Results First Take: 3Q21 – Strong performance with more upside potential

  • Stable DPU of 2.462 Scts. in 3Q21; in line with our projections
  • Key positives: i) portfolio occupancy continues to inch up to record highs, ii) acquisitions and AEIs carried out over the past year will continue to drive earnings growth over the next few quarters, iii) low gearing levels to provide ample debt headroom for KDCREIT to pounce on acquisition opportunities when available, iv) portfolio revaluation on 31 December 2021 to potentially offer upside surprise
  • Key negative: slight delay in the completion of the Guangdong DC acquisition, but we expect it to be completed soon
  • Maintain BUY with a TP of S$3.00Key operational data3Q20212Q2021% Change 
    q-o-q3Q2020% change 
    y-o-yRevenue69681.3%682.5%NPI64631.5%622.3%DI43422.0%406.3%DPU (est)2.462.460.0%2.364.5%Portfolio occupancy (%)98.1%98.0%0.1ppt96.7%1.4pptWALE (years)7.006.50.57.2-0.2Aggregate leverage35.1%36.7%-1.6ppt35.2%-0.1pptInterest Coverage Ratio (x)12.212.9-0.712.7-0.5

(+) Distributable income increased 6.3% y-o-y

  • 3Q21 distributable income of S$43.1m is a 6.3% increase y-o-y
    • Mainly due to income contribution from Amsterdam DC in December 2020, as well as higher income contribution from AEIs completed this year
    • Eindhoven DC acquisition was only completed in early-September 2021; slightly less than 1 month of income contribution in 3Q21
  • Stable DPU of 2.462 Scts. in 3Q21; in-line with our projections
    • 9M21 DPU of 7.39 Scts. forms more than 74% of our FY21 DPU projections
    • Maintained stable DPU despite the pre-emptive private placement in August 2021

(+) Record high portfolio occupancy of 98.1%

  • Portfolio occupancy of 98.1% has been the highest occupancy rate recorded
  • Strong portfolio occupancy contributed by the new 20-year triple-net master lease at Macquarie Data Centres at Intellicentre
  • Only 0.4% of leases (by rental income) will expire in 4Q21
  • KDCREIT has commenced lease renewal discussions for leases that will be expiring in FY22
    • 18.8% of leases (by rental income) will be expiring in FY22
    • Bulk of the expiries are expected to come from Keppel DC Singapore 4 and Basis Bay DC in Malaysia, given the relatively short WALE at the properties

(+) Finalised the agreement to invest in M1’s network assets

  • KDCREIT will subscribe for bonds and preference shares in the M1 network asset investment (known as NetCo)
    • KCDREIT will invest a total of S$89.7m, and receive c.S$11.0m of cash flows for the next 15 years
  • Proposed investment to be funded by proceeds of iseek DC divestment in Brisbane, and external debt
    • Proceeds from iseek DC divestment of c.S$35m; remaining S$55m to be financed by debt
  • Investment is expected to create accretion of c.3.8%
  • Including additional debt for the proposed NetCo investment, gearing would still be very healthy at only c.36%
    • Low gearing of c.35.1% currently provides KDCREIT with ample debt headroom to swiftly embark on acquisition opportunities

(-) Slight delay in the completion of the Guangdong DC acquisition

  • There has been a slight delay in the completion of the Guangdong DC acquisition
    • Previously assumed to be completed by the end of 3Q21
  • KDCREIT is confident that the acquisition will be completed soon

Our thoughts
We continue to like KDCREIT for the portfolio of quality data centre assets that have remained very resilient. As seen this quarter, overall portfolio occupancy continued to inch up to 98.1%. Owing to the proactive management of its portfolio and acquisitions done over the past year, distributable income continued to grow both organically and inorganically. Although iseek DC in Brisbane has been divested during the quarter, KDCREIT was also quick to complete the acquisition of the Eindhoven DC in September 2021, thereby mitigating the income void from iseek DC. 

Although the delay in the completion of the Guangdong DC was a slight negative, we remain confident that the acquisition will be completed soon, and generate further growth in earnings going forward. Moreover, we can look forward to KDCREIT’s investment into NetCo which will generate a stable stream of cash flow of S$11.0m per annum. Given that the EGM for its expanded mandate will likely only be carried out later in 4Q21, we expect the NetCo investment to only completed by the beginning of FY22.

KDCREIT earnings continue to be driven by strong demand for quality data centres as well as its proactive management of its portfolio and recent acquisitions. Its very healthy gearing of only 35.1% currently provides KDCREIT with the flexibility to embark on more debt-funded acquisitions and seize on acquisition opportunities quickly. As we enter into the last quarter of FY21, portfolio valuations could provide another upside surprise, given how significantly cap rates for data centres have compressed in recent months.

With a healthy forward yield of c.4.2% and a c.8% growth in DPU next year, we will be maintaining our BUY recommendation with a TP of S$3.00.