Company Reports

Keppel DC REIT’s first-quarter 2024 revenue and net property income were ahead of our expectations due to the recognition of SGD 13.3 million from the settlement of the dispute between the trust and its tenant DXC Technology. After deducting related expenses, management estimates that SGD 11.2 million will be distributed to unitholders in 2024. The trust is working with DXC to take back the disputed area and is hopeful it will get new tenants with positive rental reversions. After updating our model to incorporate this one-off settlement sum, we raise our 2024 distribution-per-unit estimate by 6.5% to SGD 0.0899, implying a yield of 5.5% at the current price. However, we keep our fair value estimate of SGD 1.80 per unit unchanged as longer-term earnings forecasts remain intact. We continue to see the trust as fairly valued. In our view, the lack of visibility on the full recovery of its Guangdong data centers will continue to weigh on its unit price performance and hence, encourage investors to wait for a wider margin of safety.

Keppel DC REIT, or KDC REIT, is a real estate investment trust that principally invests in income producing real estate assets used primarily for data center purposes and assets necessary to support the digital economy. As a wholesale data center provider, KDC REIT leases out its properties as either a colocation, fully fitted or shell and core data center. Among these three, colocation leases make up the majority of KDC REIT’s rental income but have the shortest weighted average lease expiry, or WALE, profile of less than three years compared with the fully fitted and shell and core data centers that enjoy long WALE profiles of around 11 and seven years, respectively, as of Dec. 31, 2023.

Narrow-moat Keppel DC REIT is divesting its Intellicentre Campus in Sydney, Australia for AUD 174 million to a subsidiary of Macquarie Technology Group, which is also the parent of the asset’s existing tenant. The disposal price appears attractive, at a 35.4% premium over its end-2023 valuation and a 148.6% premium over its original investment cost. This also implies an exit cap rate of 3.6%, which is lower than the Australian data center transaction cap rates that range between 5% and 6%, according to management. Concurrently, the trust will subscribe to an 8.5-year, AUD 90 million note issued by the buyer that gives an initial yield of 6.97% and comes with annual consumer-price-index-linked escalation. Management said the note’s return will mirror the divested asset’s rental income and hence expects a slight distribution per unit, or DPU, accretion of 0.7% after the transactions are completed.

Keppel DC REIT, or KDC REIT, is a real estate investment trust that principally invests in income producing real estate assets used primarily for data center purposes and assets necessary to support the digital economy. As a wholesale data center provider, KDC REIT leases out its properties as either a colocation, fully fitted or shell and core data center. Among these three, colocation leases make up the majority of KDC REIT’s rental income but have the shortest weighted average lease expiry, or WALE, profile of less than three years compared with the fully fitted and shell and core data centers that enjoy long WALE profiles of around 11 and seven years, respectively, as of Dec. 31, 2023.

Keppel DC REIT’s, or KDC REIT’s, second-half 2023 results came in lower than our expectations due to a higher-than-expected loss allowance for its Guangdong data centers. Consequently, second-half 2023 distribution per unit, or DPU, fell 16.1% year on year to SGD 0.04332. The trust is actively engaging with the Guangdong data centers’ tenant and will give them time to improve the operations and eventually repay the rent arrears. Management shared that the tenant remains committed to the lease contract and has partially settled arrears of SGD 0.1 million. That said, management has refrained from committing to a timeline to resolve this issue before seeking alternative solutions such as repossessing the data center. In our view, there is still significant uncertainty regarding the resolution of the Guangdong data centers’ tenant issue. The arrears repayment of SGD 0.1 million is also insignificant compared with the current loss allowance of SGD 10.5 million. We have thus pushed back our expectations on the resolution of this issue by another year and anticipate contributions from the Guangdong data centers to resume only from 2026. As a result, our fair value estimate is reduced to SGD 1.78 from SGD 1.92. We cut our DPU forecasts for 2024 and 2025 by 3.2% and 32.5%, respectively, but our forecast DPU for 2026 is raised by 8.1%. We had previously expected the tenant to repay all rent arrears in 2025, but now assume that the tenant will repay over three years, between 2026 and 2028. We kept our assumptions for the other data centers after the in-line results. We believe the trust is currently fairly valued and think that investors should wait for a bigger margin of safety.

