Where will the next accretive acquisition come from?
- Revenues and NPI increased by more than 3% y-o-y
- 1H23 DPU of 5.051 Scts.; in line with our FY23 projections
- Final payment for Guangdong DC 3 to be accompanied with another accretive acquisition and equity fundraising
- Maintain BUY with a revised TP of S$2.45
What’s New
Where will the next accretive acquisition come from?
1H23 revenues and NPI increased 3.6% and 3.3%, respectively
- Revenues and NPI increased y-o-y mainly due to contributions from Guangdong DC 2 and 3, and organic growth from renewals and income escalations
- Partially offset by lower contributions from Singapore colocation assets due to higher operating costs (higher electricity costs)
- Guangdong DC 2 and 3 were acquired on 12 August 2022
- 1H23 DI remained relatively flat y-o-y at S$91.3m, a 0.2% increase y-o-y
- Higher revenues were offset mainly by higher financing costs, lower contributions from Singapore colocation assets, lower government incentives for investments in Guangdong, and FX
- All-in interest rates in 2Q23 increased by 50bps, mainly due to the refinancing of the c.S$74m EUR loan due this year
- S$1m in tax savings was recognised in 1H23; relates to tax savings in FY22 for the QPDS status obtained for the NetCo bonds
- Savings of 17% in corporate taxes
- One-off pay out of tax savings
1H23 DPU of 5.051 Scts, in line with our projections
- 1H23 DPU remained fairly flat y-o-y and h-o-h
- Makes up c.51% of our FY23 estimates
- We believe that KDCREIT will be able to maintain 2H23 DPU at these levels
- Rental growth and higher portfolio occupancy rates to drive sustained organic growth; offset higher financing costs
Financing costs increased 50bps in 2Q23
- Overall cost of debt for 2Q23 was 3.3%, a 50bps increase q-o-q
- Average YTD financing cost was 3.1%, a 30bps increase compared to 1Q23
- Increase in borrowing costs mainly due to the c.S$74m EUR loan that was refinanced during the quarter
- Overall financing costs for the rest of this year are expected to remain relatively stable at the current levels
- No more refinancing required for the rest of FY23
- Only 4.0% of outstanding loans (c.S$60m) due for refinancing in FY24 (EUR and AUD loans)
- Likely to lead to further increase in all-in financing costs, but increase will be minimal
- 73% of loans remains hedged to fixed rates
- Mitigates any spikes in overall financing costs
- A further 100bps increase in interest rates will lead to a c.2.2% downside to earningsMaintained strong portfolio occupancy at 98.5%
- Portfolio occupancy rates remain strong at 98.5%
- Only 12.2% of leases (by GRI) remains to be renewed for the rest of FY23
- There will be a further 23.4% of leases that will be due for renewal in FY24
- New and renewal leases in 1H23 came from Singapore, Ireland, and the Netherlands
- Led to overall strong double-digit positive reversions
- Cyxtera lease with KDCREIT in London isn’t impacted by ongoing Chapter 11 filing of Cyxtera’s business in the US
- Cyxtera’s European entity is separate; they are current with their rents
- Ongoing litigation with DXC where provisions totalling S$14.8m for a four-year period have already been made
- No updates on the litigation
- Any recovery from these provisions made will be an upside to earnings
Guangdong DC 3 on track for completion in 3Q23
- Development of property is on track and vendor is currently working on fully fitting out the asset
- Continues to receive coupon income from the sums that have already been paid down
- C.S$140m remains to be paid once the Guangdong DC 3 development is complete
- We have already assumed c.S$90m in equity fundraising to fulfil the remaining payment
- Any equity fundraising will potentially be coupled with another acquisition
- Given KDCREIT’s cost of funding, further acquisitions will likely be accretive
- However, we have not baked any other acquisition assumptions into our projections; further acquisitions will likely lead to an upside to our forecasts
Our thoughts
While there has been a 28% rally in KDCREIT’s share price since the beginning of the year, we believe there remains upside to its share price. Our earnings projections are relatively conservative, as we have not assumed any further acquisitions, which will likely be accretive to earnings.
We have rolled forward our DCF valuation to FY24, which will reflect the full-year contribution from the impending completion of Guangdong DC 3. Based on our forecasts, KDCREIT is projected to generate a c.4% DPU CAGR over the next two years (to FY25), and any acquisitions will lead to an upside to our estimates. KDCREIT benefits from being one of the only few S-REITs that has the potential to carry out DPU-accretive acquisitions despite the high interest rates currently.
With the rolling forward of our valuation, we maintain our BUY recommendation with a revised TP of S$2.45