Singapore’s first pure-play data centre REIT in Keppel DC REIT (SGX:AJBU) released its business update for the third quarter of the financial year ended 30 September 2022 (i.e. Q3 FY2022) after market hours yesterday (26 October 2022.)
For those of you who may be hearing about the REIT for the first time, at the time of writing, its portfolio comprises a total of 23 data centres in the following locations: Singapore (6), Australia (2), China (3), Malaysia (1), Germany (2), Ireland (2), Italy (1), The Netherlands (3), The United Kingdom (3). The data centre REIT was also included in Singapore’s benchmark Straits Times Index (STI) since October 2020.
As the REIT has switched to half-yearly reporting of its financial results, it did not report its full financial statements this time round, but provided a snippet of it – which we will be looking at in this post, together with its portfolio occupancy and debt profile. Additionally, you’ll also find my review about the REIT’s latest set of results.
Let’s begin:
Financial Performance (Q3 FY2021 vs. Q3 FY2022, and 9M FY2021 vs. 9M FY2022)
In this section, let us take a look at the data centre REIT’s financial performance both on a quarter-on-quarter (i.e. Q3 FY2021 vs. Q3 FY2022), as well as on a year-on-year (9M FY2021 vs. 9M FY2022) basis:
Q3 FY2021 vs. Q3 FY2022:
| Q3 FY2021 | Q3 FY2022 | % Variance | |
| Gross Revenue (S$’mil) | $69.3m | $69.4m | +1.4% |
| Property Operating Expenses ($’mil) | $5.6m | $6.3m | +12.7% |
| Net Property Income (S$’mil) | $63.8m | $63.1m | +0.4% |
| Distributable Income to Unitholders (S$’mil) | $43.1m | $46.6m | +10.4% |
My Observations: Personally, I felt that the data centre REIT’s latest quarterly results was pretty much a muted one – where its gross revenue and net property income only inched up by 1.4% and 0.4% respectively.
In particular, the 1.4% increase in its gross revenue can be attributed to contributions from the newly acquired Guangdong Data Centre 1, 2, and 3, London Data Centre, and Eindhoven Campus, AEIs, renewals and income escalations, along with the completion of Intellicentre 3 East Data Centre, but offset by lower contributions from some of the Singapore colocation assets, depreciation of the European Dollar, Australian Dollar, and the British Pounds against the Singapore Dollar, along with the lack of contribution from iseek Data Centre following the REIT’s divestment in it.
On the other hand, the 12.7% climb in property operating expenses was due to higher property-related expenses at the Dublin assets following the AEI completion, which led to its net property income edging up by only 0.4%.
Despite that, distributable income to unitholders saw a 10.4% climb due to higher finance income mainly due to interest income from NetCo Bonds, along with coupon income from Guangdong Data Centre 3. However, no distribution is declared for the current quarter under review as the REIT have shifted to paying out distributions on a half-yearly basis.
9M FY2021 vs. 9M FY2022:
| 9M FY2021 | 9M FY2022 | % Variance | |
| Gross Revenue (S$’mil) | $204.5m | $205.9m | +0.7% |
| Property Operating Expenses ($’mil) | $16.9m | $18.5m | +9.9% |
| Net Property Income (S$’mil) | $187.6m | $187.3m | -0.2% |
| Distributable Income to Unitholders (S$’mil) | $127.3m | $138.1m | +8.5% |
My Observations: The above was self-compiled based on the REIT’s results over the first 9 months this year, as well as the last, as the REIT did not provide this in its business update.
Just like its q-o-q results, its financial performance for the first 9 months of the current financial year is also muted.
Portfolio Occupancy Profile (Q2 FY2022 vs. Q3 FY2022)
Moving on, let us take a look at Keppel DC REIT’s portfolio occupancy profile, where I will be comparing the statistics reported for the current quarter under review (i.e. Q3 FY2022 ended 30 September 2022) against that reported in the previous quarter 3 months ago (i.e. Q2 FY2022 ended 30 June 2022) to find out whether or not it has continued to remain resilient:
| Q2 FY2022 | Q3 FY2022 | |
| Portfolio Occupancy (%) | 98.2% | 98.6% |
| Portfolio WALE (years) | 7.6 years | 8.7 years |
My Observations: Its encouraging to note that the data centre REIT’s portfolio occupancy profile have improved – both in terms of portfolio occupancy, as well as portfolio WALE (Weighted Average Lease Expiry.)
