Keppel DC REIT: On track for double digit earnings growth
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- Double-digit DPU growth driven by recent acquisitions and organic rental uplift; 1H26 DPU of 5.714 Scts forms c.55% of our FY26 estimates
- Positive rental reversions remain healthy at +10% in 1H26; expected to accelerate in the coming quarters
- Strong balance sheet metrics with gearing at only 34%, with c.87% of borrowings hedged to fixed rates
- Maintain BUY with higher TP of SGD2.80
Revenues increased 14.5% y/y due mainly to accretive acquisitions. KDCREIT delivered a resilient set of 1HFY26 results, with gross revenue increasing 14.5% y/y to SGD242.0mn and NPI rising 15.1% y/y to SGD210.4mn, resulting in a slight expansion in NPI margin to 86.9% from 86.5% a year earlier. The stronger operating performance was primarily driven by the full-period contribution from Tokyo Data Centre 3, the acquisition of the remaining interests in Keppel DC Singapore 3 and 4 completed in FY25, as well as positive rental reversions and contractual rental escalations across the portfolio. These more than offset the loss of contribution following the divestment of Kelsterbach Data Centre. Results were broadly in line with expectations, with the REIT continuing to benefit from structural demand for digital infrastructure despite higher financing costs and isolated operational headwinds.
1H26 DPU rose 11.3% y/y, ahead of our earlier FY26 projections. DPU remained on an upward trajectory, increasing 11.3% y/y to 5.714 Scts, beating our earlier FY26 projections, and also beating FY26 consensus forecast. Growth in distributable income outpaced DPU, rising 18.5% y/y to SGD150.7mn, supported by stronger property earnings and acquisition contributions. However, DPU growth was moderated by the enlarged unit base following previous equity fund raisings undertaken to finance acquisitions.
DPU came in ahead of our earlier projections mainly due to the continued contribution from the NetCo bonds. The proposed sale of the notes and preference shares issued by M1 (NetCo bonds) was terminated, following the buyer’s inability to satisfy certain conditions within the agreed timeline. We had previously priced in only one quarter of coupon contribution from the NetCo bonds as the sale was anticipated to conclude within 1Q26.
Non-renewal at Cardiff DC led to the dip in portfolio occupancy. Portfolio occupancy softened q/q, declining to 92.5% (by NLA) from 95.6% in 1QFY26, almost entirely due to the expiry of the contract at Cardiff DC in the UK. Excluding Cardiff, portfolio occupancy would have remained at c.95.3%. Despite the dip in portfolio occupancy by NLA, c.95% of revenue-generating power capacity remained contracted, suggesting that the earnings impact is less severe than implied by physical occupancy.
Leasing momentum elsewhere remained healthy. Singapore continued to record stable demand with successful lease renewals, while Australia secured both new and renewal contracts at Gore Hill Data Centre, with income contribution commencing from 2HFY26. Japan remained fully occupied following the acquisition of Tokyo Data Centre 3. Basis Bay DC in Malaysia remained underutilised at 40.2% occupancy, but we understand that the divestment of the asset remains in progress.
Positive rental reversions of +10% in 1H26. Rental growth remained a key earnings driver, with portfolio rental reversions averaging c.+10% for leases commencing during 1HFY26, while leases commencing specifically in 2QFY26 achieved reversions of c.+5%. Looking ahead, we expect overall rental reversions to improve to the mid-teens level as rental rates from a lease renewal at the Gore Hill DC is understood to have more than doubled (new lease only commences in 3Q26). Furthermore, c.2.6% of expiries (by rental income) over the remainder of FY26 will be coming mainly from colocation leases, providing further opportunities for healthy positive rental reversions.
Healthy balance sheet with low gearing of only 34.0%. Balance sheet metrics remained healthy, with aggregate leverage improving to 34.0% from 35.1% in 1QFY26 following the repayment of the consumption-tax loan associated with Tokyo Data Centre 3. The average cost of debt for 1HFY26 remained low at 2.6%, although the quarterly average increased marginally to 2.7% in 2QFY26 as additional interest-rate hedges were put in place. Approximately 87% of total borrowings remained fixed-rate, limiting sensitivity to further interest-rate volatility.
Foreign currency exposure also remains well managed through natural hedging and financial hedges, with substantially all forecast distributable income protected through 1HFY27.
Our views
KDCREIT's 1H26 results exceeded both our expectations and consensus estimates, driven primarily by the continued contribution from the NetCo bonds following the termination of the proposed divestment by its Sponsor. In addition, the REIT continued to benefit from organic income growth, supported by contractual rental escalations and the commencement of leases signed in previous quarters at significantly higher rental rates.
While rental reversions moderated to +10% in 1H26 from the exceptional +40% to +50% achieved in earlier quarters, we continue to view this as a highly commendable outcome. The positive reversion reflects the sustained strength in demand for quality data centre assets and remains well above historical averages, providing continued support for earnings growth. Furthermore, we understand that rental reversions in 3Q26 will continue to surprise on the upside as a result of the lease renewal sign at the Gore Hill DC (rents will more than double).
Looking ahead, our focus will be on the backfilling of the remaining pockets of vacancy within the portfolio, particularly at the Cardiff DC and Keppel DC Singapore 1 (SGP1). Management's immediate priority for the Cardiff asset is to secure new tenants and restore occupancy, while occupancy at SGP1 is expected to decline progressively over the next c.1.5 years as existing leases expire. This is in preparation for the planned redevelopment of the asset once it is fully vacated, which should enhance its long-term value and earnings potential.
Given the REIT's stronger-than-expected earnings performance and the continued resilience of its underlying portfolio, we have revised our forecasts upwards by c.10% to reflect improved operating assumptions. Accordingly, we maintain our BUY recommendation and raise our target price to SGD2.80, reflecting our increased confidence in the REIT's earnings outlook and long-term growth prospects.
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