Keppel DC REIT units fell, but analysts still positive on data center acquisition

Singapore 50 dollar bill

Keppel DC REIT units may have fallen when they resumed trade on Tuesday, but analysts were generally positive on its deal to acquire a Singapore data center.

The units fell 3.50 percent to S$1.38 on Tuesday after being halted on Monday after the REIT said it was buying a 99 percent stake in Kingsland Data Centre for S$295.1 million, to be funded in part via a private placement of 224.0 million new units in the REIT. The new units will be issued at S$1.353 each, a discount of about 4.9 percent to the volume weighted average price of the unit’s price on May 4, the REIT said.

“We are positive on the deal as it is both DPU- and NAV-accretive (despite the acquisition being 100 percent funded by equity),” CGS-CIMB said in a note on Tuesday. DPU stands for distribution per unit and NAV stands for net asset value. It estimated the deal would generate 6.8 percent net property income yield, or S$20.3 million in net property income, in the first 12 months.

The brokerage noted the funding also lowers Keppel DC REIT’s gearing to 32.1 percent from 37.4 percent at the end of the first quarter. It was also positive on the deal raising the proportion of assets under management in Singapore to nearly half of the portfolio and as it would add a new customer to the REIT’s client list.

It also pointed to a visible acquisition pipeline for the REIT, even though this deal means it would have largely reached its target of S$2 billion in assets under management by 2018.

Acquisition pipeline

“With KDCREIT trading at a hefty premium to book, it would be easier for it to make accretive acquisitions, leading to growth, and in turn lower costs of capital, turning a virtuous cycle,” CGS-CIMB said.

It kept an Add call and edged its target price up to S$1.49 from S$1.47.

Other analysts were also positive on the deal.

Phillip Capital upgraded the REIT to Accumulate, which means it expects a 5-20 percent return, and raised its target price to S$1.51 from S$1.47. OCBC upgraded it to Buy and raised its fair value to S$1.54 from S$1.50.

Likewise, Credit Suisse was also positive, raising its DPU forecast by 0.9-3.6 percent, but it kept its target at S$1.56, with an Outperform rating. The Swiss bank noted that the lower gearing will provide the REIT with funding flexibility for acquiring more assets.

“KDC REIT has one of the strongest inorganic growth potentials among REITs, while limited expiries over the next two years the existing portfolio stable,” Credit Suisse said.

Words of caution

But Deutsche Bank had some words of caution on the REIT.

“While we are positive on the acquisition, we highlight that this is the second acquisition whereby at least 5 percent of revenues will be set aside for capex requirements,” it said. “As assets progressively age, we believe that maintenance capex requirements could rise, especially given rising power requirements and specification inflation.”

Deutsche Bank pointed to the Keppel DC Dublin 1 property, which recently had a S$15 million asset enhancement initiative.

That kept its rating at Hold, the bank said, although it also raised its 2018-20 DPU forecasts by 3..2-6.6 percent and increased its target price to S$1.30 from S$1.20.