Analysts from CGS-CIMB Research, Citi Research, DBS Group Research have kept their calls and target prices on Keppel DC REIT, even though 3QFY2023 distribution per unit (DPU) that was down 3.6% y-o-y to 2.492 cents, as the results met their expectations. On the other hand, OCBC Investment Research (OIR) has lowered its estimates and target price.
CGS-CIMB and DBS are more positive about the REIT with their “add” and “buy” calls and respective target prices of $2.53 and $2.45 while Citi and OIR are sitting 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 of $2.02, down from $2.05.
In their Oct 17 report, CGS-CIMB analysts Natalie Ong and Lock Mun Yee note that the REIT’s 3QFY2023 ended Sept 30 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 expect its 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.
Holding their DPU estimates steady, the analysts remain positive on this REIT due to its “resilient portfolio and attractive valuation”.
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The DBS Group Research team is upbeat about 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.
Looking ahead, however, DBS flags higher financing costs 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.
DBS expects the REIT’s 4QFY2023 DPU to remain “relatively stable” as its “strong occupancy and positive rental reversions should help counter the slight increase in financing costs”.
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In a separate update on Oct 17, DBS 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”.
“However, it’s essential to emphasise 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.
“Security deposits are also in place, which Keppel DC REIT could utilise 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 DBS.
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.
Lee likes the REIT for improved disclosures on the 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), Lee has kept his “neutral” call.
The 3QFY2023 marks new CEO Loh Hwee Long’s maiden results presentation. The REIT, according to Lee, will remain “focused on stabilised assets” and are open to both shell and core properties, as well as those that are fully fitted. He is unlikely to go “full-blown” on development given its limited development headroom.
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That said, he likes markets with favourable cap spreads such as Singapore due to its shorter land tenure, Japan and China. 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”, he says.
“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 are 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 and 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.
