Keppel DC REIT - DBS Research 2019-12-18: Three’s A Party!

KEPPEL DC REIT (SGX:AJBU)

Keppel DC REIT - Three’s A Party!

On the back of two accretive acquisitions in Singapore recently (KDC SGP4 and DC1), KEPPEL DC REIT (SGX:AJBU) embarked on its third accretive acquisition in FY19.
Capitalising on its low gearing post the equity fund raising in mid-September, Keppel DC REIT will fund the acquisition of the S$125.3m German datacentre (Kelsterbach DC) fully by debt. With this new addition and the two recent Singapore acquisitions, we project a robust 2-year DPU CAGR of 8.8% in FY19-21. See Keppel DC REIT Dividend History.
We maintain our BUY call, with a marginally higher Target Price of S$2.23.

Having already acquired close to S$770m (including M&E works at DC1) of assets in recent months, Keppel DC REIT will be looking forward to a record DPU in FY20. With the low cost of equity and low cost of debt available to Keppel DC REIT, we believe that the REIT will be able to make more accretive acquisitions in FY20.
Keppel DC REIT can also potentially look at another pre-emptive fund raising for its next acquisition. As such, we have factored in a conservative debt-funded acquisition of S$50m to be completed by 2H20 in our estimates.

With the recent acquisitions and inclusion into the EPRA Nareit Developed Asia Index, we believe the higher visibility and trading liquidity will lower the cost of capital for Keppel DC REIT.
Catalysts to look out for include
1. stronger-than-anticipated results,
2. tax transparency treatment for KDC SGP 4 acquisition by 2H20, and
3. further acquisitions.

Keppel DC REIT will be acquiring a freehold shell and core purpose-built datacentre facility in Kelsterbach, their second datacentre in Germany. Purchase consideration of S$125.3m, approximately 5% below Jones Lang Lasalle’s valuation of S$131.8m. Post the equity fund raising in mid-September 2019, Keppel DC REIT will capitalise on its low gearing to fully fund this acquisition by debt.
Kelsterbach DC has a total lettable area of c.540,869 sqft and is leased on a triple-net basis; 100% leased until the end of 2025 with annual rental escalations of between c.0% and 4%.
Acquisition will be accretive with an initial yield of c.6.5%, and we expect acquisition to be completed within 1Q20.

All three acquisitions (KDC SGP 4, DC 1, Kelsterbach DC) will be DPU accretive. The total cost of three acquisitions is S$710.4m, funded mainly by proceeds from private placement and preferential share offering.
Based on S$478.2m of equity raised, the funding structure comprises 67% equity and 33% debt. Also, it has recently announced the S$56.6m M&E works at DC 1 to convert the remaining shell and core space into fully fitted space for 1-Net.
1-Net will fully lease the converted space concurrently with the rest of the building; 10-year master lease agreement on a triple-net basis.
S$56.6m to be fully funded by debt and expected to contribute additional rents of between S$6.9m and S$7.4m per annum; ROI of c.12.5%. M&E works expected to be completed by 3Q20, bringing the NPI yield of DC 1 to above the initial 9%.

Post acquisitions, Keppel DC REIT’s AUM will increase to c.S$2.7bn and portfolio occupancy will increase from 94.5% to 96.0%. Average cost of debt is expected to be maintained at the current lows of approximately 1.7%.
As Kelsterbach DC and DC 1 M&E works are expected to be funded by debt, we expect gearing to inch up to the c.35-36% levels.
Despite the increased gearing levels, Keppel DC REIT will still have debt headroom in excess of S$400m. It has proactively refinanced maturing debt, with only c.S$12.5m of debt due in the whole of 2020.

Given Keppel DC REIT’s access to low-cost borrowings in euros and low cost of equity (trading at more than c.80% premium to NAV), Keppel DC REIT is able to embark on further accretive acquisitions. The acquisition of Kelsterbach DC attests to Keppel DC REIT’s ability to acquire third-party quality assets yet again.
Remaining pipeline from Sponsor in Germany and The Netherlands; Alpha Data Centre Fund to also provide an additional avenue for acquisitions.
We expect a bump up in DPU in FY20 with the completion of the Intellicentre 3 (Sydney) construction in 2H20, and the additional income from the M&E works at DC1.
The enlarged portfolio of c$2.7b gives Keppel DC REIT bigger headroom to undertake further greenfield projects.
In our forecast, we have assumed a conservative S$50m debt-funded acquisition in FY20; given acquisitions in excess of S$700m in FY19, we expect acquisitions in FY20 to exceed our S$50m forecast.
Keppel DC REIT to also benefit from organic growth with rental escalations at fully-fitted assets, and our assumed c.2% positive rental reversion at colocation assets.
We maintain BUY with a higher Target Price of S$2.23; 2-year DPU CAGR of 8.8% for FY19-21. See Keppel DC REIT Share Price; Keppel DC REIT Target Price; Keppel DC REIT Dividend History.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2019-12-18

SGX Stock Analyst Report BUY MAINTAIN BUY 2.23 UP 2.200