Keppel DC REIT - DBS Research 2021-01-27: In The Race For The Next Acquisition


Keppel DC REIT - In The Race For The Next Acquisition

  • Keppel DC REIT's FY20 DPU up 20.5% y-o-y to of S$0.0917.
  • Acquired Amsterdam Data Centre on an accretive 5.1% yield; on the lookout for more acquisitions.
  • Full occupancy at 14 properties; average occupancy at more than 90% for the other 6 properties.

Keppel DC REIT's FY20 DPU of S$0.0917 is a 20.5% increase y-o-y

  • Keppel DC REIT (SGX:AJBU)'s FY20 earnings and distribution were above expectations, led by income contribution from acquisitions and improved portfolio occupancy rates. See Keppel DC REIT's announcements.
  • Post completion of AEI at Keppel DC Singapore 5, occupancy increased from 84.2% (in 3Q20) to 100%.
  • Higher occupancies at Keppel DC Singapore 1 and Keppel DC Singapore 2.
  • Keppel DC REIT acquired Amsterdam Data Centre for S$48.1m in December 2020.
    • Double-net lease that comprises of an office and data centre component.
    • 99.1% occupancy with a WALE of 4.5 years.
    • NLA of 141,698 sqft; NPI yield of 5.1%.
    • Fully funded by Euro-denominated loan.

Keppel DC REIT - Outlook

Acquisitions in FY20 were lower-than-expected due to keen competition for data centre assets

  • Strong competition for data centre assets in FY20; cap rates for data centres has compressed significantly.
  • Only ~S$220m of acquisitions completed in FY20; our assumption for the remaining S$400m of acquisitions has been pushed backed to 2H21.

Third-party acquisitions to dominate inorganic growth in FY21.

  • The only near-term acquisition pipeline from Keppel DC REIT’s Sponsor is Almere Data Centre 2 in the Netherlands. We expect the property to stabilise and ready for acquisition by the end-2021 or early-2022.
  • Keppel DC REIT continues to be on the lookout for quality third-party data centres globally
    • Includes both co-locations and shell-and-core assets.
    • Open to single property and portfolio acquisitions.
    • Markets include the US, Europe, Australia and Singapore.
  • We believe Keppel DC REIT’s disciplined approach on accretive acquisitions may have led them to be edged-out by competitors.

AEIs and development project on track to boost FY21 income.

  • Due to disruptions from COVID-19, there were some delays to AEIs and the development project at Intellicentre 3 (Sydney) However, works are now on track for completion in 1H21.
  • We expect the completion of AEIs at DC1 Singapore and Keppel DC Dublin 2 to contribute additional income in 2H21.
  • Macquarie Telecom’s 20-year triple-net lease at Intellicentre 3 will begin once development is completed. Our estimated NPI yield for the development is 6.5%.

Average cost of debt maintained at 1.6%.

  • Following the Amsterdam acquisition that was fully funded by debt, Keppel DC REIT's gearing inched up to 36.2%.
  • Keppel DC REIT maintained low cost of debt of 1.6% and interest coverage ratio improved to 13.3x. Only S$143 of loans will be due for renewal at the end of 2021.
  • Given the low interest rate environment, we believe Keppel DC REIT will be able to maintain its low cost of funding going forward.

Our thoughts on Keppel DC REIT

  • Through its proactive asset management and increase in demand for data centre capacity, Keppel DC REIT reported FY20 DPU of S$0.0917 cents that was above our estimates.
  • The continued demand for data centre capacity in Singapore has led to higher occupancies at several properties, translating to a higher portfolio occupancy rate of 97.8%. As projected, data centre demand remained resilient throughout the COVID-19 pandemic, and Keppel DC REIT’s FY20 performance was contributed by both organic and inorganic growth.
  • Despite missing our acquisition growth projection of S$600m for the year, Keppel DC REIT’s recent acquisition of Amsterdam Data Centre demonstrates their disciplined approach in acquiring accretive properties. Although the property includes an office component, the NPI yield of 5.1% is very commendable given that cap rates for data centres in the Netherlands is among the lowest globally.
  • We await Keppel DC REIT’s next acquisition as we understand that management is stepping up its hunt for high quality and accretive acquisitions. We have pushed back the estimated completion of S$400m worth of assumed acquisitions to 2H21.
  • See Keppel DC REIT Share PriceKeppel DC REIT Target PriceKeppel DC REIT Analyst ReportsKeppel DC REIT Dividend HistoryKeppel DC REIT AnnouncementsKeppel DC REIT Latest News
  • Despite the strong results and healthy growth prospects (~6% growth in FY21 DPU), we recognise that Keppel DC REIT is currently trading at a very tight forward yield of 3.4%. As such, we maintain our HOLD recommendation. Our target price assumes a forward target yield of 3.5%.

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-01-27
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.800 SAME 2.800