Earnings season is here once again – and this time round, most of the companies will be reporting its business updates or financial results for the 3rd quarter ended 30 September 2023. Just like in the previous quarters, in the coming weeks, I will be posting reviews results by companies I have investments in as and when they are released.
First up is Keppel DC REIT (SGX:AJBU) – Asia’s first pure-play data centre REIT. At the time of writing, it owns a total of 23 data centres in 9 countries (Singapore, Australia, China, Malaysia, Germany, Ireland, Italy, the Netherlands, and the United Kingdom) with a total assets under management of S$3.7 billion.
After market hours this evening (16 October), it has released its business update for the 3rd quarter of the financial year ended 30 September 2023 (i.e., Q3 FY2023).
While the data centre REIT did not provide an update of its full financial statement this time round, it did share some key financial figures, which we will be looking at in this post, together with its portfolio occupancy and debt profile:
Financial Performance (Q3 FY2022 vs Q3 FY2023, and 9M FY2022 vs. 9M FY2023)
In this section, I will be looking at Keppel DC REIT’s financial performance for the 3rd quarter of the financial year (i.e., Q3 FY2022 vs. Q3 FY2023), followed by its results for the first 9 months of the financial year (i.e., 9M FY2022 vs. 9M FY2023):
Q3 FY2022 vs. Q3 FY2023:
| Q3 FY2022 | Q3 FY2023 | % Variation | |
| Gross Revenue (S$’mil) | $70.3m | $70.7m | +0.5% |
| Property Operating Expenses (S$’mil) | $6.2m | $6.1m | -2.3% |
| Net Property Income (S$’mil) | $64.1m | $64.6m | +0.8% |
| Distributable Income to Unitholders (S$’mil) | $46.9m | $43.9m | -6.5% |
My Observations: Gross revenue edged up by just 0.5% due to contributions from acquisitions, and overall positive income reversions and income escalations.
However, as a result of higher finance costs from the refinanced loans, as well as the floating interest rates loans, and less favourable forex hedges led to the REIT’s distributable income to unitholders falling by 6.5%.
9M FY2022 vs. 9M FY2023:
| 9M FY2022 | 9M FY2023 | % Variation | |
| Gross Revenue (S$’mil) | $205.9m | $211.1m | +2.6% |
| Property Operating Expenses (S$’mil) | $18.5m | $19.2m | +3.6% |
| Net Property Income (S$’mil) | $187.3m | $191.9m | +2.5% |
| Distributable Income to Unitholders (S$’mil) | $138.1m | $135.2m | -2.1% |
My Observations: Just like its results for the 3rd quarter, the data centre REIT’s financial results for the first 9 months of the financial year was a mixed one, and very much within my expectations – due to the lack of acquisition activities as a result of the current high interest rate environment, as well as higher borrowing costs on unhedged borrowings, and weaker forex (against the strong Singapore dollar) impacting distributable income to unitholders.
Portfolio Occupancy Profile (Q2 FY2023 vs. Q3 FY2023)
Next, let us take a look at the data centre REIT’s portfolio occupancy profile – where I will be taking the statistics reported for the current quarter under review (i.e., Q3 FY2023 ended 30 September 2023) compared against that reported in the previous quarter 3 months ago (i.e., Q2 FY2023 ended 30 June 2023) to find out if it has continued to remain at a high:
| Q2 FY2023 | Q3 FY2023 | |
| Portfolio Occupancy (%) | 98.5% | 98.3% |
| Portfolio WALE (years) | 8.0 years | 7.8 years |
My Observations: While the REIT’s portfolio occupancy fell by 0.2 percentage points (pp) to 98.3%, but I consider it to be very strong still.
In terms of lease expiry ahead, it is well-staggered out over the years, with 1.1% (by lettable area) and 1.0% (by rental income) due for renewal in the final quarter of FY2023, 6.7% (by lettable area) and 27.7% (by rental income) due for renewal in FY2024, 26.5% (by lettable area) and 22.6% (by rental income) due for renewal in FY2025, and the remaining 65.7% (by lettable area) and 48.7% (by rental income) due to renewal only in FY2026 or later.
