Is Keppel DC REIT A Good Buy In 2025? [Fundamental Analysis]

In this article, we'll conduct a fundamental analysis and review of Keppel DC REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having high capital preservation ability.

Business Description

Keppel DC REIT is an Industrial REIT that was listed in 2014 and industrial properties across 9 countries that are mainly designed to be data centres.

What I Like About KDC:

• Distribution per unit has been rising consistently (CAGR: 5~%) despite the increase in units thereby signifying the manager's capabilities to deliver yield accretive acquisitions

  
  

• Overall portfolio’s WALE is high & occupancy rate is resilient (Figure 11)

  
  

• Strong pipeline from sponsor that could contribute to future portfolio expansion.

What I Do Not Like About KDC:

• 65.80% of the portfolio has an underlying land lease of less than 30 years (All the data centers in Singapore). This results in high levels of lease decay which are not priced in by the market.

  
  

• High levels of tenancy concentration risk (Figure 12). This may result in severe DPU disruption in an event where their top tenants encounter any financial issues.

Updates From Recent Performance (FY 2024)

General Comments:

• Completed the rights issue for acquisition (KDC SGP 7 & 8) in Q4 2024. In addition, KDC also made their maiden foray into Japan with the acquisition of Tokyo DC 1 in Q3 2024.

  
  

• Divested the Intellicentre Campus and redirected the capital to the notes issued by Macquarie Data Centre Group on June 2024.

  
  

• Operating metrics remained strong with the occupancy rate remaining high at 97.2% while rent reversion in FY2024 came in at 39%.

  
  

• Gross rental income (+10.4%) and Net property income (+6.3%) due to contributions from newly acquired Tokyo DC 1, higher variable rent from the settlement sum related to KDC 1 Dispute coupled with strong rental reversion. This was partially offset by higher loss allowances for Guangdong DCs and higher operating expenses.

  
  

• Capital management metrics improved considerably with the gearing ratio standing at 31.50% while the cost of borrowing remained unchanged at 3.30%.

Positive Headwinds:

• Driven by the increasing demand for cloud services, Internet Of Things, Edge computing and Artificial Intelligence use, the global data center demand is expected to remain strong and is estimated to grow at a CAGR of 19.4% from 2024 to 2028.

  
  

• The full-year contribution from the recently acquired properties in FY2024 will be the main source of growth moving into FY2025.

Negative Headwinds:

• Nil

  
  

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Disclaimer:

This article is meant to be the opinion of the author

This article is for information purposes only

This article should not be seen as financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore