To The Moon

$Keppel DC Reit A(X1JU.SI)$

In a mixed macroeconomic environment dominated by elevated interest rates and lingering inflation concerns, real estate investment trusts (REITs) globally have struggled to reclaim their former resilience. Yet amid the volatility, Keppel DC REIT—Singapore’s only data centre-focused REIT—has just posted a 12% year-over-year increase in distribution per unit (DPU), defying broader sector caution and breathing life into the flagging optimism surrounding S-REITs.

This surprise performance comes at a critical juncture for Singapore's earnings season. Investors, both institutional and retail, are now re-evaluating whether S-REITs may be poised for a bottoming process, or whether Keppel DC’s results are more exception than norm. Given the sustained pressure from refinancing costs and weaker real estate valuations, is this the beginning of a sustainable rebound—or a last gasp before further consolidation?

The Context: What 2025 Has Meant for S-REITs So Far

2025 has been a cautious year for Singapore REITs, with macroeconomic uncertainty continuing to weigh on unit prices and investor sentiment. The persistence of “higher-for-longer” interest rate expectations in the U.S. and tighter monetary conditions across Asia have kept REIT valuations in check. While the FTSE ST REIT Index is up modestly YTD—roughly 3.1% as of July 2025—this comes after a steep drawdown from mid-2022 to late 2024.

Investors have largely flocked to hard asset-backed and inflation-hedged sectors, particularly data centres, logistics, and industrial REITs, while retail, hospitality, and office-focused names have lagged amid structural uncertainty and weaker recovery trajectories post-pandemic. Amid this bifurcation, Keppel DC REIT has emerged as a bellwether for defensive REIT investing in Singapore.

Keppel DC REIT’s Strong Earnings: A Sector Outlier

Performance Overview and Market Feedback

Keppel DC REIT reported its Q2 2025 earnings with the following highlights:

• DPU up 12% YoY, from 2.49 cents to 2.79 cents

• Gross revenue increased 14.3% YoY to S$84.6 million

• Net property income (NPI) surged 15.2% to S$77.1 million

• Portfolio occupancy rate held strong at 98.3%

• Aggregate leverage was stable at 36.1%, well below the MAS regulatory limit of 50%

The market responded swiftly. Within 48 hours of the earnings release, Keppel DC’s unit price surged 8.4%, lifting its year-to-date return to nearly 17%. Volumes spiked to multi-month highs as retail investors and institutional funds rotated into high-visibility yield plays. Analysts at multiple brokerages, including UOB Kay Hian and DBS, raised their target prices and upgraded their calls to "Buy" with revised DPU forecasts for FY2025 and FY2026.

Investor Sentiment and Sector Implications

The broader takeaway? The narrative may be shifting. While the REIT sector remains cautious, Keppel DC’s robust fundamentals signal potential for selective recovery across data centre and infrastructure-backed REITs. Amid headwinds, the strength of underlying tenant demand and the mission-critical nature of digital infrastructure are keeping valuations supported.

What’s Driving Keppel DC’s Outperformance?

Mission-Critical Real Estate with AI Tailwinds

Keppel DC REIT’s core portfolio consists of 23 high-availability, carrier-neutral data centres across Asia-Pacific and Europe. This focus on digital infrastructure has proven to be one of the most resilient REIT sub-segments globally, especially in the post-COVID digital economy. The sector has received a second wind from the AI infrastructure boom, which has increased global demand for high-density compute power, cooling systems, and edge computing locations.

Keppel DC’s anchor tenants include global cloud providers, telecom operators, and IT service firms—all of which are ramping up data storage and processing capabilities in anticipation of generative AI workloads and enterprise-level transformation.

Additionally, the REIT recently completed a strategic asset enhancement initiative (AEI) at its Dublin and Frankfurt campuses, increasing net leasable area and improving energy efficiency—two metrics prized by hyperscale tenants.

Stable Cash Flows and Low Recontracting Risk

Approximately 85% of Keppel DC’s leases are on triple-net, long-term contracts indexed to CPI. This protects the REIT from short-term rental volatility and ensures stable, inflation-linked income streams. The weighted average lease expiry (WALE) stands at a healthy 7.9 years, minimizing near-term income risk.

Moreover, nearly all utility and operating cost risk lies with tenants, further shielding the REIT from cost escalation and preserving its DPU margins—currently among the highest in Singapore’s REIT universe.

Balance Sheet Strength and Capital Strategy

Prudent Gearing and Debt Hedging

Keppel DC REIT’s balance sheet remains solid. With gearing at 36.1%, management retains ample headroom for acquisitions or asset enhancements without diluting unitholders. 75% of its debt is hedged to fixed rates, shielding it from the recent rise in borrowing costs across the globe.

In addition, the REIT has no major debt refinancing due until mid-2026, giving it runway to manage future interest rate risks and refinancing spreads strategically. This is in stark contrast to many retail or office REITs that are struggling with immediate rollover burdens.

Sustainable DPU Growth and Smart Deployment

The REIT has guided for a 5-7% DPU CAGR over the next 3 years, supported by:

• AEI income ramp-up

• Pipeline acquisitions from Keppel Group (including potential assets in Japan and India)

• AI-driven demand expansion across Tier 2 and Tier 3 cities

Management continues to signal a disciplined acquisition strategy, prioritizing cap-rate accretive deals and avoiding yield-dilutive transactions that have plagued other REITs during the low-rate era.

Verdict: Buy, Sell or Hold?

July 2025 Entry Price Verdict: Buy

At S$2.15 per unit (as of late July 2025), Keppel DC REIT is trading at a trailing yield of 5.2% and a price-to-book ratio of 1.24x. While this represents a modest premium to NAV, it is well justified by its:

• Strong cash flow visibility

• Sector-leading occupancy

• Inflation-hedged contracts

• Embedded growth via AI infrastructure expansion

Compared to traditional REIT sectors still grappling with macro pressures, Keppel DC REIT stands out as one of the few with genuine DPU growth drivers.

Investors seeking long-term, defensive income exposure—without the volatility of hospitality or the uncertainty of office real estate—should consider Keppel DC a core REIT holding in the digital age.

Conclusion: Is This the Spark for a Broader S-REIT Recovery?

Keppel DC REIT’s earnings beat isn’t just a company-specific triumph—it could mark an inflection point for investor sentiment across Singapore’s REIT sector. While it’s premature to declare a full-fledged rally, the outperformance of data centre and industrial names suggests a return to fundamentals: balance sheet discipline, inflation-resilient cash flows, and secular demand drivers.

That said, the REIT market remains bifurcated. Investors must continue to exercise discernment. Not all S-REITs are positioned to weather high-rate environments or pivot toward high-growth sectors like digital infrastructure. Keppel DC REIT’s results underscore the value of quality, scale, and strategy—factors that will likely define the next cycle of REIT leadership.

Key Takeaways

1. Keppel DC REIT reported a 12% YoY increase in DPU, defying sector headwinds and drawing strong investor interest.

2. Data centre REITs are benefiting from AI infrastructure demand, positioning them for secular growth amid macro uncertainty.

3. The REIT maintains a healthy balance sheet with low gearing and high fixed-rate debt, limiting interest rate risk.

4. At 5.2% yield and 1.24x P/B, Keppel DC offers an attractive entry point relative to peers with weaker fundamentals.

5. Verdict: Buy at current July 2025 levels, particularly for income investors seeking stability and growth in one vehicle.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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