Broker Name and Date
- Broker: CGS International Securities
- Date: October 21, 2024
3Q24 Financial Performance
Keppel DC REIT reported a 3Q24 distribution per unit (DPU) of 2.501 Singapore cents, which represented a year-over-year increase of 6.1% and a quarter-on-quarter rise of 0.4%. The DPU formed 28.9% of CGS International’s FY24 forecast, slightly exceeding expectations at 28.5% of FY24 full-year forecast.
Gross Revenue and Occupancy Rates
Gross property revenue for 3Q24 was S$76.9 million, reflecting a 8.9% increase year-on-year and 4.2% growth quarter-on-quarter. Portfolio occupancy remained stable at 97.6%, though there is a possibility it could dip to around 97.0% due to a non-renewal at the Gore Hill data center in Sydney, which represents a small percentage of the net lettable area and gross rental income.
Positive Lease Reversions and Renewals
The company successfully renewed a significant lease in Singapore with positive reversions exceeding 40%, alongside renewals in Australia, Dublin, and Amsterdam. This trend suggests strong leasing demand across its portfolio. The 3Q24 financial performance was further boosted by positive lease reversions and the contribution from a recently acquired Tokyo data center.
Gearing and Financial Position
Keppel DC REIT’s gearing increased to 39.7% in 3Q24 from 35.8% in 1H24, nearing its internal gearing limit of 40%. The increase was attributed to the acquisition of the Tokyo data center. Despite higher gearing, the REIT maintained a stable interest coverage ratio of 5.1x, with the average cost of debt declining to 3.3%, benefiting from lower cost loans in yen and euros.
Challenges at Gore Hill and Bluesea Arrears
The REIT faces challenges with non-renewals, particularly at the Gore Hill data center in Sydney, where a tenant vacated, impacting 0.5% of the net lettable area. Additionally, Keppel DC REIT is managing arrears from a tenant, Bluesea, which has had an impact on revenue from its China-based data centers. However, Bluesea managed to sign leases for 200-300 racks at the Guangdong data center in 3Q24, reflecting efforts to address occupancy issues.
Strategic Focus on Acquisitions and Growth
During the 3Q24 analyst call, Keppel DC REIT’s management expressed a keen interest in acquisitions in Japan and South Korea, where they see cap rates ranging from 3-7% depending on the market and lease contracts. Management also highlighted organic growth opportunities through asset repositioning and infrastructure upgrades, which may include securing additional power for existing data centers.
Target Price and Ratings
CGS International has revised its target price to S$2.34, up from the previous S$2.11, factoring in improved financial projections for FY24-FY26 due to higher revenue expectations and favorable lease reversions. Despite these positives, CGS International maintained a “Hold” rating, citing the lack of clear catalysts in the short term and a need for resolution regarding Bluesea arrears. The revised dividend per share forecasts for FY24-FY26 show increases between 5.6% to 10.5%.
ESG Initiatives and Commitments
Keppel DC REIT continues to emphasize sustainability, earning a C+ combined ESG score from LSEG in 2023, with particularly strong performance in environmental and governance areas. The REIT aims to reduce its Scope 1 and 2 emissions by 50% from the 2019 baseline by 2030, with progress shown by a 13.6% reduction as of 2023. Furthermore, the company has set a goal to use renewable energy for at least 50% of its colocation assets by 2030, achieving 17% renewable energy usage as of 2023.
Key Risks and Future Outlook
Key risks for Keppel DC REIT include the potential for lower-than-expected occupancy, which could affect its topline, as well as the devaluation risk of its China portfolio that might increase its gearing ratio. Upside risks could come from faster-than-expected asset acquisitions, successful collection of Bluesea arrears, and higher rental reversions. CGS International suggests that the FY25F DPU yield of 4.4% is in line with the REIT’s 5-year average.
