Results First Take: 1Q22 Business Update – Timely accretive acquisitions
- 1Q22 DPU remained flat q-o-q; slightly below our estimates
- Key positives: (i) operational metrics remain robust with improved occupancy and longer WALE, (ii) potential increase in borrowing costs mostly mitigated with c.76% of loans hedged to fix rates, and (iii) rising cost of utilities are also mostly mitigated with bulk of costs passed on to tenants
- What we will be watching out for: (i) DXC partial default and how quickly it can be resolved, and (ii) sensitivity of another significant spike in utilities costs on earnings
- Maintain BUY with unchanged TP of S$2.80
| Key operational data | 1Q2022 | 4Q2021 | % Change | 1Q2021 | % change |
| Revenue | 66 | 67 | -0.7% | 67 | -0.9% |
| NPI | 60 | 61 | -0.7% | 61 | -1.4% |
| DI | 45 | 44 | 0.5% | 42 | 5.9% |
| DPU | 2.47 | 2.47 | 0.0% | 2.46 | 0.2% |
| Portfolio occupancy (%) | 98.7% | 98.3% | 0.4% | 97.8% | 0.9% |
| WALE (years) | 7.7 | 7.5 | 0.2 | 6.6 | 1.1 |
| Aggregate leverage | 36.1% | 34.6% | 1.5% | 37.2% | -1.1% |
| Interest Coverage Ratio | 10.0 | 10.8 | -0.8 | 13.1 | -3.1 |
| All-in cost of debt | 1.8% | 1.6% | 0.2% | 1.5% | 0.3% |
(-) 1Q22 DPU remained flat; slightly below our estimates
- 1Q22 DPU was largely flat q-o-q despite income contribution from recent acquisitions
- Additional income from recent acquisitions was offset by lower contributions from Singapore (partial default by DXC), and higher utilities cost
- Partial default lowers income by c.S$3.7m per annum, or S$0.9m per quarter
- Impact from rising utilities cost was smaller as bulk of such costs are passed back to tenants
(+) Rising electricity costs will impact DPU, but largely mitigated
- Rising electricity costs will not have impact to master leases as such tenants contract directly with utilities providers
- We understand that cost of utilities will be passed on to more than 90% of colocation leases, and impact to KDCREIT is minimal
- Awaiting for KDCREIT to provide more details on sensitivity on rising utilities costs to earnings
(+) Improvement in portfolio occupancy and lengthening of WALE
- Overall portfolio occupancy increased by 0.4% q-o-q to 98.7%, and WALE lengthened to 7.7 years
- Bulk of the improvement came from recent acquisitions; London DC and Guangdong DC
- Lease at Basis Bay DC in Malaysia has been renewed and currently has a WALE of 4.7 years
- Occupancy at Dublin 1 improved by 13.6% q-o-q to 95.9% currently
(+) Gearing and all-in cost of debt inched up
- Gearing currently stands at 36.1% and all-in interest cost is 1.8%
- Increase in gearing was mainly due to additional loans taken to fund London DC acquisition
- Increase in borrowing costs was mainly due to RMB loans taken to fund Guangdong DC
- 76% of loans hedged to fixed rates and only c.11.4% of loans due to mature in FY22
Our thoughts
KDCREIT’s 1Q22 operational update came in slightly below our projections, as accretion from recently completed acquisitions were mostly offset by the DXC partial default and rising utilities cost. Although we do not have visibility on the legal suit with DXC currently, we believe that the bulk of rising costs of utilities has been reflected. Moreover, we believe improving portfolio metrics and built-in rental escalations will help mitigate further downside.
We remain confident on KDCREIT’s operating performance going forward, but will have to keep a close watch on any further spikes in utilities costs. As KDCREIT continues to be on the lookout for further acquisitions, we believe that it would be accretive to its earnings and bulk of the negatives (DXC partial default and rising electricity costs) has already been accounted for. We maintain our BUY recommendation on continued tailwinds for the data centre space, and will be maintaining our TP of S$2.80.