The earnings season has begun and Keppel DC REIT (SGX: AJBU) is one of the first REITs to report its latest business update.
The data centre REIT has succumbed to the high-interest rate environment as its finance costs shot up in the last quarter.
As a result, distribution per unit (DPU) was negatively impacted.
Here are five highlights from Keppel DC REIT’s third quarter 2023 (3Q 2023) business update.
1. A mixed set of earnings
For 3Q 2023, gross revenue inched up 0.5% year on year to S$70.7 million, aided by contributions from acquisitions and positive rental reversions and income escalations.
Net property income (NPI) increased by 0.8% year on year to S$64.6 million as property expenses dipped by 2.3% year on year.
However, finance costs surged by nearly 57% year on year to end at S$12.8 million, resulting in distributable income declining by 6.5% year on year to S$43.9 million.
Consequently, DPU for 3Q 2023 slid 3.6% year on year to S$0.02492.
The jump in finance expenses came from refinanced loans along with higher rates from floating interest rate loans.
Keppel DC REIT’s Singapore colocation assets also saw increased electricity costs that led to higher facility expenses.
For the first nine months of 2023 (9M 2023), the data centre REIT’s gross revenue rose 2.6% year on year to S$211.1 million.
Its NPI increased by 2.5% year on year to S$191.9 million.
DPU for 9M 2023 slipped by 1.2% year on year to S$0.07543.
Keppel DC REIT’s trailing 12-month distribution yield stood at 5%.
2. Healthy operating metrics
Despite the slip in DPU, Keppel DC REIT reported healthy operating metrics.
It boasted a high portfolio occupancy of 98.3% as of 30 September 2023 while the portfolio weighted average lease expiry (WALE) was 7.8 years.
The manager reported that the REIT secured new and renewal contracts in Singapore, Australia, Ireland, and the Netherlands with overall positive rental reversions.
No numbers were shared, though.
In addition, most of Keppel DC REIT’s rental income is derived from tenants with investment grade or equivalent credit profiles.
3. Favourable debt metrics
Turning to the REIT’s debt metrics, Keppel DC REIT’s aggregate leverage stood at 37.2% as of 30 September 2023.
Its average cost of debt came in at 3.5% for 3Q 2023, creeping up slightly from the 3.3% in the previous quarter (i.e. 2Q 2023).
The data centre REIT’s interest coverage ratio remained healthy at 5.4 times.
72% of the REIT’s debts are on fixed rates and the manager has stated that a 1% increase in the cost of debt will reduce DPU by 2.4% based on 3Q 2023 figures.
Fortunately, the REIT faces no further refinancing for 2023 with just 4.1% and 7% of its total debt coming due in 2024 and 2025, respectively.
4. Industry fundamentals remain robust
The outlook for the data centre industry remains bright.
According to DC Byte, global colocation data centre demand is projected to grow at a compound annual growth rate (CAGR) of 19.2% from 2023 to 2027, with enterprises and cloud players adopting a flexible IT infrastructure to complement their self-built data centres.
Artificial intelligence demand will also see the supply of global colocation data centres rise by 12.5% CAGR between 2022 and 2030.
Data centre markets also see continued strong demand driven by digital transformation and cloud adoption.
Keppel DC REIT’s sponsor, Keppel Corporation Limited (SGX: BN4), is also exploring innovative solutions such as the Floating Data Centre Module to improve cooling and increase energy efficiency.
5. A potential pipeline of assets for acquisition
Keppel DC REIT continues to source for suitable acquisition opportunities.
The REIT’s sponsor has more than S$2 billion of potential data centre assets for acquisition through Keppel Corporation’s private data centre funds.
Get Smart: Positive long-term prospects
Keppel DC REIT could not avoid the sharp increase in finance costs as global interest rates continue their upward climb.
As a result, its DPU for 3Q 2023 was negatively impacted.
However, the REIT’s operating and debt metrics remain healthy and the industry review should also give investors confidence in Keppel DC REIT’s prospects.
The data centre REIT could encounter further headwinds as its cost of debt rises in the coming quarters, but the manager can mitigate this by undertaking accretive acquisitions and when the portfolio enjoys positive rental reversions.
Is it a good time to buy into Singapore REITs? If you’ve thought about it, then our latest REITs guide will be an essential read. This exclusive pdf report shows you why REITs are still excellent assets, what sectors to look out for and how to find good REITs today. The info inside can help you build a solid retirement portfolio. Click here to download it for FREE.
Follow us on Facebook and Telegram for the latest investing news and analyses!
Disclosure: Royston Yang owns shares of Keppel DC REIT.
