• 3Q15 DPU 2.5% above IPO projection
• Portfolio occupancy at 95.1%
• FY15F distribution yield of 6.5%

3Q15 results within our expectations

Keppel DC REIT (KDCREIT) reported its 3Q15 results which met our expectations but was slightly above management’s IPO forecast. Gross revenue came in at S$25.7m, which was 1.8% above its IPO prospectus forecast. This was underpinned by contribution from the newly acquired Intellicentre 2, higher-than-expected other income and stronger variable rental income mainly from its Singapore properties, but partially offset by lower rental income in Europe, Australia and Malaysia due to FX translation impact. DPU of 1.64 S cents was 2.5% above KDCREIT’s forecast. For YTD 2015 (period from 12 Dec 2014 to 30 Sep 2015), KDCREIT’s gross revenue of S$82.9m and DPU of 5.20 S cents came in 2.9% and 1.8% above its IPO projection. The latter formed 76.1% of our FY15 forecast.

Portfolio occupancy grew slightly

KDCREIT raised its occupancy rate from 94.0% to 95.1% in 3Q15, attributed to a 4.8 ppt increase in occupancy at Citadel 100 to 80.3%. However, the increase came largely from more work space being occupied, rather than data centre space. The latter commands much higher rental rates than the former. KDCREIT experienced a hiccup at S25, as one of its tenants failed to secure a project and thus gave up space at the property. Nevertheless, management updated us that it will find an optimal mix for the building by either marketing the area or offering it to existing tenants for their expansion plans. In 3Q15, two renewal leases, two expansion leases and four new leases were signed, with positive rental reversions recorded.

Maintain BUY

We continue to like KDCREIT for its long portfolio WALE (8.9 years) and proxy to the data centre industry, which we opine has robust growth potential. Client enquiries remain healthy, while there are also inorganic growth opportunities in the market. Management has managed its risks well, fixing 100% of its interest rate exposure for long-term loans and hedging 100% of its forecasted foreign-sourced distribution up till 1H17. Backed by an attractive FY15F distribution yield of 6.5%, we maintain our BUY rating and S$1.24 fair value estimate on the stock.

Source: OCBC Research - 16 Oct 2015