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Keppel DC REIT’s Latest Earnings: Strong Growth Seen

Yesterday evening, Keppel DC REIT (SGX: AJBU) announced its third-quarter earnings for the three months ended 30 September 2016.

As a quick background, Keppel DC REIT is the first pure-play data centre REIT listed in Singapore. Right now, the real estate investment trust, which listed only in December 2014, owns and manages 10 operational data centers in several countries (Singapore, Ireland, Malaysia, Australia, UK, and the Netherlands) with a portfolio value of S$1.14 billion.

In addition, Keppel DC REIT recently announced the acquisition of a data centre in Italy in August; the purchase is expected to be completed later this year. The REIT also has a data centre in Germany that’s under development.

With that, let’s have a look at how the REIT performed in the third-quarter of 2016.

Financial and business highlights

  • Revenue for the reporting quarter came in at S$22.7 million. This is 12% lower when compared to revenue a year ago and the forecasted revenue given in the REIT’s listing prospectus.
  • But, net property income (NPI) managed to increase by by 6.2% year-on-year to S$22.7 million. The REIT’s NPI of S$22.7 million is also 3.8% higher than projected.
  • Distributable income for the reporting quarter followed suit, climbing 15.9% year-on-year to S$16.8 million. This resulted in a distribution per unit (DPU) of 1.9 cents, up 15.9% from the same quarter a year ago. Keppel DC REIT’s prospectus had a forecast of just 1.67 cents for the reporting quarter’s DPU.
  • The REIT’s portfolio occupancy decreased slightly from 95.1% in the third-quarter of 2015 to 92.7%. The weighted average lease expiry (WALE) for the REIT also dipped a little from 8.9 years to 8.6 years.
  • Moving on to the balance sheet, Keppel DC REIT’s aggregate leverage decreased from 30.1% in the third-quarter of 2015 to 29.4% in the reporting quarter. This was on the back of a decrease in debt from S$362 million to S$340 million.
  • The third-quarter of 2016 saw Keppel DC REIT report an average cost of debt of 2.4%, which is marginally lower from the 2.5% seen in the previous year. The REIT’s interest cover ratio also increased from 9.4 times to 10.1 times.
  • Keppel DC REIT’s net asset value (NAV) per unit saw a 3.4% year-on-year increase to S$0.889.

During the reporting quarter, Keppel DC REIT’s gross rental income decreased partly as a result of Keppel DC Dublin 1 taking in lower rental income. There was  a client in the datacenter that downsized its requirements in the first-quarter of 2016. There was also a “one-off non-cash downward adjustment for the straight-lining of rental income” in the reporting quarter at the Almere Data Centre.

Other factors leading to lower overall revenue for the REIT are (1) “a drop in variable income at the Singapore Properties due to lower recurring and power revenue and higher other property-related costs,” and (2) a depreciation of the pound sterling and Malaysian ringgit against the Singapore dollar.

All the negative pressures were partially offset by contributions from Intellicentre 2 and an appreciation of the Australian dollar and euro against the Singapore dollar.

Keppel DC REIT had experienced savings in property expenses (the expense was S$4.4 million lower compared to the third-quarter of 2015), which led to the growth in net property income despite lower revenue.

A future outlook

The REIT had recently announced a number of acquisitions. The first is the aforementioned Italian data centre; prior to the purchase Keppel DC REIT had no business interests in Italy. The second, which took place in October and is part of the REIT’s current portfolio of 10 operational data centres, is the completed acquisition of a data centre in Cardiff.

The last was announced just yesterday – the same day as the REIT’s earnings release. Keppel DC REIT plans to acquire the Keppel DC Singapore 3I data centre located in Singapore from its sponsor, Keppel Telecommunications & Transportation Ltd (SGX: K11).

In the earnings release, Keppel DC REIT’s manager commented on the REIT’s outlook:

“While the increase in data centre space in Singapore is expected to exert near-term pressure on rental rates, the Manager is confident of the data centre market’s long-term potential.

The proposed acquisition of Keppel DC Singapore 3 under the right of first refusal granted by the Sponsor, Keppel Telecommunications & Transportation Ltd, will serve to strengthen the REIT’s foothold in the high-potential market and provide greater income resilience with an expanded portfolio.

Apart from seeking growth through acquisitions, the Manager maintains a proactive asset management strategy by engaging clients ahead of contract expiry and working to improve occupancy of its properties in order to optimize returns from its existing portfolio.

The Manager believes that the recently announced acquisitions of the Milan data centre, Cardiff data centre as well as the proposed acquisition of Keppel DC Singapore 31 will support long-term growth for Keppel DC REIT.”

Keppel DC REIT’s units closed at a price of S$1.23 each yesterday. That price gives the REIT a price-to-book ratio of 1.39.

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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.