For those of you who are interested in investing in a REIT that invests solely in data centres, Keppel DC REIT (SGX: AJBU) is one you may want to have a look at.

It was Asia’s first pure-play data centre REIT back when it was listed on the Singapore Exchange in December 2014.

Currently, its portfolio comprises 23 data centres strategically located in key data centre hubs located in the following locations (with the number of data centre properties in brackets): Australia (1), China (3), Germany (2), Ireland (2), Italy (1), Japan (1), Malaysia (1), Singapore (6), The Netherlands (3), as well as in The United Kingdom (3), with a total assets under management of S$3.9 billion.

One of the headwind the REIT is faced with at the moment is tenant default in Guangdong Data Centre – to which I understand from the investors’ relation they are looking to take back the properties, convert them into colocation properties, and then rent them out – the entire process is expected to take about 2 to 3 years. I will continue to keep a close watch for any latest developments on this front.

This morning (26 July), the data centre REIT released its results for the 2nd quarter, as well as for the 1st half of FY2024 ended 30 June, and in this post, let us have a look at its financial performance, portfolio occupancy and debt profile, as well as its distribution payout to unitholders.

Let’s begin:

Financial Performance (1H FY2023 vs. 1H FY2024)

My Observations: Of notable mention in Keppel DC REIT’s financial performance this time round was the 87.1% surge in its property operating expenses – which was mainly due to loss allowance made for the receivables from the Guangdong Data Centres.

Distributable income to unitholders was impacted by the huge loss allowance, higher finance costs, as well as the depreciation of foreign currencies against the Singapore dollar. However, this was partially offset by increase in rents contributed by strong positive reversions and escalations, along with higher variable rent arising from the settlement sum received from DXC Dispute – for information, after deducting related expenses and GST, distributable income of approximately S$11.2m will be distributed in 2 equal tranches on a half-yearly basis for FY2024 – meaning S$5.6m for each half of the financial year.

The only positive in the data centre REIT’s latest set of results is in its gross revenue, which climbed by 11.9% to $157.2m, mainly due to higher variable rent arising from the settlement sum related to the DXC Dispute, as well as positive reversions and escalations – excluding the DXC Dispute, the year-on-year increment in its gross revenue will be somewhere around the mid-single digit percentage.

Portfolio Occupancy Profile (Q1 FY2024 vs. Q2 FY2024)

Moving on, let us have a look at Keppel DC REIT’s portfolio occupancy profile.

I will be comparing the stats recorded for the current quarter under review (i.e., Q2 FY2024 ended 30 June), against that recorded in the previous quarter 3 months ago (i.e., Q1 FY2024 ended 31 March), as follows:

My Observations: Portfolio occupancy fell by 0.8 percentage points (pp) to 97.5%.

As far as lease expiries are concerned, over the next 2 financial years (i.e., FY2024 and FY2025), it has 20.2% and 21.3% of leases by gross rental income due for renewal. With the remaining 58.5% of the leases due for renewal only in FY2026 or later.

Debt Profile (Q1 FY2024 vs. Q2 FY2024)

Similar to how I have reviewed the data centre REIT’s portfolio occupancy profile in the previous section, in the table below, you will find a comparison of its debt profile where I will be comparing the stats reported for the current quarter under review (i.e., Q2 FY2024 ended 30 June) against that reported in the previous quarter (i.e., Q1 FY2024 ended 31 March):

My Observations: Compared to the previous quarter, Keppel DC REIT’s debt profile have improved slightly – particularly, its aggregate leverage improved by 1.8pp to 35.8%, mainly due to the repayment of approximately S$58.5m of debt for Intellicentre Campus and other EUR-denominated debt to strengthen balance sheet for growth.

However, I also note that following the acquisition of Tokyo Data Centre 1, aggregate leverage is expected to increase to 39.2% (even so, at this level, there is still a good debt headroom to the regulatory limit of 50.0%), with a lower cost of debt at approximately 3.3% as at 30 June 2024 on a pro forma basis.

