• 2Q16 DPU grew 3.1% YoY
• Occupancy rate of 92.3%
• BUY with higher FV

2Q16 results within our expectations

Keppel DC REIT (KDCREIT) reported its 2Q16 results which met our expectations. Gross revenue declined 4.5% YoY to S$24.9m. This was attributed to lower rental income at Keppel DC Dublin 1 (formerly known as Citadel 100 Data Centre) due to a client downsizing its requirements, a fall in variable income at its Singapore properties and depreciation of the AUD and GBP against the SGD. However, property operating expenses declined by a larger magnitude of 32.7% and thus resulted in NPI growing 0.8% YoY to S$22.1m.

DPU rose 3.1% to 1.67 S cents. On a 1H16 basis, KDCREIT’s gross revenue slipped 4.5% to S$49.6m and this constituted 47.2% of our FY16 forecast. DPU of 3.34 S cents represented growth of 3.4% and accounted for 48.2% of our full-year projection.

Commitment to expand by some clients

KDCREIT’s overall portfolio occupancy remained relatively stable at 92.3% (+0.3 ppt QoQ). It managed to sign a forward renewal for one of its major contracts expiring in late 2017 at one of its Singapore Properties for a renewal of more than five years. This strategic tenant has also committed to expand its space by 6,800 sq ft in two phases (50% in 2H16 and 50% in 2H17).

However, in order to secure this renewal and expansion, management had to offer the tenant a more competitive rental. As such, for the first year of the new lease term, net revenue is expected to decline by a low single-digit.

This would be mitigated in the second year of the lease term as net revenue is then expected to increase by a low single-digit as compared to the original lease term prior to the renewal. KDCREIT also renewed an expiring contract at Keppel DC Dublin 1 for a five-year term with an additional take-up of 1,600 sq ft of space.

Maintain BUY

We make some minor adjustments to our FY16 forecast as we factor in a lower occupancy rate at Keppel DC Dublin 1. We also trim our risk-free rate assumption from 3.0% to 2.4% given our expectation of a softer interest rate environment. Correspondingly, our fair value estimate is lifted from S$1.24 to S$1.27. Maintain BUY.

Source: OCBC Research - 19 Jul 2016