Keppel DC REIT – Resilient demand amid tight supply



The Positives

+ Portfolio occupancy remained stable at 98.5% QoQ, with a portfolio WALE of 8.2 years. 14.3% of leases by rental income will expire in 2023. In our view, the likelihood of lease renewal is high due to the high costs of tenant re-location and 54% of its assets are located in Singapore.  


+ Prudent capital management, with 73% of debt on fixed rate. Average cost of debt increased from 2.7% in 4Q22 to 2.8% in 1Q23. A 100bps increase in interest rates would lower DPU by c.2.2%. Gearing also edged up from 36.4% at end 2022 to 36.8%. KDCREIT has no refinancing obligations in 2023 after refinancing all loans expiring in 2023 (4.9% of total) in early April at 3-month EURIBOR plus an agreed spread. Foreign sourced income is also substantially hedged till the end of 2023, and partially thereafter until the middle of 2024. EU accounts for c.24% of income.




Keppel DC REIT is on the lookout for acquisitions, including off-market transactions. Japan is a potential target market, where acquisition cap rates are around 5% and interest rates remain low. The sponsor also has >S$2bn worth of data centre assets under development and management that KDCREIT could potentially acquire.


There is a final payment of c.S$142mn upon the completion of Guangdong Data Centre 3, expected to take place in 3Q23. Our forecasts assume this would be funded via a cash call.


Downgrade from BUY to ACCUMULATE with a lower DDM TP of S$2.26 (prev. S$2.58)

KDCREIT’s NPI yield of 7.2% and long WALE of 8.2 years is still superior to other asset classes. Its largest tenants are some of the biggest internet enterprises in the world, with its largest contributing 35.5% of rental income. Catalysts include more accretive acquisitions and lower-than-expected interest costs. The current share price implies FY23e/24e DPU yields of 4.7%/4.9%.

Keppel DC REIT – Earnings cushioned by recent investments


The Positive

+ Portfolio occupancy up 0.4ppts YoY, from 98.3% to 98.7%. This was due to higher occupancy at DUB1, which improved from 82.3% to 95.9%. KDC also renewed its lease at Basis Bay, extending the the weighted average lease expiry (WALE) at the property from 0.2 years to 4.7 years. While committed occupancy was not disclosed, we understand from the management that the tenant has downsized its space. Occupancy at Basis Bay is expected to decline from 63.1% when the new lease kicks in. Portfolio WALE lengthened from 7.5 years to 7.7 years.


The Negatives

-  Litigation against DXC over revenue for provision of colocation services. KDC announced its litigation against DXC on 21 March 2022. The suit, which was initiated by KDC, was for c.S$14.8mn in colocation service revenue in connection with provision of facility management services at KDC1 for the 4-year period between 1 April 2021 and 31 March 2025. The affected occupancy is c.0.4% of KDC’s NLA as at 31 December 2021, and the impact arising from the disputed sum per annum is approximately 2.0% of FY21’s distributable income.

- Slight increase in cost of borrowing and gearing. Cost of borrowing remains low despite increasing from 1.6% to 1.8%. Portion of debt on fixed rates crept up from 74% to 76% while gearing inched up slightly from 34.6% to 36.1% post-acquisition of London DC but remains below the 50% regulatory limit.



About 17.1% of leases are due to expire in FY22, likely from KDC4 given the short WALE of 0.4 years. While the data centre moratrium in Singapore has been lifted, construction of new supply is expected to take 2-3 years to come online. Tenant stickiness is high due to the significant cost of relocation. We remain optimistic about KDC’s tenant retention ability over the mid-term.


Including the acquisition of London DC, KDC’s AUM grew 16.7% since Dec 20. Data centre cap rates were stable QoQ. KDC continues to source for acquisitions in Asia, Europe and US, with a preference for off-market deals which could provide better entry yields. KDC also has a ROFR on the remaining five data centres located within the Bluesea Intelligence Valley from the vendor of Guangdong DC.


Maintain BUY with a lower DDM TP of S$2.58 (prev. S$2.81)

FY22-26e DPUs lowered by 3.7-6.1% due to provision for litigation and higher electricity costs, resulting in 8.2% reduction in our DDM-TP from S$2.81 to S$2.58. The current share price implies FY22e/23e DPU yields of 4.7%/4.8%.

Keppel DC REIT – Valuations speak for fundamentals



The Positives

+ Portfolio occupancy up 0.5ppts YoY, from 97.8% to 98.3%. This was due to the acquisition of fully-leased Guangdong DC and occupancy improvements at KDC1 and Dub1. Occupancy at KDC1 inched up 2.0ppts to 93.1%, while occupancy at Dub1 saw a 1.1ppt improvement,  at 82.3%.

