• 4Q17 adjusted DPU +4.8% YoY
• Portfolio WALE of 9.1 years
• Downgrade on valuation grounds

4Q17 Results In-line With Our Expectations

Keppel DC REIT (KDCREIT) reported its 4Q17 results which met our expectations. Gross revenue jumped 37.2% YoY to S$36.8m. DPU accelerated 33.6% YoY to 1.75 S cents as DPU for 4Q16 was impacted by KDCREIT’s pro-rata preferential offering exercise in Oct 2016. Excluding this, adjusted DPU would have grown 4.8% YoY. For FY17, KDCREIT’s gross revenue came in at S$139.1m, or 102.0% of our forecast. DPU of 7.12 S cents represented growth of 16.0% and met 97.7% of our full-year projection. Adjusting for one-off items, KDCREIT’s DPU would instead have increased by 4.3% to 6.97 S cents.

Negative Rental Reversion From a Major Client, But Minimal Lease Expiries Ahead

During the quarter, management renewed a lease for a major client but this was secured at a negative rental reversion of 4.5%. However, this client took up additional space and is also currently occupying space at more than one of KDCREIT’s assets. Meanwhile, KDCREIT suffered revaluation losses at a number of its assets.

Management attributed this largely to lower rent assumptions (Keppel DC SG2 and Gore Hill DC), lower occupancy assumptions (Keppel DC Dublin 1) and lower revenue at Basis Bay DC due to a client returning one floor of space previously. Looking ahead, on a positive note, KDCREIT has minimal lease expiries in the near-term, with portfolio WALE standing at 9.1 years.

Share Price Has Done Well; Downgrade to HOLD

We factor this latest set of full-year results in our model, and make the following key changes in our assumptions:

1. slower ramp-up in occupancy at Keppel DC SG1 and Keppel DC Dublin 1;
2. lower finance costs;
3. higher effective tax rate; and
4. bringing forward the expected contribution from maincubes Data Centre.

Overall, our FY18 and FY19 DPU forecasts are lowered by 1.3% and 3.6%, respectively. However, our fair value inches up from S$1.50 to S$1.51 as we also roll forward our valuations. Keppel DC REIT’s share price has performed well in recent times, appreciating 24.1% since the start of 2017 (total returns: 30.5%). We see limited upside potential at this juncture, and thus downgrade our rating to HOLD.

Source: OCBC Research - 23 Jan 2018