Keppel DC REIT’s Latest Earnings: What Investors Should Know

Keppel DC REIT (SGX: ABJU) released its fiscal second-quarter earnings report yesterday. The reporting period was for 1 April 2015 to 30 June 2015.

The real estate investment trust (REIT) had its initial public offering (IPO) late last year. The trust currently owns eight data center properties spread out across Australia, Asia, and Europe.

You can read more about the REIT’s IPO here and its last earnings report here.

Financial highlights

The following’s a rundown of Keppel DC REIT’s latest set of financial figures:

  1. Gross revenue was $26 million in the reporting quarter, about 4% more than its own forecast given in the IPO prospectus.
  2. Net property income (NPI) followed suit, coming in at $21.9 million, 3.4% above its IPO projection for $21.2 million.
  3. Distribution per unit (DPU) for the quarter will be 1.62 cents, 1.9% more than its IPO projection of 1.59 cents.
  4. Its investment properties were valued at around $982 million, with a net asset value (NAV) per unit of $0.88.

Foolish investors might want to keep an eye on a REIT’s debt profile. The debt profile may provide clues on how a REIT is funded, and its sensitivity to the interest rate environment. These details are summarized for Keppel DC REIT below.

Aggregate Leverage 26.4%
Interest cover for FY2015 9.1 times
Weighted average debt to maturity 3.9 years
Annualised cost of debt 2.5%
Hedged borrowings 100%
Total borrowings $286 million

Source: Keppel DC REIT’s earnings presentation; interest coverage based on earnings before interest and taxes (EBIT) vs. finance costs

At the moment, the first real financing test for Keppel DC REIT will come in 2018, when about 55% of its outstanding loans will come due. The REIT has a $35 million undrawn revolving credit facility and that can be used to help with any debt-repayments or as an avenue for capital.

Keppel DC REIT also reported that interest rates for its loans were fixed for the next 4 to 5 years. On top of that, the REIT has also naturally hedged its foreign-sourced distributions for 2015 and 2016. This would be important since more than half of its properties (by value) reside outside of Singapore.

In all, Keppel DC REIT looks to be well-protected against both a changing interest rate environment and adverse currency swings.

Operational highlights

Keppel DC REIT ended the quarter with a portfolio occupancy rate of 94%, a slight bump up from the selfsame figure of 93.6% in the previous quarter.

The weighted average lease-to-expiry (WALE) for the REIT’s entire portfolio is currently at 7.2 years; for more granular detail, the WALE profile is distributed between a WALE of 2.6 years for co-location properties and a WALE of 10.5 years for properties with double/triple-net leases. In both types of lease arrangements, the rental rates all have built-in annual escalations of 2.0% to 4.0%.

During the quarter, Keppel DC REIT also entered into its maiden acquisition of the Intellicentre 2 building in Sydney, Australia. The sale and leaseback transaction will feature a 20-year triple-net lease arrangement with annual rental escalations. The post-acquisition gearing is expected to rise to 29.5%. There was no comment in the press release on whether the building will be accretive to the distribution yield.

The management team of Keppel DC REIT summarized their outlook for the REIT in the paragraphs below:

“Data centre demand is expected to be driven by the shift towards cloud computing and e‐commerce. Cisco projects that cloud traffic will grow by a compounded annual growth rate (CAGR) of 37% in Asia Pacific and 26% in Western Europe from 2013 to 2018, while Statista estimates an 18% CAGR of e‐commerce sales growth worldwide from 2013 to 2018.

According to IDC, the digital universe is doubling in size every two years. The amount of data created and duplicated annually is expected to reach 44 zettabytes by 2020. Despite the growing supply of data centres globally, BroadGroup expects utilisation rate of data centres to rise with supply lagging demand growth in Keppel DC REIT’s markets.

Keppel DC REIT will continue with its proactive asset management, disciplined investment and prudent capital management strategies to capture the growth potential of this industry and deliver value to its stakeholders.”

Finally, Keppel DC REIT received the recent recognition of being added to the MSCI Singapore Small Cap Index during the quarter.

Foolish summary

Keppel DC REIT last traded at S$1.06 on Wednesday. This translates to a price-to-book ratio of 1.2 based on its latest NAV per unit. With the projected DPU payout of 6.48 Singapore cents in 2015, this would give Keppel DC REIT a 6.1% distribution yield based on Wednesday’s share price.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.