+ Portfolio valuation up 8.9%, or S$213mn, on a same-store basis, largely driven by cap rate compressions. Singapore properties accounted for 83% of the valuation uplift, with cap rate range compressing approximately 55-82bps YoY, from 4.95%-10.12% to 5.25%-9.31%. Intellicentre Campus in Australia accounted for 17% of the valuation uplift after the TOP of Intellicentre 3 in Jul 21, while Cardiff DC in the UK took a 7% haircut owing to more conservative assumption following a change of valuer.

+ S$386mn in investments to secure FY22 DPU growth. KDC announced S$386mn in investments in FY21 which carry an average EBITDA yield of 7.1% (Figure 1). Given the timing of legal completion, these investments will contribute more meaningfully towards FY22 earnings.


The Negative

-  KDC4 and Basis Bay DC leases ticking down to expiry. 18.7% of leases by GRI are up for renewal in FY22, likely from KDC4 and Basis Bay DC given the shorter WALEs of 0.7 years and 0.5 years at these assets. The manager is still in the midst of renewal discussions but remains open to divesting if offer prices are compelling.   

Keppel DC REIT – Assuredly accretive acquisitions

The Positives

+ 3Q21 DPU +4.5% YoY due to acquisitions and AEI. DPU lifted by acquisition of Amsterdamn DC and Eindhoven Campus in Dec20 and Sep21, and AEIs at KDC SG5, Dub1, Dub2 and DC1. KDC renewed c.7.2% of expiring GRI in 3Q21, bring FY21 expiries to 0.4% of GRI. Occupancy remains high at 98.1% with WALE increasing QoQ from 6.5 years to 7.0 years due to the commencement of a 20-year lease at Intellicentre Campus in Jul21.

+ Fruitful quarter of capital recycling. KDC divested iSeek DC for S$35.3mn in Aug21, 21% and 1.4% above IPO and market valuation respectively. It also acquired Eindhoven Campus in Sep21 and inked the NetCo agreement in Oct21. The three investments (Figure 1) announced year-to-October totalled S$281mn, carrying weighted average yield of 8.3%. The acquisition of Eindhoven Campus was completed on Sep21, while the remaining two investments – Guangdong DC and investment in NetCo bonds – are estimated to be completed in 4Q21. We estimate that these acquisitions could provide more than 6% DPU accretion for KDC.


The Negative

- Basis Bay DC lease expiring in c.8 months may be at risk. Basis bay is a colocation asset located in Malaysia. Occupancy has remained at 63.1% since 2Q17. The management has previously cited weak interest in the asset. However, NPI contribution from this asset has been reduced by AUM growth and currently contributes c.1% to NPI.



KDC is evaluating several on- and off-market deals with cap rates ranging 4-5%. Cap rates have compressed 50-75bps since a year ago. KDC’s low cost of debt of 1.6% should still leave room for accretive acquisitions. The Sponsor group of affiliates manages more than S$2bn in data centre assets KDC could potentially acquire. KDC also has a ROFR on the remaining five data centres located within the Bluesea Intelligence Valley from the vendor of Guangdong DC.

Still no updates on Singapore’s moratorium on data centres which was rumoured to be lifted this year. Should it happen, supply could increase over the next 2-4 years. However, stickiness of data-centre tenants and Keppel’s track record as a data-centre operator should help it retain tenants.


Maintain BUY with a lower DDM TP of S$3.03 (prev. S$3.20)

FY21e/22e DPU dips 0.3%/4.1% after we adjust our forecasts to factor in the divestment of iSeek DC and investments in Eindhoven Campus, Guangdong DC and NetCo, while reversing our previously assumed S$500mn acquisition at 6% NPI yields. DDM-TP cut by 5.3% from S$3.20 to S$3.03 due to lower FY21e-FY25e DPU estimates. Figure 1 summarises the estimated contributions from announced investments versus our previously assumed S$500mn acquisition. Current share price implies FY21e/22e DPU yields of 4.1% and 4.5%.


Stock catalysts are expected from acquisitions and higher 5G, smartphone and cloud adoption. Despite its expansion of mandate, KDC will remain data centre-focused, maintain at least 90% of its assets in data centres and will only consider assets that have been 50% leased at a minimum.

