• 2Q19 DPU +6.0% YoY
• Positive rental reversions
• Bump up FV to S$1.93

2Q19 Results Within Our Expectations

Keppel DC REIT (KDCREIT) reported its 2Q19 results which met our expectations. Gross revenue and NPI jumped 13.2% and 13.6% YoY to S$47.5m and S$43.3m, respectively. This was driven by the acquisition of Keppel DC Singapore 5 in Jun 2018 (including rental top up). DPU grew 6.0% YoY to 1.93 S cents. For 1H19, KDCREIT’s gross revenue increased 19.5% YoY to S$95.5m, while NPI accelerated 19.9% YoY to S$86.5m. DPU of 3.85 S cents represented growth of 6.4% YoY and this formed 49.0% of our full-year forecast.

Positive Rental Reversions, Albeit for Smaller Clients

Management shared that it completed five lease renewals during 2Q19, resulting in positive rental reversions, although the magnitude was not disclosed. The impact was also not significant given that these were smaller clients, but we believe this is a reflection of robust demand in the market. This is especially true for Singapore, with positive demand and supply dynamics. Globally, the colocation market is expected to grow by 16%-18% this year, versus an earlier forecast of 15%-17%, according to BroadGroup.

Looking ahead, KDCREIT remains focused on hunting for acquisitions, although there were some deals which were delayed or taken off the market. Given the increased competition for data centre assets and compression in cap rates, management highlighted that it would be more difficult to acquire at above the 7% cap rate level which it had traditionally been able to do in the past.

Raising Our FV on Lower Discount Rate Assumptions

We lower our risk-free rate assumption from 2.3% to 2.0% as we expect the interest rate environment to remain conducive over the foreseeable future. We also pare our overall cost of equity assumption from 7.4% to 6.7%.

We believe this is justifiable given the following reasons:

i) While KDCREIT does not have a long listing history (IPO in Dec 2014), we believe it has increasingly been establishing a good track record in DPU growth and acquisitions,

ii) prudent capital management with a healthy aggregate leverage of 31.9% and consistent risk management strategy in place for its forex and debt hedges,

iii) defensive and unique asset class with ‘sticky’ client relationships and long portfolio WALE of 7.8 years, which is one of the longest in the S-REITs sector.

Factoring these in, our fair value estimate is bumped up from S$1.64 to S$1.93.

Source: OCBC Research - 17 Jul 2019