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

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.

FY16 results: a bag of hits… 

  • 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).

…and misses 

  • 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.

Portfolio update 

  • 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%.

14.6% of NLA up for renewal in 2017 

  • 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.

Acquisition of SGP 3 completed 

  • 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 | 2017-01-23
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.21 Up 1.180