Keppel DC REIT, or KDC REIT, is a real estate investment trust that principally invests in income producing real estate assets used primarily for data center purposes and assets necessary to support the digital economy. As a wholesale data center provider, KDC REIT leases out its properties as either a colocation, fully fitted or shell and core data center. Among these three, colocation leases make up the majority of KDC REIT’s rental income but have the shortest weighted average lease expiry, or WALE, profile of less than three years compared with the fully fitted and shell and core data centers that enjoy long WALE profiles of around 11 and seven years, respectively, as of Dec. 31, 2023.

Keppel DC REIT, or KDC REIT, is a real estate investment trust that principally invests in income producing real estate assets used primarily for data center purposes and assets necessary to support the digital economy. As a wholesale data center provider, KDC REIT leases out its properties as either a colocation, fully fitted or shell and core data center. Among these three, colocation leases make up the majority of KDC REIT’s rental income but have the shortest weighted average lease expiry, or WALE, profile of less than three years compared with the fully fitted and shell and core data centers that enjoy long WALE profiles of around 12 and eight years respectively (as of June 30, 2023).

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.

We retained our fair value estimate of SGD 1.92 per unit after Keppel DC REIT, or KDC REIT, delivered an in-line set of operating performance data in its third-quarter 2023 business update. Distribution per unit, or DPU, for the quarter fell 3.6% year on year to SGD 0.02492 from SGD 0.02585 due to higher finance cost from refinanced loans and floating interest rate loans, even as contributions from acquisitions and positive rental reversions drove revenue and net property income higher. While the trust’s portfolio occupancy rate declined slightly by 0.2 percentage points to end the third quarter of 2023 at 98.3%, management is not worried as it believes that this a transitional vacancy that should recover in the near future. We fine-tuned our operating assumptions and expect no further acquisitions for the rest of 2023 given the lack of deal activity under the high interest rate environment. As a result, our DPU assumptions for 2023, 2024, and 2025 are lowered by 0.7%, 0.9%, and 0.8%, respectively. Based on the last closing price of SGD 2.01 per unit, we think the trust is fairly valued as it trades at a 2024 dividend yield of 5.2%. Although we see KDC REIT as a strong beneficiary of the latest technological trends, such as generative artificial intelligence, we think the positives have been priced in.

Keppel DC REIT, or KDC REIT, is a real estate investment trust that principally invests in income producing real estate assets used primarily for data center purposes and assets necessary to support the digital economy. As a wholesale data center provider, KDC REIT leases out its properties as either a colocation, fully fitted or shell and core data center. Among these three, colocation leases make up the majority of KDC REIT’s rental income but have the shortest weighted average lease expiry, or WALE, profile of less than three years compared with the fully fitted and shell and core data centers that enjoy long WALE profiles of around 12 and eight years respectively (as of June 30, 2023).

Sabana REIT’s unitholders have voted to remove ESR Group as its manager and internalize the REIT management function. This move is unprecedented in Singapore, but we think it has positive implications for the industry. This event occurred because activist investor Quarz Capital led the push. As ESR Group holds around 21% of Sabana REIT compared with Quarz Capital’s 14%, ESR Group only held a slight advantage going into the vote. Ultimately, we think ESR Group lost the vote because of concerns about potential conflicts of interest—ESR Group is the sponsor of more than one industrial REIT in Singapore—and the perception that Sabana REIT has underperformed its peers due to poor management by ESR Group.

Narrow-moat Keppel DC REIT’s, or KDC REIT’s, first-half 2023 net property income grew 3.3% year on year on the back of a 3.6% year-on-year increase in revenue, in line with our expectations. The growth was largely driven by the acquisition of Guangdong Data Centres 2 and 3, partly offset by higher electricity cost and the appreciation of the Singapore dollar, which affected income for its overseas investment. Distribution per unit, or DPU, came in flat at SGD 0.05051, slightly below our expectation due to higher finance cost from refinanced loans and floating rate loans. During the call, management shared that the trust is close to absorbing the full impact of the higher interest rate environment. We have increased our near-term borrowing cost assumptions and reduced our forecast 2023 DPU to SGD 0.1007 (from SGD 0.1061), or a 1.4% year-on-year decline. We retain our fair value estimate of SGD 1.92 per unit as our long-term thesis for KDC REIT remains unchanged.

