Keppel DC REIT - DBS Research 2019-10-16: Fuel For The Tomorrow’s Digital World


Keppel DC REIT - Fuel For The Tomorrow’s Digital World

  • Inclusion into FTSE EPRA Nareit Global Developed Index positive for future liquidity. (See SGX Market Update: Recent SGX Additions to FTSE EPRA Nareit Global Developed Index.)
  • Keppel DC REIT's 3Q19 DPU increased +4.3% y-o-y to 1.93 Scts; 9M19 DPU ahead of forecast.
  • Healthy operational metrics with slight uptick in portfolio occupancy.
  • Awaiting completion of data centres in Singapore; more acquisitions to come from third parties.

What’s New

Strong 9M19 results; DPU of 5.78 Scts is 5.7% higher y-o-y

  • KEPPEL DC REIT (SGX:AJBU)'s 9M19 net property income and distributable income increased by 11.8% and 16.9% to S$128.8m and S$81.8m respectively. The increase was driven by higher contributions from Singapore properties, partially offset by weaker AUD, EUR and GBP against the Singapore dollar.
  • Rental renewals in 3Q2019 were generally positive, coupled with lower property expenses for the quarter. Even without capex reserves (monies held for future capex needs) DPU for the quarter was stable at 1.93 Scts on a q-o-q basis.

Improved operating metrics in Singapore and Dublin; uptick in occupancies at 3 properties

  • Keppel DC REIT's overall portfolio occupancy ticked 0.4ppt higher y-o-y to 93.6% in 3Q19 and weighted average lease expiry (WALE) remained long at 7.7 years. Leases renewed in 3Q19 generally recorded positive reversions, and there are only 1.3% of leases to be renewed in 4Q19.
  • Take-up by smaller tenants at KDC SGP1 and KDC Dublin1 contributed to the improved portfolio occupancy. Tenant fit-out works at KDC Dublin2 was completed in the quarter, and occupancy rose from 90.7% to 100%.
  • Retrofitting works to provide more power for tenants at KDC SGP3 was completed in the quarter, and this should add to revenue going forward.
  • Occupancy at KDC Dublin1 increased to 65.7% (vs 61.8% in 2Q19), and management believes that take-up would further improve closer to the completion of AEI in 2020.

Financial metrics strong

  • Keppel DC REIT’s financial metrics stayed strong, with average cost of debt maintained at c.1.7% with a lengthened debt tenor of 3.8 years. During the quarter, management refinanced approximately c.S$130m of loans due to expire in 2019. The SGD-denominated loans were refinanced by 6 years (to 2025) at an estimated cost of 2.5%.
  • Gearing fell to 28.9% during the quarter due to the private placement and preferential offering of approximately 277.0m new units. But gearing is projected to rise closer to c.30% after completion of the acquisitions in 4Q19.

Imputing acquisitions in our forecasts; lowering discount rates to reflect the lower interest rate environment.

  • We believe that Keppel DC REIT is in a virtuous acquisition cycle as the cost of capital is conducive to acquiring assets accretively. Given the visibility of an acquisition pipeline and ability to execute accretively, we have imputed into our forecast acquisitions worth S$75m @ 6.5% yield on a fully debt-funded basis.
  • We believe Keppel DC REIT remains on the lookout for potential acquisitions within Asia Pacific, namely Singapore, and Europe.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2019-10-16
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