Keppel DC REIT - DBS Research 2022-07-26: Overcoming Hurdles And Staying Ahead

Keppel DC REIT - Overcoming Hurdles And Staying Ahead


Keppel DC REIT's 1H21 Highlights

Distributable Income (DI) increased 8.2% y-o-y

  • Growth in DI is mainly due to accretive acquisitions over the past year (Guangdong DC 1, Eindhoven DC, and London DC).
  • Higher electricity cost had a negligible impact on earnings, as more than 90% of electricity costs are recoverable from tenants.

1H22 DPU of S$0.05049 up 2.5% y-o-y

  • Keppel DC REIT's 1H22 DPU of S$0.05049 in line with our estimates; accounting for ~50.5% of our FY22F projections. Higher DPU mainly due to accretive acquisitions, higher occupancies, and positive rental reversions.

Portfolio occupancy remained strong at 98.2%.

  • Only concern with occupancy is for Basis Bay in Malaysia. Occupancy for property fell to 40.2%; while tenants have renewed leases, they have taken on less space. The property only accounts for less than 1% of income; do not expect any significant impact to earnings.

All-in financing costs continue to inch up to 1.9%

  • All-in financing costs inched up by ~0.1% mainly due to new loans drawn down for the London DC acquisition and issuance of EUR75m notes.The EUR75m notes were issued in May 2022 at 2.61% and used to refinance expiring loans
  • Only ~S$40m of loans due to expire in FY22 (EUR-denominated loans). Loans expiring in FY23 amount to only ~S$170m (EUR and AUD denominated).
  • With ~76% of borrowings hedged to fixed rates for an average tenor of 3.6 years, Keppel DC REIT does not expect any significant increase in financing costs in FY22F. The remaining unhedged borrowings are largely denominated in EUR. We estimate that every 100bps increase in interest rates will impact DPU by ~1.6%

Minimal impact from FX

  • Keppel DC REIT hedges its income up to two years ahead; until 2H23F. Hence minimal impact to earnings this year, as income has mostly been hedged previously. With the strengthening S$ against most foreign currencies, the FX impact may only be felt in FY24, but KDCREIT is actively monitoring FX rates to minimise this impact.

No equity fund-raising in FY22F; Healthy gearing of only 35.3% currently

  • First tranche of payments for the acquisition of Guangdong DC 2 and 3 in FY22F will be funded using debt. KDCREIT will decide again if any equity fund-raising is required to fund the remaining portion of Guangdong DC 3 when approaching completion in 3Q23. Even if equity fund-raising is required in 3Q23F, we expect it to only be a small amount.

Our thoughts on Keppel DC REIT

  • Keppel DC REIT (SGX:AJBU) reported a strong set of results in 1H22 despite concerns of rising electricity costs and interest rates. 1H22 DPU of S$0.05049 is in line with our estimates, and it is helped by accretive acquisitions done over the past year, as well as continued strong occupancy rates and positive rental reversions. Much of the impact of higher utility costs and rising interest rates have been mitigated by Keppel DC REIT’s ability to pass on higher energy costs to tenants and the fact that ~76% of its borrowings that have been hedged to fixed rates.
  • As highlighted by management, Keppel DC REIT do not expect rising interest rates to have any major impact to earnings in the medium term. However, we are mindful that new loans taken, and the refinancing of expiring loans would lead to higher all-in financing costs.
  • Main drivers to Keppel DC REIT's earnings going forward will be the completion of Guangdong DC 2 and 3 acquisitions. Keppel DC REIT has reiterated that it does not require any equity fund-raising in FY22, as it has ample debt headroom to fund the first tranche of payments for the acquisitions. It will reassess the need for any equity fund-raising only when time comes to make the second tranche of payments, which is expected to be in 3Q23. In our estimates, we have already assumed that Keppel DC REIT will tap into the market to raise a small amount of equity of ~S$90m in 2H23F.
  • We remain positive on Keppel DC REIT for its stable earnings driven by its recent acquisitions. Looking ahead, the Guangdong DC 2 and 3 acquisitions will be the main driver to its ~3.8% CAGR in DPU in FY23-FY24, and it will help offset the bulk of any increase in financing costs (our estimates assume a 20bps increase in all-in borrowing costs in FY23 and FY24). As such, we are maintaining our BUY recommendation on Keppel DC REIT at a target price of S$2.50.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @

Dale LAI DBS Group Research | Derek TAN DBS Research | 2022-07-26
SGX Stock Analyst Report BUY MAINTAIN BUY 2.500 SAME 2.500

Previous report by DBS Research:
2022-06-21 Keppel DC REIT - Powering Up In China

Check out the most recent target prices at Keppel DC REIT Target Prices. Listing of analyst research reports at Keppel DC REIT Analyst Report.

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