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3 Things Investors Should Know About Keppel DC REIT’s Business and Growth Prospects

Listed in December 2014, Keppel DC REIT (SGX: AJBU) is the first pure-play data centre real estate investment trust (REIT) in Asia. Its portfolio consists of 15 data centres located in main data centre hubs in the Asia Pacific region and Europe. The REIT has a presence in Singapore, Malaysia, Australia, Ireland, Germany, Italy, the Netherlands, and the United Kingdom.

Year to date, the REIT’s units have climbed 27% to S$1.72 on 8 July 2019. It’s not surprising that Keppel DC REIT has shown significant growth in its unit price if we explore the REIT’s fundamentals.

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With that, here are three things to like about Keppel DC REIT.

A strong portfolio

When investing in a REIT, we should ensure it has a portfolio of strong assets that can attract clients easily. If the portfolio has a long weighted average lease expiry (WALE), that’s also a plus since it protects a REIT’s downside during an economic downturn. Keppel DC REIT ticks the right boxes there.

As of 31 March 2019, the data centre REIT had a high occupancy rate of 93.2% with a WALE of eight years. Most of its assets’ leases expire on or after 2024.

Source: Keppel DC REIT investor presentation

Unlike many other REITs, Keppel DC REIT’s lease structures are unique. There are three main types of data centre models: shell and core, fully fitted, and co-location. The first two types cater to single end users, whereas co-location data centres are multi-tenanted buildings that are built for rental to multiple users. Keppel DC REIT operates all three models.

The shell and core and fully fitted models have a much longer lease term compared to co-location arrangements, which are generally for a shorter period of about three to six years. Keppel DC REIT, therefore, benefits from a staggered lease expiry profile that allows for both stability and opportunities for rental reversions.Source: Keppel DC REIT investor presentation

Growth in DPU

The stable portfolio has allowed Keppel DC REIT unitholders to enjoy decent growth in distribution per unit (DPU) over the years.  Source: Keppel DC REIT investor presentation. (Note: DPU adjusted for the impact of a pro-rata preferential offering and certain one-offs in both 2016 and 2017.)

In 2015, Keppel DC REIT paid a DPU of 6.51 Singapore cents, and this has grown to 7.32 Singapore cents in 2018, translating to an annualised growth of around 4%. In the first quarter of 2019, DPU increased by 6.7% to 1.92 Singapore cents.

Riding on industry growth

Keppel DC REIT has positive market dynamics going for it in the data centre industry. Future demand could come from (1) the proliferation of cloud computing, (2) growth in data creation and data storage, and (3) increasing regulatory requirements surrounding data.

Source: Keppel DC REIT investor presentation

For instance, as part of increasing cloud adoption, the cloud gaming market is poised to grow at 15% annually. That could bode well for data centre providers such as Keppel DC REIT.

The Foolish takeaway

With a strong portfolio, DPU growth, and industry tailwinds, it’s not surprising to see Keppel DC REIT doing well of late. However, investors should determine if it is worth paying up for growth, as the REIT does not come cheap. At Keppel DC REIT’s unit price of S$1.72 on 8 July 2019, it was selling at a price-to-book ratio of 1.6 and had a trailing distribution yield of 4.3%. At a 60% premium to net asset value, there are other, cheaper REITs out there.

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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 Sudhan P doesn’t own shares in any companies mentioned.