+ Recent acquisitions have contributed positively to revenue and DPU. YoY DPU growth was achieved, notwithstanding the dilution from the private placement launched on May 7. The new units were issued on May 16 and increased the total number of units in issue by almost 20%.
+ Aggregate leverage lowered to 31.7% from 37.4%, after the private placement. Debt headroom is now about S$290mn (40% target gearing), potentially growing portfolio AUM by ~14%.
+ No refinancing risk for the remainder of 2018 and interest rate exposure has been further hedged. The next refinancing is in 2019 for the SGD-denominated borrowings that accounts for ~19% of total debt. The percentage of debt that has been hedged on fixed-rate is now 86%; from 80% in the previous quarter.
– Acquisition of KDC SGP 5 dragged down portfolio WALE and occupancy. KDC SGP 5 (16% of portfolio by valuation) was acquired in May. While portfolio WALE remains long at 8.8 years, it was shortened by the addition of KDC SGP 5 which has a WALE of 3.3 years. KDC SGP 5 is 73.9% occupied, thus contributing to the QoQ lower portfolio occupancy from 93.7% to 92.0%. Nonetheless, the tenants have committed to ramp-up their space requirements and bring occupancy to 84%. None of the office space in the property has been leased out; and we previously opined to expect hurdles in securing a tenant for the office space since it resides within a data centre and the space cannot be marketed like a typical office space.
The outlook is stable. Operationally, the long WALE of 8.8 years provides income visibility, and renewal risk is minimal with only 1.2% and 2.1% of leased area up for renewal in 2H 2018 and 2019 respectively. The recent acquisitions of maincubes Data Centre and KDC SGP 5 will continue to drive YoY distributable income growth for the next four quarters.
The current AUM stands at S$1.94bn and the Manager is still looking to grow the portfolio through acquisitions. In terms of Sponsor pipeline, Almere Data Centre 2 is not stabilised yet, and it is not in the Manager’s acquisition plan for 2018.
Maintain Accumulate; new target price of $1.45 (previously $1.51)
After incorporating 1H18 actual data into our forecasts, our new target price is due to change in our assumptions for distribution adjustments. While the long-term demand drivers for data centres remain intact, downside risk arises from the rich valuation that is an implied 1.36 times FY18e P/NAV multiple.
Update on KDC DUB 1 AEI
Status at KDC DUB 1 remains unchanged from previous quarter. Occupancy remains on the low side at 56.8% and the asset enhancement initiative (AEI) to improve the power supply is ongoing. No change to the expected capex of S$20 million. However, the AEI could now “take anything from 18 to 24 months”; from the previous estimate of 18 months.
KDCREIT is relatively over-valued in terms of trailing P/NAV, in comparison to its Australia Stock Exchange (ASX)-listed peer, Asia Pacific Data Centre, but at a higher yield.