Analysts are remaining upbeat on Keppel DC REIT (KDC REIT) after the REIT reported a “strong” set of results for the 3QFY2024 ended Sept 30 on Oct 18. The REIT reported a quarterly distribution per unit (DPU) of 2.501 cents, bringing its 9MFY2024 to above the consensus estimate at 77% of its full-year forecast.
Some analysts, like PhillipCapital’s Darren Chan, are more buoyant about the REIT’s outlook. On Oct 21, Chan upgraded his call on KDC REIT to “neutral” from “reduce” after KDC REIT’s 3QFY2024 DPU exceeded his expectations, achieving 27% of his FY2024 forecast.
“This was due to the exceptionally strong positive portfolio rental reversions, continuing the trend from 2QFY2024. A major contract renewal in Singapore secured a positive reversion of over 40%,” writes the analyst, who has also raised his target price to $2.16 from $1.93.
Morningstar Equity Research analyst Xavier Lee has similarly raised his fair value estimate to $2.10 from $1.80 previously, while keeping his rating of three stars as KDC REIT’s results beat his expectations.
“Strong demand and tight data centre supply in Singapore continue to drive strong rental reversions, as the trust recorded another positive rental reversion of more than 40% for a major renewal in the third quarter of 2024,” he writes in his Oct 18 report.
Like its peers, the team of analysts at OCBC Investment Research has kept its “hold” call on KDC REIT but with a raised fair value estimate of $2.15 from $1.97 previously. KDC REIT’s 3QFY2024 results also surpassed the team’s expectations due to the earlier-than-expected completion of the data centre acquisition in Japan and the Australian data centre note subscription.
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Meanwhile, Citi Research analyst Brandon Lee and the team at DBS Group Research have both maintained their “buy” calls with unchanged target prices of $2.29 and $2.20 respectively.
In its 3QFY2024 business update, KDC REIT posted its seventh consecutive quarter of positive rent reversions, with a major contract renewal in Singapore achieving a reversion of over 40%.
Citi’s Lee highlighted that the REIT’s operational updates showcased the strength of Singapore’s data centre sector with its second straight quarter of positive reversions coming in at over 40%.
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“KDC REIT has 11.5%/18.1%/9.3% (by rental income) of colocation leases (majority should be in Singapore we think) due for expiry in 4QFY2024/FY2025/FY2026, which we expect continued double-digit reversions for Singapore,” he writes in his Oct 18 note. “[This is] in view of Singapore’s existing tight vacancy of [around] 1% to persist next few years amid limited supply and robust demand.”
PhillipCapital’s Chan also expects to see positive rental reversions for the 11.5% of leases by gross rental income (GRI) expiring in 4QFY2024, driven by similar levels of colocation renewals in Singapore.
Other positives, in the analyst’s view, is the REIT’s lower cost of debt. In 3QFY2024, KDC REIT reported an average cost of debt of 3.3%, down from 3.5% in 2QFY2024. “71% of debt is on a fixed rate, with no debt due in FY2024, with most of the debt expiring from FY2026 and beyond,” Chan notes.
At the same time, KDC REIT’s gearing increased by 3.9 percentage points q-o-q to 39.7% as the REIT took on JPY debt to fully fund the acquisition of Tokyo data centre (DC) 1, which has since commenced contributions.
Meanwhile, rental income from its Guangdong DCs continues to be a “net off” via loss allowances, with an impact of 0.32 cents to the quarter’s DPU. “To date, Bluesea owes over a year in rental income totalling around $26 million. Asset valuations at the Guangdong DCs are likely to be affected by the non-collection of rents,” notes Chan.
He concludes: “KDCREIT 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 Singapore 7 asset situated at Genting Lane, or Keppel DC Singapore 8, which topped up in March.”
The team at OCBC has also raised their FY2024 and FY2025 DPU forecast by 2.7% and 1.2% respectively as they adjust the timing of the Tokyo DC acquisition and factor in lower borrowing cost estimates.
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They write: “Based on a closing price of $2.22, KDC REIT is trading at a relatively low FY2024 and FY2025 distribution yield of 4.2% and 4.3%, respectively, but we see upside potential with accretive acquisitions likely to come, especially in Singapore from its sponsor.”
Although Morningstar’s Xavier Lee is similarly encouraged by the REIT’s positive rent revision in the period, subsequently increasing his FY2024 to FY2025 DPU by 4.9% to 6.5%, he has lowered his FY2026 DPU estimate by 8.9% on a delayed recovery for its Guangdong DC.
“We also tightened our terminal value cap rate assumptions by 20 bps, given the strong demand for data centres and lower interest rate environment.
“While we continue to like the trust for its data centre portfolio that benefits from strong structural tailwinds such as artificial intelligence, we think the trust is fairly valued currently and encourage investors to wait for a better entry price,” he adds.
Citi’s Lee notes that KDC REIT is well-positioned to look at acquisitions, with Singapore continuing to be a key strategic market and a key foundational piece.
“Aside from continuing to be on the lookout in Singapore, KDC REIT will also look at Japan and South Korea. KDC REIT expects some cap rate tightening for some markets (except Japan) following the recent interest rate cuts, though it has not seen actual transactions that have taken place on asset-by-asset basis,” he continues.
He notes that in Singapore, the REIT is looking at a cap rate of 6% to 7% with a general land tenure period of 20 to 30 years, and is not keen on financial engineering with any form of financial support to be supported by real or committed leases.
For Japan and South Korea, cap rates are respectively at 3% to 4% and mid-5%-to-early-6%.
Lee also sees that the REIT has a fair amount of opportunities within its portfolio and is trying its best to see how it can procure power across its portfolio globally.
He writes: “For example, in Europe, Kelsterback DC is in a good location in Frankfurt and the DC component is a subset of the owned real estate, hence there could be potential to procure more power, though it is still early days with nothing concrete.”
On China, the Citi analyst notes that KDC REIT does not expect significant changes to its China asset values in FY2024 after conversing with valuers.
Finally, the team at DBS sees that KDC REIT’s outlook remains favourable, with around 26% of its leases set to expire in FY2025, providing room for continued positive rental reversions, which will be a key earnings driver.
“Despite the increase in gearing to 39.7%, we are confident that KDC REIT’s portfolio valuations will hold up, and there is potential for improvements by December 2024. KDC REIT’s proactive management and exploration of repositioning opportunities should further support portfolio valuations.”
They add that the REIT’s Guandong DCs will resume 50% of their income contribution in FY2025, although this would result in a $4 million to $5 million shortfall in earnings if this is not realised.
As at 4.41 pm, units in KDC REIT are trading 3 cents higher 1.33% up at $2.28.
