The proliferation of artificial intelligence/machine learning (often abbreviated as AI/ML) has brought about a boost in demand for data centre spaces. For Singaporean investors who like to tap onto this growing trend, there are 2 REITs that invest purely in data centres you can have a look at – one is Keppel DC REIT (SGX:AJBU) which I am invested in and my post today focuses on the REIT, and the other is Digital Core REIT (SGX:DCRU).

Listed on the Singapore Exchange on 12 December 2014 as the first pure-play data centre REIT in Asia, it invests in a diversified portfolio of income-producing real estate assets used primarily for data centre purposes, as well as real estate and assets necessary to support the digital economy. As at 31 December 2023, Keppel DC REIT’s portfolio comprises 23 data centres (they are a mix of colocation, fully-fitted, and shell and core assets) strategically located in key data centre hubs in 13 cities in 9 countries, valued at approximately $3.7 billion (71.8% of the portfolio’s assets under management is located in Asia Pacific, while 28.2% is located in Europe).

Keppel DC REIT's Annual Report for FY2023

Following the conclusion of the financial year on 31 December 2023 (I have posted a review of the REIT’s results for the 2nd half, as well as for the full year back in late-January 2024, and you can read about it here), the data centre REIT have published its annual report yesterday (26 March 2024) morning.

For the benefit of those who do not have the time to go through the report, you can read a summary of it in this post, together with details of its upcoming annual general meeting:

Summary of Keppel DC REIT’s Annual Report for FY2023

Milestones on Keppel DC REIT’s 10th Year of Listing:

  • Assets under Management grew from approximately $1.0 billion to $3.7 billion.
  • Geographical footprint expanded from 8 to 23 assets, with the REIT having a presence in key data centre markets in Asia Pacific and Europe.
  • Since its listing in December 2014, the REIT have delivered a total return of 193.2% to unitholders as at 31 December 2023.

Key Financial Figures for FY2023:

  • Distributable income and Distribution Per Unit (DPU) fell by 9.3% and 8.1% to $167.7m (FY2022: $184.9m), 9.383 cents (FY2022: 10.214 cents) respectively, mainly due to higher finance costs and loss allowances accounted for the Guangdong Data Centres. There were also net lower contributions from some of the Singapore colocation assets arising from higher facilities expenses, and less favourable forex hedges. However, this was partially offset by positive reversions and escalations, contributions from acquisitions made in FY2022, higher finance income, and tax savings following approvals obtained for NetCo Bonds to be qualified as Qualifying Project Debt Securities.
  • Gross revenue was up by 1.4% to $281.2m (FY2022: $277.3m), mainly due to contributions from prior year acquisitions, as well as positive reversions and escalations.
  • Property operating expenses spiked by 46.3% to $36.3m (FY2022: $24.8m), mainly due to loss allowances accounted for the Guangdong Data Centres.

Capital Management:

  • Aggregate leverage at 37.4% (FY2022: 36.4%)
  • Interest coverage ratio at 4.7 times (FY2022: 7.6 times)
  • Weighted average debt tenor at 3.4% (FY2022: 3.7%)

Portfolio Occupancy Profile:

  • Occupancy was at a high of 98.3%, with 17 of the 23 assets in the portfolio being fully occupied.
  • Long weighted average lease expiry of 7.6 years by area.
  • The leading tenant, a Fortune Global 500 Company, accounts for 35.0% of the REIT’s rental income, while the rest of the tenants each contribute less than 7.9% to the rental income.
  • In FY2023, the REIT was also successful in securing new and contract renewals with positive reversions and improving its power pass through positions during contract renewals for its colocation data centres.
  • On headwinds associated with high energy costs, more than 90% of electricity costs are passed through to colocation clients, whereas master lease clients contract electricity directly with the power suppliers.
  • Update on Guangdong Data Centre: In December 2023, the Manager issued a letter of demand for default on rent and coupon payments in relation to Guangdong DC 1, 2, and 3. It is working with the tenant on a recovery roadmap, and will continue to address the situation actively to protect the interests of the REIT. The manager has retained the rights to terminate the master leases, and Keppel has resources to take over the operations, if appropriate.

