• One-off boost to DPU
• Acquisition spree
• Healthier balance sheet

3Q16 results in-line with expectations

Keppel DC REIT (KDCREIT) reported its 3Q16 results which met our expectations. Although gross revenue fell 12.0% YoY to S$22.7m, NPI grew 6.2% to S$22.7m. This was largely driven by a one-off refund of property tax for its Singapore properties, which also helped to boost its DPU by an additional 0.23 S cents/unit. Hence, 3Q16 DPU jumped 15.9% YoY to 1.90 S cents. If we exclude this one-off distributable income, KDCREIT’s adjusted DPU would have grown 1.8% YoY to 1.67 S cents. For 9M16, KDCREIT’s NPI rose 1.5% to S$66.0m and formed 75.3% of our full-year forecast, while DPU of 5.24 S cents represented an increase of 7.6% and accounted for 76.2% of our FY16 projection.

Continuing its inorganic growth strategy

Following KDCREIT’s proposed acquisition of a data centre each in Milan and Cardiff in Aug and Oct this year, respectively, management has further continued its inorganic growth strategy by proposing to purchase a 90% interest in Keppel DC Singapore 3 (KDC SGP 3) from a JV between its sponsor Keppel T&T and Keppel Land Limited. This asset is built to high specifications and comes with an attractive initial NPI yield of 10.5%. The agreed purchase value is S$202.5m (total acquisition cost estimated to be S$210.6m), and would be funded wholly by a fully underwritten, pro-rata and nonrenounceable preferential offering exercise. 242m new units would be offered to existing unitholders at an issue price of S$1.155, implying gross proceeds of S$279.5m. The balance of the net proceeds would be used to pare down its debt and/or fund future acquisitions and capex. This would strengthen KDCREIT’s balance sheet as we estimate its gearing ratio would be lowered to 27.8%.

Maintain BUY

Taking these developments into account, we lower our FY16 DPU forecast by 8.3%, as the unit base will be enlarged before contribution from the KDC SGP 3 kicks in. Our FY17 DPU forecast is unchanged. Given the series of robust acquisitions which would enhance KDCREIT’s portfolio defensiveness (WALE increased) and its healthier balance sheet, we lower our cost of equity assumption from 8.3% to 8.0%. Correspondingly, our fair value estimate is raised to S$1.35 (previously S$1.30). Maintain BUY on KDCREIT.

Source: OCBC Research - 18 Oct 2016