Keppel DC REIT - CIMB Research 2018-01-22: 4Q17 On Track For S$2bn AUM In 2018

Keppel DC REIT - CIMB Research 2018-01-22: 4Q17 On Track For S$2bn AUM In 2018 KEPPEL DC REIT AJBU.SI

Keppel DC REIT - 4Q17 On Track For S$2bn AUM In 2018

  • Keppel DC REIT (KDCREIT)'s FY17 DPU of 7.12 Scts (+16% y-o-y) was broadly in line with consensus and our expectations at 96% of our full-year forecast. 4Q17 DPU of 1.75 Scts was at 24%.
  • 4Q17 results were boosted by acquisitions. Organic portfolio was mildly impacted by a -4.3% rental reversion on a key lease and 0.8% q-o-q dip in portfolio occupancy.
  • KDCREIT is on track to achieve its S$2bn AUM target in 2018. Including mainCubes and Almere 2, we estimate that it needs another c.S$200m of third-party assets.
  • Reiterate HOLD on KDCREIT with a higher DDM-based Target Price. 
  • Upside risk could come from further accretive acquisitions; downside risk from rich valuations.

4Q17: Boosted by acquisitions 

  • Keppel DC REIT's 4Q17 DPU of 1.75 Scts grew 33.6% y-o-y on the back of the REIT’s accretive acquisitions (DUB 2, Milan DC, Cardiff DC and 90% interest in SGP 3). These were partially offset by lower variable income from SGP 2 and Basis Bay DC. 
  • Adjusting for the impact of the pro-rata preferential offering in FY16, 4Q17 DPU y-o-y growth would have been 4.8%.

Fair value loss of S$8.6m on investment properties 

  • Keppel DC REIT recorded fair value loss of S$8.6m on investment properties, primarily from four assets –
    1. SPG 2 and Gore Hill DC due to lower rental assumptions and
    2. Basis Bay DC and DUB 1 on lower occupancy assumptions. 
  • We note that SGP 3 recorded a relatively sizeable investment gain, partially offsetting the losses from the four properties.

-4.5% rental reversion; portfolio occupancy fell 0.8% pt q-o-q 

  • Keppel DC REIT  booked a negative 4.5% rental reversion from a key lease renewal at Gore Hill DC in 4Q17. The strategic client occupies several properties across KDCREIT’s portfolio and was offered a bulk discount for the renewal (it is also one of the four tenants in SGP 2). The client also took up more space upon renewal. 
  • Looking ahead, a minimal 9.2% of leased area will be up for renewal in FY18F-20F, suggesting stabilised income. 
  • Portfolio occupancy declined 0.8% pt q-o-q to 92.6% due to consolidation from two clients in SGP 1.

On track for S$2bn AUM in 2018 

  • mainCubes is expected to be completed in 2Q18; we raise our revenue assumptions as we previously expected contributions from 4Q18. Including mainCubes, KDCREIT’s AUM would grow to S$1.65bn (FY17: S$1.51bn). 
  • We believe that sponsor’s Almere 2 (we estimate value of c.S$140m) could be ready for acquisition in 2018. This means that KDCREIT would need to acquire another c.S$200m worth of third-party assets to meet its S$2bn AUM target in 2018 (SGP 4 is touch-and-go; it could stabilise in late-2018/2019).

Moving parts come in the form of funding options 

  • We have factored in equity financing for 70% of mainCubes’ price tag of c.S$140m. As such, gearing should remain around 32% (FY17: 32.1%). However, the manager could temporarily let gearing drift upwards (as they have done with DUB 1 which was fully debt-funded) and address the balance sheet with an upsized equity fund raising (EFR) later on (similar to the preferential offer in 4Q16). The latter would mean a boost to FY18F DPU.
  • But, future acquisitions accompanied by EFR would only be marginally accretive.

Maintain Hold with a higher DDM-based Target Price. 

  • We increase our FY18F-19F DPU by 2.4-5% on earlier contributions from mainCubes as well as lower finance costs. We also increase our DDM-based Target Price on lower COE of 7.8% (prev 7.9%). 
  • Reiterate HOLD on KDCREIT as valuations are full. The stock is trading at 1.52x current P/BV and offers 5.4% FY18F yield.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2018-01-22
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.44 Up 1.370