Overcoming hurdles and staying ahead
(+) Distributable Income (DI) increased 8.2% y-o-y
- Growth in DI is mainly due to accretive acquisitions over the past year
- Guangdong DC 1, Eindhoven DC, and London DC
- Higher electricity cost had a negligible impact on earnings, as more than 90% of electricity costs are recoverable from tenants
(+) 1H22 DPU of 5.049 Scts; 2.5% higher y-o-y
- Higher DPU mainly due to accretive acquisitions, higher occupancies, and positive rental reversions
- 1H22 DPU of 5.049 Scts in line with our estimates; accounting for c.50.5% of our FY22F projections
(+) Portfolio occupancy remained strong at 98.2%
- Overall portfolio occupancy remained strong at 98.2%
- Only concern with occupancy is for Basis Bay in Malaysia
- Occupancy for property fell to 40.2%; while tenants have renewed leases, they have taken on less space
- Property only accounts for less than 1% of income; do not expect any significant impact to earnings
(-) All-in financing costs continue to inch up to 1.9%
- All-in financing costs inched up by c.0.1% mainly due to new loans drawn down for the London DC acquisition and issuance of EUR75m notes
- EUR75m notes were issued in May 2022 at 2.61%
- Used to refinance expiring loans
- Only c.S$40m of loans due to expire in FY22 (EUR-denominated loans)
- Loans expiring in FY23 amount to only c.S$170m (EUR and AUD denominated)
- With c.76% of borrowings hedged to fixed rates for an average tenor of 3.6 years, KDCREIT does not expect any significant increase in financing costs in FY22F
- Remaining unhedged borrowings are largely denominated in EUR
- Interest rate sensitivity: we estimate that every 100bps increase in interest rates will impact DPU by c.1.6%
(+) Minimal impact from FX
- KDCREIT hedges its income up to two years ahead; until 2H23F
- Minimal impact to earnings this year, as income has mostly been hedged previously
- With the strengthening SGD against most foreign currencies, the FX impact may only be felt in FY24, but KDCREIT is actively monitoring FX rates to minimise this impact
(+) No equity fund-raising in FY22F
- First tranche of payments for the acquisition of Guangdong DC 2 and 3 in FY22F will be funded using debt
- Healthy gearing of only 35.3% currently
- KDCREIT will decide again if any equity fund-raising is required to fund the remaining portion of Guangdong DC 3 when approaching completion
- Guangdong DC 3 acquisition only expected to be completed in 3Q23
- Even if equity fund-raising is required in 3Q23F, we expect it to only be a small amount
- Gearing will only creep up to c.39%, assuming both DCs are acquired entirely by debt
(+) Distributable Income (DI) increased 8.2% y-o-y
- Growth in DI is mainly due to accretive acquisitions over the past year
- Guangdong DC 1, Eindhoven DC, and London DC
- Higher electricity cost had a negligible impact on earnings, as more than 90% of electricity costs are recoverable from tenants
(+) 1H22 DPU of 5.049 Scts; 2.5% higher y-o-y
- Higher DPU mainly due to accretive acquisitions, higher occupancies, and positive rental reversions
- 1H22 DPU of 5.049 Scts in line with our estimates; accounting for c.50.5% of our FY22F projections
(+) Portfolio occupancy remained strong at 98.2%
- Overall portfolio occupancy remained strong at 98.2%
- Only concern with occupancy is for Basis Bay in Malaysia
- Occupancy for property fell to 40.2%; while tenants have renewed leases, they have taken on less space
- Property only accounts for less than 1% of income; do not expect any significant impact to earnings
(-) All-in financing costs continue to inch up to 1.9%
- All-in financing costs inched up by c.0.1% mainly due to new loans drawn down for the London DC acquisition and issuance of EUR75m notes
- EUR75m notes were issued in May 2022 at 2.61%
- Used to refinance expiring loans
- Only c.S$40m of loans due to expire in FY22 (EUR-denominated loans)
- Loans expiring in FY23 amount to only c.S$170m (EUR and AUD denominated)
- With c.76% of borrowings hedged to fixed rates for an average tenor of 3.6 years, KDCREIT does not expect any significant increase in financing costs in FY22F
- Remaining unhedged borrowings are largely denominated in EUR
- Interest rate sensitivity: we estimate that every 100bps increase in interest rates will impact DPU by c.1.6%
(+) Minimal impact from FX
- KDCREIT hedges its income up to two years ahead; until 2H23F
- Minimal impact to earnings this year, as income has mostly been hedged previously
- With the strengthening SGD against most foreign currencies, the FX impact may only be felt in FY24, but KDCREIT is actively monitoring FX rates to minimise this impact
(+) No equity fund-raising in FY22F
- First tranche of payments for the acquisition of Guangdong DC 2 and 3 in FY22F will be funded using debt
- Healthy gearing of only 35.3% currently
- KDCREIT will decide again if any equity fund-raising is required to fund the remaining portion of Guangdong DC 3 when approaching completion
- Guangdong DC 3 acquisition only expected to be completed in 3Q23
- Even if equity fund-raising is required in 3Q23F, we expect it to only be a small amount
- Gearing will only creep up to c.39%, assuming both DCs are acquired entirely by debt
Our thoughts
KDCREIT reported a strong set of results in 1H22 despite concerns of rising electricity costs and interest rates. 1H22 DPU of 5.049 Scts is in line with our estimates, and it is helped by accretive acquisitions done over the past year, as well as continued strong occupancy rates and positive rental reversions. Much of the impact of higher utility costs and rising interest rates have been mitigated by KDCREIT’s ability to pass on higher energy costs to tenants and the fact that c.76% of its borrowings that have been hedged to fixed rates.
As highlighted by management, they do not expect rising interest rates to have any major impact to earnings in the medium term. However, we are mindful that new loans taken, and the refinancing of expiring loans would lead to higher all-in financing costs.
Main drivers to earnings going forward will be the completion of Guangdong DC 2 and 3 acquisitions. KDCREIT has reiterated that it does not require any equity fund-raising in FY22, as it has ample debt headroom to fund the first tranche of payments for the acquisitions. It will reassess the need for any equity fund-raising only when time comes to make the second tranche of payments, which is expected to be in 3Q23. In our estimates, we have already assumed that KDCREIT will tap into the market to raise a small amount of equity of c.S$90m in 2H23F.
We remain positive on KDCREIT for its stable earnings driven by its recent acquisitions. Looking ahead, the Guangdong DC 2 and 3 acquisitions will be the main driver to its c.3.8% CAGR in DPU in FY23-FY24, and it will help offset the bulk of any increase in financing costs (our estimates assume a 20bps increase in all-in borrowing costs in FY23 and FY24).
As such, we are maintaining our BUY recommendation at a TP of S$2.50.
