Keppel DC REIT - CGS-CIMB Research 2019-09-16: SGP4 Comes In With 1-Net Tagging Along

KEPPEL DC REIT (SGX:AJBU)

Keppel DC REIT - SGP4 Comes In With 1-Net Tagging Along

Keppel DC REIT announced the proposed acquisitions of 99% of KDC SGP 4 and 1-Net North DC for a total agreed value of S$585.1m.
The transactions will be funded by a mix of equity fund raising (EFR) of c.S$473.8m, debt and issue of acquisition fee units.
We maintain our Hold call with a higher Target Price of S$1.82.

KEPPEL DC REIT (SGX:AJBU) announced the acquisitions of a 99% interest in KDC SGP 4 (SGP4) and 1- Net North DC at a total agreed value of S$585.1m. According to Keppel DC REIT management, the transactions are DPU- and NAV- accretive (+9.4% and +9.3% respectively) based on the pro-forma financials, assuming tax transparency is not granted.
The transactions will increase Keppel DC REIT’s AUM by 30.7% to S$2.58bn comprising 17 data centres globally. Keppel DC REIT expects both acquisitions to be completed in 4Q19.
See Keppel DC REIT's announcements.

Apart from the accretion, we think the deal is positive due to the higher exposure to Singapore (63% of AUM post-completion vs. 51% pre-completion). This deal also improves the portfolio’s occupancy rate from 93.2% to 94.1% and portfolio WALE from 7.8 years to 8.9 years. The deal would also lower gearing from 31.9% to 30.3%.

SGP 4 is a colocation facility with a net lettable area (NLA) of c.84,544 sq ft and has an occupancy rate of 92.0%. It has a weighted average lease expiry (WALE) of 3.0 years. As part of the SGP 4 deal, the Vendor will provide rental support of up to S$8.8m (for 100% share).
1-Net North DC has c.213,815 sq ft of floor area and is 100% committed on a triple-net master lease with 16.8 years left and renewal option for 7.6 years. SGP 4 has a stabilised yield of 7.5% while 1-Net North DC has a 9% yield according to Keppel DC REIT.

The acquisition cost of S$599.5m will be funded by EFR, debt and the issue of acquisition fee units. The equity fund raising to raise gross proceeds of c.S$473.8m comprises
1. a private placement of 135m new units to raise S$229.9m-235.4m at an issue price of S$1.703-1.744 per unit, and
2. a preferential offering to raise S$238.4m- 243.9m at an issue price of S$1.67-1.71, implying a 4.4-6.6% discount to VWAP.
The funding structure roughly implies an 80:20 equity-to-debt ratio.

Maintain HOLD. We raise our FY20-21 DPU by 8.3-7.5% to incorporate the impact of the deal which lifts our DDM-based Target Price to S$1.82, assuming tax transparency is not granted.
With Keppel DC REIT trading at 1.7x FY19F P/BV, highest amongst S-REITs, we think investors should look to participate in the private placement or preferential offering for a better entry price.
Downside risks include weaker foreign currencies and potential income uld SGP 4 not stabilise after the 24-month rental support period.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2019-09-16

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.82 UP 1.670