Still awaiting acquisitions. KDC is still negotiating several third-party deals with cap rates of 4-7%, some in advance stages. However, its deal process has been stalled by travel restrictions. Management shared that the number of deals and size have increased. While demand for data centres has compressed cap rates, asking prices for deals under negotiation are unchanged.
Demand-supply gap to lift market rents. Demand-supply gaps exist in many markets due to government restrictions on the supply of data centres. Globally, demand for data centres is being driven by big data, 5G and cloud adoption. Singapore has attracted Chinese tech companies looking to set up headquarters and operations here to perform big data analytics. We understand, however, that the Chinese tech players were unsuccessful in securing land from the government for data-centre development. Given the moratoriums on data centres in Singapore, we expect market rents to be bid up in the coming two years. While KDC’s high portfolio occupancy of 96.7% and long WALE of 7.2 years translate to low expiries in 2021/22 and leave little opportunity for positive rental reversions, many of its existing leases and co-location arrangements have built-in periodic rental escalations averaging 2-4% p.a.
Maintain NEUTRAL with higher target price of S$2.91, from S$2.57.
Our DDM-based TP has been raised from S$2.57 to S$2.91 following our assumption of S$500mn of acquisitions with an NPI yield of 6% and LTV of 30% for 1Q21e. This translates to DPU accretion of 5.0%/ 5.8% for FY21e/FY22e and gearing of 35% in FY21e. Despite strong portfolio metrics and future-ready asset classes, we reiterate our Neutral view as we believe the market has priced in potential catalysts from acquisitions and STI inclusion. KDC is trading at an all-time high and DPU yield of 3.1%/3.6% for FY20e/21e is not compelling. Prefer Ascendas REIT (AREIT SP, Accumulate, TP: S$3.63) in the sector.