Results First Take: FY23 results – Uncollected rents from Guangdong DCs continue to cast an overhang
- Overall operating metrics remains stable, but uncollected rents at Guangdong DCs continue to cast an overhang
- FY23 DPU of 9.383 Scts was c.6% below our projections and the miss was entirely due to the provisions made for the 5.5 months of uncollected rents in Guangdong
- Gearing remains at a healthy 37.4% with all-in borrowing costs inching up by 10 bps to 3.6%
- We will be reassessing our previous BUY recommendation and TP of S$2.45 following an update call with management later today
What has happened?
KDCREIT reported revenues of S$140.7m for FY23, which exhibited a relatively stable y-o-y performance. This steadiness was attributed to favourable rental reversions and escalations, effectively mitigating the impact of increased facilities expenses at certain Singapore colocation assets. Despite this, the NPI for FY23 experienced a 9.1% y-o-y decline. This reduction was primarily a result of a loss allowance provision made for the 5.5 months of uncollected rental income from the Guangdong DCs. FY23 DPU of 9.383 Scts was c.6.2% below our initial estimates, and this deviation can be solely attributed to the loss allowance for the Guangdong DCs, exerting a loss of c.0.649 Scts on the DPU. Despite the challenges faced by the Guangdong facilities, the rest of KDCREIT’s portfolio has demonstrated resilience, maintaining stability. The portfolio occupancy remained unchanged q-o-q at 98.3%, and the gearing ratio stands at a healthy 37.4%. Although there was a marginal uptick in borrowing costs by 10 bps to 3.6% in 4Q23, the overall financial position remains sound. Additionally, the portfolio valuations exhibited relative stability y-o-y, with revaluation gains recorded in most markets contributing to an overall increase of c. S$15m in valuations.
Our views.
While our appreciation for KDCREIT’s stable portfolio operating metrics remains intact, we recognise the significant challenge posed by rental arrears from its Guangdong DCs. The uncertainty surrounding this issue raises concerns, prompting the need for more comprehensive updates from the management. Understanding the available options and potential courses of action taken by the REIT is crucial. One possible avenue for resolution could be KDCREIT or its Sponsor assuming control of the Guangdong DCs, converting them into colocation facilities. However, it’s noteworthy that, as of now, neither party has committed to this course of action. As previously emphasized, the absence of income from the Guangdong DCs for the entire fiscal year could result in a substantial 15-16% downside to our FY24 DPU projections. In light of this, we will reassess our prior BUY recommendation and target price of S$2.45. We anticipate gaining more clarity and insights during the update call with management later this morning, and any pertinent information obtained will be factored into our revised assessment.