Keppel DC REIT - DBS Research 2021-07-27: Upgrade To Buy On Surprise Acquisitions


Keppel DC REIT - Upgrade To Buy On Surprise Acquisitions

  • Keppel DC REIT (SGX:AJBU)'s 1H21 DPU rose 12.5% y-o-y to 4.924 cents - above projections.
  • Acquisition of Guangdong Data Centre at a NPI yield of ~9% is highly accretive.
  • ROFR granted for the remaining Bluesea Data Centres will reignite optimism on growth trajectory.
  • Upgrade Keppel DC REIT to BUY with a higher target price of S$3.00.

Keppel DC REIT's 1H21 results highlights

DPU increased 12.5% y-o-y

  • Keppel DC REIT's 1H21 DPU of 4.924 cents was slightly above estimates
    • 1H21 DPU was 12.5% higher y-o-y
    • Higher DPU was mainly due to acquisitions of Kelsterbach Data Centre (Germany) and Amsterdam Data Centre (Netherlands)
    • Higher DPU was also due to higher contribution from DC1 and Keppel DC 2 Dublin post-AEI
  • Higher DPU implies an attractive yield of more than 3.8% currently

Upside surprise from Guangdong Data Centre acquisition

  • Announced the S$132m acquisition of a data centre in Guangdong Province, China
    • Keppel DC REIT’s first acquisition into China that could open doors for further growth in the immediate future from third parties
    • High NPI yield of almost 9%, which is unusual given that data centre yields have substantially compressed globally
    • Newly completed data centre (completed in 2019) within the Bluesea Intelligence Valley Mega Data Centre Campus
  • Sale and leaseback agreement for 15 years ensures income stability
    • 100% leased by the vendor, Guangdong Bluesea Data Development Co., Ltd (Bluesea)
    • We believe that the lease has in-built rental escalations of between 1-3% over the term of its lease
    • Triple-net lease with an option to extend for a further term of at least 5 years
  • Purchased at a 7.8% discount to independent valuation
    • Including stamp duty, VAT and acquisition fees, total acquisition cost will be S$150.9m
    • Estimated NPI yield after costs is still a very attractive ~7.7%
  • Keppel DC REIT has also been granted a pre-emptive right of first refusal to acquire the remaining five data centres within the campus
    • Each of the five other data centres has approximately the same capacity and valuation
    • We understand that the other five data centres have recently been completed and are currently being fitted-out
  • Acquisition expected to be completed within 3Q21

Equity funding improves accretion

  • Debt-to-equity funding structure is expected to be 55%:45%
  • Keppel DC REIT is trading at a P/NAV multiple of more than 2.0x
    • Low cost of equity to boost acquisition accretion
    • DPU accretion estimated to be ~2.0%

Intellicentre 3 in Sydney has been completed

  • The development of Intellicentre 3 in Sydney has been completed on 13 July 2021 at a cost of A$26.0m or S$26.6m (lower range of development estimates)
  • 20-year triple-net master lease will commence immediately; contribute an additional ~S$2m in NPI per annum
  • Together with Intellicentre 2 Data Centre, both assets will be collectively renamed Intellicentre Campus
    • Intellicentre 2 will also commence a fresh 20-year lease

Portfolio occupancy of 98.0%; highest level since listing

  • Riding on the digital economy, Keppel DC REIT’s portfolio achieved an occupancy of 98.0%
    • Highest level since its listing in 2014
    • Only 1.6% of leases (by rental income) will be expiring for the rest of FY21
  • Enviable portfolio WALE of 6.5 years
    • Will be further lengthened to 7.3 years with Guangdong acquisition

Upgrade Keppel DC REIT to BUY based on 3-year DPU growth CAGR of ~8%

Another deal with a ~9% yield

  • As cap rates for data centres continue to compress significantly globally, Keppel DC REIT has yet again surprised us with a highly accretive acquisition of a newly built data centre in Guangdong (China), with a ~9% yield. The long master-lease of 15 years makes this deal all the more attractive and demonstrates Keppel DC REIT’s capability to source for off-market deals from third parties.
  • This comes on the back of Keppel DC REIT’s potential investment into M1’s network assets at a ~9.3% IRR. The significance of the Guangdong Data Centre acquisition goes beyond another DPU accretive acquisition. The data centre acquisition reiterates Keppel DC REIT’s earlier stance that its plan to expand its mandate into network assets is purely opportunistic and gives the REIT added flexibility to evaluate a wider range of assets.
  • We believe that both these acquisitions have established Keppel DC REIT as the leading data centre S-REIT. Despite concerns of a potential dilution in its pure-play data centre status, the Guangdong acquisition is sure to echo Keppel DC REIT’s promise to remain focused on data centres. Keppel DC REIT’s commitment to generate the most value for its unitholders was also emphasized when it passed on the opportunity to acquire the Frankfurt data centre from its Sponsor (earlier in the month) as we believe that the yields were too low and the asset had not stabilised even after 2 years of completion.

Bluesea to create another acquisition pipeline

  • As part of the acquisition, Keppel DC REIT has also negotiated for a right-of-first-refusal (ROFR) for the remaining five Bluesea data centres within the campus. This agreement is especially meaningful as we do not expect any of its Sponsor’s acquisition pipeline to be ready in the next two years.
  • The ROFR of the five data centres is estimated to be valued in excess of S$600m, and it has reignited our optimism for Keppel DC REIT to grow its portfolio in the near-to-medium-term. We have revised our projections to assume S$300m worth of acquisitions by the end of FY22. In our view, the new growth target is achievable given the ROFR from Bluesea as well as Keppel DC REIT’s track record to source for third-party deals.

Organic growth to begin bearing fruit

  • Keppel DC REIT’s proactive AEI works has begun to bear fruit following the added capacity at DC1 and Keppel DC Dublin2. The projected 10% growth in DPU in FY22 will mainly come from organic growth from the two AEIs, the completion of Intellicentre3, and added income from the M1 network asset investment.
  • With a projected forward yield of 3.9% and 4.3% for FY21 and FY22, Keppel DC REIT’s yield is at its highest levels in almost two years. Keppel DC REIT will remain fundamentally a data centre specialist with more than 97% of its portfolio concentrated in data centre assets, even with the M1 investment.

Our thoughts

  • The main drivers of our upgrade of Keppel DC REIT are:
    1. delivery of highly accretive acquisitions amid significant cap rate compression globally,
    2. reignition of acquisition growth prospects, and
    3. organic portfolio growth.
  • Our revised estimates imply a DPU yield of 3.9% and 4.3% in FY21 and FY22 respectively. Having missed out on several
  • opportunities and trailing behind its peers’ portfolio growth over the past year, we believe optimism on Keppel DC REIT’s growth prospects will be reignited with the Guangdong Data Centre acquisition and the ROFR on Bluesea’s five other assets valued at more than S$600m.
  • While we eagerly await further acquisitions from Keppel DC REIT, we are cognisant of its organic portfolio growth that has been ongoing in the past few quarters and will bear fruit in the year to come. Moreover, the potential easing of the moratorium on new data centre developments in Singapore by the end of FY21 could create yet another avenue of growth in the near future.
  • With Keppel DC REIT’s acquisition growth now within sight again, we upgrade Keppel DC REIT to a BUY with a higher target price of S$3.00.
  • See

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-07-27
SGX Stock Analyst Report BUY UPGRADE HOLD 3.00 UP 2.800