Keppel DC REIT – Riding technology growth


+ Positives

+ FY20 NPI and DPU grew 37.7% and 20.5% YoY respectively, led by newly-acquired KDC4 and DC1 in Singapore (in 2H19) and Kelsterbach DC in Germany (on 1 May 2020). Portfolio occupancy was also higher from completed AEI and higher demand.

+ Portfolio occupancy improved QoQ from 96.7% to 97.8% (FY19: 94.9%). Higher occupancy in 4Q20 stemmed from: 1) the handover of newly converted DC space at KDC5 which lifted occupancy from 84.2% to 100%; 2) tenant expansion at KDC1 which increased occupancy from 89.2% to 91.1%; and 3) a new tenant at KDC2 which raised occupancy from 93.5% to 98.2%. AEI to bring more power onsite at Dub1 also allowed KDC to lease out additional space, bumping up its occupancy from 61.8% to 81.1%.

+ Acquired Amsterdam DC on 24 Dec 2020 for S$48.1mn; initial NPI yield of 5.1%. Amsterdam DC comprises a shell & core data centre and an office component, with occupancy of 99.1%. The asset is located near the Amsterdam Internet Exchange, one of the world’s largest hubs in terms of connections and traffic. Amsterdam DC has an occupancy of 99.1% and is leased to data-centre and IT service firms.


- Negative

- Natural decay of leases reduced WALE to 6.8 years (FY19: 8.6 years). Colocation (Colo) leases are the most profitable leases as rents include charges for facility management and the rental of M&E equipment. However, Colo leases typically run on shorter WALEs of 2.7 years vs. 11.2 years for fully-fitted and 7.3 years for shell & core data centres. Fortuitously, most of KDC’s Colo leases are in Singapore, which is a rising rental market due to limited new supply. As such, shorter WALEs should allow KDC to capture higher rents as the leases are marked to market upon renewal. In contrast, with a WALE of 1.5% and persistently low occupancy of 63.1%, KDC’s struggling Malaysian asset, Basis Bay (0.8% of AUM), may face occupancy risks should its existing tenant decide not to renew.



Evaluating potential acquisitions. KDC is evaluating several piecemeal and portfolio acquisitions with cap rates of 5-7%. However, travel restrictions in several countries have prevented KDC from physically inspecting the assets overseas. Management has found a way around this, which is to focus on shell & core assets which are more passive in nature and rely on third-party valuers. Using this strategy, KDC was able to acquire Amsterdam DC before the year ended.


Demand-supply gap to push up market rents. Singapore is KDC’s core market, accounting for 56% of its AUM. Given the moratorium on data centres in Singapore, we expect market rents to be bid up in the coming two years. Present higher demand has led to higher occupancy for KDC’s portfolio, though market rents have not moved. While KDC’s portfolio occupancy in Singapore is high at 97.0%, Colo leases in Singapore have WALEs of 1.4-4.0 years. These coincide with expected rent appreciation. In the meantime, KDC is expected to benefit from organic growth as many of its leases have built-in periodic rental escalations averaging 2-4% p.a.


Upgrade to ACCUMULATE, DDM-based TP raised from S$2.91 to S$3.20

Changes from our previous report

Our DDM-based TP has been raised to reflect higher occupancy and asset productivity following AEI, which raises our NPI by 6.9% on a same store basis (excluding any acquisition assumption). Our previous TP of S$2.91 assumes that KDC will make a S$500mn of acquisitions in 1Q21e (NPI yield 6% and LTV 30%). In this report, we push back our S$500mn acquisition assumption (NPI yield 6% and LTV 30%) from 1Q21 to 4Q21.


Scenario analysis: with and without acquisitions

Our acquisition assumption reduces FY21e DPU by 5.4% due to an enlarged share base, but increases FY22e DPU by 5.3% (Figure 1).

Demand for data centres is supported by increasing 5G, smartphone and cloud adoption. KDC’s higher P/NAV of 2.4x (Figure 3) is supported by the forecast growth in data centres and its ability to deliver earnings growth through AEI, rental improvements and accretive acquisitions. We forecast DPU yields of 3.3%/3.8% for FY20e/21e, which should deliver a forward yield spread of 220bps, the average of its five-year historical yield spread over 10YSGS (Figure 2).

Keppel DC REIT – In anticipation of acquisitions


The Positives


The Negatives



Still awaiting acquisitions. KDC is still negotiating several third-party deals with cap rates of 4-7%, some in advance stages. However, its deal process has been stalled by travel restrictions. Management shared that the number of deals and size have increased. While demand for data centres has compressed cap rates, asking prices for deals under negotiation are unchanged.


