KEPPEL DC REIT (SGX:AJBU)
Keppel DC REIT - Poised For More Debt-Funded Acquisitions
- Private placement completed in August will create some drag on FY21 earnings.
- iseek has exercised its option to buy back its data centre in Brisbane for A$34.5m.
- Low gearing enables Keppel DC REIT to embark on fully-debt funded acquisitions that will be highly accretive.
- Maintain BUY rating on Keppel DC REIT with a target price of S$3.00.
Pre-emptive equity fund raising
- Keppel DC REIT (SGX:AJBU)'s private placement that raised S$204.3m was completed on 23 August 2021.
- 81m new units issued at a price of S$2.522 per unit. Issue price was at only a 2.0% discount to VWAP.
- Proceeds used to fund acquisition of Guangdong Data Centre and future acquisitions. S$67.9m to be utilised for Guangdong Data Centre, remaining S$132.7m of the proceeds planned for future acquisitions
Divestment of iseek Data Centre for A$34.5m
- Keppel DC REIT announced the divestment of iseek Data Centre in Brisbane for A$34.5m or S$35.3m. The property is currently fully occupied by iseek which has an approximate WALE of 10 years remaining. iseek will be exercising its option to buy back the property from Keppel DC REIT.
- Purchase price is a ~1.5% premium to its latest valuation of A$34.0m as of 30 June 2021. Compared to the purchase consideration at IPO, the divestment is done at a ~9.5% premium.
- Based on our estimates, exit yield in excess of 10% seems relatively high. However, we understand that the property requires significant capex in the near future. We expect the divestment to be completed at the end of FY21.
- iseek Data Centre sits on a leasehold land that expires in June 2040, with an option to extend by seven years.
Slight downside to earnings
- Pre-emptive fund raising and divestment is projected to lead to some downside to our earnings projections.
- Timing difference between the private placement and completion of acquisitions is a drag on DPU.
- Although iseek Data Centre is a relatively small asset that makes up only ~1% of Keppel DC REIT’s AUM, the income void will lead to a ~2% downside to earnings on an annual basis. Estimated impact on NPI is ~S$4.5m on an annual basis.
More acquisitions anticipated by end of the year; Ample debt headroom of more than S$1bn
- Although the enlarged unit base and divestment will lead to some downside to earnings, we anticipate more acquisitions by year end. Gearing will improve to ~34% post divestment of iseek Data Centre and acquisition of Guangdong Data Centre.
- Excess proceeds from private placement and low gearing allows for debt-funded acquisitions going forward. We expect the next acquisition to take place sooner rather than later to minimise the drag on earnings.
- Our projections assume the investment into M1’s network assets and another acquisition will be done by year end: M1 network assets valued at S$87m; fully debt-funded.
- Assumes a further S$100m of acquisitions that will also be fully debt-funded; assumed NPI yield of 5.5%. Further S$300m of acquisitions by end-FY22 still intact
Our thoughts on Keppel DC REIT
- Although the pre-emptive equity fund raising and divestment of iseek Data Centre will lead to some downside to our earlier estimates, we remain positive on Keppel DC REIT’s acquisition prospects. The exit yield of iseek Data Centre may seem high given how data centre cap rates have compressed, but it allows Keppel DC REIT to avoid spending significant capex on the asset. Moreover, the property has a relatively short remaining land lease of only ~19 years, and an option to extend by a further seven years.
- With gearing expected to fall to 34% after the divestment of iseek Data Centre and the acquisition of the Guangdong Data Centre, we anticipate that Keppel DC REIT will embark on more acquisitions by the end of FY21 and raise its gearing back to optimal levels of 37% - 40%. As such, we have assumed further acquisitions of S$100m, in addition to the S$87m investment into M1’s network assets. For acquisitions of S$100m, we have assumed a conservative yield of 5.5%, and a higher acquisition yield than this would lead to upside to our numbers. As a reference, the acquisition of the Guangdong Data Centre and M1 network asset investment have projected initial yields of ~9%.
- The anticipated acquisitions together with organic growth of its portfolio (through higher rents and recently completed AEIs) is projected to lead to ~8.6% and ~8.5% growth in DPU for FY21 and FY22 respectively. Despite the enlarged unit base, Keppel DC REIT benefits from its low WACC of ~ 5.7%, making acquisitions highly accretive. Moreover, its forward yields of ~4.0% and ~4.3% (FY21 and FY22 respectively) remains very attractive and is significantly higher than the 3.0%-3.5% range that it has been trading in the past two years.
- We maintain our BUY recommendation with a target price of S$3.00.
- See
Dale LAI
DBS Group Research
|
Derek TAN
DBS Research
|
https://www.dbsvickers.com/
2021-08-30
SGX Stock
Analyst Report
3.000
SAME
3.000
