Keppel DC REIT - OCBC Investment 2019-09-17: All Good Things Come Into One


Keppel DC REIT - All Good Things Come Into One

  • Proposed two acquisitions in Singapore.
  • Strong merits from these deals.
  • Raise Fair Value to S$2.08.

KDCREIT Investment thesis

  • KEPPEL DC REIT (SGX:AJBU) is a strong proxy to growing demand for data centre space, underpinned by increasing digitalisation and cloud adoption trends. Its tenants come from fast growing industries such as internet enterprise, information technology services, telecommunications and financial services. It is also one of the most defensive REITs given its long portfolio weighted average lease to expiry of ~7.8 years.

KDCREIT Investment summary

Proposed acquisitions of KDC SGP 4 (99% interest) and 1-Net North Data Centre –

  • Keppel DC REIT has proposed two acquisitions in Singapore. The first is for a 99% interest in Keppel DC Singapore 4 (KDC SGP4) from a JV between Alpha Data Centre Fund and Keppel Data Centres Holding (70-30 JV between Keppel T&T and Keppel Land Limited). The agreed property value is S$384.9m, and works out to an expected stabilised NPI yield of 7.5% (at least 7% in first year as the property is still ramping up).
  • KDC SGP 4 is a five-storey carrier-neutral and purpose-built facility, with a current occupancy of 92% and its IT power is fully committed. There will be a rental support not exceeding S$8.7m for a 2-year period after the acquisition completion date.
  • The second proposed acquisition is for 1-Net North Data Centre (51%-owned by Keppel Infrastructure Trust and 49%-owned by Shimizu Corp) at an agreed value of S$200.2m. Expected initial NPI yield is attractive at ~9%, and the property has a triple-net master lease with 16.8 years remaining. Both acquisitions are expected to be completed in 4Q19.

DPU accretive despite equity fund raising…more acquisitions to come! –

  • We are positive on this proposed deal, given that it will consolidate Keppel DC REIT’s positioning in the Singapore data centre market (AUM will jump 30.7% to S$2.6b and Singapore’s share will increase from 51.1% to 62.7%), which is seeing strong demand and supply dynamics. Portfolio occupancy and WALE will also both increase.
  • Despite funding these acquisitions largely with equity (private placement and preferential offering to raise gross proceeds of S$478.2m; pricing came in at top-end of indicative range), Keppel DC REIT’s pro forma FY18 DPU is expected to be accretive at +9.4%, or +12.4% if tax transparency is granted on KDC SGP 4 (good likelihood of this happening, in our opinion).
  • Furthermore, Keppel DC REIT’s pro forma aggregate leverage is expected to decline from 31.9% to 30.3% post completion. This leaves it with continued ample debt headroom to fund more acquisitions and management had previously highlighted it was actively seeking third party acquisitions.

To be included in FTSE EPRA Nareit Global Developed Index –

  • Keppel DC REIT also announced recently that it will be included in the FTSE EPRA Nareit Global Developed Index with effect from 23 Sep 2019. See also SGX Market Update: Recent SGX Additions to FTSE EPRA Nareit Global Developed Index.
  • We factor in Keppel DC REIT’s proposed acquisitions in our model, and trim our FY19 DPU forecast by 0.3% (slight dilution before completion of acquisitions) but bump up our FY20 DPU forecast by 7.7%. Correspondingly, our DDM-derived fair value estimate increases from S$1.93 to S$2.08.
  • We recommend unitholders to subscribe for the preferential offering.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-09-17
SGX Stock Analyst Report BUY MAINTAIN BUY 2.08 UP 1.930