Keppel DC REIT - DBS Research 2020-07-22: Demand For More Bandwidth


Keppel DC REIT - Demand For More Bandwidth

  • Acquisitions on the horizon as travel restrictions are gradually lifted.
  • Keppel DC REIT's DPU increased 13.6% y-o-y to 4.375 Scts in 1H20.
  • Strong income visibility as operations unfazed by COVID-19 pandemic.
  • We have raised our target price on Keppel DC REIT to reflect current market conditions and factor in improved efficiency of properties.

Keppel DC REIT's operation highlights – Robust DPU growth of 13.6% y-o-y

  • Keppel DC REIT (SGX:AJBU)'s distributable income increased 38.0% y-o-y to S$75m in 1H20 mainly due to acquisitions of three assets - Kelsterbach Data Centre (Germany), Keppel DC Singapore 4 and DC1. See Keppel DC REIT Announcements.
  • Keppel DC REIT's 2Q20 DPU increased 9.8% q-o-q to 2.29 Scts due mainly to tax transparency status for Keppel DC Singapore 4 that was obtained in May 2020.
  • Property tax rebates from the Singapore government will be fully passed on to tenants.
    • No need for any further rent waivers/rebates as none of Keppel DC REIT’s tenants qualify for the mandated SME rebates.
  • Land lease for Keppel DC Singapore 4 has been extended by 30 years to 2050.
    • Paid land lease extension premium of c.S$5m.
    • Land lease extension for Keppel DC Singapore 2 and 3 (due to expire in FY21 and FY22 respectively) are expected to cost the same i.e. S$5m each for a 30-year extension.

Capital management – Debt headroom in excess of S$950m

  • Aggregate leverage of 34.5% with low all-in cost of debt of 1.7%.
  • Heathy debt tenure of 3.7 years and interest coverage ratio of 12.8x.
  • Negligible refinancing risks as only 1.2% of loans are due to expire during the rest of FY20.
    • 4.9% of expiring EUR loans have been refinanced to FY24.
    • Remaining 1.2% of AUD debt due to expire in 3Q20 will be refinanced to FY24.
    • Expect all-in cost of borrowings to be maintained even with refinancing.
  • Debt headroom of more than S$950m before gearing hits the regulatory limit of 50%.
    • Based on Keppel DC REIT’s internal leverage threshold of 40%, debt headroom remains robust at more than S$280m.

Portfolio update – S$2.8m in tax savings per annum

  • Keppel DC REIT's portfolio occupancy increased 1.4 ppt q-o-q to 96.1%.
  • Only 2.6% of leases are due to expire for the rest of FY20.
  • Tax transparency treatment for Keppel DC Singapore 4 has been obtained.
    • Translating to an annual savings of c.$2.8m in taxes per year.
    • Land lease has been extended to 30 June 2050.
  • Delays in AEIs and development projects expected due to COVID-19 outbreak.
    • Intellicentre 3 construction has been ongoing throughout the pandemic, but completion date delayed to 1H21 due to disruption to supply chain.
    • AEIs to increase power capacity at Keppel DC Singapore 5 and DC 1 have been delayed due to suspension of work; uncertain when the Singapore government will allow foreign workers living in dormitories to resume work.
    • AEI works to improve power efficiency and capacity at Keppel DC Dublin 1 has resumed and expected to be completed in 2H20.
  • The additional power capacity that will be added to Keppel DC Singapore 5 has been fully committed (S$29.9m AEI was expected to complete in 2H20 originally).
  • A EUR$12m conversion of additional space at Keppel DC Dublin 2 into a data hall has commenced; expected completion in 1H21.

Looking ahead – Resumption of growth plans

  • Keppel DC REIT expects acquisitions to resume as travel restrictions are gradually lifted.
    • Many of these acquisitions have already been in the works before the COVID-19 outbreak; hoping to complete as early as 3Q20.
    • Acquisitions in FY20 are likely to be overseas from third parties.
  • Pipeline acquisitions from its Sponsor likely to happen in FY21.
  • Cap rates in certain markets may have compressed due to increased liquidity in the market; cap rates range anywhere from 4 – 7%.
  • Willing to consider acquisitions at lower yields (sub-4%) if the asset provides long-term income stability and potential for future upside.
  • Target funding structure for acquisitions remains at 70% equity: 30% debt; to maintain portfolio leverage.

Our views

We remain optimistic on Keppel DC REIT as its operations and earnings remain unfazed by the ongoing COVID-19 pandemic.

Dale LAI DBS Group Research | Derek TAN DBS Research | 2020-07-22
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.80 UP 2.550