Keppel DC REIT - Robust growth potential
- Beneficiary of industry growth trends.
- Expect renewals on major leases.
- Attractive relative valuations.
Robust growth expected in KDCREIT’s key markets
- Keppel DC REIT (KDCREIT) is poised to benefit from the solid growth potential of the data centre industry, underpinned by expected increases in data creation and outsourcing trends.
- For the key cities which KDCREIT has exposure to, we note that new demand is projected by BroadGroup Consulting to grow at a CAGR of between 4.7% (Frankfurt) to 14.7% (Dublin) from 2016 to 2021.
- Notably, for Singapore, which is one of KDCREIT’s key markets, new demand CAGR is forecasted to jump 12.0%. This would be driven by firm support from the government, stable political climate and higher demand from hyperscale cloud players.
- For the 10 cities which KDCREIT has assets in, new demand is expected to exceed the incremental supply for six and eight of them in 2017 and 2018, respectively.
Positive on lease renewals for FY17
- KDCREIT has four major leases which are expiring in FY17, which we believe form the bulk of its 14.5% of lettable area (or 30.3% of its rental income) due for renewal this year.
- From our understanding, management has secured agreements in principle to renew three of the four leases. For the fourth, which is at its Basis Bay Data Centre in Malaysia, we expect the tenant to extend the lease. Thereafter, there are minimal lease expiries in FY18 (0.6% of lettable area), FY19 (2.1% of lettable area) and FY20 (1.6% of lettable area). This makes KDCREIT one of the most defensive REITs within the SREITs space, with a portfolio WALE of 9.6 years, in our view.
- Based on our forecasts, KDCREIT is offering distribution yields of 6.1% and 6.3% for FY17F and FY18F, which is attractive relative to its peers’ Bloomberg consensus average yield of 3.8% and 4.1%, respectively.
- The yield spread between KDCREIT and its peers set based on blended forward projections currently stands at 229 bps, which is approximately half a standard deviation above the mean since the start of 2015 (KDCREIT was listed on SGX-ST in Dec 2014).
- Given healthy valuations, a robust industry outlook and strong DPU growth profile in FY17 (+19.2%), we maintain BUY and S$1.39 fair value estimate on KDCREIT.