The recent news in the tech sector has largely been negative, filled with job cuts and reduction in capital expenditure as tech companies expect a slowdown. With tech spending slowing down, there would be concerns about demand slowdown for data centre capacity.
Amidst these tough times, we look at the performance of the 4 data centre REITs listed in Singapore and see how they or their data centre segment have fared in their latest earnings release.
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1) Mapletree Industrial Trust (SGX:ME8U)
MIT has assets under management of approximately S$8.8 billion with 53.5% of the value attributable to data centres and 42.9% of gross revenue derived from data centres as at Dec 22.
Most of the data centres are located in the US, contributing about 91% of gross revenues arising from data centres.
According to CBRE, average monthly asking rent for data centres grew by 5.9%
Y-o-Y in 1H2022. Supply constraints, combined with robust demand, specifically from the hyperscale operators, are expected to maintain the tailwinds for growth in rental rates in 2023.
The data centre segment for MIT maintained occupancies at 93.8% for the quarter. 9 of its top 10 customers were customers of the data centre segment and contributed about 23.8% of the portfolio’s gross rental income.
Although borrowing costs increased more than 30% due to the higher interest rate environment, With the higher profit contribution from data centres, MIT was able to keep its distribution per unit (DPU) for 3Q23 stable, recording a 0.9% gain when comparing to 2Q23 and a 2.9% decline when comparing to 3Q22.
2) Keppel DC REIT (SGX:AJBU)
KDCR reported DPU for FY22 was 4.8% higher than FY21 and for 2H22 that was 3.7% higher than 2H21.
The increase was due mainly to contributions from the accretive acquisitions of London Data Centre, Guangdong Data Centres 1, 2 and 3, the investment in the NetCo bonds, the contributions post asset enhancement initiatives at DC1 and the Dublin assets as well as the completion of Intellicentre 3 East Data Centre.
In 2022, KDCR secured new, renewal or expansion contracts at its data centres in Singapore, Malaysia, Australia and Ireland, which have helped to defray higher costs.
The impact of inflation was mitigated by the positive income reversions and built-in income and rental escalations. More than half of the portfolio has built-in income and rental escalations based on Consumer Price Index or similar indexation, or fixed rate mechanisms.
Contracts with no escalation have a short WALE by rental income of approximately 2.2 years.
Therefore, KDCR expects minimal impact from rising inflation and electricity costs as the impact of inflation would be mitigated by positive income reversions and income escalations.
With a leverage ratio of 36.4%, KDCR intends to continue to pursue acquisition opportunities and also attempt to continue geographical diversification for growth and income resilience.
Occupancy increased from 98.3% at the end of 2021 to 98.5% at the end of 2022 and WALE increased from 7.5 years to 8.4 years.
Although the cost of debt increased from 1.9% at Jun 22 to 2.2% at Dec 22, KDCR was able to eke out an increase to DPU due to its accretive acquisitions, higher occupancy rate and positive income reversions.
3) Digital Core Reit (SGX:DCRU)
This is DCR’s first full financial year after its IPO in November 2021. DCR reported DPU for FY22 that was 4.8% lower and for 2H22 that was 8.1% lower than its IPO forecast.
DCR recorded a portfolio occupancy of 98% (or 96%, adjusting for a customer bankruptcy), down from its IPO portfolio which was 100% occupied. Sungard, who occupied 37k sqft in Toronto filed for bankruptcy protection in April 2022 and vacated the premises effective 1 January 2023.
Digital Core REIT executed a short-term lease agreement with an investment grade cloud service provider covering half the bankrupt customer’s rental obligation.
The weighted average lease stood at 4.5 years, a significant decline from the IPO WALE of 6.2 years. This was likely due to the passage of time as there was no significant churn to its customer profile as its top 10 customers contributed 99.7% of total earnings (Previously at 99.95% during IPO).
It also completed its first acquisition in December 2022, generating 2% DPU accretion, resulting in an aggregate leverage ratio at 34.0%, up from 27.0% at IPO.
DCR capitalised on the share price which was trading below net book value of US$0.83 and repurchased 10.7 million units at an average price of US$0.585, delivering 1% DPU accretion.
4) CapitaLand Ascendas REIT (SGX:A17U)
CLAR has the smallest portion of data centres in its portfolio with approximately 8% of a total asset value of S$16.4 billion, amounting to about S$1.3 billion. Hence some of the information is combined with CLAR’s industrial segment which accounts for 19% of its portfolio.
Occupancy for this combined segment was at 89.1%, lower than the industry average of 91.9% based on JTC’s statistics. It is likely that the data centre segment made up the stronger component as occupancy was at 91.7% in the prior quarter.
Rental reversion for CLAR’s Singapore industrial and data centre was at 3.9% while the UK/Europe data centres recorded rental reversion of 11.7%. Despite the positive, the valuations for data centres in the UK/Europe still declined. Nevertheless, CLAR is optimistic that the portfolio will benefit from the digitalisation trend.
Closing statements
Overall, the 4 Data centre REITs have been resilient, maintaining high occupancy rates and positive rental reversions. Although one of the DC REIT’s customers went bankrupt, this does not yet indicate a structural slowdown as there seems to be continued strong demand for data centre capacity.
This could be due to structural tailwinds in the industry from enterprise and end user spending on cloud infrastructure services as well as public cloud services are both forecasted to continue to grow, supported by acceleration of IT modernisation initiatives and perpetual cloud usages.
Curious how the Retail REITs fared? Here’s the Singapore Retail REITs earnings round up.
