in a good position to capitalize on, I would say, modest rental reversion during the coming year as I think what we'll ultimately be able to experience.
[ Gula ] from Baird. Can I just ask, do you have any more of those, leases like the Hyundai lease, which is expiring and where you have a mark-to-market that is significantly lower than the expiring leases through your portfolio for perhaps this year, 2021 and 2022? If you just could give us an idea.
And then the second question is on the business park. You liked Grade A. Business parks are not necessarily Grade A. So are you going to -- are you taking like a step down from your original view of the portfolio? Can you hear me?
Yes. Yes. [ Gula ], I think if I might just answer the last part of that question. I do see where you're coming from. And of course, America is very different from here, and business parks here are traditionally, I think, more associated with a more industrial flavor. But in America, certainly, you have some very fancy business parks that attract a number of major financial companies as well as, I'd say, the more of the start-up or the industrial type of tenants.
So again, in America, it's slightly different. And again, credit tenants are very important to us. So for example, if Merrill Lynch is in a business park or we've had some other big names in the business park, that's a slightly different kettle of fish to what we might see here in Singapore and in Asia in terms of the business park. Good question, though. Good question, yes.
I'll just take the next one and also just to add on to what Jill was saying. I think if you look at how the portfolio has grown since IPO, I mean, we've always been known to be in Class A and Trophy, I think to [ Gula's ] question. So we don't see moving down to the business park like a downgrade, but whereas actually enhancing the portfolio.
So we have built a solid portfolio of high-credit tenants, government tenants, listed companies. So these tenants are very, very steady, very resilient. But of course, when there's different cyclical effects and different growth in the market, we may not be able to capture some of this growth. So which is why having built such a high-quality portfolio, we think we can go up to 20% to pursue some of these high-growth tenants in whichever buildings that they could be in, and that could then be in a business park. But it doesn't mean that 20% of the portfolio will be in business park. So just to clarify that to give color.
So if you look at our tenant trade sector itself, I think more than half is in the really legal, finance. We don't have -- I mean, besides Amazon, that's not even considered a tech in our sector, trade sector. We don't really have that kind of, I would say, high-growth tenants. So just to go back to your point and -- sorry, your question. Your next question again was on the rental...
The rental -- do you have any large leases that are expiring with the rent...
For 2021 and 2022, right, yes. I got it. Got it. Yes. So for 2021 and 2022 leases, I think Pat shared briefly earlier. So sweeping across the portfolio itself, I mean, there's always going to be tenants that have overrun itself just because in the U.S., the lease is a bit different. So in Singapore, if someone says that we have a negative rental reversion of 3%, there was no growth in the last 3 years or maybe 5 years because there's no step-up. So when we say that the negative rental reversion, for example, like I shared earlier, 4Q was double-digit, but it doesn't mean that throughout the year, there was no growth because they already have the 3% step-up for some of the leases. But -- so just to give some color so that in case people are a bit confused on the rental reversion model in Singapore and in the U.S. itself.
So looking at just 2021 and 2022, most of our leases are still actually at the market or actually below. So there could be a couple. But overall, I think we are still okay when we look at the leases that will be upcoming. Yes, I hope that answered your question.
Derek from DBS. Just 2 questions for me. First one is on your provision for credit loss. So just wondering, could you give us a sense what's your policy around this? Given the fact that you've collected the rents really, right, could you give us more comfort that such a scenario will not happen again in 2021?
I think it's more related to timing and, in particular, the retail tenant. First of all, the policy is basically we go through tenant by tenant to assess the collectability, right? Provisions, these are prudent provisions. It doesn't necessarily mean that it's going to go bad, right, as seen from the retail tenants. So in that particular case, I think it's a timing -- not I think. It's a timing issue because we have to close the books at some point in time. The agreement was still being inked, right? So finally, we've got it in writing, but there is a great fear for them to pay on the arrears. As I speak now, they have not paid out. Probably another week to go before the deadline is reached. So it's just more out of prudence. For year-end accounts, we make that provision. It turned out well in the case of that retail tenant, yes.
Just a follow-up on this particular question. I'm just wondering as -- I mean, as a group, you're quite happy with the -- still the exposure of the tenant or what are the mitigating factors are you thinking about like plan B or plan C, let's say, your rentals get slow again? I was curious.
