My Personal Analysis of Keppel DC REIT

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One REIT caught my attention recently. This is none other than Keppel DC REIT. While most REITs invest mainly in retail, industrial, commercial or hospitality, Keppel DC REIT is the first REIT that purely invests in data centres. Since it is the only data centre REIT, I decided to do some research and see if it is worth investing for long term dividends.

Now, what is a Data Centre? One slide from Keppel DC REIT’s Investor Presentation says it all. Basically, it is a building with facilities that house servers and network equipment, supporting clients’ critical business operations. The business requires technical expertise and intricate understanding of the industry and clients’ needs.

Portfolio

Keppel DC REIT’s portfolio comprises of 15 data centres across 8 countries namely Ireland, United Kingdom, The Netherlands, Germany, Italy, Malaysia, Singapore and Australia. Thus, 67.4% of portfolio are in Asia Pacific and 32.6% are in Europe. Below is the long list of the data centres:

Ireland

  • Keppel DC Dublin 1, Dublin
  • Keppel DC Dublin 2, Dublin

United Kingdom

  • GV7 Data Centre, London
  • Cardiff Data Centre, Cardiff

The Netherlands

  • Almere Data Centre, Almere

Germany

  • maincubes Data Centre, Offenbach am Main

Italy

  • Milan Data Centre, Milan

Malaysia

  • Basis Bay Data Centre, Cyberjaya

Singapore

  • Keppel DC Singapore 1
  • Keppel DC Singapore 2
  • Keppel DC Singapore 3
  • Keppel DC Singapore 5

Australia

  • iseek Data Centre, Brisbane
  • Gore Hill Data Centre, Sydney
  • Intellicentre 2 Data Centre, Sydney
  • Intellicentre 3 East Data Centre, Sydney (Construction expected to be completed in 2020.)

Occupancy

The portfolio occupancy stood at 93.1% as of 31 December 2018. As of 31 March 2019, the overall occupancy of Keppel DC REIT’s data centres stood at 93.2% with 65.5% of its leases expiring beyond the year 2024.

There are 3 lease types mainly Colocation, Fully-fitted and Shell & core. 75% of Keppel DC REIT’s lease type are colocation, 16.8% fully-fitted and 8.2% Shell & core.

Colocation means the equipment, space, and bandwidth are available for rental to retail customers. The customer pays for the rental of the equipment and uses its own servers. Colocation facilities provide diverse client profile and lease expiry.

Fully-fitted lease means Keppel DC REIT has equipped the building but the tenants have to manage the facility themselves and also pay for the maintenance expenses.

For the last lease type Shell & core, Keppel DC REIT simply provides the tenant with the building. The tenant have to uses its own servers, manage the facility themselves and cover all other expenses. Fully-fitted and shell & core facilities provide income stability with typically longer lease terms.

Financial Summary

Below is the 1Q2019 financial results. Gross Revenue and Net Property Income has jumped 26.4% and 26.8% respectively. Distribution Per Unit (DPU) had also increased by 6.7% if we compare the same quarter results.

1Q2019
(S$’000)		 1Q2018
(S$’000)		 Change
Gross Revenue 48,033 38,008 26.4%
Net Property Income 43,230 34,088 26.8%
Distribution Per Unit (“DPU”) (cents) 1.92 1.80 6.7%

Below is the FY18 full year financial results which looks quite solid to me. Based on the financial results, the REIT seems to be growing aggressively. Gross Revenue and Net Property Income jumped 26.2% and 26.0% respectively. Dividend investor can celebrate as the Distribution Per Unit (DPU) jumped 5.0%.

FY2018
(S$’000)		 FY2017
(S$’000)		 Change
Gross Revenue 175,535 139,050 26.2%
Net Property Income 157,673 125,119 26.0%
Distribution Per Unit (“DPU”) (cents) 7.32 6.97 5.0%

Debt

As of 31st March 2019, the average leverage stood at 32.5% with estimated $140.0m of undrawn credit facilities. The weighted average debt tenor is 3.3 years. 100% of its assets are unencumbered.

