Stock news, analysis and financial results related to Keppel DC REIT. My stock analysis will provide the current dividend yield based on historical payout and current stock price.
Keppel DC REIT will be added to the Straits Times Index on Monday, 19th October 2020. The REIT was listed in December 2014 as Asia’s first pure-play data centre REIT, with eight assets across six countries and assets under management (AUM) of approximately $1 billion. Today, the REIT’s AUM has grown significantly to approximately $2.8 billion with 18 assets in 8 countries across Asia Pacific and Europe.
The last time I looked at Keppel DC REIT was one year ago whereby I did a quick personal analysis of Keppel DC REIT. Back then, Keppel DC REIT was trading at only S$1.49 whereby I found it to be expensive. As of 16th October 2020, Keppel DC REIT was trading at S$3.04. This is twice as expensive!
Today, is it still worth buying into Keppel DC REIT? Let us take a look at its latest financial results to find out.
Financial Summary
Below is the 1H2020 financial results. Gross Revenue and Net Property Income has jumped 29.8% and 31.1% respectively. Distribution Per Unit (DPU) had also increased by 13.6% if we compare the same quarter results. If you ask me, these are very solid numbers.
1H2020 (S$’000)
1H2019 (S$’000)
Change
Gross Revenue
123,950
95,493
29.8%
Net Property Income
114,217
86,490
31.1%
Distribution Per Unit (“DPU”) (cents)
4.375
3.85
13.6%
Below is the FY2019 full year financial results. Gross Revenue and Net Property Income grew 11.0% and 12.4% respectively. Distribution Per Unit (DPU) had also increased by 4.0% y-o-y.
FY2019 (S$’000)
FY2018 (S$’000)
Change
Gross Revenue
194,826
175,535
11.0%
Net Property Income
177,283
157,673
12.4%
Distribution Per Unit (“DPU”) (cents)
7.61
7.32
4.0%
Debt
As of 30th June 2020, the gearing stood at 34.5%. 69% of loans are hedged with floating-to fixed interest rate swaps, with the remaining unhedged borrowings in EUR.
Current Dividend Yield
Based on the current share price of S$3.04 and FY19 full year distribution of 7.61 cents, this translate to a current dividend yield of 2.50%. The dividend yield is extremely low given that Keppel DC REIT is overvalued.
Summary
COVID-19 is a catalyst for many businesses to go digital, and some of these online behaviours are expected to continue post pandemic. As such, higher data traffic is expected as enterprises adopt cloud solutions and ensure adequacy of collaboration platforms and videoconferencing tools as well as stepped-up cybersecurity and cloud data protection.
At the current low dividend yield of 2.5%, I personally felt that it is too expensive to buy into Keppel DC REIT. The entry of Keppel DC REIT into STI might push the stock price further up, resulting in lower yield.
Perhaps those interested to own data center REITs should look at alternatives such as Mapletree Industrial Trust.
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.
