Keppel DC REIT - DBS Research 2024-01-29: Collaboration Instead Of Litigation

• Keppel DC REIT (SGX:AJBU)'s FY23 revenues amounted to S$281.2m, reflecting a 1.4% increase y-o-y. This growth can be primarily attributed to acquisitions completed in the preceding year, coupled with positive rental reversions and escalations.
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Revenues remained stable while NPI hit by provisions for uncollected rents.

• Conversely, NPI declined 3.0%, totaling S$245.0m. This dip in NPI was primarily a consequence of provisions made for uncollected rents from the Guangdong DC, amounting to more than S$10.5m in FY23. Additionally, there were further provisions, totaling S$0.7m (in other trust expenses), specifically allocated for uncollected coupon payments from Guangdong DC 3.
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• Gearing and borrowing costs inched up to 37.4% and 3.6% in 4Q23.
• Portfolio valuations held up in most markets.

Positive development regarding litigation against DXC Technology.

• DXC's current lease with Keppel DC REIT at Keppel DC Singapore 1 extends until March 2025, covering approximately 20,300sqft or about 18.5% of the property's NLA. Despite DXC's request to return a portion of the space in April 2021, Keppel DC REIT has not granted approval, resulting in annual rent arrears of about S$3.7m for the contested area, and S$14.8m for the four years of the lease.
• Following a recent High Court ruling in favour of Keppel DC REIT, acknowledging their claim for outstanding rents in FY21, it was also affirmed that Keppel DC REIT has the right to reject DXC's proposal for downsizing its space. The trial, slated to begin in February 2024, assumes crucial significance as the initial court decision strongly suggests Keppel DC REIT's high likelihood of securing the complete rental payment from DXC.
• Nevertheless, Keppel DC REIT has displayed prudence by making provisions for the unpaid rents, which thus constitutes less than 2% of DPU. Any amounts successfully claimed from DXC would serve as a positive boost to Keppel DC REIT's overall DPU.

Working with Guangdong DCs’ tenant on a recovery roadmap.

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Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2024-01-29 SGinvestors.io

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