After Keppel DC REIT’s (KDCREIT) announcement of its acquisition of a shell and core data centre in Tokyo on July 11, analysts are mixed on the REIT. UOB Kay Hian (UOBKH) is keeping their “hold” call with a higher target price of $1.98 from $1.96 previously, while Citi Research maintains its “buy” call with a target price of $2.07.
Keppel DC REIT made its maiden foray into Japan by acquiring a 98.47% effective interest
in a freehold shell & core data centre at West Tokyo in Japan for ¥23.4b ($201.0 million). The acquisition is fully funded by JPY-denominated debt at a cost of below 2%. It is accretive to distribution per unit (DPU) by 1.1% and should be completed in 3Q2024.
Jonathan Koh from UOBKH notes that KDCREIT’s entry into the second largest data centre hub in Asia is poised to grow at a CAGR of 10% from now until 2028.
Koh says that this acquisition deepens relationships with a hyperscale tenant. Tokyo data centre 1 was completed in 2019 and has a net lettable area of 190,166sf.
It is leased to a Fortune Global 500 company and hyperscale, who is an existing top-10 tenant, on a triple-net basis with a remaining lease term of seven years, he adds.
This improves Keppel DC REIT’s portfolio occupancy marginally by 0.1 percentage points to 98.2%, and the portfolio weighted average lease expiry (WALE) weighted by lettable area has increased from 6.5 years to 6.6 years.
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The proportion of shell & core contracts has also risen from 10.2% to 11.9% of rental income, and KDCREIT’s assets under management has increased 5.6% to $3.8 billion.
The analyst notes that the West Tokyo data centre provides a net property income (NPI) yield of 3.0%. As management says that existing passing rent in place is 10-15% below market rate, there is room for positive rental reversion when the lease is renewed seven years later. The implied NPI yield based on market rent is 3.5%, Koh says.
Koh raises his 2025 DPU forecast by 1% due to the contribution from the Tokyo data centre. He keeps his “hold” call with a dividend discount model (DDM)-based target price of $1.98.
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Likewise, Citi’s analyst Brandon Lee “views positively” KDCREIT’s acquisition. He says that rental growth is well-supported by solid demand, underpinned by rising cloud adoption, digital transformation measures and development of new technologies like generative AI, and limited supply.
Lee believes it is well-placed for positive rent reversion in ~7 years’ time and initial yield could hit mid-3%, though there are currently no embedded rental escalations.
“KDCREIT’s operational metrics would likely improve post the acquisition, with portfolio occupancy/WALE and income contribution from S&C/internet enterprises rising to 98.2%/6.6 years (vs. 98.1%/6.5 years previously) and 11.9%/45.1% (vs. 10.2%/44.1% previously), respectively,” he adds.
However, the analyst believes that the REIT’s next acquisition will require equity, as the post-acquisition gearing is at 39.4% implying just ~$50 million before hitting investors’ comfort level of 40%
Lee notes that the REIT has not hedged their Japan income, though it will not be 100% due to cost.
His target price for KDCREIT is based on an average of DDM and revalued net asset value valuations, at $2.07.
As at 3.55pm, shares in Keppel DC REIT are trading 1 cent higher or 5.24% up at $2.01.