Management

Below is the REIT’s structure. As highlighted, the REIT manager can leverage the scale and resources of a larger management platform from Keppel Capital. The REIT manager can also leverage on Keppel Telecommunications & Transportation’s expertise and track record in the industry.

Current Valuation

As of 18th April 2019, the share price stood at S$1.49. Based on FY18 distribution per unit (DPU) of 7.32 cents, this translates to a dividend yield of 4.91%. Based on the net asset value of 1.05 cents, the current price is 41.9% to premium.

Personally, I felt that a good entry price may be S$1.35 whereby if we based on a DPU of 7.32 cents, this will translate to an acceptable dividend yield of 5.42%.

Pros

  • Demand for data centre space underpinned by increasing cloud adoption, rapid digital transformation, data centre outsourcing and data sovereignty regulations.
  • Global cloud infrastructure market is expected to grow by 25% CAGR in 2019-2023.
  • Global co-location market is expected to grow by 15-17% in 2019.
  • Keppel DC REIT has built-in rental escalations of 2% to 4% per year.
  • Clients whom have signed up for leases will rarely migrate to another different data centre as it takes a significant effort to perform a large scale data migration without affecting current operations, especially companies that operate 24×7.
  • Strong Sponsor Keppel T&T

Cons

  • Exposed to a potential issue of overcapacity in the market where supply exceeds demand especially during an IT downtrend.
  • The business model of Keppel DC REIT can be easily imitated by competitors in the similar industry.

Conclusion

At the current share price of S$1.49, it surely looks expensive to dive into this REIT right now given the current dividend yield of 4.91%. I will not recommend buying in Keppel DC REIT right now unless you have a strong justification.

If you are into the IT industry, you will know that the IT trend always changes every few years and it is sure difficult to keep up with the current computing trend. When trend changes such as cloud infrastructure, the data centres definitely have to fork out a lefty sum to refresh its equipment and facilities.

The risk for investing in Keppel DC REIT ranges from medium to high as one of the factors I consider is that competitors can easily imitate the business model. The dividend yield is not lucrative as I expect it to be as industrial rates yield at least 6% and above.

Nevertheless, this is one REIT I will keep in my watch list given that it is the only REIT that is pure data centre play.

Capitaland Mall Trust Annual General Meeting (2018 Overview)

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Capitaland Mall Trust has just held their Annual General Meeting (AGM) on 11th April 2019. Capitaland Mall Trust currently makes up 11% of my stock portfolio. Basically, they are covering an overview of 2018. FY18 financial highlights from the Annual General Meeting (AGM) includes the increase of distributable income to S$410.7 million, increase of distribution per unit to 11.50 cents and increase of Net Asset Value (NAV) to S$2.02.

FY2018
(S$’000)		 FY2017
(S$’000)		 Change
Gross Revenue 697,521 682,469 2.2%
Net Property Income 493,548 478,234 3.2%
Distributable Income 410,675 395,824 3.8%
Distribution Per Unit (“DPU”) (cents) 11.50 11.16 3.0%

Occupancy Rates

Occupancy stood at 99.2% which you can find from their presentation slides below. Annual Shopper Traffic has declined slightly by 0.9% which is not too worrying and based on this figure, we can see how strong malls under Capitaland Mall is able to continue to attract shoppers despite the threat of the growing trend towards online shopping.

It is note worthy to mention how CapitaMalls attract shoppers via their shoppers reward program such as earning CapitaStars for spending at its malls where shoppers can use their rewards points to redeem CapitaMall vouchers. This has kept shoppers returning to their malls to spend.

Debt

The gearing ratio currently stood at 34.2% with 89.8% of the assets unencumbered. 13 properties are wholly owned, directly and indirectly under Capitaland Mall Trust with the exception of Westgate. You can find more details on the acquistion of Westgate here.

