Keppel DC REIT - Time to upsize your data
- We upgrade KDCREIT from Hold to Add following recent unit price weakness. In terms of total return, the stock is offering 10%, one of the meatiest in our coverage.
- We believe that recognition of an additional one-month contribution from SGP 3 in 1Q17 could lend some support to unit price strength.
- Renewal risks for FY17 are reduced and there are minimal lease expiries thereafter.
- FY17F and FY18F foreign-sourced distributions are already hedged. Based on our sensitivity analysis, a 10% appreciation in S$ could lead to a 5.2% decrease in BV.
- A 100bp increase in interest rate could lead to a 0.8% decrease in FY17F DPU; a 50bp rise in discount rate could lead to a 7.9% decrease in our DDM-based TP.
Upgrade KDCREIT from Hold to Add
- Following recent unit price weakness, we upgrade KDCREIT from Hold to Add.
- In our view, the recognition of an additional one-month contribution from SGP 3 in 1Q17 could lead to unit price strength.
- Plus, KDCREIT is trading just 1.7% above the recent preferential offering issue price of S$1.155, a strong support level, in our view. At current valuations, the stock is yielding 6.4% forward yield vs. past one-year average of 6.1%.
- Downside risk to our call would be worse-than-expected rental reversions.
FY17 to have 13 months of contribution from SGP 3
- KDCREIT completed the acquisition of 90% interest in SGP 3 on 20 Jan 17. But an agreement was reached so that the economic effect of the acquisition would have occurred on 1 Dec 16. Hence, 1Q17 distributable income would have four months of contributions from SGP 3. So, we raise our FY17F DPU by 1.7%.
- The acquisitions in FY16 would boost FY17 headline DPU growth by 21.3% yoy or 11.6% yoy vs. adjusted FY16 numbers (excluding pro-rata preferential offering and one-off property tax refund).
Favourable risk-reward with conservative assumptions baked in
- We have conservatively baked in -10% rental reversion for the Singapore lease expiry in FY17, in line with our estimated weighted average negative reversion for the REIT’s Singapore lease expiries in FY16.
- We also factored in -5% reversion to the prevailing rent at expiry for Basis Bay DC. We think that it could take two years (or by FY18F) to raise Dublin 1’s occupancy back to 75% (from c.55.8% as at end-16).
Reduced renewal risks for FY17; minimal lease expiries thereafter
- As at end-16, four major leases (two unidentified overseas leases, one Singapore lease and Basis Bay DC) representing the bulk of the 14.6% of portfolio NLA are up for renewal in FY17.
- Apart from Basis Bay, in-principal agreements have been agreed upon, thus significantly reducing renewal risks for FY17.
- We also note that there are minimal lease expiries in FY18-20F, which translates into income certainty for the trust.
Mitigating FX volatility
- Current macros could instill higher FX volatility. We estimate half of FY17F income stems from overseas. However, FY17F and FY18F foreign-sourced distribution are substantially hedged using 2-year forward contracts, albeit at unfavourable hedged rates as S$ has appreciated in 2015-16 vs. its foreign-sourced income.
- FX volatility is mainly on the book as most REITs adopt natural hedging. We sensitise that a 10% appreciation in S$ vs. all foreign currency-denominated assets could lead to a 5.2% decrease in BV.
Good credit profile; sensitivity to interest rate
- With 28.3% gearing (as at end-16), all-in financial cost of 2.3% p.a., 9.4x interest coverage, 83% of borrowings hedged against interest rate and negligible refinancing for FY17, we regard KDCREIT as having better-than-average credit profile.
- We sensitise that a 100bp rise in interest rate could lead to a 0.8% decrease in FY17F DPU; while a 50bp increase in discount rate could lead to a 7.9% decrease in our DDM-based TP.