Keppel DC REIT: Transformational acquisition driving robust earnings growth
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Transformational acquisition driving robust earnings growth
(+) Revenues and NPI were driven by strong organic growth and acquisitions.
Keppel DC REIT (KDCREIT) reported strong FY24 performance with revenues and net property income (NPI) increasing by 10.3% and 6.3% y/y, respectively. This growth was primarily driven by robust rental reversions and escalations across its portfolio. The results were further supported by contributions from the Tokyo DC, which was acquired on 31 July 2024. Additionally, KDCREIT received a settlement sum of c.SGD11mn from the DXC dispute, which also bolstered revenues for the year.
(+) FY24 DPU of 9.451 Scts was c.0.7% higher y/y, beating our estimates.
FY24 DPU of 9.451 Scts exceeded our projections by c.5%. In addition to the strong organic growth and additional contributions from the Tokyo DC, KDCREIT achieved an outstanding +39% positive rental reversion for the year, primarily driven by lease renewals in Singapore. KDCREIT sustained momentum through FY24, reporting consecutive quarters of exceptional rental reversions of over +40% in both 2Q24 and 3Q24, followed by solid performance in 4Q24, with more than +30% rental reversion.
Portfolio occupancy remained healthy at 97.2% in 4Q24, with only a slight decline due to lower occupancies at KDC SGP 1 and Gore Hill in Sydney.
(+) Gearing remains at a healthy 31.5% and financing costs have started to decline.
In 4Q24, KDCREIT’s gearing improved to 31.5% following a successful equity fundraising exercise. While gearing is anticipated to rise to c.37% when the call option for the land lease extension of the Genting Lane data centres is exercised, it remains at a healthy level. This provides KDCREIT with significant debt headroom to support future growth initiatives.
Additionally, the average cost of debt improved by around 20bps q/q to 3.1% in 4Q24, bringing the full-year average to 3.3%. Financing costs are expected to remain relatively stable in the near term, as only c.3.8% of KDCREIT’s loans are due for refinancing in FY25. This strong capital management position ensures financial flexibility and supports the REIT’s ability to pursue accretive initiatives.
(+) Portfolio valuations improved by c.3.4% on a same-store basis.
Despite experiencing revaluation declines for its overseas properties, KDCREIT reported an overall uplift of c.3.4% in portfolio valuations for FY24. This was primarily driven by more than a 10% increase in the valuations of its Singapore portfolio. However, this positive impact was partially offset by lower valuations in Europe, the UK, and Australia.
The shift in valuations can also be attributed to KDCREIT changing its valuers this year, with differing assumptions potentially influencing the valuation outcomes. Additionally, the running down of leases at certain properties contributed to the declines in overseas valuations.
(+) Transformative acquisitions in Singapore.
KDCREIT successfully completed the acquisition of the Genting Lane Data Centres (KDC SGP 7 and SGP 8) on 27 December 2024, with a total consideration of SGD1,438mn, including fees and expenses. The agreed value for both properties was SGD1,030mn based on a 15.5-year land tenure, with an additional SGD350mn allocated for the land tenure extension. This acquisition significantly strengthens KDCREIT’s presence in Singapore, a power-constrained market, boosting its assets under management (AUM) from SGD3.9bn to SGD5.2bn. Notably, Singapore's AUM now accounts for over 65% of KDCREIT’s portfolio, rising to SGD3.4bn.
The acquisition is projected to deliver DPU accretion of between 8.1% and 11.1%, varying at different stages of the deal, discussed below. Further organic growth potential exists at both properties, with contracted rents estimated to be 15% to 20% below current market colocation rents. Additionally, c.1.5 floors at KDC SGP 8 remain unutilised, offering potential for conversion into data halls, subject to regulatory approval.
To finance the acquisition, KDCREIT successfully raised over SGD1,001mn in equity, with more than SGD700mn secured through a private placement at SGD2.09 per unit and over SGD301mn raised via a preferential offering at SGD2.03 per unit. These initiatives were executed at a premium of approximately 55% to net asset value (NAV), reflecting strong investor confidence. As a result, KDCREIT’s market capitalisation increased by over 23%, reaching approximately SGD4.9bn.
Stage 1: Acquire 99.49% economic interest in SGP 7 and SGP 8 (completed).