And finally, top 10 clients contributed 78.4% towards the data centre REIT’s gross revenue, with the largest tenant (an internet enterprise – one of the largest tech companies globally) contributing 34.4% towards its gross revenue.
Debt Profile (Q2 FY2023 vs. Q3 FY2023)
Similar to how I have reviewed the REIT’s portfolio occupancy profile in the previous section, I will also be reviewing its debt profile by comparing the statistics reported in the current quarter against that reported in the previous quarter 3 months ago (i.e., Q2 FY2023 ended 30 June 2023 vs. Q3 FY2023 ended 30 September 2023) to find out if it has continued to remain healthy (which is very important in the current high interest rate environment we are in):
| Q2 FY2023 | Q3 FY2023 | |
| Aggregate Leverage (%) | 36.3% | 37.2% |
| Interest Coverage Ratio (times) | 6.0x | 5.4x |
| Average Term to Debt Maturity (years) | 3.7 years | 3.7 years |
| Average Cost of Debt (%) | 3.3% | 3.2% |
| % of Borrowings Hedged to Fixed Rates (%) | 73% | 72% |
My Observations: On the whole, Keppel DC REIT’s debt profile have also weakened slightly – particularly its aggregate leverage (where it inched up by another 0.9 percentage points to 37.2%), interest coverage coming down to 5.4%, and percentage of borrowings hedged to fixed rates coming down slightly to 72%. – for the remaining 28% of unhedged borrowings, a 100bps increase in interest rates will have a ~2.4% impact to Q3 FY2023’s DPU on a pro forma basis.
Despite of that, in my opinion, its aggregate leverage, at 37.2%, is still a healthy distance away from the regulatory limit of 50.0%.
In terms of debt maturity ahead, the good news is that there are no more refinancing obligations for the current financial year 2023. In FY2024, 4.1% of borrowings will be due for refinancing, with 7.0% of borrowings due for refinancing in FY2025, 22.8% of borrowings due for refinancing in FY2026, and the remaining 66.1% of borrowings only expiring in FY2027 or later.
Closing Thoughts
Its latest financial results (a weak growth in its gross revenue, and a decline in its distributable income to unitholders) for the 3rd quarter, as well as for the first 9 months of the financial year compared to last year was very much expected, due to the lack of acquisitions (this will slow down gross revenue growth), and at the same time, higher borrowing costs and unfavourable forex weighing down on the distributable income to unitholders.
No doubt its portfolio occupancy weakened slightly (down from 98.5% in Q2 FY2023 to 98.3% in Q3 FY2023), but in my opinion, it is still very strong. In terms of lease expiries ahead, it is also well-spread out over the next couple of years. The only thing is the high revenue contribution by the top 10 tenants, at 78.4%, with the top tenant contributing 34.4% – I understand some retail investors may not be too comfortable with this aspect.
The data centre REIT’s debt profile, compared to the previous quarter, have also weakened slightly – again, this was very much within my expectation. However, its aggregate leverage (at 37.2% as at 30 September 2023) is also a safe distance from the regulatory limit of 50.0%.
Looking ahead, I am of the opinion that its gross revenue for the final quarter of FY2023, as well as for the full-year, will likely improve by just a low single-digit percentage. Also, its distributable income to unitholders will be a lower one compared to last year, impacted by higher financing costs (on unhedged borrowings, and also newly refinanced borrowings at higher interest rates), as well as weaker forex.
With that, I have come to the end of my review of Keppel DC REIT’s 3rd quarter business update. Please note that everything you have just read is for educational purposes only, and that you should always do your own due diligence before you make any buy or sell decisions.
Related Documents
Disclaimer: At the time of writing, I am a unitholder of Keppel DC REIT.
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