On top of that, its lease expiry profile is also well-staggered, with just 0.9% of the leases (by lettable area) and 2.6% of the leases (by rental income) expiring in the remaining quarter of FY2022, 4.2% of the leases (by lettable area) and 13.3% of the leases (by rental income) expiring in the coming financial year 2023, 5.3% of the leases (by lettable area), and 22.8% of the leases (by rental income) expiring in FY2024, and 89.6% of the leases (by lettable area) and 61.3% of the leases (by rental income) expiring only in FY2025 or later.
Finally, for those who are worried about rising utilities expenses affecting the REIT’s bottom-line (and in turn, affecting its distribution payout), 90% of electricity costs are passed through to co-location clients, with master lease clients contract electricity directly with the power suppliers – hence, any disruptions to the REIT’s bottom-line and distribution from rising electricity costs are very much mitigated.
Debt Profile (Q2 FY2022 vs. Q3 FY2022)
Similar to how I have reviewed the REIT’s portfolio occupancy profile in the previous section, I will be reviewing its debt profile by comparing the stats reported in the current quarter under review against that reported 3 months ago, as follows:
| Q2 FY2022 | Q3 FY2022 | |
| Aggregate Leverage (%) | 35.3% | 37.5% |
| Interest Coverage Ratio (times) | 9.2x | 8.5x |
| Average Term to Debt Maturity (years) | 4.1 years | 3.9 years |
| Average Cost of Debt (%) | 1.9% | 2.0% |
| % of Borrowings Hedged to Fixed Rates (%) | 76% | 74% |
My Observations: Compared to the previous quarter, Keppel DC REIT’s debt profile have obviously weakened.
The 2.2 percentage point (pp) rise in aggregate leverage was mainly due to the financing of acquisition of Guangdong Data Centre 2 and the premises of Guangdong Data Centre 3 (comprising only the shell and core.)
While only 74% of its borrowings are hedged to fixed rates (a bit on the low side in my personal opinion – in light of the current rising interest rate environment, my preference its towards REITs that have more than 80% of its borrowings at fixed rates), but in terms of debt maturity, only 2.6% of borrowings will mature in the remaining quarter of FY2022, with another 11.1% of borrowings maturing in FY2023, and 4.0% of borrowings maturing in FY2024. A huge bulk of borrowings (82.3%) will mature only in FY2025 and beyond. Hence, any negativities on how the refinancing of borrowings will impact distribution payouts (where a 100bps rise in interest rates will have an approximately 2.1% impact to its Q3 FY2022 DPU on a pro-forma basis) is very much mitigated in the near- to mid-term.
Closing Thoughts
As far as the REIT’s financial performance (both on a q-o-q as well as on a y-o-y basis) is concerned, its pretty much muted – and I expect it to remain that way in the coming quarters ahead, unless or otherwise there are any contributions from new acquisitions (but in light of the current high interest rate environment, the management will likely be very careful in making such moves.)
Another thing to highlight is its debt profile – where only 74% of the REIT’s borrowings are hedged at fixed rates – while its on the low side (in my opinion), but with just 2.6% of borrowings expiring in the remaining quarter of FY2022, and another 11.1% of borrowings expiring in FY2023, any negativities surrounding the impact of rising interest rates on distribution payouts is, in my opinion, is mitigated somewhat.
On the other hand, one big positive to note about the REIT’s latest business update is its portfolio occupancy profile – where its overall portfolio occupancy rate is at a high of 98.6%, with a bulk of its leases (60.1% by lettable area, and 36.7% by rental income) only due for renewal from FY2027 and beyond, it provides a good income stability over the near- to mid-term.
With that, I have come to the end of my review of Keppel DC REIT’s latest third quarter business update. Hope you’ve found the contents presented above useful, and do take note that everything you have just read is for educational purposes only. They do not represent any buy or sell calls for the REIT’s units. You should always do your own due diligence before you make any investment decisions.
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Disclaimer: At the time of writing, I am a unitholder of Keppel DC REIT.
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