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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.
Good evening, everyone, and welcome to Keppel Pacific OUS REIT's First Quarter 2023 Key Business and Operational Updates. My name is Brenda and I represent KORE on the Investor Relations front. Let me introduce the management team on the call. We have CEO and CIO, Mr. David Snyder; and CFO, Mr. Andy Gwee. I will now hand the time over to the CEO, Mr. David Snyder.
Thanks, Brenda. Good evening and thank you all for dialing in to KORE's first quarter 2023 key business and operational updates call. Since this call is mainly for analysts who are familiar with us, we'll briefly run through the slides we always include. With that, I'll turn it over to Andy.
Thanks, Dave. I will now provide an update on KORE's financial performance for the first quarter of 2023. As I recap from 2Q last year onwards, the Manager had elected to receive 100% of its management base fee in the form of cash and not units. As such, as 1Q 2022 management fees were previously received in units, we have provided the adjusted distributable income for 1Q 2022 to provide for like-for-like comparison against the first quarter '23 DI. The Manager expects to receive 100% of its base fee for the full year of 2023 in cash. On a year-on-year basis, adjusted cash NPI and adjusted DI was 2% and 12.5% lower, respectively, and this is due to the divestment of our 2 Atlanta assets last year as well as higher financing costs. I will now touch on our balance sheet and capital management in the next slide. KORE continues to maintain a strong balance sheet with significant liquidity. All of KORE"s borrowing are U.S. dollar denominated and 100% unsecured providing the REIT refunding flexibility. We would like to reiterate that KORE has no direct exposure to any U.S. regional bank. As at 31st March '23, our aggregate leverage was 38.7% with interest coverage at 3.6x. There is sufficient headroom before we hit an ICR of 2.5x. All-in average cost of debt was 3.96% per annum. Excluding the amortization of the upfront debt financing cost, the average cost of debt was 3.86%, an increase from last quarter as the Fed hikes in 2022 and the first quarter of '23 took full effect in the first quarter. The average term to majority of KORE's debt was 3.4 years with no long-term debt refinancing requirements until end of 2024. We continue to manage our interest rate exposure with floating to fixed interest rate swaps. In April we secured a new USD 50 million committed revolving credit facility. As at the end of the quarter, 78% of the REIT's noncurrent loans have been hedged and every 50 bps increase in LIBOR or SOFR translate to an impact of about USD 0.065 in DPU per annum. I will now pass the time back to Dave to talk more on KORE's operational performance.
Thanks, Andy. Though I'm not sure you got the memo about being brief on each of our slides. Our overall portfolio committed occupancy was 91.9% as at the end of March 2023. 105 Edgeview occupancy edged down due to the nonrenewal of a company which occupied about 10,000 square feet of space. Bellaire Park saw reduced occupancy as a medical and health care tenant downsized by approximately 20,000 square feet of space. Moving on to Slide 5. We leased approximately 218,000 square feet of office space equivalent to 4.6% of our portfolio NLA. Excluding 1 significant expansion in early renewal which contribute a total of 101,000 square feet of space, we leased about 2.5% of our portfolio NLA. Rent reversion for this quarter was negative 6.5% as was skewed by the major early renewal and expansion lease mentioned above in Maitland, 1 of only a few properties where our asking rate is below our in-place rent. Excluding that lease, rental reversion was 4.9% for the rest of the portfolio. The bulk of the positive rental reversion continues to be from Seattle, Bellevue and Redmond markets. Our built-in average annual rental escalation continues to be 2.4%. There are no significant changes to Slide 6 since last quarter and our tech markets and tenants continue to drive our performance. The same goes for Slide 7, which highlights our low tenant concentration risk. Moving to Slide 8, you'll find a comparison of the last 12 months' rent growth. As rents picked up across the U.S., our key growth markets continued to outperform and saw 1.2% growth, much higher than the gateway cities. Similarly, on Slide 9, you'll see a chart that shows growth projections for the next 12 months. The projected rent outlook for KORE's key growth market stands at 1%, much higher than the 0.2% for the U.S. and the negative 0.9% for the gateway cities. On Slide 10, you'll see there have been no significant changes in our submarkets. You are all familiar with the data on Slide 12 so I'll simply comment that we're hoping the Fed is only going to raise rates a maximum of 25 more basis points this year given the range of economic data that is available. Moving on to Slide 13 where we continue to see that KORE's key growth markets continue to perform much more strongly than the U.S. average and the average of the gateway cities. Slide 14 highlights the continued outmigration from gateway cities. These big cities will continue to face difficult futures. Population growth in these gateway cities are almost all foreign immigration. New York has lost more than 400,000 people in the last 2 years and saw its population decline 0.8%. The second and third