The Positives
+ Maintained high portfolio occupancy of 98.3% (unchanged QoQ), with a portfolio WALE of 7.6 years. 27.5% of leases by rental income will expire in 2024. Leases signed in FY23 were at positive rental reversions. Additionally, some of the leases signed were restructured into power pass-through leases, which should improve NPI margins.
+ Prudent capital management, with 74% of debt on a fixed rate. The average cost of debt increased 0.1ppts QoQ to 3.6% in 4Q23, and ICR remains healthy at 4.7x. Only 4% of debt is up for refinancing in 2024 with the majority of debt expiring from 2026 and beyond. Gearing increased 20bps QoQ to 37.4%, still below KDCREIT’s internal cap of 40%. Forecast foreign-sourced income is also substantially hedged till Dec 2024.
+ Stable portfolio valuations (+0.4% yoy), with no write-down for China assets yet. In local currency terms, higher valuations were achieved in Singapore, Australia, Ireland, Italy, and the Netherlands. KDCREIT has not written-down valuations for the China assets, but we see a risk of impairment should they be unable to recover the rental arrears.
+ Positive outcome for DXC litigation, as the high court ruled in favour of KDCREIT on its intepretation of contractual rights. KDCREIT is claiming S$3mn from DXC as the sum outstanding from Apr 21 to Dec 21, as well as loss suffered as a result of DXC’s refusal to pay for the space it unilaterally gave up from Apr 21 to Mar 25. The dispute is set for trial in February 24 to determine the actual quantum to be paid by DXC to KDCREIT.
The Negatives
– Rentals owed by master lessee at Guangdong DCs. To date, Bluesea has only settled RMB0.5mn of the RMB48.3mn in arrears, and that excludes the top-up of RMB32.2mn of security deposits that KDCREIT requested. We therefore expect further loss provisions in FY24e. Management is working with Bluesea on a recovery roadmap and is also reserving its rights to terminate the acquisition of GDC 3. There is currently a RMB100mn deposit on GDC 3.
Source: Phillip Capital Research - 9 Feb 2024
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