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Keppel DC REIT - OCBC Investment 2016-08-15: Favourable Acquisition In Milan

Keppel DC REIT - OCBC Investment 2016-08-15: FAVOURABLE ACQUISITION IN MILAN KEPPEL DC REIT AJBU.SI

Keppel DC REIT - FAVOURABLE ACQUISITION IN MILAN

  • Estimated initial NPI yield of 6.5%.
  • Favourable lease structure.
  • Reiterate BUY with higher FV. 


Proposed acquisition of data centre in Milan 

  • Keppel DC REIT (KDCREIT) announced that it has entered into a share purchase agreement to acquire the shell and core building of a data centre located at Via Bisceglie 71, 73, 75, Milan, Italy (~8km from Milan City Centre). This marks KDCREIT’s maiden entry into Italy. The agreed property price of EUR37.3m (~S$57.3m) translates into an estimated initial NPI yield of 6.5%. 
  • The asset is a four-storey freehold property with a total lettable area of 15,365 sq m and is currently fully leased to one of the world’s largest telecommunications companies until 31 Dec 2027. The lease shall be renewed for an additional six-year term thereafter unless the tenant notifies the landlord otherwise. 
  • KDCREIT, being the purchaser, will also be granted a rent top-up for the period (due to incentives given by previous vendor to tenant) from the completion date or 30 Sep 2016, whichever is earlier, to 31 Dec 2018. The expected date of completion is in 3Q16.


Positive metrics of acquisition 

  • In our view, this proposed acquisition would provide the KDCREIT with solid stability and visibility. Upon completion, KDCREIT’s portfolio WALE would be lengthened further from 8.7 years to 9.3 years. Moreover, the lease is embedded with annual rental escalations and given that it is a double-net lease structure, KDCREIT would only be responsible for the property tax and insurance of the property, while the tenant will bear the fit-out and operating expenses. 
  • According to consulting firm BroadGroup, Italy is an emerging regional hub in Europe, with utilisation rates expected to trend upwards. Data centre demand is projected to increase at a CAGR of 15% from 2016 to 2020.


Maintain BUY 

  • We raise our FY16 and FY17 DPU forecasts by 0.6% and 2.8%, respectively, after factoring this development in our model. We have assumed 100% debt funding for this acquisition. 
  • Correspondingly, our fair value estimate is bumped up to S$1.30 from S$1.27. Reiterate BUY on KDCREIT, with the stock offering distribution yields of 5.8% for FY16F and 6.2% for FY17F.




Wong Teck Ching AndyCFA OCBC Investment | http://www.ocbcresearch.com/ 2016-08-15
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.30 Up 1.270


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