largest metro areas, Los Angeles and Chicago, saw similar percentage declines. Furthermore, large firms such as Citadel, Caterpillar and Boeing have left Chicago as well. This trend will likely continue as people and businesses move out of gateway cities into key growth markets. The pandemic spurred a burst of mobility, some temporary and some potentially permanent, that accelerated pre-existing trends on where and why Americans choose to live where they do. On Slide 15, we show that more large firms continue to bring their employees back to the office. Even as tech layoff announcements that really haven't been that significant have gained attention in the media, they have yet to result in major net declines in employment meaning that hiring is offsetting layoffs. As we had predicted, tech and other companies have capitalized on the hiring freezes and minor layoffs to bring workers back into the office. Amazon recently announced that they expect their employees to return to the office 3 days a week starting May 1 and we hope and expect this move will help increase the overall physical occupancy by midyear as other companies follow their lead. With so many firms requiring workers to return to the office, the dynamics of the job market have clearly shifted. For example, employees that do not comply are now likely to be terminated as in the case of Vanguard. This is how seriously employers are starting to take return to office mandates as they do not see the need to continue to exceed to demands to continue to allow work from home. Finally, on Slide 16, we close off with a summary of KORE's unique value propositions that set us apart from the other U.S. office S-REITs. Since you're all familiar with the reasons our portfolio outperforms our peers, I won't list them again and we can move straight to questions.
[Operator Instructions] I guess we have Rachel who just raised a hand.
Good to see you back in Singapore again and hopefully we will meet soon. Just maybe a few questions from me. I think firstly given all the media news about U.S. office, I was just wondering whether you could share with us what's really the real sentiment on the ground especially with your tenants and corporates? Any sectors that's fueling more -- like previously they are more stable, but now turning a bit more cautious in terms of their office space.
I think it's fairly safe to say for our markets, Rachel, that we're not seeing major changes as of yet. There are still certainly concerns even with Amazon and many others we listed bringing people back to the office. But there's certainly still some concern among office users about how much space they need, what it needs to look like, how they redevelop it over time. So I think we're going to continue to see some trends there. But again much like in the last quarter or 2, we have actually had more expansions than we had contractions within our portfolio. Like I said every other time, I don't expect it to continue and yet it continued again this quarter with very large expansion that we had. So this is not a unidirectional issue. A lot of folks are finding while they may have a little bit less space per employee at their desk area, they need more what you might call here huddle rooms and things like that where people can get together and discuss things. And so I don't think there's a 1 answer fits all. I do expect to continue to see law firms and the like shed space whenever their renewals come up. Again for us, that's not as big an issue it is for a lot of folks who have a lot of law firms, similarly consulting firms and the like that take up a lot of space and big CBD type offices. We'll continue to see that, but we hope to continue to see growth in technology and some of our other types of companies that certainly for us ought to offset it whereas in gateway markets and a lot of CBDs, that may not be the case. But our markets interestingly enough do continue to perform and we are seeing a little bit of interest on the leasing front in many of our markets.
Sounds quite positive. Just wondering the interest that you are seeing in terms of demand, is it specific to any sectors or just broad based?
I think for us it's relatively broad based. I mean there's some tech among, there's some typical office users. What I can tell you is it is pretty size dependent so most of the interest that we're seeing is 10,000 feet and below. For our portfolio, that works out well. We typically have a lot of tenants that are in several thousand square foot up to maybe an 8,000 or 10,000 square foot footprint. So we like that square footage. Anything below 6,000 or 7,000 square foot is where we'll be doing things like spec suites that help bring that business in the door, if you will, and accelerate maybe our ability to lease. So we're fairly pleased that that's the case. I mean obviously we do have some larger spaces available within our portfolio. We just don't have a lot of them compared to the competitive set. So we feel pretty good about where we're seeing the demand. Obviously in a place like Iron Point, I'd love to find some very large 25,000 square foot tenants to take up a little bit of that space. But we are tending to see the interest is much more in the 3,500-ish to 7,000-ish square foot range. But for us in general, that bodes relatively well.
Then maybe just on Spectrum downsizing -- sorry, the Spectrum renewals, any downsize in space and what about TIs? Are you giving them a lot on their TIs?
