Keppel DC REIT - CIMB Research 2016-10-18: Acquisition momentum to mask near-term supply bump

KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Acquisition momentum to mask near-term supply bump

9MFY16 DPU of 5.24Scts (+7.7% yoy) was within our and consensus expectations, at 75% of our full-year estimate. 3Q16 made up 27% of our FY16F.
KDCREIT renewed a major lease in SGP 1 for more than five years, but with an 8% negative rental reversion.
Acquisition of SGP 3 to be fully funded by preferential rights issue. We expect initial NPI yield to be 10.5% and acquisition to be DPU-accretive.

Adjust our FY16 DPU by -8.3% to factor in the rights issue. Lift our FY17-18F DPU by 4.8-5.5% as we factor in the SGP 3 and Cardiff acquisitions.
Retain Add with higher TP. Catalysts are acquisitions and potential revaluation gain.

Post the quarter, the major talking points were the -8% rental reversion for the renewal of a major lease in SGP 1 and the proposed acquisition of SGP 3.
As earlier guided, 3Q16 DPU included a one-off net property tax refund of 0.23Scts/unit or S$2.7m. This more than offset the lower rental income from a client downsizing its requirements in Dublin 1, weaker FX vs. S$ as well as a lower monthly charge from another major lease in SGP 1 which was forward renewed in 2Q16.

The REIT renewed a major lease in SGP 1 (expired in Aug 16) for more than five years, but with a -8% rental reversion. The Manager attributed the negative reversion to bulk discounting as the client is a strategic one and sits in more than one of its data centres across its portfolio. Overall, portfolio occupancy improved to 92.7% (2Q16: 92.3%).
Occupancy for SGP 1 inched up from 85.7% to 87.6% following a client’s take-up of half of the 6,800 sq ft of space expansion which was committed in 2Q16.

As at end-9M16, KDCREIT only had 1.3% of its NLA to be renewed in 2016 and another 20.8% in 2017. The majority of 2017 expiries pertain to one lease in Singapore, the Basis Bay DC and another overseas lease. We sense that the Basis Bay lease would most likely be renewed.
Post-2017, there are minimal leases ( < 3% in each year) due for renewals until 2020. Hence, investors would have a higher income certainty, and could potentially benefit from further acquisitions.

KDCREIT has finally announced the proposed acquisition of SGP 3 (formerly known as T27). Accordingly, the trust would acquire a 90% stake in SGP 3 for S$202.5m (2.2- 2.6% discount to independent valuations), with the vendor retaining a 10% interest.
The acquisition would be funded via net proceeds of S$275.3m from a fully underwritten preferential offering of 242m new units on the basis of 275 new units for every 1,000 existing units. The issue price is S$1.155/unit.

We adjust our FY16 DPU by -8.3% to factor in the rights issue. We also lift our FY17- 18F DPU by 4.8-5.6% as we factor in the SGP 3 and Cardiff acquisitions, which results in a higher DDM-based TP (S$1.33).
We conservatively assumed that tax transparency for SGP 3 would not be obtained.
We maintain Add on the stock.
Catalysts could come from further acquisitions and potential revaluation gains.
Key risk is higher-than-expected supply.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-10-18

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.33 Up 1.290