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SINGAPORE (May 8): OCBC Investment Research and Phillip Capital are upgrading their calls on Keppel DC REIT (KDC REIT) to “buy” and "accumulate" with a fair value and target price of $1.54 and $1.51, respectively, following news of the REIT’s acquisition of Kingsland Data Centre for $141.2 million.
Meanwhile, CGS-CIMB Securities maintains its “add” call on the trust with a higher target price of $1.49 compared to $1.47 previously.
All three research houses are positive on the deal as it is expected to be DPU-accretive despite the manager’s intentions to fund it 100% by way of equity. This will be accomplished using net proceeds of about $298.9 million from a private placement exercise of 224 million new units, as well as remaining net proceeds from its Oct 2016 pro-rata preferential offering.
After completion of the private placement and acquisition, KDC REIT’s manager expects gearing to decline to 32.1% from 37.4%, with the proportion of assets under management (AUM) to grow to 49.8% from 40.6%.
In a Monday report, OCBC lead analyst Andy Wong says he sees further upside in the potential leasing of vacant office space at Kingsland Data Centre, although it typically commands lower rental than data centre space on a psf basis.
After factoring in the acquisition and its related transactions into his valuation model, Wong has raised FY18 and FY19 DPU forecasts by 2.3% and 2.9%, respectively.
Like the treatment given to its KDC SGP 3 acquisition, he also expects IRAS to grant KDC REIT tax transparency on the deal.
“The initial NPI yield is expected to be 6.8% based on the current occupancy [of Kingsland Data Centre] and including rental support. This will progressively increase to ~7.8% based on the pre-committed occupancy of 84.2%, subject to how quickly the clients ramp up their racks in the property,” says Wong.
On the other hand, Phillip Capital has adjusted FY18E DPU down by 10.3% from its previous estimate but raised FY19E DPU by 3.1%.
While the research house believes long-term demand drivers for data centres remain intact, it highlights KDC REIT’s rich valuation, which implies 1.42 times FY18E P/NAV multiple, as a downside risk going forward.
Unlike OCBC’s Wong, Phillip analyst Richard Leow says he expects the REIT manager to face some hurdles in securing a tenant for the acquired property’s office space since it resides within the data centre, and will not be able to be marketed like a typical office space, in his view.
Leow also highlights that Kingsland Data Centre’s weighted average lease expiry (WALE) of 3.6 years is shorter than KDC REIT’s existing portfolio WALE of 9.6 years, although CGS-CIMB maintains that this is in line with other co-location assets in its portfolio.
“As at end-17, KDC REIT’s other co-location assets had a WALE of 4.2 years. Further, with new supply in Singapore coming down after a peak in 2016-17, KDC REIT could benefit from positive rental reversions as the leases are up for renewal in the near- to mid-term,” says CGS-CIMB lead analyst Yeo Zhi Bin in a report on Tuesday.
Yeo has raised its FY18-20F DPU forecasts by 0.1-1.9% to factor in the acquisition, which he expects to generate 6.8% NPI yield or some $20.3 million worth of NPI in the first 12 months.
The analyst highlights the property’s vacant office space as an opportunity for further earnings upside, and estimates office rents to be in the range of $4.5 psf pm. He also sees a potential 1% uplift to his FY18F-19F DPU estimates if tax transparency is granted for the property’s rental support.
Going forward, Yeo believes there is a visible acquisition pipeline for KDC REIT even as it approaches its $2 billion AUM target, as he thinks it could potentially go on to acquire three more assets from its sponsor or from Alpha Data Centre Fund.
“With KDC REIT trading at a hefty premium to book, it would be easier for it to make accretive acquisitions, leading to growth, and in turn lower costs of capital, turning a virtuous cycle,” says the analyst.
As at 11am, units in KDC REIT are trading 4 cents lower at $1.39, which translates to a FY18F DPU yield of 5.3% based on OCBC estimates.