So Spectrum is the big expansion that we have. So we early renewed their existing space and they essentially doubled their footprint. They were about 52,000-ish square feet and we picked up another 48,000 square feet from them. They have very normal sized TIs for both pieces of that and we didn't have to really do anything on the lease inducement front to bring them in. So we've got essentially for us a normal TI package and a normal free rent package related to that. The piece that we did do was to bring down their existing space to current market rates, which were below what they were paying immediately as part of this. We thought that made a lot of sense. One, it takes some of the overhang out for us at that particular property, but clearly that's a pretty fair inducement. If they're willing to take that much space this quickly, we feel like that's a pretty good trade for that space.
Okay. And any color on is it a previous lease or a long lease more than 5 years?
It's actually a more than 5 years lease. So that one goes out basically 7 years at this point. So we're in great shape with that lease with that tenant.
Okay. No [ grave ] causes or anything like rent review?
Off the top of my head I don't recall that. I'm pretty sure that is just a pure straight lease with no termination options.
Okay. Got it. And just one last question from me. In terms of 2023 that has already been refinanced, I'm just wondering what's your sense on the 2024 debt?
Dave or me?
Obviously you, Andy. Come on.
So 2024 is just 2 small size debt; one is due in November '24, the other due in December '24. And currently if we were to take a new loan now, the margin on the loan is still the same as the one that we did last year, the $180 million. So I mean of course if Fed starts, I don't know, could come down in terms of rates next year, hopefully the cost of capital for the banks are cheaper and I mean then that's where we will see probably low margin going down. But now it will be a bit too hard to sort of predict what will be the low margin where we are going to do the refinancing then.
Okay. Got it. Any stress in terms of credit tightening?
Not that we are aware of. I mean in terms of getting -- we were happy to get the committed RCF in April or just last week and that really provides us with the buffer for the CapEx as well as any working capital requirements. So at the moment we feel that in terms of capital requirement and capital management, we are in pretty good shape at the moment.
So Rachel, we do have a pool going for how long it will take for you to come back with your next round of questions. So don't disappoint me, I want to win.
Next in line Vijay.
I have a couple of questions. My first question is maybe the rent outlook or rent growth seemed to have softened a bit. I think last quarter was something that you had in-place rent in this market was 6%, now it's about 2 percentage.
Sorry, Vijay, you have a lot echo in the background. So probably maybe if we could trouble you to speak closer to your mic.
Sorry, can you hear me now? Is it better?
That's definitely better. It's still a little bit off, but we can understand you better this time. So yes, please if you wouldn't mind, start from the beginning because we missed the first number of words.
Okay. Can you give some color in terms of the rent growth. Rent growth seemed to have softened a bit. Last quarter I think your potential rent reversion was 6%, now it has come down to 2 percentage. Maybe can you give some color in terms of what is it happening in terms of the market? I think are tenants now in a much more bargaining position compared to landlords?
No, that's a good question and probably something we should have addressed right upfront. We've actually made a small change to the way that we do that calculation to try to really account for only the appropriate leases that should be considered, taking out things from square footage that really don't impact the calculation, trying to really true up to what's the real answer. That answer was a little bit below where we were before, but we really think we've now got the right comparative statistics put together. It's quite a bit more work to come to this from the raw data that we're getting from Pac Oak in the U.S., but we think we've got a more reasonable number. The other reason you're seeing that as we move into this year is you're seeing the 2.4% built-in rental escalations that are occurring. Those are obviously driving a reduction in where our in-place rents are versus asking. Our asking rents are generally speaking holding pretty consistent at this point. So we're seeing a growth in those in-places as every year sort of ticks by and just depends on timing which leases go in. But our methodology I think is a little bit better as well.
Got it. Okay. That makes sense. If you look at your portfolio in terms of 11.6 percentage of lease expiries this year, what are the discussions you're having in tenants? Are they having a lot of options to shop around? Do you think there could be a potential? How much do you think would renewals be from this part?
