Keppel DC REIT - OCBC Investment 2021-07-27: Double-Digit DPU Growth & Proposed New Acquisition


Keppel DC REIT - Double-Digit DPU Growth & Proposed New Acquisition

  • Keppel DC REIT's 1H21 DPU grew 12.5% y-o-y to S$0.04924.
  • Occupancy increased slightly to 98.0%.
  • Proposed maiden acquisition in Guangdong, China.

Keppel DC REIT's 1H21 results in-line with our expectations

  • Keppel DC REIT (SGX:AJBU) reported its 1H21 results which met our expectations. Gross revenue and NPI rose 9.0% and 8.4% y-o-y to S$135.1m and S$123.8m, respectively. This was driven by contribution from acquisitions and the completion of asset enhancement initiatives at its Singapore and Dublin assets.
  • Keppel DC REIT's 1H21 DPU grew 12.5% y-o-y to S$0.04924 and constituted 50.3% of our FY21F forecast.

Portfolio occupancy increased by 0.2 ppt q-o-q to 98.0%

  • Keppel DC REIT’s overall portfolio occupancy increased by 0.2 percentage points (ppt) q-o-q to 98.0%. Management said that rental reversions were stable, with no negative rental reversions registered on leases renewed. Portfolio WALE remained long at 6.5 years by leased area, or 4.9 years by rental income.
  • Although Keppel DC REIT announced previously that it was expanding its investment mandate to include real estate and assets necessary to support the digital economy, management highlighted that at least 90% of its AUM will continue to be data centres.

Proposed maiden acquisition in Guangdong, China, with room for future expansion

  • Keppel DC REIT announced separately its proposed acquisition of Guangdong Data Centre, a fully-fitted data centre facility in Jiangmen, Guangdong Province, for RMB635.9m (~S$132.0m), which is a discount of 7.8% to an independent valuation. This marks Keppel DC REIT’s maiden penetration into the Chinese data centre market. This Guangdong Data Centre will be fully leased back to the vendor (Guangdong Bluesea Data Development Co. Ltd. and its parent company) on a triple net basis for 15 years, and is expected to generate an initial NPI yield of close to 9%.
  • The vendor will also grant Keppel DC REIT a right of first refusal to another five data centres within the campus where the Guangdong Data Centre is located. This would provide Keppel DC REIT with a potential pipeline to expand further in China in the future.
  • Keppel DC REIT intends to fund this proposed acquisition with a mixture of debt and/or equity, with an estimated proforma DPU accretion of +1.9%. Its aggregate leverage ratio is expected to increase from 36.7% to ~37.5% upon completion of the acquisition, which is expected in 3Q21.
  • After factoring in an ESG valuation premium but lowering our terminal growth rate assumption by 25 basis points to 2.75% to account for an increasingly competitive landscape for inorganic growth, our fair value estimate for Keppel DC REIT declines from S$3.32 to S$3.19.
  • See

Keppel DC REIT - ESG Updates

  • Keppel DC REIT has adopted strong compliance mechanisms such as employee trainings and audits of ethics standards. The former includes training and development programmes, such as Keppel Young Leaders and Advanced Leadership. Keppel DC REIT also regularly engages with employees through satisfaction surveys and focuses on improving the health and wellness of its personnel. Management has earmarked its commitment to address climate change issues, as illustrated by it being a signatory of the Climate Neutral Data Centre Pact. Keppel DC REIT also said that it will utilise green energy, where available, at our data centres.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-07-27
SGX Stock Analyst Report BUY MAINTAIN BUY 3.19 DOWN 3.320