• Keppel DC REIT's 9M20 DPU of 6.73 Sct (+16.5% y-o-y) was within expectations, driven mainly by acquisitions.
• The REIT continued to see good demand and it is committed to scout for good acquisitions.
• We believe the market has priced in potential catalysts. Maintain HOLD.

Keppel DC REIT's 9M20 DPU Came in Within Expectations

• Keppel DC REIT (SGX:AJBU)’s 9M20 DPU of 6.73 Scts (+16.5% y-o-y) came in within our expectations at 71% of our full-year forecast.
• Keppel DC REIT's 9M20 revenue rose 35% y-o-y to S$191.6m while NPI increased 37% y-o-y to S$176.6m. The strong set of results was mainly driven by the acquisition of SGP 4 and DC1 in 4Q19 as well as the Kelsterbach DC acquisition in May 2020.

Operating Metrics and Demand Remain Healthy

• Keppel DC REIT’s portfolio occupancy remained healthy at 96.7% with a long WALE of 7.2 years. Leasing momentum continued to be strong with new take-ups at colocation facilities in Singapore and Dublin. It has also secured an early lease renewal at iSeek Data Centre in Brisbane, Australia which extended iSeek data centre’s WALE from 6 years to 10.7 years.
• Overall portfolio rental reversion in 3Q20 was largely neutral. We expect rental rates to remain stable in the near term, supported by increasing demand.

AEIs and Acquisitions to Drive Growth

• Keppel DC REIT has a few ongoing asset enhancement initiatives (AEIs). It has just completed AEI works at Dublin 1. IC3's AEI achieved top out this month and is on track for completion in 1H2021. AEI works at Keppel DC Singapore 5 and Keppel DC Dublin 2 are on track for completion in 1H2021. Fit-out works for DC1 will be delayed to 1H2021, affected by COVID-19. While these projects are slated for completion in 1H2021. It has secured customers for the additional data centre space.
• On the acquisition front, we understand that Keppel DC REIT is hoping to finalise a deal as soon as possible. The REIT continues to evaluate a wide range of deals including assets abroad with cap rates in the range of 4- 7%. As its sponsor’s assets will not be ready in 2020, acquisitions in 2020 will be from third-parties.
• Keppel DC REIT’s gearing remains low, at 35.2% as at end-3Q20; this gives it substantial financial flexibility for acquisitions.

Maintain HOLD

• We maintain HOLD on Keppel DC REIT with an unchanged DDM-based target price of $2.88. COVID-19 has fuelled further demand and underpins the importance of data centres, but we believe the impact of this on Keppel DC REIT has been priced in.
• Keppel DC REIT's share price is trading at 3.5% FY21F DPU yield vs. sector average of 5.5%. It has been included into the STI benchmark since 19 Oct 2020.
• Upside/downside risks include higher/lower accretion from acquisitions.

Source: CGS-CIMB Research - 20 Oct 2020