Well, one thing we do know is there are certainly options for people out there at this point in time in terms of space that they want to lease. The fact that they have options doesn't necessarily mean folks are going to leave our buildings. If we're doing our job well, we're losing tenants because we can't accommodate them anymore, which may also mean we're not doing our job very well, not maintaining enough extra space for them. But we're going to see them leaving because of consolidations. The tenant that we lost out of 1 of the 2 buildings in Denver, we actually were in discussions with them, we traded paper. We were to the point of literally being ready to sign a lease extension with them and basically the very next day, they called and said they're closing their doors, firing 100% of their employees and they're just done. I can't control for that. We're going to lose those types of tenants. We will see like others some downsizing with law firms and the like. But generally speaking if we're doing our job well, folks aren't looking to leave to save a buck here or a buck there. Some will, most don't. We're not the cheapest rent in the marketplace in most of our buildings and these tenants are already there. So we're losing tenants generally for other reasons. Several of them that we've lost and will lose are because of additional work from home. So that is still a factor, one that we think should be shrinking over -- has been shrinking and we expect will continue to shrink over time. So we look out at that 11.6%, for us that's essentially fairly normal or 10.6% I think is the right number here where we'll have a mix of tenants that vacate, a mix of tenants that expand and a mix of tenants that contract. We had a retention rate of just over 50% for the first quarter, which in this market we feel pretty good about. We've never had a really high retention rate. That's just not part of how we've tended to operate. We have a number of buildings like Westpark and several others where we have a lot of tenants and we intend to have a lot of roll and a lot of replacement. Nothing's changed on that front for us. But we do have several known vacates that are coming at -- pretty large one left at Maitland, a couple of others within the portfolio, a large one in Sacramento at Iron Point. And we're hard at work doing things in those buildings right now as we make some modifications to improve the buildings themselves, building out spec suites in both locations to try to make sure we're well positioned to not see a long-term falloff in occupancy at some of those buildings. We are seeing -- we have seen a little bit more leasing momentum than I feel like we were seeing in January. So there's going to be some movement in occupancy rates. There's no doubt that overall the U.S. market has lost quite a bit of occupancy. We have lost part of a percent over this past quarter. We'll probably see ourselves falling a little bit throughout the course of the year net-net hopefully not by very much and if things turn a little bit, it's conceivable we could maintain an occupancy level pretty close to where we are today. Hopefully, I'm giving you kind of a broad answer to your question, but hopefully just to give you a good feel for where we're at and how we're looking at occupancy for the year.
Yes. In terms of this April loan, can you give what was the cost of the loan and what was the exact rate of the borrowing cost in the first quarter?
$180 million that we had last year?
No, the April loan. What was the loan secured?
Let me check. The margin is the same or consistent with the one that we had for last year. So the margin is around, let me see, excluding the upfront is around 160 bps. Yes, 160 bps.
So no change in the margin. So it is...
Correct. So we are not -- at least for us, we are not seeing any significant change in the margin for the loans that we are taking.
Okay. And in terms of your lenders, can you give some color? Are these all local lenders or how many lenders in the U.S. you have at this point of time?
So our borrowings are all done in Singapore so it's a mixture of Singapore banks as well as banks from Malaysia, Taiwan and Canada with offices based in Singapore. So that means they have the license to lend out in Singapore. So everything is taken in Singapore.
So all these loans has been done in Singapore perspective -- from Singapore perspective?
Yes, yes.
Did they have any discussion at all in terms of anything regarding what is happening in the U.S. market in terms of financing conditions?
I mean with all the news on the U.S. economy as well as the situation there, of course they have been sort of asking for updates similar to what you guys are doing as well. So we have been providing all these updates to them as well.
Okay. Understand. In terms of physical occupancy, can you give what is the physical occupancy for your portfolio at this point of time?
Physical occupancy is around 64% average for the portfolio.
We hope to have a better answer for that after Amazon brings folks back and we get into second quarter.
I'm looking forward to that. Okay. I think that's all for me. Maybe I'll let Rachel again.
I think next we have Derek.
I cut Rachel's queue. I wanted to ask a few questions on your tenants if you may give us a little bit more color. Just look at your Top 10 tenants, right? Just wondering whether could you give some commentary around how committed do you think are they in terms of mentioning their space at this moment of time? I understand at Maitland, there was a rent that was signed below in-place, right? So does that mean that for example when Spectrum comes out, it's going to be also seeing that kind of downward shift in terms of rents? Just want to hear your thoughts around that.
