Keppel DC REIT: Business Update in Line With Expectations; Refinancing for 2023 Completed

Narrow-moat Keppel DC REIT’s AJBU 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 Centres 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 its 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.

With no major surprises in first-quarter numbers, we retain our fair value estimate of SGD 1.92. We think that the trust is fairly valued at current prices and encourage investors to wait for a better entry price.

The trust’s business update was largely within our expectations, with healthy portfolio metrics such as a high portfolio occupancy rate of 98.5% and long weighted average lease expiry profile of 8.2 years as of March 31. All the borrowings maturing in 2023 have also been successfully refinanced in April, giving the trust a backloaded and relatively long weighted average debt tenor of 3.8 years. Management guided the cost of debt to rise further in the second quarter as the full impact of the refinancing is taken in. Nevertheless, we think that the trust remains in great shape with a high interest coverage ratio of 6.8 times as of March 31. Looking ahead, recent developments in artificial intelligence and machine learning reinforce our view that KDC REIT will continue to benefit from secular tailwinds driving data centre demand.