• KEPPEL DC REIT (SGX:AJBU)'s acquisition of two data centers in Singapore a significant driver to DPU.
• Remains in a virtuous cycle of accretive acquisitions; pricing in a further S$75m in debt-funded deals by 2H20.
• Recent index inclusion to boost liquidity, resulting in a lower cost of capital for the REIT.
• Target Price raised to S$2.20 backed by DCF, maintain BUY.

BUY, Target Price Raised to S$2.20

• Given robust accretion from recent acquisitions, we believe KEPPEL DC REIT (SGX:AJBU) can maintain its meteoric rise on the back of a virtuous acquisition cycle strategy where its cost of capital remains well below its investment return.
• After an active year of acquisitions coupled with inclusion into the EPRA Nareit Developed Asia Index, we believe the REIT will continue to outperform market expectations to keep valuations at a premium.
• Keppel DC REIT is projected to deliver a robust 2-year DPU CAGR of 8.0% in FY19-21. Maintain BUY!

Where We Differ: Our Target Price Is Higher Than Consensus

• Our Target Price of S$2.20 is the highest on the street. Our numbers were raised further to incorporate recent acquisitions of two data centers in Singapore. Fueled by a still visible acquisition pipeline from the Sponsor and the manager scouting the globe for opportunities, we have assumed debt-funded acquisitions of S$75m in our estimates to be completed by 2H20.

Recent Acquisitions of 2 Data Centers in Singapore

• Keppel DC REIT recently completed the purchase of 2 data centers from its Sponsor and related entities. See Keppel DC REIT's announcements. The properties are:
  1. 100% interest in 1-Net North Data Center – Held by Keppel Infrastructure Trust (SGX:A7RU) previously
     • The purchase of both Keppel Infrastructure Trust’s 51% stake in the JV and the remaining 49% stake held by WDC Development.
     • The total agreed value of S$200.2m is slightly below Knight Frank’s valuation of S$200.5m and Edmund Tie’s S$201.5m.
     • The property is let on a triple net basis to 1-Net, a wholly owned subsidiary of MediaCorp, for another 17 years, with an option to extend for a further 7.6 years.
     • The initial yield is estimated to be 9.0%.
  2. 99% interest in Keppel DC Singapore 4 (KDC SGP4)
     • The acquisition of Keppel DC Singapore 4 for S$384.9m is below the independent valuation of S$385.1m (including rental support of S$8.7m).
     • Occupancy rate is 92% with IT power fully-committed; implying that demand for the space is robust and likely to be sticky.
     • Given that the tenants had just recently taken possession of the space and will need time to ramp up their operations, the vendor has provided a two-year rental support of S$8.7m.
     • Keppel DC REIT will enter into a facility management agreement with Keppel T & T to provide facilities, management and maintenance services.
     • Keppel DC REIT will enter into a Keppel Lease arrangement where the sponsor will manage the property and in return pay Keppel DC REIT a return that its pegged to 99% of the underlying EBITDA.
     • The initial yield is estimated to be 7.0%; and will rise to 7.5% over time as the tenants are fully committed to the datacentre’s power output.
• The total agreed valuation for the two properties is estimated to be S$580.7m and after accounting for all-in acquisition costs, amounted to S$599.5m.

Our Thoughts

Diversity in earnings and asset base; improve income visibility.

• The acquisitions will strengthen the income resilience and diversity of Keppel DC REIT’s income base from 17 properties in its portfolio (18 properties if we include the ongoing development of IC3 East data-center in Sydney, which we estimate to complete and will be acquired by end of 2020).
• KDC 4 will be the 5th co-location asset in Singapore which enables the REIT to ride the uptrend in demand for data centers in Singapore. The launch of 5G networks in Singapore by 2020, powered by data centres will augment continued robust demand for data centre space in the medium term.
• 1-Net North Data Center, backed by a long master lease of close to 17 years coupled with annual escalations of 4% will significantly boost Keppel DC REIT’s income visibility.
• With both acquisitions, the average WALE for the portfolio improves from 7.8 years to 8.9 years.
• Post completion, Keppel DC REIT will have < 5% of the leases up for renewal in 2019-2020.

Fund raising to part fund the purchases; larger headroom for debt-funded acquisition opportunities.

• Keppel DC REIT has raised S$479.3m from a private placement (S$235.4m, 135 units @S$1.744/unit) and a pro-rata non-renounceable offering (S$243.8m, 141.9m units @ S$1.71/unit) which were both well received among new and existing investors.
• Post fund raising, we estimate net gearing will fall from 31% to 30%, providing Keppel DC REIT with a slightly larger debt funded capacity to take on more opportunistic acquisitions in the future.
• Given the debt headroom available to the REIT and abundant acquisition opportunities, we have also factored S$75m debt-funded acquisition by middle of FY20 into our estimates.
• Our estimates are adjusted upwards to account for the contribution from the above mentioned two data centers, starting from FY20F onwards. We raised our DPU estimates by 2.0%-5.0%; we have previously assumed S$200m worth of acquisitions in our estimates, but management has exceeded our projections. See Keppel DC REIT's dividend history.
• Our target price is also raised to S$2.20 as we roll forward our valuation, implying a total return of 15%. See Keppel DC REIT's share price.

Source: DBS Research - 8 Oct 2019