So let's hit the Spectrum first. That was the lease that came up. And so Maitland is one of our couple of buildings where our in-place rents are actually above asking so this is not unexpected for us. We expected to see a decline there. It's just the volume of space was so big that an offset caused the negative for the quarter for us for rental reversion when in fact we had some very high rental reversions in other buildings this quarter. It's just this one was just so big at essentially 101,000 square feet, it caused the whole thing. Which is why we gave a second number showing what that reversion would be if we excluded it because we feel like given its size excluding it, we should report it. You should know it, but looking at where the portfolio as a whole is, you get a better picture by excluding it and looking at the rest of the portfolio. As we look at sort of the Top 10 like you're asking. We look at Comdata, they're just in the midst of finishing up some work they've been doing to the building themselves on their dime. So in terms of commitment by the end of their lease, I don't know. As of today, they've just redone quite a bit of space within that building. The last time I was out there and walked through, they were getting rid of some data center space and things like that converting it to regular office and which are all positives for us. Ball Aerospace were adjacent to their campus and Ball has been very active in terms of leasing space from us over the last few years and we continue to have discussions. We've got a small lease coming due in a building where they occupy the rest of the building and quite frankly, I expect they're going to lease that space from us. So we feel pretty good about where they're at. As we get farther down the list, some of them it's harder to answer. Lear Corporation is in Plaza so like most of Plaza buildings and all of Bellevue, they're not having that many people in the office. So it's real hard for me to get a good answer to where Lear is at just because of who they are, where they are. Gogo, I was just at that building a week ago at 105 Edgeview and they're very pleased with their space and I'd be very surprised if we saw them move when their lease comes due, which is quite a ways out. Meta has quite a bit of space at Westpark. For a period of time, they were signing expansion leases and taking space because they had the right to it when folks were expiring. At this point when their lease comes due, I think I would tell you I would expect to probably see a small decline, maybe call it 10,000 square feet or 0 in their space. I don't expect a big change in what Meta's doing. They're very committed to the location and we've got their testing facility there, it's one of a kind that I can't imagine they walk away from. [ Zimbi ] we're recently in discussions with about having a potential reduction in some space. They had a termination option and by the time we got to the termination option and when they need to notice us, they'd stopped even having the conversation. I was just there last week and walked through the space they had talked about giving back and it was productive and being used. So we felt good there. Spectrum just signed a massive expansion and doubled their space. Goldman Sachs was a big expansion last year that brought them into the Top 10. Auth0 is another one with the Plaza buildings that's just hard for me to speak to. There's not a lot of people in that space. So we got a couple in the top tenants that's hard. Biomedical in Texas is in their space from everything I'm aware of last time I was there not too long ago. So I think we feel pretty good about the Top 10. That's not to say by the time their leases expire, some of them may have changed. But for now I think it's maybe worthwhile kind of running through that and talking through it. But we're in pretty good shape I think with that Top 10 tenant list.
Okay. I'm just curious about -- my next question is on your lease that you leased -- space that you leased this quarter about close to 218,000 square feet, right? Is that similar to the space that would expire? I'm just wondering whether did they continue to take exactly the same amount of space or was there any net return of space to you?
No. I have to try to look up here real quick how much actually expired during the quarter. I will tell you that I'm pretty sure this is more than actually expired during the quarter. Just with the expansion with Spectrum although Spectrum's existing in-place lease was not due to mature for another year, we brought them forward to this time frame. If we take that out of the calculation, then I think we're pretty close in terms of what was expiring, which is why we gave that number 2 different ways. One inclusive of the renewal and expansion with Spectrum and one without. Just trying to help people understand what our regular pace is and I think that regular pace runs right along where we were if you look at the change in where we were at the end of last year and where we're at now. So they were expiring a total of about 250,000 square feet. So all in all yes, but it's a different mixture of space that we were signing new leases on when you get outside of the actual renewals in-place, most of the new leases were on different space than what expired, but kept it in place.
So most people actually kept that space so there isn't really a reduction in their footprint.
Actually I'm not sure I would -- in terms of reduction of footprint, true. We did not have a lot of contractions. I would say most people keeping their space, yes, we had about a 53% retention rate. That's still quite a few people that vacated their space completely. So we had about 76,000 square feet of vacates, we had 56,000 square feet of expansion and 32,000 square feet downsizing.
Okay. Got it. The other question is earlier you mentioned about physical occupancy, was it 64% or 54%? Sorry, I didn't catch that.
64%. Yes.
That's a good number. I'm just wondering whether you reckon this will be a new norm being about 70%, 75% maximum given that there's flexible arrangement going around, right? So just wondering what's the number that we should track and what number is something that you feel comfortable in this current environment?
