In a blink of an eye, the first half of the year is beyond us, and we are now into the second half of 2023. I hope you have had a great one so far.
It’s another round of earnings season again, and over the next few weeks, companies will be making available their financial reports or business updates for the quarter ended 30 June 2023.
The first company in my investment portfolio (you can check out a list of all the companies I am invested in here) to release its results is Keppel DC REIT (SGX:AJBU) after market hours today (24 July 2023).
Listed on the Singapore Exchange in December 2014, the REIT is the first pure play data centre REIT in Asia, where its portfolio comprises 23 data centres across 9 countries – Singapore, Australia, China, Malaysia in the Asia Pacific region, as well as Germany, Ireland, Italy, the Netherlands, and the United Kingdom in Europe.
In this post, you will find my review of the data centre REIT’s latest results in terms of its financial performance (1H FY2022 vs. 1H FY2023, and Q2 FY2022 vs. Q2 FY2023), portfolio occupancy and debt profile (Q1 FY2023 vs. Q2 FY2023), as well as its distribution payout to unitholders.
Let’s begin…
Financial Performance (1H FY2022 vs. 1H FY2023, and Q2 FY2022 vs. Q2 FY2023)
In this section, you will find my review of the data centre REIT’s financial results on a half-yearly basis, as well as on a quarterly basis:
1H FY2022 vs. 1H FY2023:
| 1H FY2022 | 1H FY2023 | % Variance | |
| Gross Revenue (S$’mil) | $135.4m | $140.5m | +3.6% |
| Property Operating Expenses (S$’mil) | $12.3m | $13.1m | +6.6% |
| Net Property Income (S$’mil) | $123.2m | $127.4m | +3.3% |
| Distributable Income to Unitholders (S$’mil) | $91.2m | $91.3m | +0.2% |
My Observations: Gross revenue and net property income saw slight improvements by 3.6% and 3.3% respectively as a result of contributions from the newly acquired Guangdong DC 2 and the building shell of Guangdong DC 3, along with contract renewals and income escalations. However, this was partially offset by net lower contributions from the Singapore colocation assets, largely arising from the higher facility expenses (including electricity), as well as the depreciation of foreign currencies against the Singapore Dollar.
Property operating expenses, however, went up by a higher percentage of 6.6% due to higher other property-related costs in the overseas assets.
Finally, distributable income to unitholders only inched up by 0.2% as a result of higher finance costs from the refinanced loans and floating interest rates loans.
Q2 FY2022 vs. Q2 FY2023:
The following table is a comparison of the REIT’s results for the 2nd quarter of FY2022 and FY2023 which I have computed based on the financial information for the 1st quarter, as well as for the first half of the year for the respective periods:
| Q2 FY2022 | Q2 FY2023 | % Variance | |
| Gross Revenue (S$’mil) | $69.4m | $70.1m | +0.9% |
| Property Operating Expenses (S$’mil) | $6.3m | $6.6m | +4.2% |
| Net Property Income (S$’mil) | $63.1m | $63.5m | +0.6% |
| Distributable Income to Unitholders (S$’mil) | $46.6m | $45.0m | -3.6% |
My Observations: Looking at the data centre REIT’s 2nd quarter results, it is pretty much a muted one, where gross revenue and net property income inched up by less than a percent. However, its distributable income fell by 3.6% due to impacts of higher borrowing costs.
Portfolio Occupancy Profile (Q1 FY2023 vs. Q2 FY2023)
Moving on, let us take a look at Keppel DC REIT’s portfolio occupancy profile, where I will be comparing the statistics recorded in the current quarter under review (i.e., Q2 FY2023 ended 30 June 2023) and compare them against the previous quarter 3 months ago (i.e., Q1 FY2023 ended 31 March 2023) to find out if it has continued to remain resilient:
| Q1 FY2023 | Q2 FY2023 | |
| Portfolio Occupancy (%) | 98.5% | 98.5% |
| Portfolio WALE (years) | 8.2 years | 8.0 years |
My Observations: Portfolio occupancy remains at a high of 98.5%. Even though its portfolio WALE dipped slightly, but it is still considered as stable. Also, with a WALE of 8.0 years, and with more than half of the portfolio have built-in income and rental escalations, it can provide some income stability for the REIT.
