Keppel DC REIT (KDCREIT SP) – Growth stymied by higher electricity costs and tenant dispute
• 1Q22 distribution per unit (DPU) inched up 0.2% year-on-year (YoY) to 2.466 Singapore cents
• Negative impact from higher electricity costs and ongoing tenant dispute
• Portfolio occupancy firm at 98.7%
1Q22 results slightly below our expectations – KDCREIT’s 1Q22 results fell slightly short of our expectations. Gross revenue and net property income (NPI) fell 0.9% and 1.4% year-on-year (YoY) to SGD66.1m and SGD60.1m, respectively. The decline was driven by higher electricity costs and provisions made at its Keppel DC Singapore 1 (KDC SGP 1) asset due to an ongoing tenant dispute, but partially offset by contribution from acquisitions. KDCREIT’s 1Q22 DPU came in at 2.466 Singapore cents, which represented a slight increase of 0.2% YoY, and this accounted for 24.1% of our FY22 forecast. Regarding the tenant dispute, KDCREIT had on 21 Mar 2022 announced that the master lessee and appointed facility manager (a joint venture of KDCREIT’s sponsor) of KDC SGP 1 had commenced a suit in the High Court of Singapore against one of its tenants DXC Technology Services Singapore Pte Ltd (DXC). This is in relation to a dispute pertaining to DXC’s partial default of payment in connection with the provision of colocation services at KDC SGP 1. The amount disputed is ~SGD14.8m for the 4-year period between 1 Apr 2021 and 31 Mar 2025, which accounted for ~2% of KDCREIT’s distributable income for FY21.
Likelihood of higher electricity costs ahead – KDCREIT disclosed that a further 10% increase in its share of electricity costs (after claiming what can be recovered from tenants) would have a ~3% impact to its pro forma FY21 DPU. According to management, more than 90% of electricity costs can be passed through to its tenants. However, we believe not all of KDCREIT’s electricity rates has been locked in, and hence electricity costs are likely to increase further given the high energy usage of data centres, notwithstanding the passthrough to tenants. On a positive note, KDCREIT’s portfolio occupancy remained high, improving 0.4 percentage point (ppt) quarter-on-quarter (QoQ) to 98.7% due to the inclusion of 100%-occupied London Data Centre to its portfolio. Portfolio WALE also increased to 7.7 years by leased area (5.1 years based on rental income). Management highlighted that there were not many lease renewals during the quarter, and rental reversions were stable to slightly positive.
Lower DPU forecasts and fair value – In terms of financial position, KDCREIT’s aggregate leverage ratio rose 1.5 ppt to 36.1%, with a higher average cost of debt of 1.8%. Management has hedged 76% of its borrowings, with its remaining floating debt denominated in EUR. We cut our FY22 and FY23 DPU forecasts by 2.7% and 3.1%, respectively, as we factor in higher electricity costs and provisions from the ongoing tenant dispute in our model. We also increase our risk-free rate from 1.9% to 2.5% and lower our terminal growth rate assumption by 25 basis points to 2.0%. Correspondingly, our fair value estimate declines from SGD2.61 to SGD2.28.
KDCREIT has an ESG rating since Sep 2018. This is also the highest ESG rating within our S-REITs coverage. KDCREIT has adopted strong compliance mechanisms such as employee trainings and audits of ethics standards. The former includes training and development programmes, such as Keppel Young Leaders and Advanced Leadership. KDCREIT also regularly engages with employees through satisfaction surveys and focuses on improving the health and wellness of its personnel. Management has earmarked its commitment to address climate change issues, as illustrated by it being a signatory of the Climate Neutral Data Centre Pact. KDCREIT also said that it aims to halve its combined Scope 1 and Scope 2 emissions by 2030 from a 2019 baseline, and plans to introduce renewable energy to at least 50% of its colocation assets by 2030. HOLD. (Research Team)