Keppel DC REIT - A bag of hits and misses
- FY16 DPU of 6.14 Scts (-5.7% yoy) was slightly below consensus but within our forecast, forming 97% of our full-year estimate.
- Adjusted DPU for FY16 would have been 6.68 Scts (+2.6% yoy) and 0.5% higher than IPO forecast. 2.8 Scts DPU was declared for 2H16; ex-date on 27 Jan 17.
- Portfolio occupancy at 94.4% (+1.7% pts qoq). WALE extended to 9.6 years (9M16: 8.6 years).
- Acquisition of SGP 3 has been completed; tax transparency granted.
- Maintain Hold with a higher DDM target price. The stock is trading at 6% FY17 yield and 1.3x FY16 P/BV. We also introduce our FY19F numbers.
FY16 results: a bag of hits…
- We consider FY16 to be a bag of hits and misses for KDCREIT. The hits sprang from its acquisition momentum; the misses from organic portfolio weakness.
- We were also slightly taken aback by the S$14m devaluation losses. KDCREIT achieved S$61m of distributable income (+6.3% yoy), and surpassed its IPO forecast by 4%.
- The outperformance came from a one-off property tax refund and inorganic contributions (from IC2, Cardiff DC and Milan DC).
- The misses stem from lower contributions from DUB 1, lower variable income from Singapore properties and stronger S$ vs. foreign-sourced income.
- S$14m devaluation losses were due to SGP 2 (lower rental assumptions by valuers), DUB 1 (lower occupancy), Basis Bay (higher cap rate) and GV 7 (FX translation losses). These were partially offset by revaluation gains from the Australian properties and Almere.
- Excluding the impact of the pro-rata preferential offering, the later completion of SGP 3 and the one-off property tax refund, adjusted DPU would have been 6.68 Scts.
- With the inclusion of Cardiff and Milan DC, portfolio occupancy ticked up 1.7% pts qoq to 94.4%. WALE was extended to 9.6 years (9M16: 8.7 years), the longest in our coverage.
- Occupancy for DUB 1 was maintained at 55.8% and we think it could take some time for the manager to fill the space.
- In the interim, the manager has planned an S$15m-AEI to position DUB 1 more competitively.
- Due to frictional vacancy, occupancy for SGP 1 dropped 2.9% pts qoq to 84.7%.
14.6% of NLA up for renewal in 2017
- Looking ahead, 14.6% of NLA is up for renewal in 2017. This comprises four major leases, comprising two unidentified overseas leases, one Singapore lease and Basis Bay DC.
- Apart from Basis Bay, we understand that agreements in principle have been agreed upon. In addition, KDCREIT renewed a Singapore lease (est. 7k sq ft or 0.8% of portfolio NLA) in 4Q16 for another five years.
- The average rental for the next five years is c.3% higher than the preceding level.
Acquisition of SGP 3 completed
- KDCREIT completed the acquisition of 90% interest in SGP 3 on 20 Jan 17. An agreement was reached so that the economic effect of the acquisition would have occurred on 1 Dec 16.
- The REIT has also been granted tax transparency for SGP 3, which leads us to raise our FY17-18 DPU by 2.7-4.8% (previously not assumed).
- Our DDM target price increases (from S$1.18 to S$1.21) on the back of the DPU upgrades.
- Maintain Hold on limited upside.
- Upside/downside risks hinge upon acquisition momentum and leasing demand.