We are entering the REIT earning season again for Q3 2023. Keppel DC REIT kickstarted this earning season, and here we summarize its quarterly results for you. Keppel DC REIT is a pure-play data center REIT with exposure to nine countries: Singapore, Australia, Ireland, China, Germany, Netherlands, United Kingdom, Italy, and Malaysia. Let’s dive into Keppel DC REIT Q3 2023 results.
Key Takeaways
- Keppel DC REIT’s DPU in Q3 2023 fell by 3.6% year-on-year to 2.492 cents. The decline is attributed to the higher financing costs, less favorable forex hedges, and lower contributions from some of the Singapore colocation assets arising from higher facilities expenses, including electricity costs.
- The debt profile has slightly deteriorated this quarter, with the aggregate leverage ratio increasing to 37.2% and the interest coverage ratio decreasing by 0.6 to 5.4 times. However, the overall debt profile is still healthy.
Financial Performance
Here we compare Keppel DC REIT Q3 2023 result to the same quarter last year, Q3 2022 (data in SGD thousands):
| Q3 2023 | Q3 2022 | % Change | |
|---|---|---|---|
| Gross Revenue | 70,676 | 70,322 | +0.5 |
| Property Expenses | (6,091) | (6,235) | (2.3) |
| Net Property Income | 64,585 | 64,087 | +0.8 |
| Finance Income | 2,742 | 2,416 | +13.5 |
| Finance Costs | (12,837) | (8,180) | +56.9 |
| Distributable Income | 43,876 | 46,943 | (6.5) |
| DPU (cents) | 2.492 | 2.585 | (3.6) |
Keppel DC REIT grew its gross revenue by 0.5%, attributed to the contributions from acquisitions, positive income reversions, and income escalations. Despite the increased income, higher finance costs, which grew by 56.9%, offset these gains. The manager highlighted the following reasons that contributed to the higher costs: higher refinancing costs, higher costs from floating interest rates loans, lower contributions from some of the Singapore colocation assets due to the higher facilities expenses, and less favorable forex hedges. As a result, the DPU declined to 2.492 cents, which is 3.6% lower than last year.
The results show mixed results for Keppel DC REIT, with growing revenue but lower DPU. We think this is expected as the higher interest rates will eventually bite all REITs as they refinance their debt. The good news is that Keppel DC REIT has no more debt to refinance this year and only a minimal amount (4.1%) to refinance next year.
Debt Profile
Because we are in a high-interest rate environment, it is wise to scrutinize the REIT’s debt profile more to ensure it can withstand pro-longed restrictive economic conditions. Here is the summary of the key metrics:
| Q3 2023 | Q2 2023 | Change | |
|---|---|---|---|
| Aggregate Leverage | 37.2% | 36.3% | +0.9% |
| Average Cost of Debt | 3.5% (Q3 2023)
3.2% (YTD) |
3.3% (2Q 2023)
3.1% (YTD) |
+0.2%
+0.1% |
| Interest Coverage Ratio (ICR) | 5.4x | 6.0x | -0.6x |
| Weighted Average Debt Tenor | 3.7 years | 3.9 years | -0.2 years |
| % of Borrowings Hedged
to Fixed Rates |
72% | 73% | -1% |
Keppel DC REIT’s debt profile has weakened this quarter, with the aggregate leverage ratio climbing by 0.9% to 37.2%. The interest coverage ratio (ICR) also dropped by 0.6x to 5.4x. Despite the weakening debt profile, we believe it is still relatively healthy. The aggregate leverage ratio of 37.2% is still far from the regulatory limit of 50%.
Debt Maturity Distribution
As we expect to be nearing the end of this rate hike cycle, we typically like to review the debt that needs refinancing within the next two years. These next two years may still see elevated interest rates, so prudent fiscal management is still essential for these next few years.
Overall, we like Keppel DC REIT’s debt maturity distribution. The excellent news for Keppel DC REIT is that there is no more debt to refinance for 2023. Additionally, only 4.1% are due for refinancing in 2024, and 7% are due in 2025. This distribution allows the REIT to have a relatively limited impact on its bottom line should the high-interest rate environment persist for another two years.
Portfolio Occupancy
By looking at the portfolio occupancy, we can roughly gauge the fundamentals of the REIT’s business. Here is the summary:
| Q3 2023 | Q2 2023 | |
|---|---|---|
| Occupancy Rate | 98.3% | 98.5% |
| WALE | 7.8 years | 8 years |
The portfolio occupancy rate declined slightly from 98.5% in the previous quarter to 98.3% this quarter. Portfolio WALE also slightly dipped to 7.8 years. However, despite these declines, the overall portfolio occupancy is still very healthy.
Regarding the lease expiry breakdown, only 1% is due for renewal this year, 27.7% for 2024, and 22.6% for 2025.
Most of Keppel DC REIT’s major tenants are in the thriving IT and Telecom sectors. Their tenants are some of the biggest companies in their respective industries, which may result in less diversification.
Neo Telemedia Issue
A recent report from DBS Group Research has been released, which suggests that Neo Telemedia, one of Keppel DC REIT’s major tenants, may be experiencing financial difficulties or even bankruptcy in the worst-case scenario. Three data centers in Guangdong are master-leased to Neo Telemedia and contribute to approximately 10-11% of the REIT’s revenue. If Neo Telemedia were to file for bankruptcy, it could have a negative impact of up to 16% on Keppel DC REIT’s DPU.
However, DBS also reiterated that Neo Telemedia has continued to pay its rental and has not warned of any potential delay.
Remarks
We think the Keppel DC REIT Q3 2023 financial update is well within our expectations. The higher finance costs are expected in this higher interest rate environment. Going forward, should the restrictive economic condition persist, we expect the REIT only to grow minimally, and its cost will rise as more debt will be refinanced next year. The DPU will likely still be under pressure in the short term.
Despite all these, we believe Keppel DC REIT’s debt profile and fundamentals still look healthy, and the REIT should be able to withstand a prolonged higher interest rate environment.
As for the Neo Telemedia, the issue is still developing, and we cannot say for sure whether it will materialize. If it does, there is a potential for a bearish trend in the short term. However, we believe Keppel DC REIT is well-positioned to weather this storm.
You can check our Keppel DC REIT analysis page for more information about this REIT. We also have a dedicated page for Keppel DC REIT dividend data if you are looking for its dividend data.
You may check out our Singapore REITs’ data page for analysis and data for other REITs.
Related pages:
- Keppel DC REIT financial results page: https://www.keppeldcreit.com/en/investor-relations/financials/financial-results/
- Q3 2023 operational update presentation: https://www.keppeldcreit.com/en/file/investor-relations/financial-results/2023/3q2023-presentation-slides.pdf
