Keppel DC REIT - CIMB Research 2017-01-23: A bag of hits and misses

KEPPEL DC REIT AJBU.SI

Keppel DC REIT - A bag of hits and misses

FY16 DPU of 6.14 Scts (-5.7% yoy) was slightly below consensus but within our forecast, forming 97% of our full-year estimate.
Adjusted DPU for FY16 would have been 6.68 Scts (+2.6% yoy) and 0.5% higher than IPO forecast. 2.8 Scts DPU was declared for 2H16; ex-date on 27 Jan 17.
Portfolio occupancy at 94.4% (+1.7% pts qoq). WALE extended to 9.6 years (9M16: 8.6 years).
Acquisition of SGP 3 has been completed; tax transparency granted.

Maintain Hold with a higher DDM target price. The stock is trading at 6% FY17 yield and 1.3x FY16 P/BV. We also introduce our FY19F numbers.

We consider FY16 to be a bag of hits and misses for KDCREIT. The hits sprang from its acquisition momentum; the misses from organic portfolio weakness.
We were also slightly taken aback by the S$14m devaluation losses. KDCREIT achieved S$61m of distributable income (+6.3% yoy), and surpassed its IPO forecast by 4%.
The outperformance came from a one-off property tax refund and inorganic contributions (from IC2, Cardiff DC and Milan DC).

The misses stem from lower contributions from DUB 1, lower variable income from Singapore properties and stronger S$ vs. foreign-sourced income.
S$14m devaluation losses were due to SGP 2 (lower rental assumptions by valuers), DUB 1 (lower occupancy), Basis Bay (higher cap rate) and GV 7 (FX translation losses). These were partially offset by revaluation gains from the Australian properties and Almere.
Excluding the impact of the pro-rata preferential offering, the later completion of SGP 3 and the one-off property tax refund, adjusted DPU would have been 6.68 Scts.

With the inclusion of Cardiff and Milan DC, portfolio occupancy ticked up 1.7% pts qoq to 94.4%. WALE was extended to 9.6 years (9M16: 8.7 years), the longest in our coverage.
Occupancy for DUB 1 was maintained at 55.8% and we think it could take some time for the manager to fill the space.
In the interim, the manager has planned an S$15m-AEI to position DUB 1 more competitively.
Due to frictional vacancy, occupancy for SGP 1 dropped 2.9% pts qoq to 84.7%.

Looking ahead, 14.6% of NLA is up for renewal in 2017. This comprises four major leases, comprising two unidentified overseas leases, one Singapore lease and Basis Bay DC.
Apart from Basis Bay, we understand that agreements in principle have been agreed upon. In addition, KDCREIT renewed a Singapore lease (est. 7k sq ft or 0.8% of portfolio NLA) in 4Q16 for another five years.
The average rental for the next five years is c.3% higher than the preceding level.

KDCREIT completed the acquisition of 90% interest in SGP 3 on 20 Jan 17. An agreement was reached so that the economic effect of the acquisition would have occurred on 1 Dec 16.
The REIT has also been granted tax transparency for SGP 3, which leads us to raise our FY17-18 DPU by 2.7-4.8% (previously not assumed).
Our DDM target price increases (from S$1.18 to S$1.21) on the back of the DPU upgrades.
Maintain Hold on limited upside.
Upside/downside risks hinge upon acquisition momentum and leasing demand.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-01-23

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.21 Up 1.180