With the proliferation of artificial intelligence/machine learning (also known as AI/ML for short), I am of the opinion that demand for data centres is going to continue to remain resilient. In that regard, for those of you who would like to take advantage of this trend and invest in a pure-play data centre REIT listed on the Singapore Exchange, then Keppel DC REIT (SGX:AJBU) is one you can have a look at.

Currently, the REIT has a portfolio size of approximately S$3.6 billion, with properties in the following locations (and the number of properties in brackets): Singapore (6), Australia (2), China (3), Malaysia (1), Germany (2), Ireland (2), Italy (1), the Netherlands (3), as well as in the United Kingdom (3).

In December 2023, it was reported the REIT’s tenant of the 3 Guangdong Data Centres has defaulted on its rental obligations and related expenses, and a letter of demand has been issued. If the rent, coupon, and receivables could not be recovered, the REIT’s distribution payout would be impacted by 6.4% based on the its full year distribution payout in FY2022. You can read the news report on The Business Times in full here. As a unitholder of the REIT, I will be following the developments of this issue very closely.

This morning (26 January 2024), the data centre REIT have made available its results for the financial year ended 31 December (i.e., FY2023), and in this post, you will find a review of its financial performance, portfolio and debt profile, as well as its distribution payout to unitholders:

Financial Performance

In this section, you will find a comparison of Keppel DC REIT’s financial performance recorded for the current financial year under review against the previous financial year, as well as for the 2nd half of the current financial year under review against the same time period last year:

FY2022 vs. FY2023:

FY2022FY2023% Variance
Gross Revenue
(S$’mil)
$277.3m$281.2m+1.4%
Property Operating
Expenses (S$’mil)
$24.8m$36.3m+46.3%
Net Property
Income (S$’mil)
$252.5m$245.0m-3.0%
Distributable Income
to Unitholders
(S$’mil)
$184.9m$167.7m-9.3%

My Observations: On the whole, Keppel DC REIT’s results for the full year was largely weaker – with the only positive being the 1.4% increase in its gross revenue, which can be attributed to full year contribution from acquisitions made in the prior year, together with positive rental reversions and escalations. However, this was partially offset by net lower contributions from the Singapore colocation assets (largely arising from higher facilities expenses), as well as a weaker foreign currency against the Singapore dollar resulting in lower foreign sourced income.

The huge 46.3% jump in its property operating expenses was largely due to loss allowances made for the receivables from the Guangdong Data Centres (with regard to that, I understand that as at end-2023, the tenant has settled part of the sums in-arrears of RMB0.5m [S$0.1m], and the REIT is working with the tenant on a recovery roadmap). This led to the data centre REIT’s net property income and distributable income to unitholders falling by 3.0% and 9.3% respectively.

2H FY2022 vs. 2H FY2023:

2H FY20222H FY2023% Variance
Gross Revenue
(S$’mil)
$141.8m$140.7m-0.7%
Property Operating
Expenses (S$’mil)
$12.5m$23.1m+85.6%
Net Property
Income (S$’mil)
$129.3m$117.6m-9.1%
Distributable Income
to Unitholders
(S$’mil)
$93.7m$76.4m-18.5%

My Observations: Gross revenue inched down by 0.7% due to lower net contributions from the Singapore colocation assets, largely arising from higher facility expenses.

Property operating expenses saw a huge 85.6% jump, mainly due to loss allowance in relation to uncollected rental and coupon income of ~5.5 months and recoveries at the Guangdong Data Centres. Together with a 43.5% increase in finance costs (from $18.0m in 2H FY2022 to $25.8m in 2H FY2023), its distributable income to unitholders fell by 18.5%.

Portfolio Occupancy Profile (Q3 FY2023 vs. Q4 FY2023)

One of the reasons I invested in the REIT back in October 2021 (you can have a look at the list of 13 Singapore-listed companies I have investments in here) is its very high portfolio occupancy recorded in its properties, and it has continued to remain as such.

Let us have a look at the numbers recorded for the 4th quarter of FY2023 ended 31 December 2023, compared against that recorded in the previous quarter (i.e., the 3rd quarter of FY2023 ended 30 September 2023) to find out whether it has continued to remain at a healthy rate:

Q3 FY2023Q4 FY2023
Portfolio Occupancy
(%)
98.3%98.3%
Portfolio WALE
(years)
7.8 years7.6 years

My Observations: Occupancy rates of its portfolio remains at a high of 98.3%, unchanged from the previous quarter. I understand that the REIT have managed to secure new and renewal contracts with positive reversions.

As far as lease expiries are concerned, I note that there is rather big percentage of leases by rental income (27.5%) due for renewal in FY2024, as well as another 26.6% and 22.9% by lettable area and rental income respectively due for renewal in FY2025. That said, a huge percentage of the leases (49.8% by lettable area and 28.6% by rental income) are due for renewal only in FY2029 or later – which is quite some time from now.

