Keppel DC REIT: Data Center Outlook Remains Robust but Positives Have Been Priced In

We retained our fair value estimate of SGD 1.92 per unit after Keppel DC REIT AJBU, 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.

The trust’s new CEO remains upbeat on the prospect of the data center industry, citing data from third-party research reports that suggests global colocation data center demand will outstrip supply in the near term. Notably, he also shared his observations that hyperscaler demand for data centers in China remains strong in the tier 1 cities, amid positive news of the Chinese government granting its first batch of approvals for generative artificial intelligence to companies such as Baidu and Sensetime.