Yes. I think we're comfortable with the arrangements. I think as -- COVID is a challenging time, isn't it? It's a give and take. I mean you can't actually kind of just say -- boot you out because you're not paying rental, right? So this is part of the negotiated deal. So you pay out some. We give you some concessions along the way. So I think we're in good shape with them. We'll -- again, every month, we'll monitor the situation for this tenant and all the other tenants within our portfolio.
There is a process for all of this when you're working with the tenant, particularly in a year like last year where it was really highlighted and very, very visible for a lot of different tenants. So the first thing is the property managers actually engage with the tenants, and they do a survey with them to find out what their financial state is. Obviously, we're looking at how -- we're looking at ourselves at how they look financially, their results as they're coming out in the market. And then, obviously, it's much better work with the tenant and work through with them. Some of them are a bit naughty, I've said this before, a little bit delinquent, if I may put it like that, in their approach. But then what good CFO wouldn't be? And we work through them. But this can take many, many months. But there comes a point, as Robert says, where you have to make a call on this, and we felt it was right to do so, and we discussed it very thoroughly. But it's quite unusual.
Also, you have different levels then in terms of legality and litigation. What you do is you send them notices. You can then send them a form of default letter just -- which is sort of one step-up. But obviously, usually, most people at that point retreat and don't go for the full litigation, and that's probably because they aren't actually intending to go bankrupt. So just to give you a little bit more color on what goes on. There's a lot of work that goes on with the tenants and the situation.
Yes. May I just ask just one more question? So I would like some color on Atlanta. I understand there's a bit of supply coming onstream. Although there's some preleasing, I'm just curious whether the tenant comes from a like-for-like building that what you have. I just want to understand the risk of occupancies on Atlanta.
Yes, Pat. Pat, did you hear that?
I did -- I didn't quite understand the part about the tenant that you referenced. But I think Atlanta as a whole is a market that we feel incredibly positive about or encouraged about. It's been capturing outsized population growth for a number of years. There's been a tremendous inflow of tech companies into that market. I think one of the buildings that's in the supply that we show on one of the slides is -- that we consider to be competing with our property in Midtown is 40% preleased to Google. So that's who's taking that big chunk of space. Microsoft has just made a huge commitment to Atlanta all right near Peachtree. It's near -- Georgia Tech is an education hub that's churning out a tremendous amount of tech talent. It's capturing all the Sun Belt growth, and now it's got the tech tailwinds to go with it.
So I think from a supply perspective, there's a lot of tenants going there, and I'm pretty confident that the -- that any supply that comes online will be absorbed. And we feel pretty encouraged about the Atlanta market over the long term. I think it's a great place to be.
Just to add on. Maybe just to add on to Pat on Atlanta, right? So we see the supply of Atlanta itself from Buckhead and also for Midtown. So I think for Midtown itself, one of the buildings that's quite close to us that is up for supply, but the asking rent is more than 50%, more than what we are asking. So I think we feel quite comfortable in terms of the asking itself. So that -- just to give you a bit more color. I think Vijay has a question, is it?
Yes. Vijay from RHB. A couple of questions. Firstly, drilling a bit into the occupancy decline for some of your assets. I just want to understand what the tenants are thinking at this point of time. Was this occupancy drop was because tenants are downsizing or moving to some other markets where there is a bit of low cost or tenants going into competitive space in this market?
Okay. Maybe I'll just give a bit of color on the 2020 leases that we did and the renewals. So the retention rate for 2020 is about, say, maybe about 55%, 60% for 2020 itself. So out of all the leases and all the tenants that we saw, actually, only about 2 or 3 of them was really due to COVID. So some of them, even, for example, the case that we had in Michelson, the decision to even not renew was kind of like -- we really kind of like heard it pre-COVID. So I think COVID just kind of like confirmed it for them. So that was not like because of COVID, and then they are getting out because the in U.S., just remember that there's no break clause.
So I think the other 2 cases that happened, unfortunately, one is the F&B. So I mean, if you are an F&B, it's a bit quite tricky because they have been closed for so long. You see in Hong Kong then in Singapore itself, you can't believe it. And the other one that we saw is really that they wanted to downsize to a smaller building. I would say the smallest floor -- and they want everyone on the same floor. So if we can't provide that for them, then it's very hard for them to stay. So some of the reasons are not really, say, COVID per se. So we didn't see real actual huge influx. It's like not like 90% of the leases were not renewal, however, due to COVID. So out of like the 20-or-so, maybe just like 2 or 3 itself. So that...
