3 Things To Help You Understand Keppel DC REIT’s Business

Listed in 2014, Keppel DC REIT (SGX:AJBU) is the first REIT in Singapore to invest primarily in data centres. Its existing portfolio consists of 15 data centres located in 10 cities across eight countries in Asia and Europe. It is sponsored by Keppel Telecommunications & Transportation Limited (SGX: K11), which in turn is a subsidiary of the conglomerate, Keppel Corporation Limited (SGX: BN4).

Recently, I wrote an article detailing the top three performing REITs in Singapore over the past 12 months, and Keppel DC REIT came in first with a return of 14.1%. With that in mind, I thought it would be useful for investors to know a few more essential details about the REIT.

What are data centres?

A data centre is a facility that is used to house computer systems and its associated components. These include storage systems used in cloud computing and telecommunications systems.

Data centres are secure facilities and are specially designed and equipped to house client’s server racks and provide required power and cooling. They also need to be equipped with backup power supplies, redundant data communications connections, and fire protection. As such, data centres need to be operated by people with technical expertise and have 24-hour monitoring systems to ensure minimal disruption.

Three lease types

Keppel DC REIT offers three types of leasing arrangements with its clients. There is the colocation, fully fitted and shell & core lease.

In the colocation lease, Keppel DC REIT owns and provides the mechanical and electrical equipment and the facility management. The client simply pays for rental of the equipment and uses its own servers. As you may have guessed, this type of leasing arrangement requires higher ongoing operational expense for the REIT, but it also means that it can charge a much higher rent.

The fully fitted lease is when Keppel DC REIT has equipped the building but tenants need to manage the facility themselves. Tenants also have to pay maintenance expenses.

The shell & core lease is where Keppel DC REIT simply provides the tenant with the building. The tenant will have to fill in its own equipment and facility management, and cover all expenses. In certain cases, the tenant also pays the property tax if it is a triple net lease.

Below is a breakdown of rental income by lease type for Keppel DC REIT:

Source: Keppel DC REIT factsheet

Tenant type and occupancy rate

Internet enterprises, telecommunications and IT services companies are Keppel DC REIT’s typical tenants. Around 88.2% of its tenants come from these three sectors alone. Financial services and other corporates make up the remaining 11.8%.

As of 31 March 2018, the REIT had a portfolio occupancy of 93.7% and weighted average lease to expiry of 9.6 years by leased area. Typically, its shell & core and fully fitted leases have much longer lease contracts than its colocation contracts.

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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 Jeremy Chia owns shares in Keppel Corporation Limited.