Keppel DC REIT risks dilution amidst piling debt

After buying maincubes Data Centre, the proportion of debt in its current capital rose to 37.4%.

According to OCBC Investment Research analyst Andy Wong Teck Ching, Keppel DC REIT is facing dilution risks in the near future.

After it completed its maincubes Data Centre acquisition in Germany, the REIT's aggregate leverage ratio has moved up to 37.4%. "Given an estimated debt headroom of $80.2m before reaching an aggregate leverage ratio of 40%, coupled with its end-2018 AUM target of S$2b (portfolio size of $1.66b as at 31 Mar 2018) and long-term aggregate leverage target of 30%, we believe there are potential dilution risks in the near future," Ching said.

The analyst also noted that during its acquisition of Keppel Data Centre Singapore 3, its management had undertaken an equity fundraising exercise to raise proceeds in excess of the purchase quantum so as to bring its gearing ratio down.

Ching raised his distribution per unit (DPU) forecast to 2.1% as he had previously assumed only six months of contribution from maincubes. However, the DPU projections in 2020 to 2022 are significantly lower. "Our 2020F-2022F DPU projections are lowered by 0.7%-1.0% as we factor in higher borrowing costs from KDCREIT’s acquisition of the remainder of 999-year leasehold land interest in Keppel DC Dublin 1 for an agreed value of EUR30m, of which legal completion is expected in 1H2020."

Keppel's net property income (NPI) rose by 18.2% YoY from $28.84m to $34.1m in the first quarter of 2018. This was on the back of higher income from Keppel Data Centres (KDC) Dublin 2 and Singapore 3 and higher variable income from KDC Singapore 1, partially offset by lower rental income from Basis Bay Data Centre and Gore Hill Data Centre as well as higher finance costs and manager’s fees.