Company description

Keppel DC REIT was listed on 12 December 2014 and is the first pure-play data centre REIT listed in Asia and on the Singapore Exchange (SGX-ST). Its investment strategy is to principally invest, directly or indirectly, in a diversified portfolio of income-producing real estate assets which are used primarily for data centre purposes, as well as real estate related assets, with an initial focus on Asia Pacific and Europe.

Its current portfolio comprises 14 high-quality data centres strategically located in key data centre hubs. With an aggregate lettable area of approximately 1,043,967 sq ft, the portfolio spans ten cities in eight countries in Asia Pacific and Europe.

Keppel Telecommunications & Transportation Ltd (Keppel T&T), the Sponsor of the REIT, has also granted Rights of First Refusal (ROFR) to the REIT for future acquisition opportunities of its data centre assets.

Keppel - Buttonwood Capital

Investment thesis

Keppel DC REIT is a strong proxy to growing demand for data centre space, underpinned by increasing digitalisation and cloud adoption trends. Its tenants come from fast growing industries such as internet enterprise, information technology services, telecommunications and financial services. It is also one of the most defensive REITs given its long portfolio weighted average lease to expiry of close to 10 years.

Investment summary

2Q18 results in-line with expectations – Keppel DC REIT (KDCREIT) reported its 2Q18 results which met our expectations. Gross revenue jumped 21.5% YoY to S$41.9m, while NPI rose 21.4% to S$38.1m. This increase was driven largely by the acquisitions of maincubes Data Centre and Keppel DC Dublin 2, coupled with higher variable income from Singapore and appreciation of EUR, MYR and GBP against SGD. DPU grew 4.6% YoY to 1.82 S cents. For 1H18, KDCREIT’s gross revenue and NPI improved by 19.8% and 19.9% to S$79.9m and S$72.2m, respectively. DPU of 3.62 S cents represented a mild decline of 0.3%. However, after adjusting for a one-off capital distribution in 1H17, adjusted 1H18 DPU grew 4.0% to 3.62 S cents. This formed 45.7% of our FY18 forecast, but we expect a stronger 2H18 as KDCREIT had only completed the accretive acquisition of a 99% interest in Keppel DC Singapore 5 (KDC SGP 5) on 12 Jun this year. Nevertheless, we trim our FY18F DPU by 2.2% due to a timing issue from KDCREIT’s recent equity fundraising exercise, whereby its private placement of 224m new units was issued on 16 May versus our previous assumption of 30 Jun 2018. Our FY19 forecasts and fair value estimate of S$1.54 remain intact.

Room for more acquisitions – Operationally, KDCREIT’s portfolio occupancy declined slightly from 93.7% (as at end-1Q18) to 92.0% due to the addition of KDC SGP 5, which is 73.9% occupied. As highlighted in our previous report dated 7 May 2018, KDC SGP 5 had an occupancy rate of 67.7% prior to the acquisition, and this is expected to ramp up progressively to its pre-committed level of 84.2%, which would translate into an attractive NPI yield of ~7.8%. Looking ahead, management remains active in sourcing for further inorganic growth opportunities, and is open to both new and existing markets. Given its healthy aggregate leverage ratio of 31.7% (as at 30 Jun 2018), we believe KDCREIT has ample debt headroom to make more DPU accretive acquisitions in the near future. This would also be supported by the still favourable borrowing environment in markets such as Europe and Australia.

Stronger-than-expected increase in portfolio valuations.

DPU accretive acquisitions.

Ramp up in occupancy in its Singapore, Dublin and Malaysia centres