CGS-CIMB Research analysts Eing Kar Mei and Lock Mun Yee are keeping their “add” recommendation on Keppel DC REIT (KDCREIT) after the REIT reported a distribution per unit (DPU) of 2.466 cents for the 1QFY2022 ended March.
They have also kept their target price unchanged at $2.62.
To the analysts, the DPU stood lower than their expectations at 23% of their full-year DPU estimate.
During the quarter, the REIT saw gross revenue decline some 0.9% y-o-y to $66.1 million while net property income (NPI) fell 1.4% y-o-y to $60.1 million.
The lower figures were due to provisions made for a client payment under dispute at KDC SGP 1 and higher electricity costs.
As such, the analysts have lowered their DPU estimates for the FY2022 to FY2023 by 1% to 5% as they factor in higher electricity costs, litigation provisions, as well as on the back of their updated FY2021 numbers.
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“While its near-term DPU could be impacted by higher electricity cost, the strong demand for data centre will underpin its income resilience in the longer term,” the analysts write in their April 19 report.
They add that they deem the REIT’s current situation as a “minor near-term hiccup”.
In the 1QFY2022, Keppel DC REIT saw an improvement in its portfolio occupancy and weighted average lease expiry (WALE) which stood at 98.7% and 7.7 years respectively, from 98.3% and 7.5 years in the previous quarter.
Rental reversion in the 1QFY2022 was also stable, to which Eing and Lock expect the REIT to “continue to deliver stable rental reversions in FY2022, as it continues to see strong demand for data centres”.
The REIT’s balance sheet also remains supportive for acquisitions, in which the REIT manager is actively looking out for.
According to the analysts, re-rating catalysts include a faster pace of acquisitions, while a larger-than-expected impact from the higher electricity costs is a downside risk.
DBS Group Research analyst Dale Lai has also kept his "buy" call on the REIT with a target price of $2.80.
"The recent completion of the Guangdong Data Centre and London Data Centre has reignited optimism on KDCREIT’s growth trajectory. In addition, a right of first refusal (ROFR) has been granted for the other five data centres within the Guangdong Data Centre campus," Lai writes in his April 25 report.
Lai has, however, lowered his acquisition yield assumptions given the rapid cap rate compressions seen in data centre assets globally.
Further to his report, Lai is estimating a DPU CAGR of 6% from now till FY2023 driven by the REIT's recent acquisitions, organic growth from its past asset enhancement initiatives (AEIs) and developments, as well as further potential acquisitions by the end of FY2022.
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"Given its debt headroom, we have assumed $300 million worth of acquisitions at an implied yield of 5% by the end of FY2022 in our estimates," Lai says.
Furthermore, the REIT's current portfolio occupancy of 98% is the highest since its IPO in 2014.
The way Lai sees it, the continued demand for data centre capacity and the rise of the digital economy, will bode well for the REIT, supporting higher occupancies and revenues across its portfolio in the foreseeable future.
The analyst has identified key risks such as higher barriers to entry and stiffer competition from international operators/funds which are also looking to grow their footprint and attract tenants.
"With the strong fundamentals and growth projections for data centres, we are increasingly seeing investors competing for assets in the industry."
The research team at OCBC Investment Research has kept its "hold" call as the REIT's results for the 1QFY2022 fell slightly below the team's expectations.
The team has also given the REIT a lower fair value estimate of $2.28 from $2.61 previously due to the likelihood of higher electricity costs ahead.
"KDCREIT disclosed that a further 10% increase in its share of electricity costs (after claiming what can be recovered from tenants) would have [an estimated] 3% impact to its pro forma FY2021 DPU. According to management, more than 90% of electricity costs can be passed through to its tenants," the team writes.
"However, we believe not all of KDCREIT’s electricity rates have been locked in, and hence electricity costs are likely to increase further given the high energy usage of data centres, notwithstanding the pass-through to tenants," it adds.
In addition to its lowered fair value estimate, the OCBC team has cut its DPU estimates for the FY2022 and FY2023 by 2.7% and 3.1% respectively on the back of the higher electricity costs and provisions from the REIT's ongoing tenant dispute.
"We also increase our risk-free rate from 1.9% to 2.5% and lower our terminal growth rate assumption by 25 basis points to 2.0%."
As at 12.42pm, units in Keppel DC REIT are trading 10 cents lower or 4.5% down at $2.12.
