BROKERAGE firm UOB Kay Hian (UOBKH) has upgraded its call on Keppel DC Real Estate Investment Trust (Reit) to “buy” from “hold”, and raised its target price to S$2.09, from S$1.98.
This comes after the trust surpassed the firm’s expectations for the first half, with a positive rental reversion of more than 40 per cent for a major renewal contract in Singapore in Q2 FY2024.
Positive rental reversions are expected to continue in the second half of the year, as the trust continues to benefit from strong demand and a tight vacancy rate of 1 per cent in Singapore.
Revenue contribution from Singapore grew 6.6 per cent year on year in H1 FY2024, amid a slight easing in portfolio occupancy – which inched down 0.8 percentage point to 97.5 per cent in the second quarter of FY2024.
UOBKH expects a similar positive rental reversion for the Reit’s expansion into Japan. The trust holds about a 98.5 per cent effective interest rate in the Tokyo Data Centre 1.
It is leased to a Fortune Global 500 company and, who is an existing top 10 tenant, on a triple-net basis with remaining lease term of seven years.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
The existing passing rent in place is 10 to 15 per cent below the market rate, suggesting positive rental reversion when the lease is renewed seven years later.
The acquisition, which is accretive to distributions per unit (DPU) by 1.1 per cent, is projected to be completed in the Q3 FY2024.
The research team also raised its DPU forecast by 4 per cent, citing strong positive rental reversions for colocation data centres in Singapore. This comes as demand for colocation space arising from artificial intelligence-powered applications persists.
Additionally, provisions for the Reit’s Guangdong data centres are expected to persist in the second half this year and into FY2025.
Analyst Jonathan Koh noted, however, that the managers of the trust were making progress on a recovery roadmap for the Chinese data centres, which includes building a leasing pipeline.
It plans to submit proposals to potential tenants, such as artificial intelligence startups, Koh added.
A potential interest rate cut by the European Central Bank could also benefit the Reit. Its euro-dominated debt accounted for 40 per cent of total borrowings.
About 7 per cent of total borrowings maturing in 2025 are denominated in Euros, and on floating interest rates that are not hedged.
Koh said he expects the trust to continue scouting for opportunities to acquire data centres in its preferred markets of Singapore and Japan, as AI continues to fuel the demand for these facilities.