KDCREIT completed the acquisition of a 49.0% stake in "Memphis 1", the entity holding KDC SGP 7 and SGP 8, while subscribing to notes in the vehicle that collectively translate to a 99.49% economic interest in both properties. The acquisition was based on an agreed property value of SGD1,030mn for the two assets, which have a remaining land tenure of c.15.5 years. The acquisition was fully funded by proceeds from the equity fundraising exercise. This transaction is estimated to deliver a DPU accretion of c.11%.
Stage 2: Exercise call option, and obtain land tenure extension.
KDCREIT plans to acquire the remaining 51% stake in Memphis 1 and convert its notes to gain full ownership of KDC SGP 7 and SGP 8. Concurrently, the REIT intends to secure a 10-year land tenure extension, which will extend the remaining land tenure of both properties to c.25 years. The lease extension consideration has been agreed at SGD350mn, excluding the JTC land premium and stamp duty, which are estimated to total c.SGD11.1mn.
Stage 2 of the acquisition will be funded by new loans and is expected to be completed in 2H25. Upon completion, gearing is projected to settle at c.37%, with an estimated DPU accretion of approximately 7% at this stage.
Stage 3: Obtain tax transparency for SGP 7 and SGP 8.
Following the transfer of direct ownership of KDC SGP 7 and SGP 8 to KDCREIT, the next stage involves applying for tax transparency for these assets. It is estimated that the process to obtain tax transparency will take approximately six months. Based on current projections, tax transparency is expected to be granted by the end of FY25.
Once achieved, this status is estimated to generate annual tax savings of c.SGD6.5mn, further enhancing the REIT's profitability. At this stage, the estimated DPU accretion is expected to improve to c.8%.
(+) Revenues and NPI were driven by strong organic growth and acquisitions.
Keppel DC REIT (KDCREIT) reported strong FY24 performance with revenues and net property income (NPI) increasing by 10.3% and 6.3% y/y, respectively. This growth was primarily driven by robust rental reversions and escalations across its portfolio. The results were further supported by contributions from the Tokyo DC, which was acquired on 31 July 2024. Additionally, KDCREIT received a settlement sum of c.SGD11mn from the DXC dispute, which also bolstered revenues for the year.
(+) FY24 DPU of 9.451 Scts was c.0.7% higher y/y, beating our estimates.
FY24 DPU of 9.451 Scts exceeded our projections by c.5%. In addition to the strong organic growth and additional contributions from the Tokyo DC, KDCREIT achieved an outstanding +39% positive rental reversion for the year, primarily driven by lease renewals in Singapore. KDCREIT sustained momentum through FY24, reporting consecutive quarters of exceptional rental reversions of over +40% in both 2Q24 and 3Q24, followed by solid performance in 4Q24, with more than +30% rental reversion.
Portfolio occupancy remained healthy at 97.2% in 4Q24, with only a slight decline due to lower occupancies at KDC SGP 1 and Gore Hill in Sydney.
(+) Gearing remains at a healthy 31.5% and financing costs have started to decline.
In 4Q24, KDCREIT’s gearing improved to 31.5% following a successful equity fundraising exercise. While gearing is anticipated to rise to c.37% when the call option for the land lease extension of the Genting Lane data centres is exercised, it remains at a healthy level. This provides KDCREIT with significant debt headroom to support future growth initiatives.
Additionally, the average cost of debt improved by around 20bps q/q to 3.1% in 4Q24, bringing the full-year average to 3.3%. Financing costs are expected to remain relatively stable in the near term, as only c.3.8% of KDCREIT’s loans are due for refinancing in FY25. This strong capital management position ensures financial flexibility and supports the REIT’s ability to pursue accretive initiatives.
(+) Portfolio valuations improved by c.3.4% on a same-store basis.
Despite experiencing revaluation declines for its overseas properties, KDCREIT reported an overall uplift of c.3.4% in portfolio valuations for FY24. This was primarily driven by more than a 10% increase in the valuations of its Singapore portfolio. However, this positive impact was partially offset by lower valuations in Europe, the UK, and Australia.
The shift in valuations can also be attributed to KDCREIT changing its valuers this year, with differing assumptions potentially influencing the valuation outcomes. Additionally, the running down of leases at certain properties contributed to the declines in overseas valuations.
(+) Transformative acquisitions in Singapore.
KDCREIT successfully completed the acquisition of the Genting Lane Data Centres (KDC SGP 7 and SGP 8) on 27 December 2024, with a total consideration of SGD1,438mn, including fees and expenses. The agreed value for both properties was SGD1,030mn based on a 15.5-year land tenure, with an additional SGD350mn allocated for the land tenure extension. This acquisition significantly strengthens KDCREIT’s presence in Singapore, a power-constrained market, boosting its assets under management (AUM) from SGD3.9bn to SGD5.2bn. Notably, Singapore's AUM now accounts for over 65% of KDCREIT’s portfolio, rising to SGD3.4bn.