Just to add to what Carol is saying. I mean there's always reasons. We had 2 of our smaller tenants. One, the chap who ran the firm retired. And there was another small one, where the individual, again, the head of the firm actually was critically ill, not from COVID, from an underlying health condition. And then, of course, we did have one very small tenant in Washington, GNC, the multi-vit outlet which actually went bankrupt. But that was only 1,600 square feet. So as Carol said, really, last year, people stopped, stayed put, and it was really decisions that have been made before COVID or for, as I say, very special reasons that people left the building. So it was -- I mean, we're very pleased in the way that people stuck with us.
And the second question is on the rent collections. Your rent collections have slowed down a bit in fourth quarter to 94 percentage. Other than the 2% who's the retail tenants who I would expect to be slow, maybe which sectors these tenants are in terms of slower rents being collected.
Maybe I can take that one last. So I think you have heard Jill and Robert mention, actually, the 94% I think that we did. If you look at the retail tenant that we provided a credit loss for, which I suppose like agreed that they're going to pay, we're just waiting for the cash to come in, that will bring our collections to 99%. So that's really like just one detail that has brought it.
So if all things happen, we're quite hopeful because I think it took them so long to come to an agreement. So last year was challenging in a sense like if you don't make it, I think you don't make it. But if you decide that this is what you're going to do, so we negotiated really hard. It doesn't make sense if anybody goes into any kind of default or litigation. So they have come to the table and said that they will be paying up, which is why it was quite last minute. So that would have brought our collections all the way to 99%, yes.
It's really nice to see everyone here, and happy Chinese New Year, and Gong Xi Fa Cai in advance to everyone. I'm [ Ryan ] from ProButterfly. And my question is I think Jill and everyone had -- Carol, everyone has shared something very exciting about the growth of Manulife and the JVs and all the business parks and all the growth sectors. So that's quite exciting. But my question is specifically pointing -- and I point to Slide #35. MUST current DPU yield is at about 7.8%. And the -- yes, it's pointing at 7.8%. But the true -- but while you have a lot of these potential acquisitions lined up, the thing is at the current pricing, at the current yield, it does seem like many of the cap rates of the properties that you potentially could acquire is, I think, unlikely to be at 7.8%. It's likely to be lower, which potentially could imply that if you acquire at these current prices, it could be dilutive.
No.
And is it true? And is that unfounded? And can you help us shed some color on that? And how do you help to boost this kind of -- yes.
Yes. Great question. I think it's good that you asked that so that we can share a little bit more. So I think in -- and what we have tried to do and say for the last couple of years is we will try not to do a dilutive deal. So which is why I think in 2020, even though I think we're presented with so many, so many opportunities, we decided that the right thing to do was not grow for the sake of growing because it wouldn't have been accretive.
So if you look at what we are doing right now at 7.8% and looking at where we are intending to go, so the high growth sectors like in the business parks and even a tech tenant, you'll be surprised that actually, our cap rates are actually higher. So they could range from the 6.5% to 7.5%, depending on where you are. And because they are not in the swanky like Class A Trophy kind of like building, the cap rates actually could make sense where we are trading right now. And of course, I think for the size that we are right now at a $2 billion AUM, we are not going to say like buy a $30 million one small little building or $50 million because it wouldn't move the needle. It's not worth getting you guys up to relook at your model to see what really happens on the REIT level. So just to give color.
So U.S. is quite big, and we have actually managed to see some attractive properties that we were eyeing. But last year, even, let's say, we hold steady the yield at 8%, that was difficult because the share price was very volatile. So we could go up and down 3%, 4% a day. So it was very hard for like me to price the accretion because one day, I'll be accretive. Then the next day, when I press my button for the basement or whatever, it becomes not accretive. So it was a bit tricky from that point of view.
So hopefully, I think also, I think to what Jill has shared, it's all about the vaccine. We firmly believe in it. The physical occupancy in our buildings currently for the portfolio is about 15%. So I think once the vaccine is really rolled out fast and furious, that could really, really change. And if you look at the slide that we talk about the bosses to employees, what they really want, they really want to start to come back quite soon. And I think, one, it's all about the vaccine, right? So once you have that, I think things will move quite quickly. Yes.