Demand-supply gap to lift market rents. Demand-supply gaps exist in many markets due to government restrictions on the supply of data centres. Globally, demand for data centres is being driven by big data, 5G and cloud adoption. Singapore has attracted Chinese tech companies looking to set up headquarters and operations here to perform big data analytics. We understand, however, that the Chinese tech players were unsuccessful in securing land from the government for data-centre development. Given the moratoriums on data centres in Singapore, we expect market rents to be bid up in the coming two years. While KDC’s high portfolio occupancy of 96.7% and long WALE of 7.2 years translate to low expiries in 2021/22 and leave little opportunity for positive rental reversions, many of its existing leases and co-location arrangements have built-in periodic rental escalations averaging 2-4% p.a.


Maintain NEUTRAL with higher target price of S$2.91, from S$2.57.

Our DDM-based TP has been raised from S$2.57 to S$2.91 following our assumption of S$500mn of acquisitions with an NPI yield of 6% and LTV of 30% for 1Q21e. This translates to DPU accretion of 5.0%/ 5.8% for FY21e/FY22e and gearing of 35% in FY21e. Despite strong portfolio metrics and future-ready asset classes, we reiterate our Neutral view as we believe the market has priced in potential catalysts from acquisitions and STI inclusion. KDC is trading at an all-time high and DPU yield of 3.1%/3.6% for FY20e/21e is not compelling. Prefer Ascendas REIT (AREIT SP, Accumulate, TP: S$3.63) in the sector.

Keppel DC REIT – Premium for a future-ready asset class


The Positives
+ No out-of-pocket rental rebate to tenants but passed on the property tax rebates by the government to Singapore tenants. All tenants remain current with rents.

+ $2.8mn tax savings p.a. upon attainment of tax transparency for KDC 4. KDC 4 attained of tax transparency status on 25 May 2020, which will result in some $2.8mn worth in tax savings. An extended land lease title at KDC 4 by 30 years till June 2050 (cost $5mn). Despite some anticipated delays, the tax transparency status was attained within c.7 months after acquisition on 31 October 2019, within the estimated 6 to 9-month gauge based on past application.

+ Early lease renewal negotiations reduced FY21 expiries from 10.75 to 6.2% by NLA as at end-June 2020. The REIT has 2.6% of total net lettable area (NLA) up for renewal in 2H 2020. The Manager has started engaging clients for early renewals and brought down the total NLA due for expiry in 2021 from 10.7% as at end 2019 to 6.2% as at 30 June 2020.


The Negatives

- Delay in AEI and development timelines due to lockdowns. KDC has several AEIs ongoing – Dub 1 (increase energy efficiency, TBC 2H20), KDC SG 5 (conversion of 15.8% NLA from non-DC space to DC), DC1 (fit out of shell & core space, TBC 1H21) and the development of Intellicentre 3 (delayed from 4Q20 to 1H21). AEIs for Dub 1 and Dub 2 have resumed following a 2-month lockdown, however construction works in Singapore remain suspended due to government policies on foreign workers residing in dormitories. While development works in Australia were allowed to continue through the pandemic, delay in certain supplies may result in delays.

- Gearing increased from 30.7% to 34.5% as at 30 June 2020, as expected, due to acquisition of Kelsterbach DC (Germany, TBC 1H20) and the balance of the 999-year land lease for KDC Dub 1. However, with KDC‘s strong balance sheet and high-interest coverage ratio of 12.8x, we view this utilisation of gearing headroom favourably.


Acquisition timeline thwarted by travel restrictions. KDC is negotiating several third-party deals, some of which are in advanced stages. However, travel restrictions have made asset viewing impossible. Increase in potential buyers may lead to bidding-up of prices.


Maintain NEUTRAL with a higher target price of $2.57 (previously $2.31)
In the 5 years since listing, KDC has grown DPU at a CAGR of 2.7%. Our previous DDM assumptions incorporated a 1.5% terminal growth rate which is below the historical pace of DPU growth. Our change in TP is attributed to a higher terminal growth of 2.0% incorporated (prev. 1.5%). In light of the increased competition for assets, we have assumed a more tapered terminal growth rate of 2.0% (vs. the historical CAGR or 2.7%). Based on our FY20e DPU of S$0.90, DPU yield of 3.3% is on the low side while P/NAV of 2.26x

Keppel DC REIT – Only if the price is right


The Positives


The Negatives


Note: KDC will be adopting half-yearly reporting. The next announcement of financial statements will be for the half-year period ending 30 June 2020.



