Keppel DC REIT: Worst Fears on Guangdong Data Centers Coming True

We lowered our 2023 and 2024 distribution per unit, or DPU, forecast for Keppel DC REIT, or KDC REIT, by 2.2% and 16.9% after the trust disclosed that the tenant of its Guangdong Data Centres 1, 2 and 3 has defaulted on rents and coupon payments. We have previously highlighted our concerns that the tenant was struggling to fill up its server cabinets having achieved a low utilization rate of 28% back in September 2022. This worsens to 22% as of September 2023, which the tenant attributes to the lingering impact of the COVID-19 pandemic of the business environment. Given the challenges faced by this tenant, we expect the tenant to remain in default for the rest of 2023 and 2024. We expect the tenant to resume rental payments in 2025 and back pay the trust for amounts owed in 2023 and 2024 after a recovery in their data center operations and receiving the balance SGD 120 million held back by the trust for Guangdong Data Centre 3. We leave our fair value estimate of SGD 1.92 per unit unchanged as we continue to expect the tenant to fulfil its obligations eventually. In the worst-case scenario that the assets have to be written off, our fair value estimate falls to SGD 1.62 per unit, implying a 16% downside from its last closing price of SGD 1.89 per unit. We encourage investors to wait for a better entry point given that the units remain fairly valued after a 9% decline post announcement.