Healthy positive reversions trend maintained
- 3Q/9M23 DPU of 2.492/7.543 was 3.6% /1.2% lower yoy, but in line at 24.3%/73.7% of our FY23F; topline growth wiped out by higher interest cost.
- KDC maintained occupancy at 98.3% in 3Q23, with single- to double-digit reversion on leases signed in the quarter.
- Reiterate Add on KDC’s resilient portfolio and attractive 5.4% FY24F DPU yield, which is at the +1.2 s.d. level.
Topline growth eroded by higher interest expense and forex
3Q23 revenue/NPI grew by 0.5%/0.8% yoy on the back of contributions from acquisitions and positive reversions/escalations; however, this was more than offset by higher finance expense (+S$4.7m/56.9% yoy), lower contributions from SG colocation assets due to higher electricity costs and less favourable forex hedges.
Operationally resilient – positive reversions and high occupancy
During the quarter, KDC secured positive reversions for new and renewed leases in Singapore, Australia, Ireland and the Netherlands. Rental reversions ranged from singledigits to low double-digits. On top of the higher rents negotiated, management shared that KDC also restructured some power inclusive leases into power pass-through leases, which should help improve NPI margins and improve KDC’s electricity cost pass-through ratio. Portfolio occupancy slipped 0.2bp qoq to 98.3% in 3Q23 due to lower occupancies at SGP1 and SGP2 as a result of smaller tenants moving their operations to the cloud, according to management. Management is currently evaluating several leases for the vacant space and
is optimistic about backfilling the space give the limited data centre availability in Singapore. FY23F lease expiries have been largely de-risked with 27.7% of leases by rental income expiring in FY24F, likely from Singapore and the Netherlands judging from the shorter weighted average lease expiries for assets in these countries.
Gearing to remain below 40% post milestone payment, in our view
3Q gearing slipped qoq from 36.3% to 37.2% while cost of borrowing inched up 20bp to 3.5% (YTD: 3.2%). Interest cover ratio was still healthy at 5.4x. Fit-out completion and milestone payment (c.S$157m) for Guangdong DC 3, originally estimated for 3Q23, has been delayed to 4Q23/1H24 due to Covid-related supply disruptions. We estimate gearing will remain below 40% in 4Q23F/FY24F, even if the milestone payment was fully debtfinanced. Management previously said that it may consider funding this via equity fund raising (EFR) if it can dovetail the EFR with a new acquisition. Near-term acquisitions are likely to be third-party assets in Japan and Korea, in our view, given sponsor’s SGP7 (Genting Lane) will only be ready for acquisition after stabilisation, likely in the next 6-18 months.
FY24F DPU yield of 5.4% attractive at +1.2 s.d. level
No changes to our FY23-25F DPU estimates and DDM-based TP of S$2.53. Reiterate Add on KDC’s resilient portfolio and attractive valuation. Potential re-rating catalysts are higher than-forecast reversions and a faster pace of acquisitions. Downside risks are slower utilisation of racks, which could affect KDC’s topline, and higher-than-expected interest costs, which could erode profitability.