UOB Kay Hian

Monday, 21 April 2025

Keppel DC REIT (KDCREIT SP) Analysis: Strong DPU Growth and Promising AI-Capable Expansion

Keppel DC REIT: Overview

Keppel DC REIT invests in a diversified portfolio of income-producing real estate assets primarily used for data center purposes. Listed on the SGX on 12 Dec 14, it is the first pure-play data center REIT in Asia. [[1]]

• GICS Sector: Real Estate
• Bloomberg Ticker: KDCREIT SP
• Shares Issued (m): 2,255.5
• Market Cap (S\$m): 4,578.7
• Market Cap (US\$m): 3,489.4
• 3-mth Avg Daily T’over (US\$m): 16.3
• 52-Week High/Low: S\$2.37/S\$1.61
• FY25 NAV/Share (S\$): 1.54
• FY25 Net Debt/Share (S\$): 0.79
• Major Shareholders: Temasek Hldgs (21.8%) [[1]]

Investment Recommendation

• Recommendation: BUY (Maintained) [[1]]
• Share Price: S\$2.03 [[1]]
• Target Price: S\$2.55 [[1]]
• Upside: 25.6% [[1]]

Price Performance

• 1 Month: (7.3%) [[1]]
• 3 Month: (5.1%) [[1]]
• 6 Month: (9.8%) [[1]]
• 1 Year: 22.3% [[1]]
• Year-to-Date: (6.9%) [[1]]

1Q25 Results: Contributions From SGP7 And SGP8 Kick In

KDCREIT reported a solid DPU growth of 14.2% yoy in 1Q25, in line with expectations. The growth would have been more pronounced if not for an elevated capex reserve, estimated at S\$6m and equivalent to 10% of distributable income. The upsurge in positive rental reversion for colocation leases in Singapore is expected to continue in 2025 and 2026. Management is also considering enhancing and expanding SGP1 into an AI-capable data center. [[1]]-[[2]]

Financial Highlights – 1Q25

Key financial figures for 1Q25 compared year-over-year:

• Gross Revenue: S\$102.2m (+22.6%) – Contributions from newly-acquired SGP7, SGP8, and Tokyo DC 1. [[2]]
• Net Property Income (NPI): S\$88.1m (+24.1%) – Partially offset by the divestment of Intellicentre Campus in Sydney. [[2]]
• Distributable Income: S\$61.8m (+59.4%) – Finance costs declined 4.1% yoy. [[2]]
• DPU (S cent): 2.503 (+14.2%) – Provision for Guangdong DCs is equivalent to a DPU of 0.249 S cents. [[2]]

Analysis of Results

• DPU Performance: KDCREIT reported a DPU of 2.503 S cents for 1Q25 (+14.2% yoy), which is in line with expectations. [[2]]-[[3]]
• Growth Factors: The strong growth is attributed to:
  • Full-quarter contributions from newly-acquired SGP7 and SGP8 (completion: 27 Dec 24). [[3]]
  • The acquisition of Tokyo Data Centre 1 (completion: 31 Jul 24). [[3]]
  • Contract renewals and rental escalation in 2024. [[3]]

  This was partially offset by the divestment of Intellicentre Campus in Sydney, Australia (completion: 24 Jun 24). Distributable income grew 59.4% yoy to S\$61.8m. [[3]]

• Rental Reversion: KDCREIT clocked a positive rental reversion of 7% for renewals in Dublin and smaller leases in Singapore during 1Q25. No major contract renewal occurred, and leases renewed in 1Q25 accounted for only 1.8% of rental income. [[3]]
• Portfolio WALE: Portfolio occupancy eased marginally by 0.7ppt qoq to 96.5% due to lower occupancy at SGP1 in Singapore and the divestment of Kelsterbach Data Centre in Frankfurt, Germany (completion: 24 Mar 25). KDCREIT provides stable cash flows due to its long portfolio WALE weighted by lettable area of 7.1 years (Dec 24: 6.3 years). [[3]]-[[4]]
• Balance Sheet: Aggregate leverage dipped 1.3ppt qoq to 30.2% as of Mar 25 as sponsor subscription of S\$85m was completed in Feb 25. The average cost of debt was stable at 3.1% in 1Q25, with about 68% of KDCREIT’s borrowings hedged to fixed interest rates. Management expects the cost of debt to remain in the low-3% range in 2025. [[4]]
• Capex Reserve: The capex reserve was elevated at an estimated S\$6m in 1Q25, equivalent to 10% of distributable income, for SGP2, SGP7, and SGP8. This reserve is expected to normalize towards 5-7% in subsequent quarters. [[4]]