I would just add, in the back of the IMR report, there is actually a map with some cap rates. And I think you'll be surprised when you look at those and see what the opportunities are because they are -- there's a vast array of opportunity. I suppose the other thing is that at some point in the future, we may do some recycling some dispositions as well. So there's also that opportunity as well. So there's a lot in our bag of goodies. There are a lot of tools in that kit bag.
[ Joy ] from HSBC. Two questions from me. First on JVs. Is there sort of a specific geographic exposure or sector exposure you're trying to achieve through JV in...
I wouldn't say there is -- I mean, we'll take all opportunities, whatever is best for the portfolio. We've always said that. And that was why we said we would be on the West Coast, we'd be on the East or the North. We didn't have to follow some particular smile, if I can put it like that. I think we know who I'm talking about.
But clearly, with the migration trends at the moment, that's why I mentioned the big Sun Belt, and we're talking really from West to East, right across America. It's a big sway with many, many attractive locations, I mean, whether it's Phoenix, Nashville, Raleigh. I mean it goes on and on and on. We've mentioned many of these places before. And certainly, we are seeing quite a number of people with very interesting portfolios that have something to offer in that respect.
Maybe just to add. I mean, what we want to say is like it's not going to be like overnight, we're going to be like an industrial REIT or a different kind of REIT. So we talk about JV. To Jill's point, it could be anything. Someone with a pipeline, someone who wants to invest in the U.S. but no expertise in doing so. And I mean, we have been seeing such requests coming through off and on.
So we're just keeping all options open. And I think having Pat based in New York City itself right in the middle of where it all happens is going to be something that we're definitely going to be focusing on a lot more. We want to make sure that when we grow, we grow in a meaningful way. But also having someone on the ground to look at what's happening and to feel what the market is, I think that will be important.
So it's not like we're going to be like looking for JVs, to your point, maybe like we're going to do like 30% different sector kind of thing. This business is still going to be -- we want to grow. We want to expand whatever comes along, and it has to be accretive. So even if I want to become industrial for whatever reason, the numbers at this point in time is going to be very tricky because industrial is the hottest sector in the U.S. with the lowest cap REIT, yes.
And the second one is on the market operation. You mentioned physical occupancy is about 15%. Is there a difference across the portfolio? Is there relationship versus vaccination rate? So have you seen that higher vaccination rate versus high physical occupancy?
And the other thing is on the tech take-ups. So the tech guys have been the largest space take-up over the last year in the U.S. Are these space all for their own use? Or has that been out in a subleasing market?
I didn't quite get the last bit of it.
Okay.
For the second question, what I understand is some of the tech guys will be opportunistically taking space because the rate is good. But currently, they don't actually need that much of space. So that actually goes back to the subleasing market. So I'm just trying to understand, is this the real demand? Or does this include their expansion in the future?
Maybe we can let Pat take the question about the subleasing and then the question prior to that also.
Yes. What was the question prior again? Remind me.
If you want, I can answer that. This is on -- let me answer that one first, and then we can come back to Pat. And I think this is on the real occupancy, the actual physical occupancy. So during the year, you had a couple of things. First of all, you had the pandemic, and then you had civil unrest, okay? So somewhere like Penn, for example, in Washington, the actual occupancy has been at 5% almost the entire year because -- and also, we have the U.S. Treasury in there, and the government was at home. So you have situations like that. You have 2 other buildings like Capitol and Centerpointe where we've been up as high as 25%, but it's also late depending on what's going on, whether it's a new lockdown or we're coming out of lockdown. And so some of these areas we've seen -- so then we give an average of 15%.
So there's been a general but slow trend up with the exception of places like Penn and also Figueroa in L.A. And again, I think that's more to do with what's happened more recently in terms of civil unrest. At this point, we're pretty stable. But obviously, as the vaccine rolls in, we're up to almost 40 million doses in America now as of last night. I'm watching that oneworld data. As that kicks in -- and we are seeing once again all the time on these news alerts that we get 24 hours a day at Manulife, we're seeing that various locations are allowing restaurants to stay open later than 10:00 at night. We're seeing all sorts of areas opening up. So I think that we're going to start to see a little bit like the number of cases dropping because people are being injected. I think in the same way, we'll start to see the actual physical occupancy increase. And obviously, that would be great for the car parking so...
Yes.
Pat, do you want to take the question on subleasing?
