Keppel DC REIT - CGS-CIMB 2018-05-08: Accretive Deal; Singapore Presence Reinforced

Keppel DC REIT - CGS-CIMB 2018-05-08: Accretive Deal; Singapore Presence Reinforced KEPPEL DC REIT SGX: AJBU

Keppel DC REIT - Accretive Deal; Singapore Presence Reinforced

  • KDCREIT has proposed the acquisition of 99% interest in Kingsland data centre (DC) for S$295.1m. The stabilised NPI yield is guided to be 7.8%.
  • Despite the acquisition being 100% funded by equity, the deal is both DPU- and NAV-accretive. It also resets KDCREIT’s gearing and reinforces its Singapore presence.
  • We note that the short WALE of 3.6 years is in line with colocation assets. Another downside risk is potential income shortfall should the asset not stabilise.
  • We raise our FY18F-20F DPU by 0.1-1.9% as we factor in the acquisition. We see KDCREIT in a virtuous cycle. ADD maintained. 
  • Downside risks could also come from higher-than-expected rate hikes or unfavourable acquisitions.

What’s the deal

  • The agreed S$295.1m value of Kingsland DC (or SGP 5) is c.6% discount to independent valuation of S$316.8m (valuers have not factored in the income support). The valuation cap rate is 8.25%, in line with the REIT’s other SGP DCs. 
  • SGP 5 is a five-storey, purpose-built, carrier-neutral colocation DC with Tier III specifications. Located in Jurong, it was completed in 2015 with c.99k sq ft of NLA. Land lease expires in 2041. 
  • Similar to SGP 1, SGP 5 has a relatively higher office component, which can also be reflected from a psf valuation. SGP 1 and 5 are valued at c.2.6k-3k psf vs. c.4.5k for SGP 2 & 3.

Why we are positive on the deal

  • We are positive on the deal as it is both DPU- and NAV-accretive (despite the acquisition being 100% funded by equity). The funding would also reset KDCREIT’s gearing to 32.1% (1Q18: 37.4%). 
  • Post-completion (we expect by end-May), the proportion of assets under management (AUM) in Singapore would increase from 40.6% to 49.8%. 
  • Lastly, SGP 5 currently has three tenants; the acquisition would introduce a new customer to the REIT’s customer base.

The numbers behind the DPU accretion

  • In a nutshell, we estimate SGP 5 to generate 6.8% NPI yield, or S$20.3m NPI in the first 12 months. This takes into account the S$6.6m from the 12-month rental support (net of tax) and 5% of gross revenue p.a. to be set aside as capex reserve. After which, we expect the facility to be fully ramped up (clients to fully take up the power) and with the committed space occupancy of 84.2% fully contributing. 
  • We estimate the stabilised NPI yield to be 7.8% or S$23.3m NPI.

Some upside from tax transparency and office take-up

  • While the facility’s power fully committed, there is still some space vacancy from the office component (15.8% vacancy). We estimate office rents could be in the range of S$4.5 psf pm. 
  • Further, there could be c.1% uplift to our FY18F-19F DPU if tax transparency is granted for the rental support. 
  • Lastly, on funding, KDCREIT is seeking a private placement of 224m new units at S$1.353/unit, or a 4.9% discount to VWAP on 4 May to raise gross proceeds of S$303.1m.

Potential downside risks from the deal

  • Though the WALE of SGP 5 seems short at 3.6 years, we note that this is in line with colocation assets. As at end-17, KDCREIT’s other colocation assets had a WALE of 4.2 years. 
  • Further, with new supply in Singapore coming down after a peak in 2016-17, KDCREIT could benefit from positive rental reversions as the leases are up for renewal in the near- to mid-term. 
  • Another downside risk is potential income shortfall should the asset not stabilise after the 12-month rental support period.

In a virtuous cycle; Add maintained

  • Post-acquisition, KDCREIT would have more or less reached its S$2bn AUM target (by 2018). Nonetheless, there is still a visible acquisition pipeline as we identify that the REIT could potentially acquire three more assets from the sponsor or from Alpha Data Centre Fund. 
  • With KDCREIT trading at a hefty premium to book, it would be easier for it to make accretive acquisitions, leading to growth, and in turn lower costs of capital, turning a virtuous cycle. 
  • Maintain ADD with a slightly higher DDM-based Target Price (S$1.49).

YEO Zhi Bin CGS-CIMB | LOCK Mun Yee CGS-CIMB | https://research.itradecimb.com/ 2018-05-08
SGX Stock Analyst Report ADD Maintain ADD 1.49 UP 1.470