Keppel DC REIT, or KDC REIT, is a real estate investment trust that principally invests in income producing real estate assets used primarily for data center purposes and assets necessary to support the digital economy. As a wholesale data center provider, KDC REIT leases out its properties as either a colocation, fully fitted or shell and core data center. Among these three, colocation leases make up the majority of KDC REIT’s rental income but have the shortest weighted average lease expiry, or WALE, profile of less than three years compared with the fully fitted and shell and core data centers that enjoy long WALE profiles of around 12 and eight years respectively (as of June 30, 2023).

Narrow-moat Keppel DC REIT’s, or KDC REIT’s, first-quarter 2023 net property income grew 6.3% year on year on the back of a 6.5% year-on-year increase in revenue, in line with our expectations. The growth was largely driven by the acquisitions of Guangdong Data Centre 2 and 3, while partly offset by higher facility expenses such as maintenance, staff costs, and electricity. The trust also managed to obtain approval from the Monetary Authority of Singapore for their NetCo bonds to be Qualifying Project Debt Securities, and exempt from corporate income tax of 17%. As a result, there is an additional tax savings of SGD 1 million from 2022 which will be distributed to unitholders over the first half of 2023.

Keppel DC REIT’s, or KDC REIT’s, second-half 2022 distributable income grew 7.3% year on year on the back of a 4% year-on-year increase in its net property income, higher finance income received from its investment in the NetCo bonds, and coupon income from GuangDong Data Centre 3 that is still undergoing fitout work. As a result, second-half 2022 distribution per unit, or DPU, increased 4.8% year on year to SGD 0.05165, in line with our expectations.

Keppel DC REIT, or KDC REIT, is a real estate investment trust that principally invests in income producing real estate assets used primarily for data center purposes and assets necessary to support the digital economy. As a wholesale data center provider, KDC REIT leases out its properties as either a colocation, fully fitted or shell and core data center. Among these three, colocation leases make up the majority of KDC REIT’s rental income but have the shortest weighted average lease expiry, or WALE, profile of less than three years compared with the fully fitted and shell and core data centers that enjoy long WALE profiles of around 12 and seven years respectively (as of March 31, 2022).

Keppel DC REIT, or KDC REIT, delivered a good set of operating performance data in its third-quarter 2022 business update, which is in line with our expectation. We maintain our fair value estimate at SGD 1.92 per unit and our narrow moat and stable moat trend ratings are unchanged. Following the market selloff over rising interest rate concerns, we think the opportunity to accumulate a quality data center REIT such as KDC REIT has emerged, as the trust is trading at an attractive 2023 distribution yield of 6% currently. We continue to like the trust as we think it is well positioned to benefit from the strong secular growth trends such as cloud computing, artificial intelligence, 5G, and other technological advancements driving the data center sector.

Keppel DC REIT’s, or KDC REIT’s, second-quarter 2022 operating performance was generally in line with our expectations. However, we are raising the exit cap rate used to compute the terminal value of KDC REIT’s data center assets on the back of the more aggressive U.S. federal-funds rate hikes to combat inflation. Hence, we have lowered our fair value estimate to SGD 1.92 from SGD 2.18. This implies a forward distribution yield of 5.3% and price/book value of 1.4 times. While we continue to like KDC REIT for its strong fundamentals—arising from strong secular growth trends such as cloud computing, 5G, and other technological advancements driving the data center sector—we think the trust is fairly valued at the current price as the positive outlook is largely priced in.

Keppel DC REIT, or KDC REIT, is a real estate investment trust that principally invests in income producing real estate assets used primarily for data center purposes and assets necessary to support the digital economy. As a wholesale data center provider, KDC REIT leases out its properties as either a colocation, fully fitted or shell and core data center. Among these three, colocation leases make up the majority of KDC REIT’s rental income but have the shortest weighted average lease expiry, or WALE, profile of less than three years compared with the fully fitted and shell and core data centers that enjoy long WALE profiles of around 12 and seven years respectively (as of March 31, 2022).

Keppel DC REIT, or KDC REIT, is a real estate investment trust that principally invests in income producing real estate assets used primarily for data center purposes and assets necessary to support the digital economy. As a wholesale data center provider, KDC REIT leases out its properties as either a colocation, fully fitted or shell and core data center. Among these three, colocation leases make up the majority of KDC REIT’s rental income but have the shortest weighted average lease expiry, or WALE, profile of less than three years compared with the fully fitted and shell and core data centers that enjoy long WALE profiles of around 12 and seven years respectively (as of March 31, 2022).