Yes. And then -- sure on subleasing. If I think I understand correctly, I think that if you look at -- so there's a slide in the deck that shows that our markets that we're in are much less influenced by sublease space than some of the bigger gateway markets and that our sublease percentage year-over-year has actually declined. And I think the question, if I understand it correctly, there have been tenants in maybe San Francisco and New York that over the last 12, 24, 36 months, towards the latter end of the past cycle, leased too much space to grow into, and now they're trying to sublease that space. But I think going forward, what we expect in terms of tenants that we sign leases with, either new or renewals or expansions, we don't expect them to sort of lease space to warehouse it and hope to grow into it and then put it on the sublease market just to sort of take advantage of the market dynamics at the time. I think across the board, anyone that leases space right now is going to lease only what they need. And if they need to grow at a later date, that will be a conversation that you have down the road. So I wouldn't expect space to be leased and then put on the sublease market. If I understand the question correctly, that would be my answer.
This is Terence from Crédit Suisse. I just have a question on the competitive environment. So it seems like market rents are holding up quite well, albeit I think the narrative is -- some of it is on short-term renewals. So given a slower leasing market, I'm just wondering, how are landlords competing for the same pool of tenants? And are they, say, looking to give more incentives in that regard?
Pat? Pat, would you like to take that?
Yes. Absolutely. Yes, it's definitely -- it's competitive, for sure. It's -- COVID -- and 2020 was a tough year. And I think that things were sort of just at a standstill. Like everybody is at home for 2020, and I think that you're going to see a lot of pent-up demand as these vaccinations roll out and people start to want to get out of their homes and go to restaurants and get back into the cities or the environments, go back to the office and feel a little bit normal again.
So I think that there could be demand -- more normalized demand as the year rolls on and things sort of return to normal. But in terms of how we adapt to the current environment as property owners, I think it's fair to say that you have to adapt. And I think the benefit is that not a lot of tenants want to sign -- as I alluded to earlier, not a lot of tenants want to sign incredibly long-term leases, which is a little bit ironic because you figure out if you were a tenant that had a good, long-term outlook, you'd probably want to lock in now and try to take advantage of the environment and lock in a low rate. But that's not really what we're seeing. So we're seeing tenants that are a little bit gun-shy on taking long-term deals. And so as property owners, we're adapting to that, and we'll start to be more flexible in looking at shorter- to medium-term leases to accommodate what tenants want. And I think in exchange for doing that, you get -- you might be able to extract better economics than signing into a long-term lease right now.
So we're trying to meet demand is what I would say on the whole, and we think that, that will sort of help us weather the storm and capitalize on the upside as things sort of return to normal over the next 12, 24, 36 months.
Okay. I've just been given a signal that we have maybe one more minute. Does anyone have any pressing questions? We actually have quite a bit of questions on the online. Just that because of the interest of time, I think, to be fair, I think we will take the questions from the floor first. And for those joining us on the audio, just apologies, but please drop us an e-mail. We will follow up with your questions if some of the questions that you ask is not answered, yes. So last question for Rachel, is it?
Sorry. Just one last question from me. Just on your gearing result. The gearing has inched up to about 41%. So what are your thoughts on that? And what's your comfortable gearing level?
Well, 41% is still fairly manageable. I mean, MAS guideline's 50%. So there's a headroom of about $375 million. And in terms of CapEx spendings that we budgeted for this year is there about around the same level as last year. We cut back on a lot of nonessential CapEx. We only spend where it needs to be, basically preserving gearing, preserving cash flows, right? And in terms of liquidity, we still have about $115 million of revolver credit -- committed revolver credit line that's untapped at the moment, yes.
Sorry, maybe just to follow up. Given potential acquisitions, would you like -- would you foresee that you might move your gearings up a little bit more?
Well, yes, it depends on deal by deal, how accretive is that transactions. If it needs a bit of a kick, we may have to look at a tad bit more leverage. But if the deal can take a bit more equity, then that's an opportunity for us to deleverage a bit. I have to say, I mean, let's see what deals comes along this year, yes.
Okay. Thank you. We've come to the end of this session. We will be hanging around for a while. So if you still have questions that you want, please feel free to ask us. And thank you, everybody, for your precious time. I hope you have got your goodie bag with pineapple tarts and our limited-edition REIT packets inside. So the REIT packet actually transform into an organic cream. Instructions and everything is inside. So it's a bit special, and this is in support of the social enterprises which we have always wanted to.
So thank you for your time, and thank you for the audience on the live audio. So we wish everybody an ox-picious new year. Have a great day ahead. Thank you.