Keppel DC REIT – Strong rental reversion

Excerpts from CGS International report

Keppel DC REIT (SGX: AJBU)

• 2H24/FY24 DPU of 4.902/9.451 Scts were above expectations, at 53.7%/103.7% of our FY24F forecast.
• Rental reversion was strong at about +39% in FY24. We expect the robust momentum to extend into FY25F, underpinned by Singapore renewals.

Reiterate Add rating with an unchanged TP of S$2.48.

2H24/FY24 results highlights

Keppel DC REIT reported 8.8% and 8.5% yoy increases in revenue and NPI to S$153.1m and S$127.6m, respectively, in FY24, on strong rental reversions from Singapore contract renewals and contributions from Tokyo DC1, but partly offset by the sale of Intellicentre Campus. 2H24 distributable income grew by 20.2% yoy to S$91.9m, translating into a DPU of 4.902 Scts, +13.2% yoy. KDCREIT revalued up its overall portfolio, with a 3.4% uplift to its end-FY24 portfolio value, on a same-store basis.

Keppel DC REIT saw a +39% rental reversion in FY24

Portfolio occupancy stood at 97.2% at end-Dec 2024 (vs. 97.6% in 3Q). KDCREIT enjoyed strong portfolio rental reversion exceeding 30% in 4Q24, and about +39% for FY24. Management has guided that Singapore’s rental reversion outlook remains robust in FY25F, which bodes well for its lease expiries of 22.1% this year. In addition to the upcoming lease expiry of SGP4 DC (remaining WALE 0.5 years at end-FY24), management has indicated that there are a number of larger leases in Singapore due to be re-contracted. Hence, KDCREIT’s robust rental reversion momentum will likely extend into FY25F, in our view.

Low gearing of 31.5% positions Keppel DC REIT well for inorganic growth

Keppel DC REIT gearing fell to 31.5% at end-Dec 2024 following its equity fund raising exercise to purchase SGP7 and SGP8 DC and, as such, we think the REIT remains well positioned to continue seeking inorganic growth. Management has indicated that it will continue to look for value creation opportunities via strategic acquisitions, and leverage on positive market trends, including generative AI. Some markets on its radar include Japan, South Korea and the developed markets in Europe. KDCREIT’s average cost of debt slipped to 3.1% in 4Q24 and management guided that it expects funding cost to remain in the low 3% range for FY25F. Interest coverage ratio improved qoq to 5.3x at end-FY24.

Valuation/Recommendation

We tweak our FY25-26F DPU by 0.05-1.3% post results and keep our DDM-based TP of S$2.48 unchanged. Potential re-rating catalysts for the stock over the next 12 months could come from greater exposure to the robust Singapore DC market, potential earnings upside from greater tax transparency on the earnings. Other rerating catalysts include collection of arrears from Bluesea and higher-than-forecast rental reversions. Downside risks: lower-than-forecast portfolio occupancy, affecting its topline, and potential devaluation of its China portfolio, raising its gearing ratio.

You can find the full report here and the company website here.