Keppel DC REIT - OCBC Investment 2017-07-18: Downsizing At Basis Bay, But Impact Not Significant

Keppel DC REIT - OCBC Investment 2017-07-18: Downsizing At Basis Bay, But Impact Not Significant KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Downsizing At Basis Bay, But Impact Not Significant

  • 2Q17 DPU up 4.2% YoY.
  • Occupancy fell 2 ppt QoQ to 93.1%.
  • Trim forecasts slightly.

2Q17 results in-line with expectations 

  • Keppel DC REIT (KDCREIT) reported its 2Q17 results which met our expectations. 
  • Gross revenue and NPI jumped 38.8% and 41.9% YoY to S$34.5m and S$31.4m, respectively. This was driven by contributions from the acquisitions of the 90% interest of KDC SGP 3, Milan DC and Cardiff DC, but partially offset by lower variable income from KDC SGP 1 and KDC SGP 2 and impact from a client downsizing its requirements at KDC DUB 1. 
  • DPU grew by a lower magnitude of 4.2% YoY to 1.74 S cents due to higher finance costs and an enlarged unit base from a preferential offering exercise last year. 
  • For 1H17, KDCREIT’s gross revenue spiked up 34.5% to S$66.7m and formed 49.9% of our FY17 forecast. DPU increased 8.7% to 3.63 S cents and constituted 49.6% of our full-year projection.

Tenant downsized at Basis Bay Data Centre 

  • As a recap, at the end of 1Q17, KDCREIT had three major overseas leases which were expiring for the remainder of the year. 
  • Management has secured agreement in-principle for two of the leases, and are currently finalising the lease documentation. However, for the lease at Basis Bay Data Centre in Malaysia, the tenant has decided to return one data centre floor but will continue to lease the two remaining data centre floors for another five years. 
  • From our understanding, this tenant had been utilising only two out of the three floors it was leasing from KDCREIT previously. As a result of this downsizing, the property’s occupancy fell to 63.1% from 100%, while portfolio occupancy slipped 2 ppt QoQ to 93.1%, as at 30 Jun 2017.

Maintain BUY 

  • Notwithstanding this disappointing development, we do not expect a significant impact to KDCREIT’s financials. 
  • Our previous forecasts assume that Basis Bay Data Centre would contribute only 2.8% of our overall FY17 NPI projection. We now lower both our FY17/FY18F NPI forecasts by 0.7%, and our FY17/FY18F DPU projections by 0.9%, as we factor in the lower occupancy in our model. 
  • We conservatively assume that a replacement tenant would only begin contribution to KDCREIT in 2H18. However, our DDM-derived fair value estimate remains unchanged at S$1.39. Maintain BUY.

Wong Teck Ching Andy CFA OCBC Investment | 2017-07-18
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.390 Same 1.390