Keppel DC REIT delivers solid performance. Will its share price rebound continue?



By Thong Jun Xi • 25 Jul 2023 • 0 min read

Keppel DC REIT (KDC REIT) reported a stable distribution per unit (DPU) for the first half of 2023 compared to the previous year. However, with its share price gaining 26% so far this year, a potential equity fundraising would be a key risk for the stock.

Keppel DC REIT results 1H 2023

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What happened?

Keppel DC REIT (KDC REIT) has kicked off the earnings season for Singapore REITs, where we will see 17 of them reporting earnings this week.

Keppel DC REIT reported a distribution per unit (DPU) of 5.051 cents for the first half of 2023, stable from the previous year. 

For this article, I would be sharing my key takeaways from both Keppel DC REIT’s 1H 2023 results and their earnings webcast.

What you need to know about Keppel DC REIT’s (KDC REIT) results

Keppel DC REIT’s distributable income in the first half of 2023 was little changed compared to the previous year. 

While there was some increase in its revenue, this was offset by an increase in property operating expenses with higher electricity costs, as well as an increase in finance costs with higher interest rates. 

Source: Keppel DC REIT 1H 2023 results presentation


Addressing concerns on the higher electricity costs, Keppel DC REIT management shared that data centre assets in Singapore and Australia are currently on fixed tariffs till 2024. In addition, a significant portion of these utility costs would be pushed to or recovered from the tenant during lease renewals. 

Keppel DC REIT also reported a slight drop in its net asset value, mainly due to foreign currencies weakening against the Singapore Dollar.

Source: Keppel DC REIT 1H 2023 results presentation


What are the positives from Keppel DC REIT’s (KDC REIT) results?

#1 - Portfolio occupancy rate remains high

Keppel DC REIT’s occupancy rate was 98.5% as at June 2023, unchanged from March 2023. 

During the earnings webcast, management of Keppel DC REIT shared that rental reversion in the first half of 2023 stands at a double-digit figure, reflecting the continued demand for data centre spaces.

 Source: Keppel DC REIT 1H 2023 results presentation


With the recent financial difficulties faced by selected tenants in the data centre market, management of Keppel DC REIT assured investors that it has a high quality client base.  

During the earnings webcast, there were queries about the status of the ongoing $14.8 million litigation claim against DXC and why it has not been resolved after close to a year.

Keppel DC REIT management shared that due to the complexity of the claim, it was not able to resolve the claim quickly with the courts. Hence, it is currently still pending a court date for the hearing.

Nevertheless, Keppel DC REIT has made provisions for the amount and excluded it from the distributable income since 2022. As such, there would be minimal adverse impact going forward. 

If the litigation claim were successful, there may be potential upside to future distributions for unitholders. 

There was also much discussion about Cyxtera, a provider of co-location data centre services which filed for bankruptcy in June. They are also in a master lease agreement with Keppel DC REIT for the G7 data centre in London.

Keppel DC REIT management shared that they are currently still paying for their rental obligations. 

In the worst-case scenario, should Cyxtera fail to meet its obligations, Keppel DC REIT will source for a new master lease tenant or take over and operate the data centre themselves.

Source: Keppel DC REIT Annual Report 2022


#2 – Medium term outlook remains positive for data centres

In terms of growth prospects, management reiterated that the data centre outlook remains positive due to limited supply in developed markets, the needs of the digital economy and generative AI.

In particular, management of Keppel DC REIT believes that generative AI could be a major catalyst for data centre demand given the need for immense computing power, and the REIT is well positioned to capitalise on the AI growth potential.

However, the REIT has yet to see any improvement to data centre demand from generative AI as yet as the industry is still in its infancy.  

What are the negatives from Keppel DC REIT’s (KDC REIT) results?

#1 – Higher interest rates has impacted distributable income

With the higher interest rate environment, we can dive deeper to understand how this has impacted Keppel DC REIT’s distributable income.

As seen from its debt profile below, Keppel DC REIT’s average debt cost increased to 3.3% in the second quarter at 2.8% in the first quarter. 

Source: Keppel DC REIT 1H 2023 results presentation


If we analyse the financial statements, Keppel DC REIT also recorded a 73.4% increase in its finance costs as compared to the previous year.

Source: Keppel DC REIT 1H 2023 financial statement


During the earnings webcast, Keppel DC REIT’s CFO shared that the higher finance costs came through largely from refinancing of floating loans.

As seen below, Keppel DC REIT currently has 73% of its debt at fixed rates and 27% of its debt at floating rates. This was unchanged from 1Q 2023. 

Despite the higher interest expense, Keppel DC REIT does not have any further refinancing needs for 2023 and the aggregate leverage remains healthy at 36.3%.

Source: Keppel DC REIT 1H 2023 results presentation


#2 - Potential equity fundraising 

Management shared that an equity fundraising could be considered to fund the final payment for the acquisition of Guangdong Data Centre 3, as well as any potential future acquisitions.

Following the fit-out of Guangdong Data Centre 3, Keppel DC REIT’s gearing is expected to increase to 38.5% from 36.3% currently.

With the pace of interest rate increases slowing down, Keppel DC REIT could also resume on making accretive acquisitions. Management of Keppel DC REIT noted that the REIT will continue to focus on the Asia-Pacific and Europe regions for any potential acquisitions.

What would Beansprout do?

Source: Google


After its 1H 2023 results, Keppel DC REIT’s share price remains little changed at $2.26 as of noon on 25th July 2023. 

That said, Keppel DC REIT’s share price has gone up by 26% so far this year, making it the best performing Singapore REIT year-to-date. 

This came about despite its removal from the benchmark Straits Times Index (STI) last month. 

The strong share price performance of Keppel DC REIT is likely driven by its stable distributions despite higher costs, as well as favourable long-term outlook for the data-centre market. 

However, the key risk for Keppel DC REIT after its strong share price rebound is any potential equity fund raising to fund acquisitions.  

At its current market price, Keppel DC REIT offers a forward dividend yield stands at 4.5%. This remains above the cut-off yield on the latest 6-month T-Bill on 20th July.

In comparison to other REITs with data centre assets, Keppel DC REIT’s forward dividend yield is slightly below the likes of Capitaland Ascendas REIT (5.0%), Mapletree Industrial Trust (5.6%) and Digital Core REIT (8.1%) as of 25 July 2023.

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