SINGAPORE (Oct 18): Keppel DC REIT (KDC REIT) remains attractive after reporting its 3Q16 results on Monday, with both OCBC Research and CIMB maintaining their “buy” calls with target prices of $1.35 and $1.33 respectively.

Both OCBC and CIMB noted that the 3Q16 results were within expectations; with OCBC lead analyst Andy Wong highlighting that despite the 12% fall in gross revenue to $22.7 million, net property income (NPI) still rose 6.2% to $22.7 million.

(See also: Keppel DC REIT’s 3Q DPU rises 15.9% to 1.90 cents on one-off gain; proposes $202.5 mil acquisition )

CIMB lead analyst Yeo Zhi Bin noted that a one-off net property tax refund of $2.7 million has offset lower rental income from a client downsizing requirement in Dublin 1. Even so, without the one-off distributable income, OCBC’s Wong noted that KDC REIT’s DPU still grew 1.8% to 1.67 cents, instead of 15.9% to 1.9 cents.

The negative 8% rental revision for a major lease renewal in SGP 1 for more than five years raised eyebrows; however the REIT attributed the revision as bulk discounting for a strategic client who sits in more than one of its data centres. Overall occupancy rates improved to 92.7%, up 0.4 percentage points quarter-on-quarter.

The minimal renewals post-2017 provide assurance on income, notes CIMB’s Yeo, with less than 3% of leases due for renewal each year till 2020. The majority of 2017 lease expiries pertain to Basis Bay DC and an overseas lease, which Yeo is confident of being renewed.

“Hence investors would have higher income certainty and potentially benefit from further acquisitions,” says Yeo.

Meanwhile, KDC REIT’s inorganic growth strategy continues with the proposed acquisition of a 90% stake in Keppel DC Singapore 3, from a joint venture between Keppel Telecommunications and Transport and Keppel Land. This asset has an attractive NPI yield of 10.5% notes OCBC’s Wong.

The purchase price of $202.5 million will be fully funded by a preferential rights issue, offered to shareholders at an issue price of $1.555. The balance of the implied gross proceeds of $279.5 million will be used to reduce debt or fund future acquisitions and capex notes Wong. “This would strengthen KDC REIT’s balance sheet,” he adds.

These developments have both research houses cutting FY16’s DPU forecast by 8.3%.

Units in KDC REIT traded up 1 cent at $1.24 as of 11.21am.