OCBC Investment Research Private Limited 17 April 2025 Keppel DC REIT: Strong Singapore Positioning Drives Continued Growth Investment Overview Keppel DC REIT (KDCREIT) is strategically positioned to capitalize on the increasing demand for data center space, fueled by ongoing digitalization and the adoption of cloud technologies. [[1]] The REIT’s tenant base includes rapidly expanding sectors such as internet enterprises, IT services, telecommunications, and financial services. [[1]] KDCREIT boasts one of the longest portfolio weighted average lease expiry (WALE) profiles within the S-REITs sector, standing at 7.1 years by lettable area and 4.4 years by rental income as of March 31, 2025. [[1]] With minimal debt maturities in FY25, KDCREIT faces relatively lower refinancing risks compared to its peers. [[1]] The acquisition of two high-quality, AI-ready hyperscale data centers in Singapore is expected to bolster KDCREIT’s position as a leading data center owner in the region and reduce its portfolio exposure to China. [[1]] 1Q25 Performance Highlights DPU Jump: 1Q25 distribution per unit (DPU) increased by 14.2% year-on-year (YoY) to 2.503 Singapore cents. [[1]] Revenue and NPI Growth: Gross revenue and net property income (NPI) rose by 22.6% and 24.1% YoY, respectively, to SGD102.2 million and SGD88.1 million. This growth was attributed to contributions from acquisitions and organic growth from rental uplifts in previous lease renewals. [[1]] Finance Cost Reduction: Finance costs decreased by 4.1% YoY to SGD12.5 million due to interest savings from loan repayments, further boosting the DPU. [[1]] In-Line with Forecast: The reported DPU accounted for 25.4% of initial forecasts and aligned with expectations. [[2]] Rental Reversions and Occupancy Rental Reversions: Portfolio rental reversions moderated to 7% due to the renewal of smaller leases, particularly in Dublin and Singapore. Less than 2% of KDCREIT’s leases by rental income were renewed in 1Q25. [[2]] Future Outlook: Approximately 13.6% of KDCREIT’s leases by rental income are set to expire in the remaining three quarters of FY25, with significant expiries in Singapore during 2Q25. This is expected to positively impact rental reversions, driven by healthy demand and supply dynamics. [[2]] Singapore Positioning: With 66.3% of its assets under management located in Singapore, KDCREIT is well-positioned for growth, with previous major lease renewals in Singapore resulting in robust rental reversions exceeding 30%. [[2]] Portfolio Occupancy: Portfolio occupancy stood at 96.5% as of March 31, 2025, a slight decrease of 0.7 ppt quarter-on-quarter (QoQ) due to higher vacancies at Keppel DC Singapore 1. [[2]] Keppel DC Singapore 1: The occupancy of this property is expected to decline from 72.2% to below 60% as it includes a large portion of non-data center space. Management is evaluating options to improve the asset’s positioning. [[2]] Balance Sheet and Financial Adjustments Aggregate Leverage: KDCREIT’s aggregate leverage ratio decreased slightly from 31.5% (as of December 31, 2024) to 30.2%. However, it is projected to increase to the mid-30% level by the end of FY25 as loans are drawn down for a land lease extension for Singapore DC Singapore 7 and 8. [[2]] Cost of Debt: The average cost of debt remained stable QoQ at 3.1%, with management expecting it to remain around this level for FY25. [[2]] DPU Forecasts: Factoring in the divestment of Kelsterbach Data Centre in Germany and a delayed recovery of KDCREIT’s Guangdong data centers, FY25 and FY26 DPU forecasts have been lowered by 0.8% and 5.1%, respectively. [[2]] Fair Value Estimate: Consequently, the fair value estimate has been adjusted from SGD2.43 to SGD2.35. [[2]] ESG Updates ESG Rating Upgrade: KDCREIT’s ESG rating was upgraded in late-Nov 2022, driven by its low accounting risk compared to global peers. [[3]] Corporate Governance: KDCREIT leads in corporate governance with a ‘one share one vote’ principle, aligning unitholders’ economic exposure with voting power. [[3]] Whistleblower Protection: The REIT has a disclosed policy providing whistleblower protection, and its business ethics practices are on par with global peers. [[3]] Potential Catalysts and Risks Potential Catalysts: Stronger-than-expected increase in portfolio valuations. [[3]] DPU accretive acquisitions. [[3]] Ramp up in occupancy at its Singapore, Dublin, and Malaysia data centers. [[3]] Investment Risks: