Keppel DC REIT Unit Price Slides After Revenue, Income Drop in Q1

Keppel DC REIT’s stock price has dropped by seven percent since Tuesday after the manager of the SGX-listed trust reported declines in both net property income and revenue in the first quarter compared to the initial three months of 2021.

Having seen its unit price grow at the fastest rate of any Singapore-listed REIT in 2020, the dedicated data centre vehicle saw its net property income fall by 1.4 percent to S$60.1 million ($44.2 million) in the first three months of the year from S$60.99 million a year ago, the trust’s manager reported in a bourse filing on Tuesday.

“Keppel DC REIT’s 1Q22 results fell slightly short of our expectations,” OCBC Investment Research said in a report on Wednesday. “The decline was driven by higher electricity costs and provisions made at its Keppel DC Singapore 1 (KDC SGP 1) asset due to an ongoing tenant dispute, but partially offset by contribution from acquisitions.”

While the analyst report identified rising costs, Keppel DC REIT also saw its gross revenues slip by 0.9 percent to S$66.1 million during the period. investors were quick to react to the bad news with the REIT’s unit price falling to S$2.08 on Thursday from S$2.23 two days earlier.

Clocking Down

Keppel DC REIT’s Q1 performance is in line with the trust’s growth over the past two years. In 2021 Keppel DC REIT grew its net property income by just 1.9 percent compared to the preceding year, after achieving an expansion of 37.7 percent in 2020 and a 12.4 percent upswing in 2019.

Last quarter’s dip in revenue also aligned with slowing performance for Keppel REIT in 2021, after the trust had boosted its top line by 36 percent in 2020 and 11 percent in 2019.

Investors have noted the shifting results for Singapore’s first pure-play data centre REIT, with the trust’s unit price having fallen nearly one-third from its October 2020 peak of S$3.00.

Keppel DC REIT notified the stock exchange last month that it was involved in a dispute over payment with a tenant at one of its Singapore facilities, with that $14.8 million tussle denting its financial results.

OCBC also said that it expects ongoing increases in power costs for the REIT, despite assurances made by the trust’s manager that over 90 percent of these charges can be passed on to tenants.

Notwithstanding its drop in revenue, Keppel DC REIT reported distributable income of S$44.5 million for the quarter, which was up 5.9 percent from the same period in 2020. This increase also helped to boost its distributions per unit to S$2.47 in the first quarter from S$2.46 a year earlier.

OCBC has now lowered its DPU forecast for the trust this year by 2.7 percent and by 3.1 percent for 2023. The investment bank has also trimmed its fair value estimate on the trust’s equity to S$2.28 from S$2.61 previously.

Big and Bulky

Keppel DC REIT’s slowing financial performance could be a sign that the trust is still digesting a set of recent acquisitions, according to Jabez Tan, head of research at data centre analysis firm Structure Research.

“While revenue growth is important, it often tends to be a lagging indicator of health as leases signed take time to ramp into and revenue is generated overtime as usage increases,” Tan said.” The relatively lower revenue growth numbers is more so a function of Keppel DC REIT’s strategy of acquiring and housing stabilised data centre assets in its portfolio that are largely almost fully occupied before being added to Keppel DC REIT’s books, and because of that you therefore don’t get the big growth numbers that stem from leasing up an empty data centre asset.”

Acquisitions of data centres and investment in debt securities contributed to Keppel DC REIT’s rising DPU for the quarter, the trust’s manager said, while adding that occupancy rate in the portfolio improved by 0.4 percentage points to 98.7 percent at the end of March.

In December of last year the trust agreed to spend $76 million to acquire an office park property with data facilities near London as its sole acquisition of the fourth quarter. During September, Keppel DC REIT had purchased a data centre in the Netherlands, and the trust’s manager agreed to make its first acquisition of a China property in July when it committed to a $98 million buy.

The trust now has 21 data centres across 9 countries in Asia Pacific and Europe, compared to 18 facilities at the end of 2020.

Competition Appears

In addition to the challenges of managing a growing portfolio and dealing with pricier power, Keppel DC REIT is also facing greater competition for the attention of data centre-hungry investors in listed trusts.

In early December Digital Core REIT, a trust backed by a set of US data centres and sponsored by Digital Realty concluded its $600 million IPO on the Singapore exchange.

Singapore-listed Mapletree Industrial Trust has also rapidly been recasting itself as a data centre owner, with the REIT agreeing to spend $1.3 billion last year to acquire 29 US data centres. That purchase gave the Temasek Holdings-backed trust a presence in 13 of the 15 largest data centre markets in the US.