Initiate at Buy: The only one of its kind in Asia

Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. MCI (P) 094/06/2016, MCI (P) 085/06/2016, MCI (P) 126/02/2017 Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch View HSBC Global Research at: https://www.research.hsbc.com   Asia’s first and only data centre REIT  Attractive growth prospects with robust balance sheet  Good dividend yield with growth; initiate at Buy, TP SGD1.40 Asia’s first and only data centre REIT. KDC REIT, Asia’s first and only pure-play data centre REIT, offers investors a unique proposition. The data centre segment of the property market is generally seen as defensive with high barriers to entry, yet is also associated with growth amid the emergence of ‘big data’. Keppel Telecommunication & Transportation (KTT) – the REIT sponsor – is a subsidiary of Keppel Corporation and a Temasek-linked company, and provides integrated services and solutions for logistics businesses and data centres. Well-diversified portfolio – 12 assets in nine regional data centre hubs. The REIT’s portfolio today, appraised at SGD1.4bn (our estimate: SGD1.59bn), comprises 12 properties with a total leasable area of c900k sf. By geography, the 12 assets are spread across nine cities (regional data centre hubs) in Asia (c50%, mostly Singapore), Australia (c20%) and Europe (UK, Netherlands, Ireland, and Italy). Attractive growth prospects – acquisition-led and organic. Acquisitions have been the REIT’s primary growth driver. Since listing, the portfolio has grown from SGD1.02bn to SGD1.4bn, driven by the purchase of four properties (not including the forward purchase of a fifth asset – maincubes – due to be completed in 2018). And while KTT has granted the right of first refusal (ROFR) on all its properties to KDC REIT, all but one acquisition that it has made since listing have been third-party deals, indicating management has the ability to source and structure deals. Management is targeting to grow the portfolio to SGD2bn by 2018e, although our estimates do not reflect future acquisitions and developments beyond those that are contractual (such as maincubes), consistent with our practice for other REITs under our coverage. From an organic growth perspective, the majority of the portfolio assets have rental step-ups (some CPI-linked, others as high as 4%). This, together with a possible occupancy uplift at properties which are not fully occupied, suggests there is room for growth. Our DPU growth estimates are 2.9% for 2017e and 4.4% for 2018e. Robust debt metrics; good dividend yield with growth prospects; initiate at Buy. Aggregate leverage is c28%; and while this will rise to c33% post the completion of the maincubes acquisition in 2018e, it is still within management’s comfort level. Other debt metrics are robust: no debt will reach maturity for the rest of 2017 (average debt duration is 2.9 years) and 83% of debt is fixed. Our target price of SGD1.40 – set at a 5% discount to the average of our RNAV and DDM estimates – implies upside of 14.8%. At the current price, the 2017e DPU yield is 6.1% and we project DPU growth of 2.9% – the mix of DPU yield and growth is amongst the best within our SREIT coverage universe. Given this, as well as the REIT’s unique positioning within the sector, we initiate at Buy. Downside risks are shorter underlying land leases for the Singapore properties, risk of obsolescence of equipment due to changes in technology, build-up of supply in key markets resulting in lower rents, overpaying for assets, and macro risks.17 May 2017 INITIATE AT BUY TARGET PRICE (SGD) PREVIOUS TARGET (SGD) 1.40 - SHARE PRICE (SGD) UPSIDE/DOWNSIDE 1.22 14.8% (as of 15 May 2017) MARKET DATA Market cap (SGDm) 1,398 Free float 100% Market cap (USDm) 1,001 BBG KDCREIT SP 3m ADTV (USDm) 2 RIC KEPE.SI FINANCIALS AND RATIOS (SGD) Year to 12/2016a 12/2017e 12/2018e 12/2019e HSBC DPU 0.061 0.074 0.076 0.080 HSBC DPU (prev) - - - - Change (%) - - - - Consensus DPU - 0.074 0.075 0.078 Dividend yield (%) 5.0 6.1 6.3 6.5 Price to NAV 1.3 1.3 1.3 1.3 52-WEEK PRICE (SGD) Source: Bloomberg, HSBC estimates Pratik Burman Ray, CFA* Senior Property Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch pratikray@hsbc.com.sg +65 6658 0611 Utkarsh Rastogi* Associate Bangalore *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Keppel DC REIT (KDCREIT SP) EQUITIES REITS Singapore 0.9 91.3 01.6 005 /1611 /1605 /17Targ et price: 1.4 5High : 1.2 7 Lo w: 1 .05 Curren t: 1.2 4MiFIDII–ResearchIsyouraccessagreed?CONTACT us todayInitiate at Buy: The only one of its kind in Asia  EQUITIES ● REITS 17 May 2017 2 Key charts and tables P/RNAV for SREITs under HSBC coverage* Source: HSBC estimates, *For comparison purposes, we exclude Mapletree Grea