The acquisition is projected to deliver DPU accretion of between 8.1% and 11.1%, varying at different stages of the deal, discussed below. Further organic growth potential exists at both properties, with contracted rents estimated to be 15% to 20% below current market colocation rents. Additionally, c.1.5 floors at KDC SGP 8 remain unutilised, offering potential for conversion into data halls, subject to regulatory approval.
To finance the acquisition, KDCREIT successfully raised over SGD1,001mn in equity, with more than SGD700mn secured through a private placement at SGD2.09 per unit and over SGD301mn raised via a preferential offering at SGD2.03 per unit. These initiatives were executed at a premium of approximately 55% to net asset value (NAV), reflecting strong investor confidence. As a result, KDCREIT’s market capitalisation increased by over 23%, reaching approximately SGD4.9bn.
Stage 1: Acquire 99.49% economic interest in SGP 7 and SGP 8 (completed).
KDCREIT completed the acquisition of a 49.0% stake in "Memphis 1", the entity holding KDC SGP 7 and SGP 8, while subscribing to notes in the vehicle that collectively translate to a 99.49% economic interest in both properties. The acquisition was based on an agreed property value of SGD1,030mn for the two assets, which have a remaining land tenure of c.15.5 years. The acquisition was fully funded by proceeds from the equity fundraising exercise. This transaction is estimated to deliver a DPU accretion of c.11%.
Stage 2: Exercise call option, and obtain land tenure extension.
KDCREIT plans to acquire the remaining 51% stake in Memphis 1 and convert its notes to gain full ownership of KDC SGP 7 and SGP 8. Concurrently, the REIT intends to secure a 10-year land tenure extension, which will extend the remaining land tenure of both properties to c.25 years. The lease extension consideration has been agreed at SGD350mn, excluding the JTC land premium and stamp duty, which are estimated to total c.SGD11.1mn.
Stage 2 of the acquisition will be funded by new loans and is expected to be completed in 2H25. Upon completion, gearing is projected to settle at c.37%, with an estimated DPU accretion of approximately 7% at this stage.
Stage 3: Obtain tax transparency for SGP 7 and SGP 8.
Following the transfer of direct ownership of KDC SGP 7 and SGP 8 to KDCREIT, the next stage involves applying for tax transparency for these assets. It is estimated that the process to obtain tax transparency will take approximately six months. Based on current projections, tax transparency is expected to be granted by the end of FY25.
Once achieved, this status is estimated to generate annual tax savings of c.SGD6.5mn, further enhancing the REIT's profitability. At this stage, the estimated DPU accretion is expected to improve to c.8%.
Our views.
KDCREIT’s outperformance was largely driven by stronger-than-expected rental reversions of +39% and some financing cost savings. These results reflect KDCREIT’s ability to leverage its robust asset portfolio and effective management strategies. Looking ahead, earnings are expected to continue to improve, supported by the recent acquisitions of KDC Singapore 7 and 8, along with organic income growth at existing properties. A further boost to earnings is anticipated once tax transparency for the Genting Lane assets is obtained, which is estimated to occur in late FY25.
Lease expirations in FY25 present a significant opportunity for additional positive rental reversions, with c.15.4% of leases due for renewal. Notably, the majority of these expiries (around 13.7%) are co-location leases, which are expected to benefit from strong demand and favourable market conditions.
On the capital management front, gearing is projected to increase slightly when the call option for the land lease extension of the Genting Lane asset is exercised, but it is estimated to stabilise at around 37%, which is still a very healthy level with ample debt headroom. Additionally, financing costs are expected to decline further throughout the year, providing additional financial flexibility.
The recent acquisition of the Genting Lane DCs has significantly enhanced KDCREIT’s portfolio and continued strong rental reversions (especially in Singapore), positioning KDCREIT for a stronger year in FY25. We have revised our projections and maintain our BUY recommendation with a higher TP of SGD2.50, reflecting our expectation of stronger earnings growth ahead.
Earnings from the Guangdong DCs have been written off in our revised projections, as there is still no clarity on when the issues can be resolved. However, once there are any resolutions to the Guangdong DC leases, this will be another catalyst to our earnings estimates.
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