Keppel DC REIT’s 2023 DPU Tumbles 8.1%: 5 Highlights from the Data Centre REIT’s Full Year Earnings

Hot on the heels of the two Mapletree REITs releasing their earnings, the next in line is Keppel DC REIT (SGX: AJBU) with its second half of 2023 (2H 2023) and full-year results.

The data centre REIT reported a downbeat set of numbers chiefly because of a provision made for uncollected rental income from one of its tenants.

Despite this, Keppel DC REIT sported healthy operating metrics and saw stable valuations for its portfolio.

Here are five highlights from the data centre REIT’s latest 2023 results.

1. Lower DPU due to loss allowances and higher finance costs

Keppel DC REIT was hit by a double whammy in 2H 2023 as higher finance costs and an allowance for uncollected rental income impacted its distribution per unit (DPU).

For 2H 2023, gross revenue slipped 0.7% year on year to S$140.7 million.

The REIT saw contributions from acquisitions and enjoyed positive rental reversions and escalations but saw lower contributions from colocation assets in Singapore due to higher facility expenses.

Property expenses shot up 85.6% year on year to S$23.1 million principally because of the allowance for around 5.5 months of uncollected rental and coupon income from its Guangdong data centres.

Finance costs also leapt 43.5% year on year to S$25.8 million, resulting in an 18.5% year-on-year decline in distributable income to S$76.4 million.

Consequently, DPU for 2H 2023 fell by 16.1% year on year to S$0.04332.

For 2023, DPU slid 8.1% year on year to S$0.09383, giving the REIT’s units a trailing distribution yield of 5.3%.

Investors should note that the loss allowance impacted 2023’s DPU by S$0.00649; Excluding this loss, DPU would have been S$0.10032 had the tenant paid up on time.

2. Healthy operating metrics

The REIT continued to sport healthy operating metrics despite the fall in its DPU.

Portfolio occupancy stood high at 98.3% with the portfolio’s weighted average lease expiry by net lettable area at 7.6 years.

The manager also secured new and renewal contracts with positive rental reversion.

Keppel DC REIT has a total of 79 customers with the majority of its rental income derived from clients with investment grade or equivalent credit profiles.

3. Favourable debt metrics

Moving on to debt metrics, Keppel DC REIT’s aggregate leverage stood at 37.4% as of 31 December 2023.

At this gearing level, the REIT has available debt headroom of S$169 million to hit its internal cap of 40%.

The data centre REIT’s average cost of debt, however, crept up to 3.6% for the fourth quarter of 2023, higher than 2023’s 3.3%.

Close to three-quarters of Keppel DC REIT’s loans are on fixed rates and its interest coverage ratio remained healthy at 4.7 times.

4. Stable portfolio valuation

In a nod to the sustained demand for Keppel DC REIT’s properties, portfolio valuation for its 23 data centres remained stable.

The valuation as of 31 December 2023 stood at S$3.6 billion, slightly above the prior year’s valuation of S$3.59 billion.

Through its sponsor Keppel Ltd (SGX: BN4), Keppel DC REIT has a pipeline of more than S$2 billion worth of potential data centre assets for acquisition.

5. A bright outlook for the sector

Data centre demand remains robust as Keppel DC REIT reported a bright outlook for the sector.

Cloud service providers are growing at 45% per annum from 2018 to 2023 and driving colocation demand.

Other factors include the shift to cloud computing, digitalisation, generative artificial intelligence, and the Internet of Things.

In particular, interest in Asia-Pacific data centres remains strong with improved cable connectivity, increased adoption of e-commerce, and the introduction of online banking.

Get Smart: Manager working with Chinese tenant

Keppel DC REIT was negatively impacted by a client’s failure to pay its rental on time.

However, at the end of December 2023, this tenant had settled part of the sum in arrears of around S$0.1 million.

The manager is now working closely with the tenant on a recovery roadmap and will strive to get the most favourable outcome for the REIT.

Meanwhile, the manager also aims to capitalise on growth opportunities within the data centre industry to gradually strengthen Keppel DC REIT’s global presence.

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Disclosure: Royston Yang owns shares of Keppel DC REIT.

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