Analysts from CGS-CIMB Research, Citi Research, DBS Group Research have all kept their calls and target prices unchanged while OCBC Investment Research (OIR) has lowered its estimates and target price. The reports come after Keppel DC REIT’s results for the 3QFY2023 ended Sept 30 stood in line with their estimates. The REIT’s distribution per unit (DPU) for the quarter fell by 3.6% y-o-y to 2.492 cents. DPU for the 9MFY2023 stood 1.2% down y-o-y at 7.543 cents.
CGS-CIMB and DBS are more positive on the REIT with their “add” and “buy” calls and respective target prices of $2.53 and $2.45 while Citi and OIR remain on the fence. Citi has a “neutral” call with a target price of $2.16 while OIR has a “hold” call with a fair value estimate (or target price) of $2.02, down from $2.05 previously.
In their Oct 17 report, CGS-CIMB analysts Natalie Ong and Lock Mun Yee note that the REIT’s 3QFY2023 business update reflected an “operationally resilient” business with positive reversions and high occupancy. The REIT secured positive reversions for new and renewed leases in Singapore, Australia, Ireland and the Netherlands while rental reversions ranged from positive single-digit to low double-digit growths.
“FY2023 lease expiries have been largely de-risked with 27.7% of leases by rental income expiring in FY2024, likely from Singapore and the Netherlands judging from the shorter weighted average lease expiries for assets in these countries,” say Ong and Lock.
The analysts also see the REIT’s gearing to remain below 40% following its milestone payment for Guangdong DC 3’s fit-out completion. The payment of some $157 million has been delayed to 4QFY2023 or 1HFY2024 from 3QFY2023 previously. The analysts’ estimate comes even if the milestone payment is fully funded by debt.
That said, the REIT’s manager previously indicated that it may consider funding the milestone payment via an equity fund raising (EFR) if it can dovetail the EFR with a new acquisition, the analysts add.
See also: Keppel DC REIT's adverse reaction Neo Telemedia and “acquisition strategy”
In the near-term, Ong and Lock see that acquisitions are likely to be third-party assets in Japan and Korea given that the REIT’s sponsor’s SGP7 (Genting Lane) will only be ready for acquisition after stabilisation. This is likely to take place in the next six to 18 months.
In addition to their unchanged target price, the analysts have kept their DPU estimates for the FY2023 to FY2025 unchanged. They remain positive on the REIT’s outlook due to its “resilient portfolio and attractive valuation”.
The DBS Group Research team is upbeat on the REIT for three key reasons: its positive lease renewals in 3QFY2023, its minimal loan financing till FY2026 and its “very healthy” portfolio occupancy of 98.3% as at Sept 30.
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Looking ahead, however, the team is slightly cautious on the financing costs that have been inching up mainly due to the floating Euro-denominated loans. The team is also looking out for any impact of cap rate expansions on the REIT’s year-end portfolio valuations.
Meanwhile, the DBS team sees that the REIT’s 4QFY2023 DPU will remain “relatively stable” as its “strong occupancy and positive rental reversions should help counter the slight increase in financing costs”.
“In the near term, we foresee equity fundraising to be a priority. Guangdong DC 3's completion is expected, with full-fitting by year-end. Our estimates include an equity fundraising of approximately $90 million to cover the remaining payment for Guangdong DC 3,” the team writes in its Oct 16 update.
“It's important to note that our estimates do not account for any additional acquisitions, which could likely be accretive and potentially provide upside to our projections. We understand that there are still opportunities for accretive acquisitions, particularly in regions with positive asset yield spreads. Keppel DC REIT remains vigilant for deals in markets such as Singapore (fully-fitted), Japan, and China. However, there may be some caution regarding further expansion in China, given Keppel DC REIT's already substantial exposure and concerns about the Chinese economy,” it adds.
In a separate update on Oct 17, the DBS team notes that the recent developments pertaining to Neo Telemedia, the master tenant at Keppel DC REIT’s Guangdong data centres, may “potentially pose a risk” to the REIT.
“However, it's essential to emphasize that, at this stage, it is premature to take any immediate action, given that the tenant has consistently met all their rental obligations and has not signalled any issues,” the team adds.
That said, the REIT will benefit from having a sponsor that has the capabilities to operate and manage data centres.
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“Security deposits are also in place, which Keppel DC REIT could utilize in the event of any late payments. Additionally, Keppel DC REIT's sponsor boasts a well-established team in China, capable of taking over property management if necessary, ensuring a faster transition and minimising any downtime,” says the DBS team.
Citi’s Brandon Lee says he sees any reactions to Keppel DC REIT’s units to be “muted” given its manager’s “marginally better disclosures” although this is mitigated by a weaker occupancy in the REIT’s Singapore portfolio.
“Keppel DC REIT’s 3QFY2023 operational updates were broadly in-line (in terms of DPU and reversions), but the marginal positives lie in management’s improved disclosures on a few items, namely sponsor’s pipeline, acquisitions strategy and quarterly finance costs. Nonetheless, given its outperformance year-to-date (+14% versus Singapore REITs’ or S-REITs’ -9%) and fairly-priced valuations (1.5x P/B and 4.9/5.2% FY2023/FY2024 yields), we maintain our ‘neutral’ rating,” he writes.
The latest update is the first maiden results presentation for the REIT’s new CEO, Loh Hwee Long, who was appointed to the role only in July.
On acquisitions, Lee sees that the REIT will remain “focused on stabilised assets” and are open to both shell and core properties, as well as those that are fully-fitted. He adds that the REIT is unlikely to go “full-blown” on development given its limited development headroom.
That said, he sees possibilities in markets with favourable cap spreads such as Singapore due to its shorter land tenure, Japan and China. He adds that the US – which is always a “strong market” that the REIT has not explored – is also a possibility but there are challenges to “doing it accretively”.
“Keppel DC REIT has no strict preferred asset type, as it will be dependent on geographies and [its] sponsor’s on-the-ground expertise, especially for colocation assets for which it will not enter new geographies,” says Lee.
Finally, the research team at OIR notes that the REIT is a “strong proxy” to the growing demand for data centre space and is one of the most defensive REITs given its long portfolio weighted average lease expiry (WALE).
However, they remain concerned over the credit profile of Neo Telemedia, the master lessee at its Guangdong data centres.
On acquisitions, the OIR team noted that SGP7 in Genting Lane, Huailai Data Centre in Greater Beijing appear to be the most likely acquisition targets for the REIT in the near term. The REIT manager also hinted – at a briefing for analysts – that it was looking at more opportunities to tap into its sponsor’s pipeline.
“Other markets with positive spreads between asset yields and borrowing costs include Japan, but there is a lack of available assets for sale,” says the OIR team.
To this end, the OIR team has trimmed its FY2023 and FY2024 DPU forecasts by 1.6% and 1.4% respectively on account of higher finance cost assumptions, the only brokerage to do so.
As at 12.15pm, units in Keppel DC REIT are trading 8 cents lower or 4.21% down at $1.82.