Key Financials

The following table summarizes the key financial forecasts for Keppel DC REIT:

Consensus DPU (S\$ cent) and UOBKH/Consensus Ratios:

Source: Keppel DC REIT, Bloomberg, UOB Kay Hian [[4]]-[[5]]

Stock Impact Analysis

• Reciprocal Tariffs: Not directly affected by reciprocal tariffs. Singapore remains capacity-constrained, while demand in Europe remains robust. Management continues to focus on delivering strong results for unitholders. [[5]]-[[6]]
• Acquisitions: Actively rebalancing KDCREIT’s portfolio to capitalize on structural trends, such as generative AI. Scouting for opportunities to acquire data centers in preferred markets like Japan, South Korea, and Europe, aiming for hyperscale data centers with a capacity of 20-50MW. [[6]]
• AI Focus: KDCREIT focuses on AI inference workloads, leveraging Singapore’s competitive advantage in connectivity. It does not handle AI training workloads, which are affected by recent innovations to improve algorithmic efficiency and reduce computational costs. [[6]]
• Singapore Market: Singapore remains supply-constrained, with tight vacancy expected to persist in 2025 and 2026. Infocomm Media Development Authority awarded four data center operators with a capacity of 80MW in Jul 23. New supply is expected to come on stream largely in 2027, sustaining positive rental reversion into 2025 and 2026. [[6]]-[[7]]
• Potential AEI for SGP1: Occupancy at SGP1 in Singapore slipped marginally by 2.7ppt qoq to 72.2% in 1Q25 and is expected to drop below 60% after DXC fully vacates in 2Q25. This provides an opportunity for KDCREIT to enhance SGP1 to become AI-capable, including securing a larger power supply for capacity expansion and converting non-data center space into data center space. [[7]]

Valuation and Recommendation

• Recommendation: Maintain BUY. Target price of S\$2.55 based on DDM (cost of equity: 7.0%, terminal growth: 2.5%). [[7]]
• Earnings Revision: Maintain existing DPU forecast. [[7]]

Share Price Catalysts

• Demand for colocation space arising from AI applications. [[7]]
• Acquisitions of hyperscale data centers in Japan, South Korea, and Europe. [[7]]-[[8]]
• Backfilling of vacant spaces for data centers in Guangdong, China. [[8]]

Key Operating Metrics

Performance metrics over the past five quarters:

* hoh % chg for DPU

Investment Properties

• Singapore: 65.3% [[8]]
• Australia: 5.4% [[8]]
• Ireland: 6.1% [[8]]
• China: 5.5% [[8]]
• Germany: 4.5% [[8]]
• Netherlands: 4.7% [[8]]
• Japan: 4.2% [[8]]
• United Kingdom: 2.9% [[8]]
• Italy: 1.1% [[8]]
• Malaysia: 0.3% [[8]]

Rental Income by Contract Type

• Colocation: 75.8% [[8]]
• Fully-fitted: 17.1% [[8]]
• Shell & Core: 7.1% [[8]]

Rental Income by Trade Sector

• Internet Enterprises: 63.1% [[8]]-[[9]]
• IT Services: 16.9% [[9]]
• Telecommunications: 15.9% [[9]]
• Financial Services: 3.2% [[9]]
• Corporate: 0.9% [[9]]

Lease Expiry Profile

• 2025: 5.4% (By Lettable Area), 6.0% (By Rental Income) [[9]]
• 2026: 9.2% (By Lettable Area), 8.3% (By Rental Income) [[9]]
• 2027: 8.8% (By Lettable Area), 62.3% (By Rental Income) [[9]]
• 2028: 13.6% (By Lettable Area), 8.2% (By Rental Income) [[9]]
• 2029: 4.5% (By Lettable Area), 14.4% (By Rental Income) [[9]]
• 2030 & Beyond: 29.2% (By Lettable Area), 30.1% (By Rental Income) [[9]]

Profit & Loss

Projected financial performance:

Balance Sheet

Projected balance sheet figures:

Cash Flow

Key cash flow metrics:

Key Metrics

Financial ratios and metrics: