Keppel DC REIT - CIMB Research 2016-04-13: Injection of T27 in the offing

KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Injection of T27 in the offing

1Q16 DPU of 1.67 Scts (+3.7% yoy) was in line with consensus and our expectations, forming 24% of our full-year estimate.
Despite a client downsizing its space requirements in Citadel 100 during the quarter, we view KDC REIT’s performance as resilient, underscored by 1Q16 results.
8.2% of NLA up for renewal in 2016, majority of which pertains to a tenant in its Singapore property. Verbal agreement for lease to be extended for five years.

Imminent injection of T27 could come hand-in-hand with equity fund raising. We expect the acquisition to be yield-accretive.
As a beneficiary of the Big Data boom, KDC REIT remains one of our top picks in the sector. Maintain Add, with an unchanged DDM-based target price of S$1.18.

KDC REIT achieved S$14.7m distributable income in 1Q16, which was 1% higher than the IPO forecast or 3.8% higher yoy. The earnings outperformance came from lower property and other expenses, which were partly offset by lower revenue.
Revenue was 2.8% lower than IPO forecast as a client downsized its requirements in Citadel 100 and foreign currencies depreciated against the S$. However, contribution from Intellicentre 2 mitigated some of the weakness.
Overall, we view 1Q16 performance as resilient.

Largely due to Citadel 100, 1Q16 portfolio occupancy decreased to 92% (4Q15: 94.8%). Occupancy for Citadel 100 dropped to 52.8% in 1Q16 (4Q15: 77.4%) as a client downsized its space requirements from 27,000 sq ft to 10,000 sq ft. The consolation was that the client extended the lease for the 10,000 sq ft of space.
Meanwhile, management is focusing on a few prospects to take up the bulk of the unfilled space.
We expect the majority of Citadel 100 to be leased in 2H16.

The majority of space up for renewal in 2016 pertains to a tenant in the REIT’s Singapore property. We understand that the parties have reached a verbal agreement for the lease to be extended for another five years.
Meanwhile, there are three significant leases coming up for renewal in 2017, forming 23.9% of NLA. We believe that these comprise two leases in Singapore and the lease in Basis Bay.
We understand that management has started negotiations on one of the leases.

KDC REIT’s sponsor, Keppel T&T (KPTT SP, Add) announced that T27 (one of the properties in the ROFR pipeline) is fully committed, following S$84.5m of contract wins from two clients. Hence, we expect T27 to be injected into the REIT in the next six months.
We believe that the acquisition will come hand in hand with equity fund-raising. Even with a 30-70 debt-equity financing, we expect the injection to be yield-accretive, based on our calculations.

Reiterate Add and DDM-based target price of S$1.18.
We are cognisant that demand is likely to match near-term supply growth, at best, and have factored in moderate rental reversions of of < 5% in 2016.
We think Singapore’s data centre market will continue to expand and absorb supply growth, evidenced by the entry of LinkedIn.
While seven data centres are due to be completed by end-2016, their openings in phases (T27 took two years to fully ramp up) mean that impact of the new supply will not be instantaneous.

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-04-13

CIMB Securities SGX Stock Analyst Report ADD Initiate ADD 1.18 Same 1.18