[Update on 19 April 2024: In the ‘Closing Thoughts’ section, I requested clarifications from the REIT’s investor relations regarding the Guangdong Data Centre, lease renewals, and top tenant concentration issues. They provided responses on the same day, which are now included in italics under the respective questions.]

Listed on the Singapore Exchange on 12 December 2014, Keppel DC REIT (SGX:AJBU) is Asia’s first pure-play data centre REIT.

As the name suggests, it invests in properties used for data centre purposes. On top of that, it also invest in real estate and assets necessary to support the digital economy. Currently, its portfolio comprises 23 data centres strategically located in key data centre hubs in 13 cities in 9 countries across Asia Pacific and Europe.

One concern surrounding Keppel DC REIT at the moment is tenant default at its Guangdong Data Centre, to which it has made loss allowances for in its FY2023 results (as a result, its property operating soared by 46.3%, and its net property income and distributable income to unitholders fell by 3.0% and 9.3% respectively). In my opinion, as long as the issue remains unresolved, its unit price will continue to be negatively impacted. It is something I will keep a close watch on for any latest developments as a unitholder.

The data centre REIT have released its business update for the 1st quarter of FY2024 ended 31 March this morning (19 April 2024). In this post, you will find my review of its financial results, portfolio occupancy, as well as its debt profile.

Let’s begin:

Financial Performance (Q1 FY2023 vs. Q1 FY2024)

Despite being a business update for the 1st quarter, Keppel DC REIT still provided some information about its financial performances.

In the table below, you will find a comparison of the financial numbers recorded in the current quarter under review (i.e., Q1 FY2024) against that recorded in a year ago (i.e. Q1 FY2023):

Q1 FY2023Q1 FY2024% Variance
Gross Revenue
(S$’mil)		$70.4m$83.4m+18.4%
Property Operating
Expenses (S$’mil)		$6.5m$12.4m+89.6%
Net Property
Income (S$’mil)		$63.9m$71.0m+11.2%
Distributable Income
to Unitholders (S$’mil)		$46.3m$38.8m-16.3%

My Observations: Keppel DC REIT’s financial performance for the 1st quarter of the year was weighed down loss allowances for rental defaults by its tenant in Guangdong DC, which led to a 89.6% year-on-year jump in its property operating expenses.

This, coupled by higher finance costs, and less favourable forex hedges, resulted in a 16.3% decline in its distributable payout to unitholders to $38.8m.

Finally, the 18.4% increase in the data centre REIT’s gross revenue was attributable to the settlement sum received in relation to the dispute with DXC (with the S$13.3m settlement sum received in full; after deduction of related expenses and taxes, distributable income of S$11.2m will be distributed evenly over 4 quarters in FY2024).

Portfolio Occupancy Profile (Q4 FY2023 vs. Q1 FY2024)

Moving on to the data centre REIT’s portfolio occupancy profile, you will find a comparison of the stats recorded in the current quarter under review (i.e., Q1 FY2024 ended 31 March 2024) against that recorded in the previous quarter 3 months ago (i.e., Q4 FY2023 ended 31 December 2023) to find out whether it has continued to remain resilient:

Q4 FY2023Q1 FY2024
Portfolio Occupancy
(%)		98.3%98.3%
Portfolio WALE
(years)		7.6 years7.4 years

My Observations: Portfolio occupancy remains at a high of 98.3% (which is good to note).

From my understanding in the REIT’s presentation slides, it has managed to secure new and renewal contracts at favourable reversions (which is positive in terms of the growth of its gross revenue moving forward).

However, in terms of lease expiry, I note that in the remaining 3 quarters of FY2024 as well as in FY2025, it has 26.7% and 23.0% of leases by rental income due for renewal – in total, it amounts to close to 50% of leases due for renewal in the next 2 years, and I will be closely watching on whether they are being renewed at favourable terms.

Another thing to note is that, in terms of its top 10 tenants, the top tenant (a Fortune Global 500 Company) contributes 34.7% towards the data centre REIT’s rental income, with the remaining tenants contributing no more than 7.8% towards its rental income – so the risk here is that, should the top tenant decide not to renew its contract, the REIT’s financial performance will take a significant hit.

Debt Profile (Q4 FY2023 vs. Q1 FY2024)

Similar to how I have reviewed the REIT’s portfolio occupancy profile in the previous section, I will also be doing a review of its debt profile the same way – i.e., by comparing the statistics recorded for the current quarter under review (i.e., Q1 FY2024 ended 31 March 2024) against that recorded in the previous quarter 3 months ago (i.e., Q4 FY2023 ended 31 December 2023) to find out if it continues to remain at a healthy level:

Q4 FY2023Q1 FY2024
Aggregate Leverage
(%)		37.4%37.6%
Interest Coverage
Ratio (times)		4.7x3.6x
Average Term to
Debt Maturity (years)		3.4 years3.2 years
Average Cost of
Debt (%)		3.6%3.5%
% of Borrowings Hedged
to Fixed Rates (%)		74%73%

My Observations: In terms of the REIT’s debt profile, on the whole, I consider it to be healthy – particularly, its aggregate leverage of 37.6%, even though it has inched up slightly compared to the previous quarter, is still a safe distance to the regulatory limit of 50.0%.