Yes. I think if we can hit 70%, we're very comfortable with 3.5 days a week. I think 75% is probably closer to my expectation. I think most businesses are going to get back to 4 days. I mean obviously Amazon started at 3, Microsoft started at 3. Over time I expect they change that to 4. There are businesses that are back 5 days a week. And when you really look at tech employment in the U.S. while it's a big factor for us, total tech employment is dwarfed by most other office using employment. So they're not going to bring down that whole average too much for the entire U.S. and we're pretty thrilled with 64% right now. We do hope to see that hit 70%, 75%, to 80% would be I think a fantastic place if that's the new normal.
Got it. Okay. My last question is on valuations. I mean we're just reading news about how valuations have fell through the floor in the U.S. I'm just wondering whether anything I think what we saw last quarter versus what could happen again at the end of the year, it could be a little bit premature to be worried about this. But how are you feeling about your portfolio of values at this point in time and this part of the cycle? Should we be looking at a scenario that gearing could go past 40% and you will need to recap the balance sheet? Is that something that's on the top of mind at this moment in time or your input on this would be great?
Well, it's a very timely question. When we look at our portfolio within the U.S., what I would tell you is we're not seeing a lot of the same pressure you see in a lot of the gateways. We're not seeing massive declines in rent. Our rental income -- our overall income remained pretty flat, remained in line with or even slightly ahead of what we had budgeted and expected for the quarter. So we feel pretty good about our performance. In terms of valuations, we've seen 2 Fed rate hikes since year-end and we would expect those would have some impact on cap and discount rates. So we hear people talk about other things that might have some impact, certainly inflation, overall U.S. economy where we're at, where we're going may have some impact. We've heard other concerns raised as well. I would tell you I don't think there's been a material change in the value of our real estate. I would tell you I'm sure there's some small decline in the value of our real estate. You can't have 2 Fed rate hikes even if only 50% of each of those is hitting cap rates. That's to make a very minor change, but not material. So that's kind of where we're at today. By the time we get to year-end in conversations that we've had with appraisers, I think -- what I would tell you is I think a lot of them expect that the rate pressure we're seeing now reverses by year-end and so we could see maybe some decline during the year. It may stay through year-end and it may turn back around and come back the other direction by year-end. I'm not really sure. I wish I had that crystal ball to know, but I feel like that's probably a reasonable expectation that they might have, we might have. So barring a major recession in the U.S., that deal is reasonable. I think that meets with general economists' projections. Everybody but the Fed seems to think the Fed is going to reverse rates before the end of the year. So hard to say exactly, but certainly there would be some minor decline in any real estate portfolio in the U.S. We're just better positioned than most and I think ours would be a lot less than those in gateway cities. When you look at San Francisco and I'm reading over the last couple of days San Francisco is now at 30% vacancy, 34% total vacancy for the market when you include some of the shadow space. That would be a disaster to be in or around San Francisco in terms of valuation. L.A. is just as bad or worse and New York is pretty rough unless you're in Hudson Yards. So we're not in those markets so I don't think we're getting hit nearly as hard, but I'm sure there's some decline.
Next we have Jonathan.
David, my first question relates to 105 Edgeview and Bellaire Park. You mentioned nonrenewal 100,000 square feet and 20,000 square feet. Sorry, I missed the industry sector that the tenant came from. And could you also elaborate on the reason why the nonrenewal, is it downsizing or relocation or other reasons?
You and Derek are making it tough on us today. Derek's got like was it the floor falling out. Whatever Derek was saying about how bad it is in the U.S. real estate market, you've got a 100,000 square foot tenant leaving my building when it was only a 10,000 square foot tenant. It's not that bad. In terms of who we had leaving, we had at 105 a technology company and that was a tech company that just they shut their doors and decided it wasn't worth moving forward, which is not something I think totally unexpected for tech. We'll periodically see that. But we're not going to see that to a very large portion of our portfolio. That's fairly unusual I think. For Bellaire, that was as you would expect. Synergy Healthcare going to be a health care company that we have there. We actually did sign direct leases with 2 of the 3 subtenants that they had, which made up for part of that space and offset it and in both locations we've got at least a little bit of activity. We've actually got more in Bellaire of potential activity going on there for hopefully backfilling that space and/or leasing other space within the portfolio.
Also 2 health care tenants?
Yes, the 2 sub tenants that we went direct with were both health care.
I do understand your portfolio is quite differentiated. And so second question relates to do you intend to divest and if you do, could you share location where you're interested to divest and also the reason for doing so?