Looking at its debt maturity profile, the REIT does not have any borrowings due for refinancing in the 2nd half of FY2024. In FY2025 and FY2026, it has 7.3% and 20.7% of borrowings due for refinancing each year, with the remaining 72% of borrowings due for refinancing in FY2027 or later.

Distribution Payout to Unitholders

The management of Keppel DC REIT declares a distribution payout to the unitholders on a half-yearly basis – once when it reports its results for the 1st half of the year, and once when it reports its results for the 2nd half of the year.

For the 1st half of FY2024, a distribution payout of 4.549 cents/unit was declared. Compared to its payout of 5.051 cents/unit last year, this represented a 9.9% decline, mainly due to loss allowance for the Guangdong Data Centres, higher finance costs, and depreciation of foreign currencies against the Singapore Dollar.

If you are a unitholder of Keppel DC REIT, do take note of the following dates about its distribution payout:

Ex-Date: 02 August 2024
Record Date: 05 August 2024
Payout Date: 23 September 2024

CEO Mr Loh Hwee Leong’s Comments and Outlook (from the REIT’s Press Release)

“Our strong operational performance and organic growth achieved in 1H 2024 underscore our commitment to create value. This was complemented by the strategic DPU-accretive transactions involving Tokyo Data Centre 1 and Intellicentre Campus. We will continue to optimise our portfolio, leverage our expertise and network to seize growth opportunities while upholding financial discipline to deliver sustainable returns.”

Closing Thoughts

3 headwinds faced by the REIT at the moment include loss allowances made for Guangdong Data Centres (and from my understanding from the REIT’s management, they will need somewhere around 2-3 years to fully resolve the issue), weaker foreign currencies against the Singapore Dollar, and higher financing costs (with about 26% of borrowings on floating rates as at 30 June 2024, the high interest rate environment is going to impact its distribution payout to a certain extent – even though when the US Federal Reserve starts cutting interest rates in the later months of the year, the REIT could benefit).

Debt profile continues to remain at a very healthy level – with its aggregate leverage is still a good distance away from the regulatory level of 50.0%.

Finally, on its portfolio occupancy profile – no doubt it has declined slightly compared to the previous quarter (from 98.3% in Q1 FY2024 to 97.5% in Q2 FY2024), it is still at a very high level. However, I still posed the following 2 questions to the investors’ relations to find out more about it (and I will update this page with the responses once I receive them):

[Update on 26 July 2024: Keppel DC REIT’s investors’ relation provided a response almost instantly, and they are being update under each question.]

1. I observed that Keppel DC REIT’s portfolio occupancy rate as of 30 June 2024 was 97.5%, a slight decrease from the 98.3% recorded on 31 March 2024. Could the management explain the reason for this decline?

[Response: The decline in portfolio occupancy was mainly due to the drop in occupancy of Keppel DC Singapore 1 arising from the DXC Dispute (link). We have taken back the space that was under dispute and re-letting of the space is in progress.]

2. I would also like to seek clarification from the management regarding lease expiries. Notably, 20.2% of leases by rental income are up for renewal in the second half of FY2024, and an additional 21.3% are due for renewal in FY2025 (in Page 11 of the Presentation Slide). This means that approximately 41.5% of leases are set to expire within the next 1.5 years. Could the management provide an update on whether discussions with tenants regarding lease renewals have begun, and at this point, can the management provide any projections on the rental reversion for these renewed leases?

[Response: Discussions for contract renewals for FY 2024 are ongoing and we hope to provide updates when finalised.]

With that, I have come to the end of my review of Keppel DC REIT’s latest results for the 1st half of FY2024. Do note that all the opinions expressed in this post are purely my own which I am sharing for educational purposes only. They do not constitute any buy or sell calls for the REIT’s units. You should always do your own due diligence before you make any investment decisions.

Related Documents

• Press Release
• Financial Statements
• Presentation Slides

Disclaimer: At the time of writing, I am a unitholder of Keppel DC REIT.

The post An Analysis of Keppel DC REIT's Results for 1H FY2024 first appeared on The Singaporean Investor.