Looking at its debt maturity ahead, it has approximately 4.0% and 7.0% of borrowings due for refinancing in the remaining 3 quarters of FY2024 and in FY2025 respectively. The remaining 89% of borrowings are due only in FY2026 and later. By that time, it is expected that interest rates will be lower than current levels, leading to more favourable borrowing costs.

Closing Thoughts

Keppel DC REIT’s financial performance was weighed down by loss allowances it has recognised for the rental default of a tenant in its Guangdong DC – with regard to this issue, from my understanding, the tenant have made additional partial payments totalling RM0.65m in Q1 FY2024, and the REIT has actively engaged with the tenant to safeguard the interests of the REIT and its stakeholders. It’s something I will be keeping a close watch on.

Another area of concern is that, even though its portfolio occupancy is at a high of 98.3%, but between FY2024 and FY2025, it has about 50% of the leases (by rental income) due to renewal – hence, the terms at which these leases are being renewed will have an impact on the REIT’s financial performances in the years ahead.

On the other hand, in terms of its debt maturity, I note that it has only 11% of borrowings maturing in FY2024 and FY2025, with 89% of borrowings maturing only in FY2026 or later – by then, interest rates would be lower compared to today, and these borrowings should be renewed at more favourable borrowing costs.

With some of the concerns regarding loss allowances for the tenant default in its Guangdong Data Centre, relatively high percentage leases due for renewal within the next 2 years, and a huge revenue contribution by the REIt’s top tenant in mind, I have submitted the following 3 questions to seek clarification from the REIT’s management:

Question 1: For how many more quarters will “loss allowances” be made on the tenant default for Guangdong DC?

Keppel DC REIT’s Response:

  • As part of the recovery roadmap, we are taking a more active approach and indirectly stepping in to run the Guangdong Data Centres like a colocation asset. This allows us to get to know the assets and stakeholders better, which will prepare us for a takeover in the worst case scenario.
  • From our involvement, we have gained greater insights into the operations and leasing pipeline for the assets. We have seen an increase in generative AI related enquiries and a healthy leasing pipeline. These will nonetheless need some time to convert into contracts and ramp up subsequently, which usually takes 2 – 3 years for new data centres.
  • We will continue to closely monitor progress for the Guangdong DCs for the next 12 – 24 months.

Question 2: I noticed that close to 50% of the leases (by rental income) are due for renewal in the remaining 3 quarters of FY2024 (26.7%) as well as in FY2025 (23.0%). May I ask if the REIT has already engaged in discussions with the tenants on lease renewal? The reason for my question is because should the lease be renewed at unfavourable terms, the REIT’s gross revenue in the years ahead will take a huge hit.

Question 3: I note that the top tenant (which is a Fortune Global 500 Company) contributes 34.7% towards the REIT’s rental income – may I know what is the lease period? The reason for my question is because, should this single tenant decide not to renew its lease upon expiry, the REIT’s gross revenue will be adversely impacted.

Keppel DC REIT’s Responses to Questions 2 and 3:

  • Demand for data centres is expected to outpace supply. The strong demand for data centres is underpinned by several secular trends including the continued move to the cloud, global rollout of 5G technology and wider adoption of AI. On the other hand, supply is expected to be constrained due to a lack of available power and increasing sustainability concerns.
  • Client retention rates tend to be higher for our asset class given the mission critical nature of the business, and we are confident of being able to maintain a healthy occupancy, given our strong track record and long-standing relationship with our clients. 
  • At the portfolio level, our contract expiry profile is staggered, which helps to lower the risk of a significant decline in rents/non-renewals in any single year. 
  • For leases coming up for renewal, discussions on contract renewals are ongoing. We typically engage our clients at least 6 to 9 months before each contract expiry or prior if needed, to understand their renewal intentions or shifts in business strategy.
  • Contracts with our top client is spread across different data centres/geographies with contracts with different expiry dates. Our top client has grown with us since IPO.  Given the global reach and market dominance of hyperscalers or large enterprises, it is common in the industry and amongst our peers, for a large, credit worthy client to be an anchor client in the portfolio, based on their contracts in multiple assets for a global portfolio. 
  • Keppel DC REIT will continue to ensure we remain a preferred partner for hyperscalers/clients. This includes curating a portfolio of strategically located data centres in markets important to our target clients, as well as working with Keppel Data Centres to create a robust and reliable ecosystem that meets the stringent and evolving needs of hyperscalers/clients.

Finally, in case you are wondering, there are no distribution payouts declared for the current quarter under review, as the REIT has a half-yearly distribution payout policy.

With that, I have come to the end of my review of Keppel DC REIT’s latest Q1 FY2024 business update. Please take note that all the opinions expressed above are purely my own which I’m sharing for educational purposes only. They do not represent any buy or sell calls for the REIT’s units. As always, you are strongly advised to 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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