Introduction to Keppel DC REIT

Keppel DC REIT, Asia’s first pure-play data center REIT, continues to make its mark in the real estate investment trust sector. With a diversified portfolio of income-producing assets focused on data center operations, the REIT has shown robust performance since its listing on the SGX in December 2014. As of January 2025, Keppel DC REIT trades at S\$2.27 per share, with a target price of S\$2.53, representing an upside potential of 11.5%.

Key Financial Performance Highlights

Strong Rental Reversion and Organic Growth

In 2H24, Keppel DC REIT achieved a remarkable >30% positive rental reversion, making it the third consecutive quarter of strong double-digit rental growth. The newly acquired Tokyo Data Centre 1 contributed significantly to gross revenue and net property income (NPI), which grew by 8.8% and 8.5% year-over-year (yoy), respectively. The REIT reported a robust distributable income of S\$91.9 million (+20.2% yoy), driven by reduced finance costs and a distribution of a DXC settlement sum worth S\$5.6 million.

Improved Aggregate Leverage

The REIT’s aggregate leverage improved by 8.2 percentage points quarter-on-quarter (qoq) to 31.5% in 4Q24. This improvement was attributed to revaluation gains and a successful equity fund-raising exercise. Further improvements in leverage are anticipated with the sponsor subscription of S\$85 million in 1Q25, potentially reducing the leverage to 30.0%.

Distribution Per Unit (DPU) Growth

Keppel DC REIT declared a distribution per unit (DPU) of 4.902 Singapore cents for 2H24, marking a 13.2% yoy increase. The full-year DPU reached 9.5 Singapore cents, reflecting strong organic growth and contributions from acquisitions.

Portfolio Insights

Stable Occupancy and WALE

The portfolio maintained a stable occupancy rate of 97.2% as of 4Q24, supported by a long weighted average lease expiry (WALE) of 6.3 years. The Singapore market accounted for 65.3% of the portfolio valuation, boosted by tight supply and strong investment demand.

Acquisitions and Strategic Focus

KDCREIT completed the acquisition of SGP7 and SGP8 in December 2024. These data centers are designed for AI inference workloads, offering ultra-low latency connectivity and an NPI yield of 6.5-7.0%. The acquisition is expected to be accretive to the pro forma DPU by 8.1% for 1H24. The REIT is also repositioning its portfolio by divesting non-core assets, such as the Basis Bay Data Centre in Malaysia, to focus on the hyperscaler market.

Valuation Growth

Portfolio valuation increased by 3.4% on a same-store basis, with Singapore experiencing a 10.4% rise. This growth was fueled by strong rental reversions and high investor interest.

Key Financial Metrics

Market Outlook and Strategic Initiatives

Capitalizing on AI Trends

The growing adoption of AI inference and generative AI presents significant opportunities for Keppel DC REIT. The REIT is strategically positioned to benefit from this trend, with data centers designed to handle AI workloads.

Future Acquisitions

The management is actively scouting for acquisition opportunities in key markets, including Singapore, South Korea, and Japan. Additionally, there is potential for asset enhancement in its Kelsterbach data center in Germany.

Stable Cost of Debt

The average cost of debt fell to 3.1% in 4Q24, with 66% of borrowings hedged to fixed interest rates. Management expects debt costs to remain stable in 2025.

Recommendation

UOB Kay Hian maintains a BUY recommendation for Keppel DC REIT, with a target price of S\$2.53. The valuation is based on a dividend discount model (DDM) with a cost of equity of 7.0% and a terminal growth rate of 2.5%. The REIT is expected to deliver strong rental reversions, accretive acquisitions, and stable cash flows, making it an attractive investment opportunity in the real estate sector.