Keppel DC Singapore 5 could deliver an initial 7.8% yield in H2 2019

KDC SGP 5’s occupancy rate improved to 84.2% in Q3 versus 73.9% in Q2.

Keppel DC REIT is forecasted to see high income visibility going into FY2019/20 thanks to its acquistions amidst a volatile market climate given limited expiries over the coming two financial years, according to a report by DBS Equity Research.

The firm hit its targets in 2018 after gross rental income grew 24.7% YoY YTD to $127.5m primarily due to the contribution from an expanded portfolio which includes a development in Dublin and Keppel DC Singapore 5 (KDC SGP 5), as well as higher power revenue from its Singapore properties.

The report highlighted how KDC SGP 5’s occupancy rate improved to 84.2% versus 73.9% in Q2 and has achieved its occupancy capacity for the data-centre space at the development. The remaining vacancies are office space which analysts expect to be taken up in the medium-term. The analysts project KDC SGP 5 to deliver an initial yield of 7.8% when full operations take effect in H2 2019.

Appreciation of the EUR and GBP against the SGD also boosted Keppel DC REIT’s income, DBS analysts said. “This partially offset the lower revenues from Basis Bay data centre (DC) and Gore hill DC due to a bulk discount provided during renewal of the latter’s lease a year ago and the weakness in the AUD versus the SGD.”

In addition, an income of $5m due to rental top-ups which is $2.5m higher YoY partially offset lower ad hoc service and power revenues.

Net profit income (NPI) rose 24.6% to $115.2m YTD mainly on a proportionate increase in expenses, DBS analysts said. On a quarterly basis, top line and NPI came in at 34% and 33.4%, respectively.

Also read: Keppel DC REIT NPI jumped 33.4% to $43.04m in Q3

Keppel DC REIT’s overall income rose 24.6% YoY to $69.9m YTD, according to the report, whilst distribution per unit (DPU) increased 4.8% to $0.0547.

“Distributable income growth is a key driver of share price performance,” the analysts highlighted, citing how since the firm’s initial public offering (IPO), Keppel DC REIT’s assets under management (AUM) has grown 50%.

The report however noted that the firm may face higher barriers to entry and stiffer competition to attract and retain tenants given that the data centre market is dominated by several large international operators aggressively expanding into markets where Keppel DC REIT is present.

According to Cushman & Wakefield, there is a risk of an oversupply of data centres in Singapore which is likely to result in limited organic potential for Keppel DC REIT’s, amongst other local operators’, data centres.

Nevertheless, the REIT’s major markets of Singapore, Europe and Australia continue to see strong demand for data centres on the back of global growth in data usage, the report highlighted.

Also read: Robust demand for hyperscale data centre could buoy Keppel T&T

Interest rate movements are unlikely to have a significant impact on Keppel DC REIT’s price, according to the analysts. Any interest-rate risks are likely to be mitigated by proactive management of the REIT’s debt profile.

Meanwhile, the firm’s financial metrics remained strong with average cost of debt stable at 1.9% with 86% of the rates fixed.

“The REIT will be renewing 19%, or close to approximately $130m, of loans expiring in 2019 which we believe should not be an issue to refinance,” the analysts noted. “We believe that the opportunity will be to swap the debt into a foreign currency-denominated debt (EUR or AUD), given the REIT’s diversified earnings base to achieve a better natural hedge position.”