Keppel DC REIT - CIMB Research 2017-10-16: 3Q17 A Straightforward Quarter

Keppel DC REIT - CIMB Research 2017-10-16: 3Q17: A Straightforward Quarter KEPPEL DC REIT AJBU.SI

Keppel DC REIT - 3Q17: A Straightforward Quarter

  • Keppel DC REIT (KDCREIT) 9M17 headline DPU of 5.37 Scts (+11.2% yoy) broadly in line with our and Bloomberg consensus expectations, at 73% of our FY17F. 3Q17 DPU of 1.74 Scts was at 24%.
  • 3Q17 adjusted DPU growth of 4.2% yoy sprang from inorganic contributions from SGP 3, Milan and Cardiff data centres. Otherwise, 3Q17 was a relative straightforward quarter. The REIT was rather quiet on the leasing-front.
  • Given the recent uptick in unit price, we downgrade KDCREIT to Hold with slightly higher DDM-based target price of S$1.37.
  • Upside/downside risks hinge on conditions of data centre market and acquisitions.

3Q17: a straight forward quarter 

  • In terms of leasing activities, 3Q17 was a relatively uneventful quarter, especially when compared to previous quarters. 3Q17 headline DPU of 1.74 Scts was 16.8% higher yoy.
  • Adjusting for the pro-rata preferential offering and the one-off property tax refund in 2016, growth would have been 4.2% yoy. This sprang from inorganic contributions from SGP 3, Milan and Cardiff data centres (DCs), though partially offset by lower variable income from Singapore and lower contribution from Basis Bay.

Higher occupancies at both SGP 1 and Dublin 1 

  • With the addition of B10 (acquired on 13 Sep 2017), portfolio weighted average lease expiry (WALE) as at end-3Q17 remained long at 9.2 years while occupancy was at 93.4%. 
  • Occupancy for SGP 1 improved 3.2%-pt qoq to 90.7% due to expansionary commitment by a client in 2Q16; while occupancy for Dublin 1 improved 1.3%-pt qoq due to a new contract by an existing client.

Minimal lease expiries over 2018-2020 

  • Looking ahead, we expect income to be stable with minimal expiries spanning 2018-2020 as only 4.9% of leased area would expire over the next three years. 
  • Meanwhile, 5% is up for renewal in the remainder of 2017. Pending lease document finalisation, key terms have been agreed in-principle for the two remaining major leases due in 2017.

Aggregate leverage increased to 32.1% 

  • With the acquisition of B10, aggregate leverage increased 4.4% pts qoq in 3Q17 to 32.1%. KDCREIT is looking to term out its euro short-term loan (used to fund B10) into a 5-year loan. 
  • Average cost of debt was maintained at 2.2% p.a. As at end-3Q17, 67% of borrowing costs has been hedged into fixed rate (vs. end-2Q17: 83%) while KDCREIT’s foreign-sourced distributions have been hedged up to 1H19.

S$2bn AUM target on track 

  • We reiterate our view that KDCREIT is close to achieving its S$2bn asset under management (AUM) target by 2018 (as at end-3Q17, AUM stood at S$1.54bn). 
  • Including sponsor’s Almere 2 in The Netherlands (estimated price tag of c.S$140m) and the forward purchase of maincubes in Germany (purchase price S$129m), the manager needs to acquire around S$200m worth of third-party assets from now to 2018.

Downgrade to Hold with slightly higher target price 

  • Given the recent uptick in its unit price, KDCREIT now offers total return of less than 10% (1.1% upside + 5.6% FY18F yield). Hence, we downgrade it to Hold. 
  • Nonetheless, if we were to factor in a S$2bn AUM by end-2018, we could derive a TP of S$1.40. Our DDM-based TP raises on a slightly lower Australian discount rate (to align with valuation across sector). 
  • Lastly, pending further details, we have not factored in the S$15m asset enhancement initiative (AEI) for Dublin 1 and the accompanying potential benefits.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | 2017-10-16
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.37 Up 1.360