The latest earnings reporting season has begun and the first on the list to release is Keppel DC REIT (SGX: AJBU).
The data centre REIT reported its fiscal 2023’s first half (1H 2023) earnings and boasted a strong set of financial and operating metrics.
With the REIT sector facing the twin headwinds of high inflation and surging interest rates, Keppel DC REIT managed to hold its own.
Here are five highlights from the REIT’s latest 1H 2023 earnings.
1. A respectable set of financial numbers
Keppel DC REIT saw its gross revenue rise 3.6% year on year to S$140.5 million for 1H 2023.
The higher revenue was contributed by the acquisition of Guangdong Data Centre 2 and the building shell of Guangdong Data Centre 3 along with tenancy renewals and rental income escalations embedded in tenancy agreements.
Net property income increased by 3.3% year on year to S$127.4 million.
Distribution per unit (DPU) increased marginally year on year from S$0.05049 to S$0.05051.
A 34.7% year on year jump in finance income was offset by a 73.4% year on year surge in finance costs as the impact of higher interest rates kicked in.
The annualised DPU amounts to S$0.10102, giving Keppel DC REIT’s units a forward distribution yield of 4.5%.
2. High occupancy with a long WALE
The data centre REIT’s portfolio occupancy stood high at 98.5% as of 30 June 2023.
Its weighted average lease expiry (WALE) by net lettable area came in at eight years.
The REIT manager secured a mix of new, renewal and expansion contracts in Singapore, Ireland and the Netherlands and reported healthy positive rental reversion.
With more than half of its portfolio containing leases with built-in rental escalations, Keppel DC REIT’s rental income can keep pace with the inflation rate.
In addition, the bulk of the REIT’s rental income is obtained from clients with investment grade or equivalent credit profiles.
Its top client, which takes up 35.2% of the REIT’s rental income for June 2023, is present in five different data centres with different expiries, thus mitigating the risk of a sharp drop in rental income at any point in time.
3. Favourable debt metrics
Keppel DC REIT saw its average cost of debt hit 3.3% for the second quarter of 2023, up from 2.8% in the first quarter.
For 1H 2023, the cost of debt stood at 3.1%.
This rise in the borrowing cost was responsible for the surge in finance expenses for the REIT in the first half.
Aggregate leverage for the REIT came in at 36.3% with a trailing 12-month interest coverage ratio of six times.
The good news is that Keppel DC REIT has completed the refinancing of all its loans in 2023, with just 4.1% and 7% of total debt expiring in 2024 and 2025, respectively.
73% of the REIT’s loans are pegged to fixed rates, so an increase in interest rates will only affect the remaining 27% of loans.
Sensitivity analysis projects that a 1% increase in interest rates will reduce the second quarter’s DPU by around 2.2%.
4. Market fundamentals remain solid
Data centre demand continues to be robust, driven by the adoption of digitalisation and cloud computing along with the explosion in interest for generative artificial intelligence (AI).
According to Jones Lang Laselle, generative AI applications such as Google’s Bard and OpenAI’s ChatGPT will require more computing power and data storage, thereby spurring the need for data centres with higher power density.
Structure Research also forecasts a 12% year on year growth in the global data centre colocation and interconnection market to US$72.7 billion this year, showcasing the continued strong demand for this asset class.
5. Acquisition-driven growth
The manager intends to pursue more data centre acquisition opportunities to grow Keppel DC REIT’s portfolio.
With aggregate leverage at 36.3%, Keppel DC REIT has sufficient debt headroom to pursue more acquisitions.
It has been slightly over a year since the manager announced its last acquisition, that of two data centres in Guangdong, China.
Once the acquisition of Guangdong Data Centre 3 is completed in the third quarter, Keppel DC REIT would have purchased three data centres in China.
Back in July 2021 when the first Chinese data centre acquisition was announced, the manager announced that there were five more data centres to be completed and that the REIT has a right of first refusal to acquire them.
Hence, there are still three data centres in the pipeline that could be acquired by Keppel DC REIT in time to come.
In addition, the REIT also has a more than S$2 billion pipeline for potential acquisitions from its sponsor Keppel Corporation Limited (SGX: BN4) through its subsidiary Keppel T&T.
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Disclosure: Royston Yang owns shares of Keppel DC REIT.
