Executive Summary

Keppel DC REIT’s (SGX: AJBU) latest results sparked an unusually strong market reaction after quarterly rental reversion slowed from approximately 51% in the first quarter of 2026 to around 5% in the second quarter. At face value, the sharp moderation raised questions about whether pricing power within one of Singapore’s highest-quality data centre REITs was beginning to weaken.

However, focusing on a single quarterly metric risks overlooking the broader operating picture. While rental reversion moderated, the REIT continued to deliver double-digit growth in distributions and operating income, maintained a conservative balance sheet, and reported that approximately 95% of its revenue-generating power capacity remains contracted. Rather than asking whether one quarter’s rental reversion was disappointing, a more useful question is whether the latest results materially change Keppel DC REIT’s long-term investment thesis.

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1H 2026 Results at a Glance

If headline financial performance were the only measure, Keppel DC REIT delivered another strong set of results.

Distribution per unit (DPU) increased 11.3% year-on-year to 5.714 cents, supported by growth in both existing operations and contributions from acquisitions completed over the past year. Gross revenue rose 14.5%, while net property income (NPI) increased 15.1%. Distributable income grew even faster, rising 18.5%, reflecting both higher operating income and disciplined financing costs.

Operationally, the REIT also maintained several characteristics that have consistently differentiated it within Singapore’s listed REIT universe. Aggregate leverage remained conservative at 34.0%, the average cost of debt stayed low at 2.6%, and 87% of borrowings remained fixed-rate. Portfolio WALE extended to 6.7 years, improving cash flow visibility, while approximately 95% of revenue-generating power capacity was already contracted.

Metric	1H 2026	YoY Change
Distribution Per Unit	5.714 cents	+11.3%
Gross Revenue	S$242.0 million	+14.5%
Net Property Income	S$210.4 million	+15.1%
Distributable Income	S$150.7 million	+18.5%
Aggregate Leverage	34.0%	Stable
Average Cost of Debt	2.6%	Stable
Interest Coverage Ratio	6.9×	Healthy
Borrowings on Fixed Rates	87%	High
Portfolio WALE (by lettable area)	6.7 years	Extended

Taken together, these headline figures reinforce that Keppel DC REIT continues to generate healthy operating performance. However, they also raise a more important analytical question. If distributions, operating income and balance sheet metrics all improved, why did investors focus almost exclusively on quarterly rental reversion?

That question forms the basis for the remainder of this analysis.

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The Market May Be Focusing on the Wrong Metric

The immediate focus following the results announcement was understandable. Rental reversion slowed sharply, and for a REIT trading at a premium valuation, any indication that pricing power may be weakening naturally attracts investor attention.

Yet rental reversion is only one indicator of portfolio quality—and arguably not the most reliable one when viewed over a single quarter.

Unlike revenue or occupancy, rental reversion is heavily influenced by lease expiry schedules. Some reporting periods include renewals of contracts signed many years earlier at below-market rents, producing exceptionally strong positive reversions. Other quarters involve leases already much closer to prevailing market rates, naturally resulting in more modest increases.

Historical reporting illustrates this clearly. Rental reversion measured approximately 2% in the fourth quarter of 2025 before jumping to around 51% in the first quarter of 2026 and moderating again to roughly 5% in the second quarter. Rather than indicating a smooth deterioration in pricing power, these fluctuations largely reflect the timing and composition of lease renewals.

Management has maintained full-year rental reversion guidance of around 10%, while indicating that renewals at Gore Hill Data Centre are expected to contribute more meaningfully during the second half of the year. Taken together, the evidence suggests that the first-quarter outcome was probably exceptional rather than representative, while the second-quarter result should not be interpreted in isolation.

For long-term investors, the more important question is therefore not whether quarterly rental reversion slowed, but whether pricing power across the broader portfolio remains intact.

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Four Indicators That Better Explain Portfolio Quality

Assessing a specialised data centre REIT requires looking beyond a single leasing statistic. The latest results provide four indicators that together offer a more complete picture of Keppel DC REIT’s underlying operating performance.

1. Pricing Power Remains Positive

Although second-quarter rental reversion moderated significantly from the previous quarter, rents continued to be renewed above prior contracted levels. More importantly, lease renewals secured at Gore Hill Data Centre are only expected to begin contributing during the second half of the year, providing a reasonable explanation for management’s expectation that rental reversion will improve over the coming quarters.

The evidence therefore points towards lease timing rather than a meaningful deterioration in pricing power.

2. Contracted Power May Matter More Than Occupancy

One of the more useful metrics highlighted during the results presentation was that approximately 95% of the portfolio’s revenue-generating power capacity is already contracted.

This is particularly important because data centres differ fundamentally from traditional industrial properties.

Customers are not primarily paying for floor space. They are purchasing reliable electrical infrastructure, cooling capacity, network connectivity and operational resilience. A tenant occupying relatively little physical space may consume a disproportionate share of available electrical capacity.

As artificial intelligence workloads become increasingly power intensive, electricity has arguably become the industry’s most constrained resource.

Viewed through this lens, contracted power arguably provides a better indication of economic utilisation than physical occupancy alone.

