Keppel DC REIT - Phillip Securities 2016-01-15: Outperformed IPO forecast

Keppel DC REIT - Phillip Securities 2016-01-08: Exposure to growth in data requirements KEPPEL DC REIT AJBU.SI 

Keppel DC REIT - Outperformed IPO forecast 

  • Healthy 94.8% portfolio occupancy and long WALE of 8.7 years. 
  • Manageable interest rate risk and 29.2% gearing; interest cover of 6.1x in FY16e, by our estimates. 
  • 3.28 cents DPU for the 6M period from 1 July 2015 to 31 December 2015; ex-dividend date on 20 January and payment date on 29 February. 

 11.8% of leased lettable area up for renewal in 2016 

  • This comes mainly from two tenants – one from Citadel 100 and the other from one of the Singapore Properties. 
  • The Citadel 100 tenant currently occupies 27,000 sq ft and will downsize to 10,000 sq ft in the late part of 1Q16, due to a change in business strategy. The Manager guided that occupancy at Citadel 100 will consequently drop from 77.4% to c.52%, and will seek new tenants to fill the space. (Citadel 100 contributed 14.1% of the portfolio's FY2015 Gross Revenue.) 
  • The lease of the other tenant in the Singapore Property is expiring in 2H2016, and is in the process of re-contracting for another 5 years. 
  • Separately, S25 is 85.7% occupied and the Manager is working with existing tenants to take up more space. 

 22.5% of leased lettable area up for renewal in 2017 

  • This is from three large tenants, two of whom are located in Singapore, while the third is located overseas. One of the Singapore tenants has given a verbal agreement to renew for 5 to 7 years. 
  • The Manager continues to engage the other two tenants, and believes they are likely to stay on. 

 Upcoming supply pressure mitigated 

  • The Manager clarified that the 47% increase in data centre supply quoted in a recent media report refers to power supply (megawatts) and not lettable space. 
  • There are only three bigger tenants within the Singapore Properties with leases expiring in the next two years. 
  • The Manager highlighted that the data centre sector experiences high tenant retention, and new space is typically taken up by new clients, and not existing clients shifting out to the new spaces. 

 Balanced portfolio of long WALE and co-location 

  • The portfolio has a long weighted average lease expiry (WALE) of 8.7 years by leased lettable area. 
  • Co-location leases are typically shorter (three to six years), and has been balanced out with double-net and triple-net leases in the portfolio. 
  • Longer leases from double-net and triple-net leases contribute to the stability, while co-location leases allow for rents to be marked-to-market. 

 Investment Actions 

  • FY15 has 385 days from 12 December 2014 to 31 December 2015, so 1Q16 and FY16 is expected to be slightly weaker than 1Q15 and FY15, respectively. 
  • We continue to like Keppel DC REIT for its unique exposure to data centre properties, capitalising on the growth in data requirements. 
  • Maintain "Accumulate" rating and unchanged DDM valuation of S$1.13.

Richard Leow Phillip Securities | http://www.poems.com.sg/ 2016-01-08
Phillip Securities SGX Stock Analyst Report BUY Initiate BUY 1.13 Same 1.13