The Motley Fool

3 Reasons to Be Bullish About Keppel DC REIT

Keppel DC REIT (SGX: AJBU) has been having a good year so far. Over the past nine months, ended 30 September, its adjusted distribution per unit (DPU) rose 4.8%, on the back of acquisition contribution and rental top ups. In addition, DPU growth accelerated in the most recent quarter to 6.3%.

But that’s not all. Beyond these impressive headline numbers, there are some developments that could bode well for its future.

Low gearing affords it plenty of headroom for accretive acquisitions

As at 30 September 2018, Keppel DC REIT had a gearing ratio of just 32.0%, which is one of the lowest among real estate investment trusts (REITs) in Singapore. It is also well below the 45% regulatory cap imposed by the Monetary Authority of Singapore.

At its current level, Keppel DC REIT has an additional S$278 million in debt headroom to make acquisitions.

Keppel DC REIT has also had a track record of making use of its capital flexibility in the past. Since its initial public offering (IPO) in 2014, its portfolio has grown from eight assets to 15, which clearly indicates that management is keen to continue to expand its portfolio.

Development of data centre in Australia is expected to be yield-accretive

In the quarter just passed, Keppel DC REIT has entered into an agreement to develop another data centre on vacant land within Intellicentre 2 data centre site in Sydney. In the agreement, Macquarie Telecom will sign a new 20-year triple net master lease on both the new data centre and the original Intellicentre 2 data centre. The new development is expected to be completed between 2019 and 2020 and will likely be yield-accretive.

Investors should be pleased that Keppel DC REIT has already secured a tenant for the new development and it will under a triple lease agreement. This means that the tenant will be responsible for all tax payments, building insurance and maintenance. This sort of agreement protects the REIT from downside risks.

Positive outlook for data centre industry

A third reason to be bullish is the tailwinds that surround the data centre space. There are plenty of drivers of higher demand for data centres. Increased digitalisation and cloud adoption, firms choosing to outsource data centres, rather than own them, and data sovereignty regulations are all key drivers for increased data centre demand.

Moreover, according to BroadGroup Consulting, many hyperscale cloud players are only about a third of the way through their planned data centre build-outs, which could lead to more data centre space requirements in the future.

The Foolish bottom line

The future certainly looks bright for Keppel DC REIT. Besides the industry tailwinds surrounding the data centre space, Keppel DC REIT continues to be well-managed and it has a great financial position to take advantage of any acquisition opportunity. Even though it currently trades at a 33% premium to its book value and spots a 5.3% yield, which is lower than many other REITs, investors who are willing to pay a premium now could still be rewarded in the future.

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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 Jeremy Chia doesn’t own shares in any companies mentioned.