Keppel DC REIT - DBS Research 2023-02-01: Surge In Energy Cost A Thing Of The Past

• Keppel DC REIT (SGX:AJBU)'s FY22 revenue and NPI were 2.3% and 8.1% (y-o-y) higher, respectively, due to acquisitions completed over the year, which includes the acquisition of Guangdong DC 2 and 3 and also the full-year income contribution from Guangdong DC 1, London DC, and Eindhoven DC. See Keppel DC REIT's announcement dated 31 Jan 2023.
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  • The increase in finance income is mainly due to NetCo Bonds and coupons from Guangdong DC 3.
• Keppel DC REIT's FY22 DPU of 10.214 cents was ~103% of our estimate. See Keppel DC REIT's Dividend History.
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• Despite the surge in energy costs in 1H22, the majority of energy contracts have been re-contracted at more favourable fixed rates for the next two years. We do not expect the volatility in electricity cost to have any further significant impact on Keppel DC REIT's earnings.
• Further increase in rents projected for FY23 – Demand for DC capacity still remains strong and has not seen any slowdown, despite concerns of the tech industry slowing down. Supply of DCs in the major markets remains limited. Structural tailwinds for DCs are still intact, leading to higher rents for DC operators
• Keppel DC REIT's portfolio valuations were up for all markets, a result of higher occupancies and rents, except Malaysia. Cap rates in APAC and Europe remain stable, partly due to continued demand and lack of transactions.
• Average cost of debt increased 20bps q-o-q to 2.2% currently. Every 100bps increase in interest rates will lead to a ~2.1% impact to Keppel DC REIT's DPU.
• Approximately 11.1% of loans (~S$167m) will be due to mature in FY23. All-in financing costs are expected to creep up further as the loans expiring in FY23 were contracted 5 years ago at very low rates. Keppel DC REIT's gearing improved to 36.4%, mainly due to a valuation uplift.
• Lockdowns in China over the past year have led to some delays in the construction of Guangdong DC 3. As its completion is only expected in 3Q23, there is still time, and it is too early to tell if completion will be delayed. There is more than sufficient debt headroom to fund the remaining payments of the Guangdong DC 3 acquisition; gearing will be maintained below 39% if it is fully debt-funded. However, it is unlikely that Keppel DC REIT will want to utilise all its debt headroom for the payments.

Our thoughts on Keppel DC REIT

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Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2023-02-01 SGinvestors.io

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