Slowdown in data outsourcing trend. [[3]] Compression in cap rates leading to overpayment for acquisitions. [[3]] Changes in the regulatory landscape in countries where KDCREIT operates. [[3]] Valuation Analysis Comparison with peers: Metric KEPPEL DC REIT (KEPE.SI) FY25E KEPPEL DC REIT (KEPE.SI) FY26E CAPITALAND ASCENDAS REIT (CAPD.SI) FY25E CAPITALAND ASCENDAS REIT (CAPD.SI) FY26E FRASERS LOGISTICS & COMMERCIAL TRUST (FRAE.SI) FY25E FRASERS LOGISTICS & COMMERCIAL TRUST (FRAE.SI) FY26E MAPLETREE INDUSTRIAL TRUST (MAPI.SI) FY25E MAPLETREE INDUSTRIAL TRUST (MAPI.SI) FY26E MAPLETREE LOGISTICS TRUST (MAPL.SI) FY25E MAPLETREE LOGISTICS TRUST (MAPL.SI) FY26E Price/Earnings 19.6 18.4 17.0 16.6 18.4 16.1 14.6 14.9 19.5 17.5 Price/Book 1.3 1.3 1.1 1.1 0.3 0.3 1.1 1.1 0.8 0.8 EV/EBITDA 20.1 18.6 19.1 18.4 18.4 17.8 18.6 18.0 20.5 20.2 Dividend Yield (%) 4.9 5.3 5.8 6.0 7.2 7.3 6.9 6.8 6.9 6.9 ROE (%) 6.7 7.1 6.6 6.8 4.6 4.8 7.3 7.4 4.7 4.8 Source: Refinitiv [[3]] Company Overview (as of 31 December 2024) Keppel DC REIT was listed on the Singapore Exchange on 12 Dec 2014 as the first pure-play data centre REIT in Asia. [[4]] The REIT’s investment strategy focuses on investing directly or indirectly in a diversified portfolio of income-producing real estate assets used primarily for data center purposes, as well as assets supporting the digital economy. [[4]] Keppel DC REIT’s investments include colocation, fully-fitted, and shell and core assets, alongside debt securities, enhancing portfolio diversity and resilience. [[4]] Managed by Keppel DC REIT Management Pte. Ltd. and sponsored by Keppel, a global asset manager with expertise in sustainability-related solutions. [[4]] Portfolio Metrics Portfolio AUM: [[4]] FY2018: 7.32 SGD’b FY2019: 7.61 SGD’b FY2020: 9.17 SGD’b FY2021: 9.85 SGD’b FY2022: 10.21 SGD’b FY2023: 9.38 SGD’b Distribution per Unit (DPU): [[4]] FY2018: 9.38 S cents FY2019: 9.45 S cents FY2020: 0.00 S cents FY2021: 2.00 S cents FY2022: 4.00 S cents FY2023: 6.00 S cents FY2024: 8.00 S cents Portfolio Breakdown By Geography: [[4]] Singapore: 66.6% Australia: 3.8% China: 5.6% Japan: 4.4% Germany: 4.5% Ireland: 6.2% The Netherlands: 4.8% Other countries: 4.2% By Segment: [[4]] Internet Enterprise: 61.1% Telecoms: 15.8% IT Services: 18.7% Financial Services: 3.5% Corporate: 0.9% Company Financials Income Statement (In Millions of SGD except Per Share) Item FY2020 FY2021 FY2022 FY2023 FY2024 Revenue 265.6 271.1 277.3 281.2 310.3 Cost of Revenue 43.5 47.2 51.6 63.6 78.3 Gross Profit 222.1 223.9 225.7 217.6 231.9 Operating Expenses 16.2 -140.1 -69.5 14.1 -108.9 Operating Income or Losses 205.8 364.0 295.1 203.5 340.8 Interest Expense 13.1 13.3 30.0 65.7 — Pretax Income 192.8 350.7 265.2 137.8 340.8 Income Tax Expense (Benefit) 21.0 29.2 31.0 15.6 26.8 Income Before XO Items 171.7 321.6 234.2 122.2 314.0 Minority/Non Controlling Interests (Credits) 3.6 7.9 3.3 3.7 13.3 Net Income/Net Profit (Losses) 168.2 313.7 230.9 118.5 300.7 Net Inc Avail to Common Shareholders 168.2 313.7 230.9 118.5 300.7 Normalized Income 171.7 321.8 234.2 122.2 314.0 Basic Earnings per Share 0.1 0.2 0.1 0.1 0.2 Basic Weighted Avg Shares 1,652.1 1,682.1 1,737.9 1,740.7 1,759.2 Diluted EPS Before Abnormal Items 0.1 0.2 0.1 0.1 0.2 Diluted EPS Before XO Items 0.1 0.2 0.1 0.1 0.2 Diluted EPS 0.1 0.2 0.1 0.1 0.2 Diluted Weighted Avg Shares 1,652.1 1,682.1 1,737.9 1,740.7 1,759.2 Source: Refinitiv [[5]] Profitability Ratios Ratio FY2020 FY2021 FY2022 FY2023 FY2024 Return on Common Equity 8.82 14.80 9.81 5.02 10.58 Return on Assets 5.47 9.02 5.94 3.01 6.58 Return on Capital 10.48 9.23 8.30 8.09 7.00 Return on Invested Capital 7.08 6.45 5.50 5.26 4.72 Operating Margin 72.58 129.40 95.62 49.00 109.84 Incremental Operating Margin 1.14 1.78 0.74 0.51 2.24 Pretax Margin 72.58 129.40 95.62 49.00 109.84 Income before XO Margin 63.32 115.71 83.26 42.15 96.90 Net Income Margin 63.32 115.71 83.26 42.15 96.90 Net Income to Common Margin 63.32 115.71 83.26 42.15 96.90 Effective Tax Rate 10.91 8.32 11.69 11.30 7.87 Dividend Payout Ratio 80.21 48.24 70.94 126.74 50.13 Sustainable Growth Rate 8.75 14.73 9.74 4.95 10.53 Source: Refinitiv [[5]] Credit Ratios Ratio FY2020 FY2021 FY2022 FY2023 FY2024 Total Debt/EBIT 5.62 5.99 6.73 6.97 7.84 Net Debt/EBIT 4.46 5.04 5.86 6.26 6.39 EBIT to Interest Expense 16.15 16.35 7.31 3.24 – Long-Term Debt/Total Assets 31.15 30.06 31.64 35.15 29.37 Net Debt/Equity 0.50 0.50 0.55 0.59 0.43 Source: Refinitiv [[5]]