Another thing to note about its portfolio occupancy is that, the top client (a Fortune Global 500 company) contributes 35.0% towards the REIT’s rental income [hence to a certain extent, there is a risk in that, should the company opt to not renew its leases when they expire, the REIT’s rental income will suffer from a big decline). The remaining tenants contribute no more than 7.8% towards the REIT’s rental income.

Debt Profile (Q3 FY2023 vs. Q4 FY2023)

No doubt the US Federal Reserve (or US Fed for short) have signalled that interest rates will be cut in 2024, but at the present moment, they still remain at a very high level. Also, even if the US Fed have trimmed interest rates, it will be some time before the lower borrowing costs will be reflected as the REITs refinance their borrowings.

Hence, it is still very important to keep a close eye on a REIT’s debt profile to make sure its aggregate leverage does not inch too close to its regulatory limit (of 50.0% should the interest coverage ratio be maintained at 2.5x or above) – even though there are no penalties should its aggregate leverage cross above the regulatory limit, but the REIT will no longer be allowed to take up further bank borrowings, which means it will no longer be able to expand through further acquisition of properties.

In the table below, let us take a look at Keppel DC REIT’s debt profile recorded for the 4th quarter of FY2023 ended 31 December 2023, compared against that recorded in the previous quarter 3 months ago (i.e., the 3rd quarter of FY2023 ended 30 September 2023) to find out if it is in a healthy state:

Q3 FY2023Q4 FY2023
Aggregate Leverage
(%)
37.2%37.4%
Interest Coverage
Ratio (times)
5.4x4.7x
Average Term to
Debt Maturity (years)
3.7 years3.4 years
Average Cost of
Debt (%)
3.2%3.6%
% of Borrowings Hedged
to Fixed Rates (%)
72%74%

My Observations: Apart from the slightly higher percentage borrowings hedged to fixed rates (at 74%, up from 72% in Q3 FY2023), Keppel DC REIT’s debt profile is a weaker one, with its aggregate leverage inching up by another 0.2 percentage points (pp) to 37.4% (however, it is still a good distance away from the regulatory limit of 50.0%), and average cost of debt up by another 0.4pp to 3.6%.

Looking at its debt maturity profile, it is pretty well-spread out over the years – with 4.0% of borrowings due for refinancing in FY2024, 7.0% of borrowings due for refinancing in FY2025, 23.1% of borrowings due for refinancing in FY2026, and the remaining 65.9% of borrowings due for refinancing only in FY2027 or beyond.

Distribution Payout to Unitholders

The management of Keppel DC REIT declares a distribution on a half-yearly basis – hence, for the 2nd half of FY2023, a distribution payout of 4.332 cents/unit was declared – comparing with its payout of 5.165 cents/unit, this represents a 16.1% decline, as a result of higher finance costs, and loss allowances for the uncollected rental income from the Guangdong Data Centres.

If you are a unitholder of the data centre REIT, do take note of the following dates on its distribution payout:

Ex-Date: 02 February 2024
Record Date: 05 February 2024
Payout Date: 11 March 2024

Together with its distribution payout of 5.051 cents/unit declared in the 1st half of FY2023, it’s full year distribution payout amounts to 9.383 cents/unit – and this represents a 8.1% decline compared to the previous financial year (i.e., FY2022), where a total distribution payout of 10.214 cents/unit was declared.

Closing Thoughts

Apart from its portfolio occupancy profile (where the occupancy rate of its properties continue to remain at a high level of 98.3%), the data centre REIT’s results for the 2nd half and for the full year ended 31 December 2023 (i.e., FY2023) was largely a weaker one (in my personal opinion).

For its financial results, its net property income and distributable income for unitholders was impacted by loss allowances made for the receivables from the Guangdong Data Centres, along with higher finance costs (which climbed by 56.1% for the full year [compared to last year], as well as by 43.5% for the 2nd half of the year [compared to the same time period last year]).

Debt profile for the 4th quarter of FY2023 compared to the previous quarter 3 months ago was also slightly weaker – particularly with its aggregate leverage up by 0.2pp to 37.4% (but as I have mentioned earlier, it is still at a healthy level), along with its average cost of debt going up by another 0.4pp to 3.6%.

As a unitholder, I will continue to keep tabs on the situation surrounding its Guangdong Data Centres – to recap, as at end-2023, the tenant has settled part of the sums in-arrears of RMB0.5m (S$0.1m), and the REIT is working with the tenant on a recovery roadmap.

With that, I have come to the end of my review of Keppel DC REIT’s latest results for the 2nd half, as well as for FY2023. Do note that all the opinions above are purely my own which I’m sharing for educational purposes only. They do not imply any buy or sell calls for the REIT’s units. As always, please do your own due diligence before you make any investment decisions.

Related Documents

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

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