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Brokers' take: Keppel DC Reit primed for more acquisitions amid healthy Q3 results

ANALYSTS were generally cheered by the financial results of Keppel DC Reit (real estate investment trust) as the data centre-focused Reit on Tuesday posted a third-quarter distribution per unit (DPU) of 1.85 Singapore cents, up 6.3 per cent from 1.74 Singapore cents for the same period a year earlier.

Gross revenue in the three months ended Sept 30 had jumped 34 per cent to S$47.6 million, and gross rental income was S$44.6 million, boosted 30.2 per cent from the same period a year earlier, thanks to its acquisitions of Keppel DC Singapore 5, maincubes Data Centre in Offenbach am Main, Germany and Keppel DC Dublin 2.

While the Reit's overseas contribution benefited from the appreciation of the euro against the Singapore dollar,  this was partially offset by lower rental income from Gore Hill Data Centre in Australia, as well as the depreciation of the Australian dollar against the Singdollar. Net property income rose 33.4 per cent to S$43 million.

DBS analysts Derek Tan and Mervin Song noted steady operating metrics, as occupancy rates had risen to 93.1 per cent, as opposed to 92 per cent for the second quarter this year, with a weighted-average lease expiry (WALE) of 8.5 years.

"We do note that for Singapore properties – Keppel DC Singapore 1 saw a slight dip due to a tenant returning space (86.6 per cent versus 87.3 per cent for Q2 2018) but the overall impact is small," they wrote.

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DBS also does not believe that the Reit will not have an issue refinancing its close to S$130 million of loans expiring in 2019, as it could be an opportunity to swap the debt into foreign currency-denominated debt (euro or Australian dollar), allowing it to secure a better natural hedge position.

CGS-CIMB , maintaining its "add" call, also upped its target price slightly to S$1.51, and raised DPU estimates for Keppel DC Reit's FY2019 and FY2020 respectively by 0.5 per cent and 1.2 per cent on the back of the results, and to factor in contributions from a recent agreement with Macquarie Telecom (MT) to construct Intellicentre 3 East DC (IC 3) on vacant land within the IC 2 site in Sydney, Australia.

The Australia project means "we anticipate that Keppel DC Reit's earnings will grow steadily", said CGS-CIMB's Lock Mun Yee and Eing Kar Mei.

DBS analysts said: "Overall gearing remained low at 32 per cent, which empowers the Reit to acquire more assets going into 2019. While not committing to an AUM (assets under management) target, the manager is reviewing opportunities in both new and existing markets as the Reit looks to bulk up and grow distributions and AUM."

CGS-CIMB had a similar view. They said the gearing "puts the trust in a good position to explore new acquisition opportunities in Asia and Europe as well as in the US". "It has also hedged its foreign sourced distributions until first-half 2020, providing the Reit with good income visibility."

Assets under management for Keppel DC Reit stood at S$1.95 billion, comprising 15 data centres in eight countries.

However, third-quarter results fell short of expectations for OCBC Investment Research due mostly to capital expenditure set aside for Keppel DC Singapore 3 and Keppel DC Singapore 5.

Analyst Andy Wong Teck Ching reduced the broker's DPU forecasts by 4.5 per cent for FY2018 and 5.0 per cent for FY2019, factoring in the capex reserves which it had previously not accounted for and weaker Australian dollar assumptions. It also lowered its DDM-derived (dividend discount model-derived) fair value to S$1.48 from S$1.54.

Still, he said the Reit saw good growth and healthy operating metrics.

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