Higher data traffic and the accelerated pace of cloud and technological adoption is expected as more work from home. This will cause tenants to deplete their space capacity at a faster rate than planned, which may lead to tenants needing to replenish rack space post-COVID.

Tax transparency for KDC SG 4 (acquired 31 Oct 19) is expected to be granted within 6 to 9 months after application, based on previous tax transparency applications (KDC SG 5’s approval took c.6months). Minor delays possible in light of the COVID-19 disruptions.

Gearing will increase from 30.7% to 32.8% for FY20 due to acquisition of Kelsterbach DC (Germany, TBC 1H20) and the balance of the 999-year land lease for KDC Dub 1. With KDC‘s strong balance sheet and high interest coverage ratio of 12.8x, we view this utilisation of gearing headroom favourably.

Strong price appreciation has compressed yields to the 3%-4% range, on the low side for SREITs. We like the data centre asset class due to its future-ready characteristics, growing pace of cloud and technological adoption and limited supply. Since listing, KDC has grown AUM by c.2.5x and DPU by 11.3%. We believe that their operating track record, strong portfolio metrics and index inclusion has driven yield compression. KDC’s P/NAV for 2019 was 2.14x, a significant premium above other industrial SREITs. However, the stability and resilience in earnings, as well as income visibility from long WALE of 8.3 years, as well as comparison to its peers leads us to think that the premium is justified. KDC’s low FY20e and FY21e yield of c.3.7% and 3.9% respectively are similar to the yields of US-listed data centre REITs of 1.5%-4.1%, as shown in Figure 1.


Downgrade to HOLD with a higher target price of $2.20 (previously $2.06)

We adjust our estimates to reflect the acquisition of Kelsterbach DC and the conversion of two floors of Shell&Core space at DC1 to a Fully-Fitted lease. We lowered our cost of equity by 100bps to reflect the lower interest rates and lower our beta slightly as we believe the data centre asset class should be less sensitive to market factors.

We continue to like KDC for reasons mentioned above. However, we think that upside is limited given the strong ride up in prices, with yields at c.3%, not compelling. We recommend accumulating on pull back.

Keppel DC REIT – Delivering, as expected


The Positives


The Negatives



Vacant, non-DC NLA poses potential for conversion to data centre (DCs), making KDC a beneficiary of tapering DC supply in Singapore. Currently, 22,178 sqft of NLA - 6.4% and 15.8% from KDC SG 1 and KDC SG 5 - are non DC space. KDC is in the midst of getting government approval to bring more IT power onsite to convert the space at KDC SG 5 to DC space.


Maintain ACCUMULATE with a higher target price of $2.06 (previously $2.00)

We raise our estimates by 2%  to reflect the strong demand for DCs admist the tightening DC supply. Our TP of $2.06 implies a 3.8%/4.46% FY19e/FY20e DPU yield.

Keppel DC REIT – Double happiness: Double-digit DPU accretive acquisition


A look at the assets


Keppel Data Centre 4 (KDC4) – S$384.9mn


1-Net North Data Centre (1NN) – S$200.5mn


Impact on KDC


What do we think?

A highly anticipated, well-timed and positive move. The proposed acquisition is highly accretive and results in a stronger enlarged portfolio as well as better financial metrics.



The announcement of the dual acquisition comes hot on the heels of KDC’s inclusion into the FTSE EPRA NAREIT Developed Index. KDC’s rich valuation of 1.6x P/NAV is well supported given the added visibility from index inclusion, their niche portfolio of data centres and track record of acquisition-driven DPU growth.

Despite the sizable two-asset acquisition, acquisitions within the next 12 months are still a possibility as discussions with several third-party sellers have been underway since the start of 2019.


Key risks

The key risk remains the attainment of the tax transparency status for the entity holding KDC4. KDC successful attained tax transparency status for KDC1, KDC2, KDC3 and most recently KDC5 in January 2019 (acquired 12 June 2018). The confirmation of tax transparency is expected to be announced between 6 – 9 months after application.


Upgrade to ACCUMULATE with a higher target price of $2.00 (previously $1.71)

KDC’s cost of funds have been falling steadily since listing (FY15/FY17/2Q19 2.5%/2.3%/1.7%). We lower our cost of equity assumption by 48bps from 6.99% to 6.51% to reflect the lower risk-free rate.

We adjust our forecast to incorporate the proposed acquisitions and the lower cost of equity assumption. Our target price translates to a FY19/FY20 DPU yield of 3.8%/4.4% and a FY19 P/NAV of 1.64x.



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