Well, Jonathan, how much money do you have and do you require debt financing? Because that's really going to be the driving factor here on whether we're going to be divesting. No, in all seriousness, we're not planning on divesting anything near term. There is no market in the U.S. right now. With banks not favorably disposed to lend on real estate transactions, there are no legitimate buyers out there. So the only sales that we're seeing in the U.S. are [ forced ] transactions and they're not very pretty. When it comes to the point where we're able to see transactions again, then I would tell you we go to the things that are sort of the smallest piece of the portfolio. Iron Point in Sacramento is one. Again it's in a state that is not a key growth state. It's a key growth market in a non-key growth state and it's very small. It takes a lot of asset management time much like the 2 in Atlanta so it is the next one on the dock, if you will, to be offloaded. And then 1800 West Loop, we actually really like our building. If you look at 1800 West Loop in terms of its occupancy and performance versus its submarket, we're not going to cover off the ball, but it's just tough in Houston. There is so much vacancy elsewhere. There's vacancy in our Galleria submarket. But the other 2 main submarkets in the energy corridor and the CBD are so vacant that while we continue to see population growth, job growth, GDP growth, you name it, Houston is doing well; we just can't seem to catch a break on the office front and so we're not going to see office rental growth for some time. So that's one where once we get that building to around 90%, there's a market to sell into. That would make sense to recycle and move it into one of the markets where we really see a lot more growth like the majority of our portfolio.
And last but not least, a big part of your portfolio is in U.S. Seattle. So I'm just wondering if Downtown is doing bad, is there some flight to quality from Bellevue and Redmond to Downtown? Maybe there are Grade A or trophy buildings there that have better spec. Is there like a risk of flight to quality to Downtown? Is that a risk? And then could you also comment on -- you mentioned about physical occupancy. Could you share physical occupancy in Bellevue, Redmond and how Amazon's new policy will change the situation there?
Sure. Let's start with the second half of that first. Plaza Buildings are running between 35% and 40% in terms of physical occupancy and that's the CBD building obviously. When we go to suburban Bellevue at Bellevue Tech, you see a big improvement up to about 50%. And then when we get out to Westpark, which is in Redmond, that has been one of our best performing physically occupied buildings from day 1. It's running about 95%. So it's a product in large part of one of the things that we like to talk about for our portfolio and that is low-rise tech occupied buildings where they're generally using the top floor or floors for office and they're using the bottom floor for manufacturing, testing, other sorts of things that they do. And so practical must be in the office to accomplish their jobs types of tech tenants. That's what Westpark has. That's why Westpark runs 95% occupied. It's I believe the highest occupied building in our portfolio with maybe 1 other building out there to tie it and the rest are 10% to 20% below that for our other better performings. So we're hoping to see Amazon bringing folks back, to me which is the main one, should trigger a number of other tech companies, probably the majority of tech companies left in the area to set return dates anywhere within 2 to maybe 4 months of that once it actually happens. They're all waiting with bated breath to see A day or Amazon's back to workday here and what happens. So I do think that bodes well for physical occupancy within especially Bellevue, but I think that's going to play out throughout the rest of the tech markets and many other markets in the U.S. as well. In terms of a flight to quality, I think we need to get you out to our buildings and show you our buildings in Bellevue. Coincidentally, I think we're doing that next month. But we're going to get you out there and show you that versus Seattle because Downtown Seattle is not the flight to quality. The flight to quality is the Bellevue with the newer better buildings. So that's where Amazon is moving. They're moving out of Seattle. They have been for some time now and that's the trend we're going to continue to see. If you're moving into Downtown Seattle, you're moving into a place with significant homeless problems, a city that is not particularly business friendly. You're moving into places that have less parking, parking that's so dated and old that I can't park my truck in a single building I've ever been to in Downtown Seattle. So there's a lot of reasons why Seattle is not the flight to quality, Bellevue is a location of quality. All the big tech companies aside from Amazon have been headquartered on Bellevue side. That's why we talk about Seattle, Bellevue, Redmond. It is the east side not the West. It is the place of choice from Google to Microsoft to Meta to now Amazon has announced all future developments in Bellevue to T-Mobile. You name it. The companies you're aware of that still have a big presence there are on that side. So we're not worried about a flight to Seattle. We would scratch our heads if we had a tenant tell us they're even considering it. In fact 1 anecdotal from our portfolio, we do have 1 tenant at Bellevue Tech that actually considered going to Downtown Seattle because they could get way cheaper rents than we charge at Bellevue Tech. They explored it, they looked at it, they went and visited it and they decided you know what, why don't we just sign a lease here with you and we'll keep our space.
Okay. And I guess your truck must be pretty, pretty big. Hope to see that during the site visit.
