Keppel DC REIT - OCBC Investment 2022-04-20: Growth Stymied By Higher Electricity Costs & Tenant Dispute

KEPPEL DC REIT (SGX:AJBU)

Keppel DC REIT - Growth Stymied By Higher Electricity Costs & Tenant Dispute

Keppel DC REIT's 1Q22 distribution per unit (DPU) inched up 0.2% y-o-y to S$0.02466.
Negative impact from higher electricity costs and ongoing tenant dispute.
Portfolio occupancy firm at 98.7%.

Keppel DC REIT (SGX:AJBU)’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 to S$66.1m and S$60.1m, respectively. The decline was driven by higher electricity costs and provisions made at its Keppel DC Singapore 1 (KDC SGP1) asset due to an ongoing tenant dispute, but partially offset by contribution from acquisitions.
Keppel DC REIT’s 1Q22 DPU came in at 2.466 Singapore cents, which represented a slight increase of 0.2% y-o-y, and this accounted for 24.1% of our FY22 forecast.
Regarding the tenant dispute, Keppel DC REIT had on 21 Mar 2022 announced that the master lessee and appointed facility manager (a joint venture of Keppel DC REIT’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 ~S$14.8m for the 4-year period between1 Apr 2021 and 31 Mar 2025, which accounted for ~2% of Keppel DC REIT’s distributable income for FY21.

Keppel DC REIT 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 Keppel DC REIT’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 pass-through to tenants.
On a positive note, Keppel DC REIT’s portfolio occupancy remained high, improving 0.4 percentage point (ppt) quarter-on-quarter to 98.7% due to the inclusion of 100%-occupied London Data Centre to its portfolio.
Keppel DC REIT's 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.

In terms of financial position, Keppel DC REIT’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 for Keppel DC REIT 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 for Keppel DC REIT declines from S$2.61 to S$2.28.
See

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2022-04-20

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