In terms of lease expiry profile, they are quite well-spread out over the years ahead, as follows:
- 2nd half of FY2023: 3.4% by net lettable area, and 12.2% by rental income
- FY2024: 5.8% by net lettable area, and 23.4% by rental income
- FY2025: 26.4% by net lettable area, and 22.5% by rental income
- FY2026 and beyond: 64.4% by net lettable area, and 41.9% by rental income (more importantly, a huge bulk of the leases will only expire in FY2028 and beyond).
Debt Profile (Q1 FY2023 vs. Q2 FY2023)
Just like how I have reviewed the REIT’s portfolio occupancy profile in the previous section, I will also be reviewing its debt profile by comparing the statistics recorded in the current quarter under review against that recorded in the previous quarter, and you can find them in the table below:
| Q1 FY2023 | Q2 FY2023 | |
| Aggregate Leverage (%) | 36.8% | 36.3% |
| Interest Coverage Ratio (times) | 6.8x | 6.0x |
| Average Term to Debt Maturity (years) | 3.8 years | 3.7 years |
| Average Cost of Debt (%) | 2.8% | 3.3% |
| % of Borrowings Hedged to Fixed Rates (%) | 76% | 73% |
My Observations: In my opinion, the REIT’s debt profile have weakened slightly compared to the previous quarter – where its average cost of debt went up by 0.5 percentage points (pp), and because of that, its interest coverage fell to 6.0x – despite of that, I still consider it to be healthy (anything above 5.0x is considered healthy in my opinion).
As far as its aggregate leverage goes, at 36.3%, it is a good distance away from the regulatory limit of 50.0%, giving the REIT some good debt headroom to pursue any yield accretive acquisitions.
With 73% of the borrowings hedged to fixed rates, the remaining 27% of unhedged borrowings will be affected by the current high interest rate environment, where a 100-basis point increase will have a ~2.2% impact to Q2 FY2023’s distribution per unit on a pro forma basis.
On its debt maturity profile, the REIT have completed refinancing of all loans due in 2023 in April 2023, hence there is nothing to worried about for this aspect in the 2nd half of the current financial year. In 2024, only 4.1% of the borrowings will be due for refinancing, and another 7.0% due for refinancing in FY2025. The remaining 88.9% of the borrowings will be due for refinancing only in FY2026 and beyond.
Distribution Payout to Unitholders (1H FY2022 vs. 1H FY2023)
The management of Keppel DC REIT declares a distribution payout to unitholders on a semi-annual basis.
For the first half of the financial year 2023 (period between 01 January and 30 June 2023), a distribution payout of 5.051 cents/unit was declared – more or less the same compared to its payout of 5.049 cents/unit declared in the same time period last year (i.e., 1H FY2022 between 01 January and 30 June 2022).
If you are a unitholder of the REIT, do take note of the following dates regarding its distribution payout:
Ex-Date: 31 July 2023
Record Date: 01 August 2023
Payout Date: 14 September 2023
Closing Thoughts
On its financial performance, it was a rather muted set of results in my opinion, but one that is expected, considering the lack of acquisition activities due to the high interest environment, along with unfavourable forex hedges – which saw its distributable income to unitholders taking a hit.
Portfolio occupancy continues to be very resilient, at 98.5%, with a long WALE, and rental escalations built-in, hence providing some degree of income stability here.
Finally, on its debt profile, no doubt it has weakened slightly, but it is good to see that only about 11.1% of borrowings will be due for refinancing from now till end-2025 (none in the 2nd half of FY2023, 4.1% in FY2024, and 7.0% in FY2025), where by then, interest rates should have come down to reasonable levels. Hence, in my opinion, the REIT’s impact to the high interest rate environment is quite minimal.
With that, I have come to the end of my review of Keppel DC REIT’s results for the first half of FY2023. As always, I hope you have found the contents presented in this post useful, and do note that everything you have just read in this post is for educational purposes only. You are strongly encouraged to do your own due diligence before making any investment decisions.
Related Documents
Disclaimer: At the time of writing, I am a unitholder of Keppel DC REIT.
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