• 1Highly accretive proposed acquisition of 99% stake in KDC4 and 100% stake in 1NN will increase DPU by c.12.4% and AUM by 30.7%.
• FY19e DPU to fall 0.42 cents from 7.98 cents to 7.56 cents due to the enlarged unit base while FY20e DPU will increase 0.37 cents from 8.33 cents to 8.70 cents, translating to DPU growth of 15.1% in FY20.
• 6x P/NAV is well supported; private placement of S$235.4mn was 9.3 times subscribed.
• Upgrade to ACCUMULATE with a higher target price of $2.00 (previously $1.71).

A look at the assets

• Acquisition of KDC4 and 1NN for agreed value of S$384.9mn and S$200.5mn respectively.
• Equity fund raising grossed S$473.8mn comprising of a S$235.4mn private placement tranch and S$242.8mn preferential offering. The private placement was 9.3x oversubscribed. 91.7% of proceeds will be used to fund the acquisition, implying a 80:20 equity-to-debt ratio.
• Proposed acquisition is subject to a shareholder vote. The EGM is likely to take place in end-October/early-November, with deal headed towards a end-November completion.
• Acquisition will increase the AUM in Singapore from 51.1% to 62.7%.

Keppel Data Centre 4 (KDC4) – S$384.9mn

• Proposed acquisition of 99% interest in KDC4, a five-story colocation asset with NLA of 84,544 sq ft. KDC4 has committed occupancy of 92% and is located in Tampines.
• Pro forma DPU accretion ranges from 4.1% – 7.5% (figure 1 and 2), the higher-end accretion is contingent on IRAS’s approval of the REIT tax transparency status for the KDC4 target entity.
• KDC4 is a 2-year-old asset which is currently under stabilization. As revenues are driven by the amount of power utilised by the tenants, rental support of c.$8.8m has been negotiated to cover the 24-month period after completion of the sale to provide rental top-ups during the initial period as clients progressively power up their racks. The rental top-ups will ensure that KDC will receive a NPI yield of at least 7% during the initial 2 years. The stabilised NPI yield for KDC4, given current 92% occupancy, will be 7.5%.
• At the current committed occupancy of 92%, KDC4’s stabilised NPI yield stands at c.7.5%. As all the IT power is fully committed, additional Capex will be required to bring more power onsite in order to lease out the remaining 8% of space as data centres. Alternatively, the remaining space could be leased out as ancillary office space.

1-Net North Data Centre (1NN) – S$200.5mn

• Proposed acquisition of 100% interest in 1-Net North Data Centre (1NN), a five-story triple-net master-leased asset with NLA of 213,815 sq ft.
• First assets located in the North (Woodlands) and provides diversification; while master lease provides income visibility and stability.
• Of the five floors, four are data centres (DC) and the remaining floor is comprised office and ancillary space.
• 1NN’s NPI yield of 9% will provide DPU accretion of 6%
• 100% occupied on a 17 + 7.6 year lease term.

Impact on KDC

• Significant DPU accretion from 9.4% – 12.4%.
• Stronger portfolio: Better diversification across lease types (figure 3 and 4); WALE will be increased to 8.9 years from 7.8 years; and portfolio occupancy will improve form 93.2% to 94.1%. Leverage will fall 160bps from 31.9% to 30.3%.
• Greater leasing synergies and operational efficiency due to economies of scale given close proximity of KDC4 to KDC2 and KDC3.

What do we think?

A highly anticipated, well-timed and positive move. The proposed acquisition is highly accretive and results in a stronger enlarged portfolio as well as better financial metrics.

Outlook

The announcement of the dual acquisition comes hot on the heels of KDC’s inclusion into the FTSE EPRA NAREIT Developed Index. KDC’s rich valuation of 1.6x P/NAV is well supported given the added visibility from index inclusion, their niche portfolio of data centres and track record of acquisition-driven DPU growth.

Despite the sizable two-asset acquisition, acquisitions within the next 12 months are still a possibility as discussions with several third-party sellers have been underway since the start of 2019.

Key risks

The key risk remains the attainment of the tax transparency status for the entity holding KDC4. KDC successful attained tax transparency status for KDC1, KDC2, KDC3 and most recently KDC5 in January 2019 (acquired 12 June 2018). The confirmation of tax transparency is expected to be announced between 6 – 9 months after application.

Upgrade to ACCUMULATE with a higher target price of $2.00 (previously $1.71)

KDC’s cost of funds have been falling steadily since listing (FY15/FY17/2Q19 2.5%/2.3%/1.7%). We lower our cost of equity assumption by 48bps from 6.99% to 6.51% to reflect the lower risk-free rate.

We adjust our forecast to incorporate the proposed acquisitions and the lower cost of equity assumption. Our target price translates to a FY19/FY20 DPU yield of 3.8%/4.4% and a FY19 P/NAV of 1.64x.