Jonathan Koh from UOBKH notes that KDCREIT’s entry into the second largest data centre hub in Asia is poised to grow at a CAGR of 10% from now until 2028.
Koh says that this acquisition deepens relationships with a hyperscale tenant. Tokyo data centre 1 was completed in 2019 and has a net lettable area of 190,166sf.
It is leased to a Fortune Global 500 company and hyperscale, who is an existing top-10 tenant, on a triple-net basis with a remaining lease term of seven years, he adds.
This improves Keppel DC REIT’s portfolio occupancy marginally by 0.1 percentage points to 98.2%, and the portfolio weighted average lease expiry (WALE) weighted by lettable area has increased from 6.5 years to 6.6 years.
See also: SAC Capital initiates ‘buy’ on Sanli Environmental after $105.3 mil contract win from PUB
The proportion of shell & core contracts has also risen from 10.2% to 11.9% of rental income, and KDCREIT’s assets under management has increased 5.6% to $3.8 billion.
The analyst notes that the West Tokyo data centre provides a net property income (NPI) yield of 3.0%. As management says that existing passing rent in place is 10-15% below market rate, there is room for positive rental reversion when the lease is renewed seven years later. The implied NPI yield based on market rent is 3.5%, Koh says.
Koh raises his 2025 DPU forecast by 1% due to the contribution from the Tokyo data centre. He keeps his “hold” call with a dividend discount model (DDM)-based target price of $1.98.
See also: CGSI downgrades Grab to ‘hold’ ahead of 2QFY2025 results, expects consumer spend to slow in 2H2025
Likewise, Citi’s analyst Brandon Lee “views positively” KDCREIT’s acquisition. He says that rental growth is well-supported by solid demand, underpinned by rising cloud adoption, digital transformation measures and development of new technologies like generative AI, and limited supply.
Lee believes it is well-placed for positive rent reversion in ~7 years’ time and initial yield could hit mid-3%, though there are currently no embedded rental escalations.
“KDCREIT’s operational metrics would likely improve post the acquisition, with portfolio occupancy/WALE and income contribution from S&C/internet enterprises rising to 98.2%/6.6 years (vs. 98.1%/6.5 years previously) and 11.9%/45.1% (vs. 10.2%/44.1% previously), respectively,” he adds.
However, the analyst believes that the REIT’s next acquisition will require equity, as the post-acquisition gearing is at 39.4% implying just ~$50 million before hitting investors’ comfort level of 40%
Lee notes that the REIT has not hedged their Japan income, though it will not be 100% due to cost.
His target price for KDCREIT is based on an average of DDM and revalued net asset value valuations, at $2.07.
As at 3.55pm, shares in Keppel DC REIT are trading 1 cent higher or 5.24% up at $2.01.
