Analysts are mixed on Keppel DC REIT (KDC REIT) after it announced its 1HFY2024 results ended March. CGS International (CGSI) and OCBC Investment Research (OIR) have kept their “hold” call with an unchanged target price of $1.99 and $1.97 respectively, DBS Group Research has kept its “buy” call with an unchanged target price of $2.20, and PhillipCapital has kept its “accumulate” call with a higher target price of $1.93 from $1.86 previously.
As a recap, the REIT recorded a 1HFY2024 distribution per unit (DPU) of 4.55 cents, which fell by 9.9% y-o-y but rose 5% h-o-h. Its revenue came in at $157.2 million was 11.7% higher h-o-h and non-property income (NPI) came in at $32.6 million, 12.8% higher h-o-h.
KDCREIT secured a major lease renewal with its sponsor, with more than a 40% positive rental reversion, and an overall portfolio occupancy of 97.5% which dipped 80 basis points q-o-q.
The REIT’s DPU exceeded the expectations of all three brokerages, coming in at 52.6% of CGSI’s FY2024 expectations, 53% of PhillipCapital’s full-year forecast and “slightly ahead” of DBS’s FY2024 DPU estimate of 9 cents.
Natalie Ong and Lock Mun Yee from CGSI say that they are still awaiting portfolio rebalancing and Bluesea arrears from the REIT.
As the world awaits for the US Fed to begin announcing the much anticipated interest rate cuts, CGSI’s Ong and Lock believe that portfolio rebalancing opportunities will only turn financially viable for the REIT once the rate cuts happen.
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On redevelopment opportunities, the analysts note that accretion would be the key determining factor as well as securing a certain level of precommitment for the space. In terms of acquisitions, the REIT’s focus markets would be Singapore and Japan, according to management.
Within KDC REIT’s sponsor pipeline, Almere 2 and SGP 7 are fully leased, the latter still in the handover/ramping-up phase. While KDC REIT’s preference has been to acquire stabilised assets, given that SGP7 is fully leased, Ong and Lock think some form of rental guarantee for the first few years could make the acquisition palatable for the REIT.
The CGSI analysts note that this quarter’s portfolio occupancy fell due to the space returned by DXS, and the Amsterdam data centre non-renewal of ancillary office space. They note that the REIT recorded strong positive reversion of more than 40% for a major lease renewal at SGP 3, extending SGP 3’s weighted average lease expiry (WALE) from 0.6 years as at 1QFY2024 to 4.3 years as at 2QFY2024.
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“We think this bodes well for the 20.2%/18.2% of leases by gross rental income (GRI) expiring in 2H2024/FY2025; the majority of expiring leases came from Singapore colocation assets, SGP 2, SGP 4 and SGP 5, which had WALE in the range of 0.8-1.1 years as at end-2Q2024,” they add.
However, the REIT is still working with tenant Bluesea on a recovery plan for Guangdong DC 1, 2 and 3, and received a token payment of about RMB0.65 million ($120,000) in both 1QFY2024 and 2QFY2024, the analysts highlight.
Ong and Lock note a stable interest cost for the REIT in 2QFY2024, and no change in interest cost guidance.
The analysts remain neutral on the REIT as they see a lack of catalysts, and are waiting for more clarity on the Bluesea resolution. Their target price is derived from a discount dividend model.
Likewise, OIR's research team notes that KDC REIT is a strong proxy to growing demand for data centre space, but concerns around its Guangdong data centre has created uncertainties.
The analysts note that the REIT has one of the longest WALE profiles within the S-REITs sector at 6.4 years by lettable area and 4.1 years by rental income as at June 30, 2024, with minimal debt maturities from FY2024 to FY2025 and hence would be relatively less refinancing risks compared to its peers.
But the ongoing concerns over the credit profile of its master lessee in Guangdong following rental arrears have created uncertainties over the REIT's distribbutions outlook, and recovery progress has been "sluggish thus far", they note.
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On the other hand, DBS’s analysts Dale Lai and Derek Tan continue to remain positive on the REIT. They say that the REIT’s accretive acquisitions over the past year will drive earnings growth, and the recently completed asset enhancement initiatives will generate organic growth.
The DBS analysts say that the full-year contribution from acquisitions will support earnings growth, and protracted completion of the Guangdong DC 3 will lead to higher income contribution from the asset.
Like Ong and Lock from CGSI, the DBS analysts are waiting for the REIT to make accretive acquisitions, which they also anticipate will happen once interest rates drop.
If an absence of income from the Guangdong DCs continues, it will lead to a further downside in Lai and Tan’s projections.
For now, they remain confident that the REIT will backfill its remaining vacancies in its Singapore properties, while its Japan acquisition will diversify its income stream. Its capital management metrics remain healthy, they note, and have revised estimates upwards to include income contribution from the Tokyo DC acquisition and the distribution of the DXC settlement sum.
“Therefore, we are maintaining our buy recommendation with an unchanged target price of $2.20,” they say.
Finally, Darren Chan from PhillipCapital notes that the strong momentum of investments into data centres is expected to continue, fuelled by institutional investments and strong underlying fundamentals. “KDC REIT stands to benefit, as it has a diversified portfolio of data centres in key markets. Potential inorganic growth opportunities could be the sponsor’s Keppel DC SGP 7 asset situated at Genting Lane, or Keppel DC Singapore 8, which topped up in March 24,” he notes.
Likewise, he says that catalysts for a higher rating will include more accretive acquisitions and the collection of rentals in arrears from Bluesea.
As at 1.15pm, units in Keppel DC REIT are trading 4 cents higher or 2.01% up at $2.03.
