KEPPEL DC REIT (SGX:AJBU)
Keppel DC REIT's FY21 Results - Valuations Speak For Fundamentals
- Keppel DC REIT (SGX:AJBU)'s FY21 DPU of S$0.09851 (+7.4% y-o-y) was in line, forming 100.3% of our forecast. FY21 revenue increased due to acquisitions, completion of redevelopment at Intellicentre 3 and various AEIs in Ireland and Singapore.
- S$386mil in investments made in FY21 could provide more than 4% in DPU accretion for Keppel DC REIT.
- Maintain BUY call on Keppel DC REIT on earnings stability and attractive entry price for future-ready DC assets. FY22e-25e have been lowered by 0.9-4.1% on the anticipated rising cost of borrowing.
The Positives
Portfolio occupancy up 0.5ppts y-o-y, from 97.8% to 98.3%.
- This was due to the acquisition of fully-leased Guangdong DC and occupancy improvements at KDC1 and Dub1. Occupancy at KDC1 inched up 2.0ppts to 93.1%, while occupancy at Dub1 saw a 1.1ppt improvement, at 82.3%.
Portfolio valuation up 8.9%, or S$213mil, on a same-store basis
- Portfolio valuation up 8.9%, or S$213mil, on a same-store basis, largely driven by cap rate compressions. Singapore properties accounted for 83% of the valuation uplift, with cap rate range compressing approximately 55-82bps y-o-y, from 4.95%-10.12% to 5.25%-9.31%.
- Intellicentre Campus in Australia accounted for 17% of the valuation uplift after the TOP of Intellicentre 3 in Jul 21, while Cardiff DC in the UK took a 7% haircut owing to more conservative assumption following a change of valuer.
S$386mil in investments to secure FY22 DPU growth.
- Keppel DC REIT announced S$386mil in investments in FY21 which carry an average EBITDA yield of 7.1%. Given the timing of legal completion, these investments will contribute more meaningfully towards FY22 earnings.
The Negative
KDC4 and Basis Bay DC leases ticking down to expiry.
- 18.7% of leases by GRI are up for renewal in FY22, likely from KDC4 and Basis Bay DC given the shorter WALEs of 0.7 years and 0.5 years at these assets. The manager is still in the midst of renewal discussions but remains open to divesting if offer prices are compelling.
Outlook
- Keppel DC REIT completed the acquisition of its newest asset, London DC, on 11 Jan 22. The S$105.5mil shell and core asset is located in Bracknell within Greater London.
- Bracknell is dubbed the Silicon Valley of the UK due to its large concentration of multinational technology companies and conglomerates. It is fully leased to telecommunications company, Vodafone, on a triple-net lease until 2039. We estimate yield to be 3.8-4.4% assuming annual rental escalations of 1.5%-4.0% from last known NPI. This is Keppel DC REIT’s priciest acquisition yet. However, the management is optimistic that Bracknell is poised to benefit from spillover demand from neighbouring supply-scarce London in the long term.
- The acquisition will lengthen WALE from 7.7 years to 8.1 years and push gearing from 36.4% to 38.2%. Post-acquisition, shell and core assets will account for 20.9% of AUM, up from 18.3%.
- Including the acquisition of London DC, Keppel DC REIT’s AUM grew 16.7% since Dec 20. Keppel DC REIT continues to source for acquisitions in key DC markets such as UK, Amsterdam, Paris, Germany and the US, with a preference for larger acquisitions. Keppel DC REIT also has a ROFR on the remaining five data centres located within the Bluesea Intelligence Valley from the vendor of Guangdong DC.
- There are still no updates on Singapore’s moratorium on data centres which was rumoured to be lifted in 2021. The lack of absence of new supply in the interim saw a small uptick in occupancy at KDC1, but FY21 rental growth remained “stable” as the management preserved landlord-tenant relationships during lease discussions.
- The management is of the view that the lifting of the moratorium will be an eventuality but the new supply could take 2-4 years to come onto the market. However, stickiness of data-centre tenants and Keppel’s track record as a data-centre operator should help it retain tenants.
Maintain BUY with a lower DDM target price of S$2.81
- FY22e-25e DPUs estimate for Keppel DC REIT have been lowered by 0.9-4.1% on the anticipated rising cost of borrowing. Our DDM-based target price for Keppel DC REIT dips from S$3.03 to S$2.81 on lower DPU estimates and higher cost of equity of 5.88% assumption (previously 5.75%). The current Keppel DC REIT's share price implies FY22e/23e DPU yields of 4.8%/4.9%.
- See
Natalie Ong
Phillip Securities Research
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https://www.stocksbnb.com/
2022-01-27
SGX Stock
Analyst Report
2.81
DOWN
3.030
