The Investing Pros And Cons Of Keppel DC REIT

Keppel DC REIT (SGX: AJBU), which was listed less than two years ago in December 2014, is a real estate investment trust that owns and manages data centers in several countries (that would be Australia, Germany, Ireland, Malaysia, Netherlands, Singapore, and the UK).

I took a look at the REIT’s business lately to come up with a list of investing pros and cons. Here’s a list of the pros:

  • Data centres have gained popularity over the past couple of years due to expanding data usage and requirements. Setting up a data centre can be costly for companies, and that’s why renting one has its advantages.
  • Keppel DC REIT has signed long-term leases with its clients. In the quarter ended 30 June 2016, the REIT’s weighted average lease expiry (WALE) by leased lettable area stood at 8.7 years.
  • Keppel DC REIT’s leases also have built-in rental escalations of 2% to 4% per year.

Now here are the cons:

  • In the REIT’s last reported quarter (the second-quarter of 2016), it recorded a 4.5% year-on-year drop in revenue to S$24.9 million. The drop happened partly because of a client downsizing its requirements in the quarter. This goes to show that Keppel DC REIT’s clients can still reduce usage even if they have signed long-term leases.
  • Keppel DC REIT is exposed to a potential issue of overcapacity in the market. In its latest earnings release, the REIT commented that “[a]n increase in data centre space is expected in Singapore these two years, which may exert near-term pressure on rental rates.”

It is of utmost importance for investors to dig deep into a stock or REIT and weigh its pros and cons before taking any action. The list above for Keppel DC REIT is by no means a complete one, but I think it could still provide some useful insights.

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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.