Despite the REIT reporting a lower distribution per unit (DPU) of 2.492 cents, this is in line with the analyst’s expectations, forming 25.1% of their FY2023 forecasts.
Chan says that the REIT’s 3QFY2023 revenue/net property income (NPI) growth of 0.5%/0.8% y-o-y was driven by contributions from acquisitions and positive income reversions and escalations. However, this was “more than offset” by higher finance costs (+56.9% y-o-y) and less favourable forex hedges.
Chan highlights two positives from the performance of the REIT for this quarter. Firstly, Keppel DC REIT maintained a high portfolio occupancy of 98.3% with a portfolio weighted average lease expiry (WALE) of 7.8 years.
He notes that 27.7% of leases by rental income will expire in 2024, with only 1% expiring for the rest of 2023. The leases signed in 3QFY2023 were in Singapore, Australia, Ireland and the Netherlands, and were at positive rental reversions.
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“Additionally, some of the leases signed were restructured into power pass-through leases, which should improve NPI margins,” Chan says.
In addition, the REIT demonstrated prudent capital management, with 72% of debt on fixed rate, according to the analyst.
He notes that the average cost of debt increased 0.2 percentage points (ppts) q-o-q to 3.5% in 3QFY2023, and interest coverage ratio (ICR) remains healthy at 5.4x. The REIT has 4.2% of debt up for refinancing in 2024 and the majority of debt expiring from 2026 and beyond. However, Chan notes that gearing increased 90 basis points (bps) q-o-q to 37.2%.
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“A 100 bps increase in interest rates would lower DPU by about 2.4%. Forecast foreign sourced income is also substantially hedged till June 2024,” he adds.
While the analyst maintains that there are no negatives for the REIT, he notes that there is a final payment of about $142 million upon the completion of Guangdong Data Centre 3, originally scheduled for 3QFY2023, but has been delayed due to Covid-related supply chain disruptions.
“According to our estimates, gearing would still remain below 40% even if this was fully funded by debt. However, equity fund-raising could be an option, especially if KDCREIT was to combine this final payment with an acquisition,” says Chan. “The most likely contender would be its sponsor’s Keppel DC Singapore 7 (KDC SGP 7) asset situated at Genting Lane, which is currently being fitted-out by the tenant after its completion in 2QFY2023.”
With that, the analyst concludes that KDCREIT’s growth catalysts would include more accretive acquisitions and lower-than-expected interest costs, while organic growth will stem from renewals in FY2024, barring contributions from potential acquisitions.
“The current share price implies FY2023/FY2024 DPU yields of 5.2%/5.4%,” Chan says. “We upgrade from neutral to buy with an unchanged dividend discount model-derived target price of $2.26.”
As at 1.03pm, units in Keppel DC REIT are 1 cent down or 0.56% lower at $1.77.
