Keppel DC REIT: How Does It Make Money?

Keppel DC REIT (SGX: AJBU) was listed back in December 2014 .

At its initial public offering (IPO), units of Keppel DC REIT were offered at S$0.93 apiece. The REIT closed trading at a unit price of S$1.43 on 11 December 2017, providing its early investors a total return of over 70% since its IPO (including dividends). As Foolish investors, we want to look beyond the stock price movement to understand the underlying business.

And for that, we can turn to Keppel DC REIT’s original IPO prospectus. The document contains a wealth of information on the REIT’s business and market.

Cost matters

Previously, we learnt that a key requirement in data centers is high reliability. It follows that data centers are measured by their level of reliability.

That is on the technical side of things. On the commercial side, data center services are offered in different ways. For reference, here is a data center looks like:

Source: Keppel DC REIT IPO prospectus

According to BroadMedia Consulting’s (BMC) research, a group that was commissioned by Keppel DC REIT’s manager, data center services are often offered in three formats: cabinets, cages and suites:

“Cabinets are enclosures that provide a relatively small amount of usable space. Cages are private enclosures that can accommodate cabinets and freestanding or non-rack mountable equipment. Suites are private rooms with solid walls that can be configured to the specifications of the customer.”

Beyond that, in the third party provider space (where Keppel DC REIT operates), data center providers may differ in the depth of service provided. On this point, BMC highlighted four categories of data center services:

“1. Real estate investors;

2. Wholesale co-location specialists that offer clients space, power and cooling, as well as access and connectivity to multiple carriers;

3. Retail co-location specialists who offer a more managed service than wholesale co-location providers with service such as installation and operational support, smaller deals from rental of part of a data centre rack, and more focus on access to carriers and other partners such as cloud companies; or

4. Cloud and managed services providers, which offer a much broader IT offering, ranging from website or email hosting to full IT outsourcing, rather than simply space and power in a data centre.”

Based on the categorization above, it’s worth mentioning that the bulk of Keppel DC REIT’s data centers is a co-location service. The split in terms of revenue is shown in the presentation slide below:

Source: Keppel DC REIT’s quarterly presentation

We will look at the REIT’s competitive landscape next. Check in again for more on Keppel DC REIT in the following week.

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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 writer Chin Hui Leong doesn’t own shares in any companies mentioned.