Robust Growth of the Data Centre Industry:

  • Fuelled by a further increase in cloud spending (as businesses and consumers increasingly adopt cloud-based solutions and services for efficiency and scalability), global rollout of 5G technology (which is expected to drive data centre demand as more devices are connected at higher speeds), along with Internet of Things and Generative Artificial Intelligence (which create new data centre demand as they generate vast amounts of data to be process and stored).

Sustainability Efforts:

  • In 2023, the REIT enhanced its reporting in accordance with recommendations from the Task Force on Climate-related Financial Disclosures (TCFD), further refining its scenario analysis and quantifying the financial impact of associated risks.
  • Attained a 3 Star rating and a Green Star status in the 2023 GRESB Real Estate Assessment – an improvement from a 2 Star rating and a Green Star status from its inaugural submission in 2022.
  • The REIT also scored an ‘A’ for its GRESB Public Disclosure in 2023, as well as a ‘B-‘ rating for its inaugural submission for the full CDP Climate Change Questionnaire 2023.
  • Keppel has shared plans to build DataPark+, an innovative, scalable, low-carbon, modular data centre campus. This is on top of approval being obtained for the construction of a floating data centre module which uses seawater instead of potable water for cooling – which Keppel DC REIT will stand to benefit as part of the Keppel family to propel the data centre industry towards a greener future.

Looking Ahead:

  • Management expects more acquisition opportunities for quality data centres as the interest rate environment stabilises.
  • Supported by a robust balance sheet, Keppel DC REIT is well-positioned to capture strategic growth opportunities – through 3rd party acquisitions, or through its Sponsor Keppel (which has more than $2 billion worth of data centre assets under development and management which the REIT can potentially acquire).

Details of Keppel DC REIT’s Upcoming AGM

When? Wednesday, 17 April 2024
Time? 10.30am
Where? Suntec Singapore Convention and Exhibition Centre, Nicoll 2-3, Level 3, 1 Raffles Boulevard, Suntec City, Singapore 039593

If your units of Keppel DC REIT are held in your CDP account, there is no need to pre-register, as verification will be done on the spot when you register at the meeting venue. However, if your units are held in a CDP account, then you will need to contact your brokerage to appoint you to attend the meeting as a proxy.

There are no options for unitholders to attend the meeting virtually.

Questions? You may submit them to investor.relations@keppeldcreit.com no later than 10.30am on 03 April 2024 for them to be addressed. Personally, I have submitted a couple of questions:

(i) With the proliferation of AI, will there be any additional capital expenditures required to equip the data centre properties to cater to the AI requirements for the colocation assets.

(ii) Given that the big tech companies like Alphabet and Amazon are building their own data centre properties to host sensitive data, and an increasing number of other companies look set to follow suit, will that lead to a gradual decline in demand in leases for data centres owned by 3rd parties (like Keppel DC REIT’s)?

(iii) What is the status surrounding Cyxtera – where the NASDAQ-listed data centre operator is the REIT’s customer at its GV7 Data Centre in London. Is the data centre still occupied by the company? If it is, then can the management provide an update on the payment of rentals? If not, may I know if the property has been leased to other companies or is it vacant?

(iv) Are there any updates surrounding the tenant default at the Guangdong Data Centres? Also, are there any timelines the management has to resolve this issue?

[Update on 15 April 2024: Keppel DC REIT have published their responses to substantial questions submitted by unitholders. All 4 questions which I submitted were responded to, and you can read about it here.]

Closing Thoughts

Definitely, there are headwinds at the moment related to the default of the tenant at its Guangdong Data Centres (as we can see for FY2023, it is one of the reasons why its distributable income to unitholders, and distribution per unit have taken a big hit). I am keeping tabs on the issue.

Another concern people may have is on increasing energy costs impacting the REIT’s bottom-line – on this, I note that a huge percentage of it (above 90%) has been passed on to the tenants for its colocation properties, while for its master lease properties, the tenants arrange their own energy provider, hence the impact of this issue on the REIT is minimal in my opinion.

On the other hand, I like to highlight that many of the REIT’s properties are fully occupied. Coupled with long leases (which is the nature of the industry), they provide a good level of income stability.

Finally, I will not be attending the meeting due to time constraints.

With that, I have come to the end of my summary of Keppel DC REIT’s annual report for FY2023. As always, I hope you have found the information presented in this post useful. However, do take note that all the opinions expressed above are purely mine which I am sharing for educational purposes only. You are strongly advised to 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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