I think we have time for 1 last question from Rachel. Rachel, I see you have raised your hand.
Dave, did you win your bet?
Rachel, I lost the pool, you took too long to come back. It's terrible so I'm not going to answer your questions. They better all be for Andy. No, I'm kidding.
Just a few follow-up questions. I think for the Bellaire one, I hear that it's from a health care company. Is it because the business is not doing well and hence they have also sublet the space or maybe downsizing moving to another buildings?
Yes. There it was a very strange tenant that was actually not my favorite so this is a decision that works out well in our favor. We may have a little bit of a temporary hit here to occupancy, but we're essentially massively downsizing a tenant that we don't really like all that much. So this is a plus for that building to see this and then we're in discussions with at least 1 other for some of that space as well. So this is all a net positive in my view to retain the good tenants, be in discussions with at least 1 more, then have some good space that is in a good location within the building to market to a tenant I'd much prefer to have, which would be almost anyone.
Okay. Got it. And maybe just to try to understand your reversions, you're saying that some of the buildings actually get [indiscernible] from reversions. Is it mainly because of the in-place rents are actually just well below the market rent?
So for this quarter, it's because we had such a large lease that was signed at Maitland where our in-place rents at Maitland are above asking rent. And so Maitland -- to be clear, I said there were 2 or 3 buildings in the portfolio where that's the case. Maitland is the only one where that's a significant difference in my view between asking and in-place. The others are a lot closer to net. But this one has a big difference. So that's what the impact was this time. When we take out that 1 lease, but again very large 101,000 square feet. So I take 1 lease out, negative 6.5% turns into positive 4.9% and that's because Plaza in a market where there's not that many people in the building physically continues to have really positive rent reversions that were in double digits at quite high levels. Westpark continues to have good positive rental reversions. We saw positive rental reversions elsewhere in the portfolio. So we have a few buildings most notably, it's not going to be a shock after Mainland, the other 2 would be the 2 buildings in Houston 1800 and Bellaire Park. And so there's really the 3 of the portfolio where you've got a difference between in-place and asking that is in the wrong direction. The rest of the portfolio is basically flat to something better than that. So we feel good about where we should be generally speaking in terms of rental reversions still being in that low single-digit range. That should be where we see things happen.
Okay. So Plaza is mainly because the rent is still much below the increased rent -- the in-place rent is still much below the market rent. Is that right? Is that why you couldn't do the double-digit reversion?
Yes. So Plaza's just had many years of significant rent growth well in excess of the 2.5% to 3% built-ins that we're able to put into those leases. Plaza tends to be on the higher closer to the 3% range for those built-in escalators. So we've got -- if we've got a lease that's call it 5 years old coming through a Plaza, they're going to be a big positive mark-to-market on that. We've also not seen rents falling off there by much. They flatten for sure, but we're still seeing that be a relatively strong market where we can hit our asking and haven't had to reduce it. We're just not able to grow it like we once could though in certain circumstances we may still do at the high end of asking. So we still feel good about Plaza from that perspective. Plaza, Westpark portfolio, those are still going to be locations where we should see pretty significant positive rental reversions bringing up the rest of that portfolio.
Okay. Got it. Just one last question. I think to follow-on from Derek's question. It's a bit early in terms of talking about valuation. Are you concerned that some decline in your valuation portfolio will actually push up your gearing to closer to your 45% gearing mark and are you looking for ways to do something about it?
Rachel, how bad do you think our portfolio is? 45%, my goodness. I mean that would be worse that we'd have to have a Manulife size problem for that. We do not think that we have anything that's going to push us close to 45%. Could we have gearing switch to something close to 40%? Sure, because we're going to have capital that we're spending this year that's going to start pushing us close to that level if we spend all of our expected capital this year because it's all going to have to come from the debt side. So if you put those 2 factors together, then yes, by year-end you could be looking at something along those lines. But for now the kinds of numbers that would get us -- Andy, what number would it take to get us to 45% leverage?
We need probably around $200 million drop in valuation.
$200 million drop in valuation is not anything I foresee in the cards for our portfolio, Rachel. If I am wrong about that, well, I shouldn't have this job and I won't. So I think we can safely say that is not an expectation that we are entertaining. But a small change in value, several percent, sure. With the kind of changes that we're seeing in interest rates driving cap rates and discount rates, yes, that's certainly in the cards.
I think that we have nobody else in line. So I think that cuts off the analyst teleconference for today. You may now disconnect. Thank you for joining the call.