Keppel DC REIT Earnings: In Line With Expectations; Cyxtera’s Woes To Have Limited Impact

Narrow-moat Keppel DC REIT’s AJBU, or KDC REIT’s, first-half 2023 net property income grew 3.3% year on year on the back of a 3.6% year-on-year increase in revenue, in line with our expectations. The growth was largely driven by the acquisition of Guangdong Data Centres 2 and 3, partly offset by higher electricity cost and the appreciation of the Singapore dollar, which affected income for its overseas investment. Distribution per unit, or DPU, came in flat at SGD 0.05051, slightly below our expectation due to higher finance cost from refinanced loans and floating rate loans. During the call, management shared that the trust is close to absorbing the full impact of the higher interest rate environment. We have increased our near-term borrowing cost assumptions and reduced our forecast 2023 DPU to SGD 0.1007 (from SGD 0.1061), or a 1.4% year-on-year decline. We retain our fair value estimate of SGD 1.92 per unit as our long-term thesis for KDC REIT remains unchanged.

The emergence of ChatGPT and generative artificial intelligence underscores our confidence in the secular demand for data centers. We believe KDC REIT is a strong beneficiary of such trends but we think investors should wait for a better entry price as the units currently trade at 1.2 times our fair value estimate and a tight 2023 dividend yield of 4.4%. We also think the high interest-rate environment will continue to be a near-term headwind for the trust, limiting its ability to replicate its historically successful strategy of growing inorganically.