3. Occupancy Weakness Appears Concentrated Rather Than Widespread

Portfolio occupancy declined to 92.5%, a figure that initially appears concerning.

However, management indicated that excluding the vacancy at Cardiff Data Centre, occupancy would have been approximately 95.3%. Rather than indicating weakening demand across multiple markets, current evidence suggests that occupancy pressure remains concentrated within a single asset.

This distinction is important.

A portfolio-wide decline in occupancy would point towards weakening demand for data centre capacity. An isolated vacancy instead suggests an asset-specific leasing challenge that management must address without necessarily changing the broader investment thesis.

4. Financial Flexibility Remains A Competitive Advantage

The balance sheet continues to support the operating story.

Aggregate leverage remains conservative at 34.0%, average borrowing costs are approximately 2.6%, around 87% of debt is fixed, while interest coverage remains a healthy 6.9 times. Portfolio WALE has also extended to 6.7 years, improving cash flow visibility.

These figures matter because data centres require continual reinvestment. As power densities increase and customer requirements evolve, owners must continue upgrading electrical infrastructure, cooling systems and building specifications.

Financial flexibility therefore supports more than balance sheet resilience—it supports long-term competitiveness.

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Has Anything Materially Changed?

Taken together, the latest results do not appear to materially weaken Keppel DC REIT’s operating fundamentals.

Bringing these indicators together, the latest results suggest that while individual operating metrics may fluctuate from quarter to quarter, the broader investment thesis remains largely intact.

Assessment Area	Latest Evidence	Research View
Pricing Power	Positive rental reversions; full-year guidance ~10%	Constructive
Demand	~95% contracted power capacity	Remains robust
Occupancy	92.5%; largely Cardiff-related	Monitor, but not systemic
Financial Strength	34% gearing; 2.6% debt cost; 6.9× ICR	Strong competitive position
Growth Capacity	Conservative leverage and acquisition flexibility	Supports long-term expansion
Valuation	~1.3× P/B	Quality recognised; expectations elevated

Viewed collectively, these indicators present a more balanced picture than quarterly rental reversion alone.

The portfolio continues to generate healthy cash flows, management has secured future lease renewals, and the balance sheet retains flexibility to support future investment.

The investment debate has therefore shifted.

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The Bigger Question Is No Longer Quality—It Is Valuation

Operationally, Keppel DC REIT continues to justify its reputation as one of Singapore’s highest-quality listed REITs.

The more difficult question is whether today’s valuation already reflects much of that quality.

Trading at around 1.3 times book value, Keppel DC REIT commands a meaningful premium to many listed REITs, including peers within the data centre sector. That premium is supported by its specialised portfolio, experienced management, conservative balance sheet and exposure to long-term structural demand.

However, premium valuations inevitably raise expectations.

Investors paying above book value are effectively assuming that management will continue delivering disciplined acquisitions, successful lease renewals and prudent capital allocation over many years. Even relatively modest operational disappointments can therefore have an outsized impact on investor sentiment.

This helps explain why the second-quarter rental reversion attracted so much attention. The concern is less about one quarter’s leasing outcome than about whether the premium valuation leaves sufficient room for execution risk.

What Would Change the Investment Thesis?

Rather than focusing on quarterly fluctuations, investors may be better served by monitoring the factors that would genuinely alter the long-term investment case.

These include:

• Sustained deterioration in rental reversions across multiple reporting periods rather than one quarter.
• A meaningful decline in contracted power utilisation, suggesting weakening demand for the portfolio’s core infrastructure.
• Occupancy weakness spreading beyond Cardiff into other major assets.
• More aggressive acquisitions that dilute per-unit returns or weaken balance sheet discipline.
• Evidence that capital expenditure is no longer generating appropriate returns through improved leasing outcomes or cash flow growth.

These developments would represent stronger evidence of a changing investment thesis than any individual quarterly metric viewed in isolation.

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Key Risks & Mitigating Factors

• Cardiff leasing risk: The current vacancy remains concentrated within one property, but successful re-leasing on attractive commercial terms remains an important milestone.
• Guangdong tenant exposure: Expected credit loss provisions remain manageable, although tenant quality and receivable collections continue to warrant monitoring.
• Capital allocation discipline: Financial flexibility provides optionality, but future acquisitions and redevelopment spending must remain value accretive on a per-unit basis.
• Premium valuation: High-quality assets continue to justify stronger valuations, although elevated expectations reduce the margin for operational missteps.

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The Dividend Uncle Research View

The latest results do not materially alter Keppel DC REIT’s long-term investment thesis.

The moderation in quarterly rental reversion appears more reflective of lease timing than a broad deterioration in pricing power, while occupancy weakness remains concentrated within a single asset. High contracted power utilisation, a conservative balance sheet and extended lease visibility continue to support the portfolio’s operational resilience.

The more important investment question is therefore no longer whether Keppel DC REIT remains a high-quality REIT. The market has largely answered that. Instead, investors should consider whether the current valuation appropriately balances that quality against the execution risks that accompany any premium-rated business.

For long-term investors, the latest results reinforce an important principle. Quarterly metrics provide useful signals, but investment decisions should ultimately be grounded in the durability of the underlying business. On that measure, the evidence today suggests Keppel DC REIT’s core investment thesis remains largely intact.

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