Redevelopment of Funan

Funan Centre

I have mentioned that the re-opening of Funan that can be a possible catalyst of CapitaMall Trust. The redeveloped Funan (Six storey retail mall, two office towers and one block of serviced residence) is targeted to re-open in mid 2019. Including leases under active negotiations, leasing has reached more than 80%.

Current Dividend Yield

The same question comes into our mind. Should you buy Capitaland Mall Trust now? Based on the distribution per unit of 11.5 cents and current price of S$2.39, this translates to a dividend yield of 4.81%. I will give it a miss if I am not yet vested as I am targeting for a dividend of above 5% for REITs.

The REIT is also current trading above its Net Asset Value (NAV) of S$2.02. The current price is 18.3% above premium to its NAV.

OUE Hospitality Trust and Commercial REIT Merger

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There was a trading halt for OUE Hospitality Trust on 8th April 2019 and investors like me who are vested in OUE Hospitality Trust smell something fishy. The announcement came shortly. The respective managers of OUE Commercial REIT (“OUE C-REIT”) and OUE Hospitality Trust (“OUE H-Trust”) jointly announced the proposed merger of OUE C-REIT and OUE H-Trust (the “Proposed Merger”).

With the merger, the total assets will increase to approximately S$6.8 billion, making it one of the largest diversified S-REITs (Office and Hospitality).

The managers cited the following reasons for the proposed merger:

  1. Creation of one of the largest diversified S-REITs
  2. Larger capital base and broadened investment mandate provide flexibility and capability to drive long-term growth
  3. Enhanced portfolio diversification and resilience
  4. DPU accretive transaction

New Structure

With the merger, OUE Hospitality Trust investors get to own OUE Bayfront, One Raffles Place, OUE Downtown Office and Lippo Plaza which I deemed are quality assets to me.

OUE Hospitality Trust Security Holders

Currently, OUE Hospitality Trust makes up 4% of my stock portfolio.

Based on the announcement, stapled security holders of OUE Hospitality Trust (the “Stapled Security holders”) will receive the following under the scheme consideration:

  • S$0.04075 in cash per Stapled Security (“Cash Consideration”); and
  • 1.3583 new OUE C-REIT units per Stapled Security (the “Consideration Units”).

Distribution Per Unit

The total DPU paid out by OUE Hospitality Trust in FY18 was 4.99 cents.

The Proposed Merger will be distribution per unit (“DPU”) accretive on a historical pro forma basis for both OUE C-REIT unitholders and OUE H-Trust Stapled Securityholders by 2.1% and 1.4% respectively, for the 12-month period ended 31 December 2018.

If the DPU for the new combined REIT is 5 cents, this is only 1 cent more than the current 4.99 cents paid out by OUE Hospitality Trust. I can be wrong but the accretion is actually 0.2%.

Debt

Based on the presentation slides, the enlarged REIT’s larger capital base will also enhance its funding capacity and flexibility, with (i) debt headroom increasing from approximately S$254 million (for H-Trust) to approximately S$551 million as at 31 December 2018.

The gearing for OUE Hospitality Trust and OUE Commercial Trust is 38.8% and 39.3% respectively. Gearing is expected to increase to 40.3% after the merger. This is currently very near the cap of 45%.

My Thoughts

As a dividend investor, I am very concern on the DPU accretion which after the merger does not seem so fantastic and in fact the post merger DPU seems flat to me. However, the cash consideration of S$0.04075 in cash per stapled security does appeal to me.

Gearing ratio has increased to 40.3% which I deemed as high and leaves little headroom for further acquisition.

As you can see below, the stock market also does not support this merger. Share price declines slightly from S$0.735 to S$0.72.

Here is the share price of OUE Commercial REIT which declines from S$0.53 to S$0.51.

As an existing OUE Hospitality Trust investor, I probably will hold on for the cash per stapled security and continued flat DPU. If I am not yet vested, I will try to avoid OUE Hospitality Trust and OUE Commercial REIT in view of the high gearing after the merger.