Keppel DC REIT Earnings: Tenant Issue Dragged Distributions Lower; Units Fairly Valued

Keppel DC REIT’s, or KDC REIT’s, second-half 2023 results came in lower than our expectations due to a higher-than-expected loss allowance for its Guangdong data centers. Consequently, second-half 2023 distribution per unit, or DPU, fell 16.1% year on year to SGD 0.04332. The trust is actively engaging with the Guangdong data centers’ tenant and will give them time to improve the operations and eventually repay the rent arrears. Management shared that the tenant remains committed to the lease contract and has partially settled arrears of SGD 0.1 million. That said, management has refrained from committing to a timeline to resolve this issue before seeking alternative solutions such as repossessing the data center. In our view, there is still significant uncertainty regarding the resolution of the Guangdong data centers’ tenant issue. The arrears repayment of SGD 0.1 million is also insignificant compared with the current loss allowance of SGD 10.5 million. We have thus pushed back our expectations on the resolution of this issue by another year and anticipate contributions from the Guangdong data centers to resume only from 2026. As a result, our fair value estimate is reduced to SGD 1.78 from SGD 1.92. We cut our DPU forecasts for 2024 and 2025 by 3.2% and 32.5%, respectively, but our forecast DPU for 2026 is raised by 8.1%. We had previously expected the tenant to repay all rent arrears in 2025, but now assume that the tenant will repay over three years, between 2026 and 2028. We kept our assumptions for the other data centers after the in-line results. We believe the trust is currently fairly valued and think that investors should wait for a bigger margin of safety.