Keppel DC REIT’s Latest Earnings: Better-Than-Expected Distribution Growth

Keppel DC REIT (SGX: AJBU) released its fiscal second-quarter earnings yesterday evening. The reporting period was for the three months ended 30 June 2016.

As a brief background, the real estate investment trust owns and manages nine data centers that are located in six countries, namely, Singapore, Ireland, Malaysia, Germany, the United Kingdom, and the Netherlands. It’s a relatively new entity in Singapore’s stock market given that it was listed only on December 2014.

With that, let’s dive into Keppel DC REIT’s latest report card to see how it fared.

Financial and balance sheet highlights

Here are some of the REIT’s latest financial figures:

  • Gross revenue for the reporting quarter came in at S$24.9 million, some 2.4% lower than the forecast given in its initial public offering prospectus. The gross revenue of S$24.9 million also represents a 4.5% year-on-year decline.
  • But, the REIT’s net property income (NPI) managed a good showing. Property expenses for the reporting quarter came in at S$2.76 million – which is 28.4% lower than the IPO forecast and 32.7% lower than in the second-quarter of 2015. As a result, Keppel DC REIT clocked S$22.1 million in NPI, 2.2% better than expected and 0.8% higher than a year ago.
  • The higher NPI flowed to the bottom-line. Distributable income for the second-quarter of 2016 climbed by 3.3% year-on-year to S$14.75 million resulting in a distribution per unit (DPU) of 1.67 cents which is up similarly by 3.1%. The REIT’s distributable income and DPU were both higher than the projections given in its IPO prospectus – by 1.0% and 0.6%, respectively. Keppel DC REIT had listed a number of factors leading to its distributable income coming in better than expected: “contribution from Intellicentre 2, higher finance income, lower finance costs, property-related and other expenses.”
  • The REIT reported a 3.5% year-on-year increase in its adjusted net asset value (NAV) per unit from S$0.85 to S$0.88.
  • Moving on to debt-related information, Keppel DC REIT’s aggregate leverage climbed from 26.4% in the second-quarter of 2015 to 29.1% in the reporting quarter. Meanwhile, its debt tenor had declined from 3.9 years to 2.8 years.
  • That said, its cost of debt had decreased marginally over the same period from 2.5% to 2.4%. The interest coverage ratio also increased slightly from 9.4 times to 9.5 times while the weighted average debt maturity decreased to 2.8 years from 3.9 years.

Business highlights

Keppel DC REIT ended the reporting quarter with a portfolio occupancy rate of 92.3%, a slight decrease from the 94.0% seen in the same period a year ago. The good thing is the portfolio’s weighted average lease to expiry (WALE) by leased lettable area had improved from 7.2 years to 8.7 years.

Given the recent hullabaloo surrounding the vote by the people of the United Kingdom to leave the European Union – what’s commonly known as Brexit – Keppel DC REIT’s manager had shared its views on Brexit’s potential impact on the REIT:

“Keppel DC REIT has minimal exposure to Brexit as it has only one asset in the United Kingdom, GV7 Data Centre, which contributes approximately 6.8% of the REIT’s portfolio. Occupancy risk is low as the entire facility is on a long master lease to a well-established client until 2027. The REIT also has hedging policies in place against currency fluctuations.”

The REIT’s manager also noted that, during the reporting quarter, a forward renewal was signed for one of its major leases that was going to expire in late 2017 in one of its properties in Singapore.

In addition to renewing the contract for more than five years, the client has also committed to take on an additional 6,800 square feet of data centre space in two phases; half will be taken in the latter half of this year while the remaining half will be taken in the second-half of 2017.

A client also renewed an expiring contract for a five-year term at the Citadel 100 Data Centre and took up an additional 1,600 sq ft of space.

A Future Outlook

Commenting on its future prospects, Keppel DC REIT said that “the data centre industry is expected to see sustained growth with developing technologies forming the next wave of digital revolution and data creation.” It added:

“International Data Corporation (IDC) forecasts that the global Internet of Things market will grow at compounded annual growth rate (CAGR) of 16.9% from US$655.8 billion in 2014 to US$1.7 trillion in 2020, as more devices come online and drive demand for connectivity platforms and services.”

But, the REIT also warned:

“An increase in data centre space is expected in Singapore these two years, which may exert near-term pressure on rental rates.”

Keppel DC REIT’s focus remains on “engaging clients ahead of contract expiry and negotiating forward renewals across its portfolio where possible.”

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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 Esjay does not own shares in any companies mentioned.