Keppel DC REIT’s Q2 2022 in Line; Rising Interest Rates Weigh on FVE

Keppel DC REIT’s, or KDC REIT’s, second-quarter 2022 operating performance was generally in line with our expectations. However, we are raising the exit cap rate used to compute the terminal value of KDC REIT’s data center assets on the back of the more aggressive U.S. federal-funds rate hikes to combat inflation. Hence, we have lowered our fair value estimate to SGD 1.92 from SGD 2.18. This implies a forward distribution yield of 5.3% and price/book value of 1.4 times. While we continue to like KDC REIT for its strong fundamentals—arising from strong secular growth trends such as cloud computing, 5G, and other technological advancements driving the data center sector—we think the trust is fairly valued at the current price as the positive outlook is largely priced in.