Keppel DC REIT (SGX: AJBU), or KDCR, is a pure-play data centre REIT that owns 15 high-quality data centres located in key data centre hubs. The portfolio has a net lettable area of 1.1 million square feet and spans 10 cities in eight countries in Asia Pacific and Europe.
KDCR released its second-quarter 2019 (Q2 2019) earnings recently, and reported a 13.2% year-on-year rise in gross revenue, mainly due to the acquisitions of the maincubes Data Centre and Keppel DC Singapore 5 in March and June 2018 respectively. Net property income (NPI) was up 13.6% year-on-year for Q2 2019 and 19.9% for H1 2019, as property expenses rose less than revenue.
Distribution per unit (DPU) was 3.85 Singapore cents for H1 2019, up 6.4% year-on-year and representing an annualised dividend yield of 4.5% at the last closing price of S$1.71. This may seem rather low for a high-quality, well-established REIT with a strong sponsor, but I believe the DPU has good growth potential in the coming quarters.
Low aggregate leverage and cost of debt
KDCR has an aggregate leverage ratio of just 31.9%, which is significantly below the regulatory limit of 45% for REITs. This allows the REIT to gear up further for opportunistic acquisitions of data centres to add to its portfolio. The REIT has around S$216.8 million worth of undrawn credit facilities to tap on and had just issued a EUR 50 million 7-year floating rate note due 2026 to diversify its funding sources.
As the REIT’s loans are mainly in SGD, AUD, GBP and EUR, the overall cost of debt has stayed low at just 1.7% per annum. Such a low cost of debt makes it much easier for the REIT to make an accretive acquisition that will improve DPU for unitholders.
Favourable industry tailwinds
Industry fundamentals continue to be sound, supported by strong demand for data centres due to the growth in data creation and need for storage. The global co-location market’s growth has been revised up from an earlier forecast of 15%-17% to 16%-18% by, while 5G connections are expected to generate 2.6 times more traffic than the average 4G connection.
These tailwinds bode well for KDCR as it signals continued strong demand for its data centres, which will underpin rental rate growth over the medium-term. With positive rent reversion, the REIT should be able to generate higher NPI, increase its amount available for distribution, and up its DPU.
Asset enhancements and expansion
Three data centres are currently undergoing expansion or asset enhancement. Keppel DC Singapore 3 is undergoing retrofitting works for expansion, which should be ready by Q3 2019. Keppel DC Dublin 2 is going through a power upgrade, and fit-out works to make way for client expansion in H2 2019, and occupancy rate for this data centre will increase to 100% upon completion. Lastly, Keppel DC Dublin 1 is undergoing asset enhancement works to improve energy efficiency, with expected completion in 2020.
These enhancements and expansions are a core aspect of organic growth for the REIT, as they increase the occupancy rate and also lower the costs of operating the data centre. The former will boost revenue while the latter will improve NPI, both of which have the effect of increasing income available for distribution.
A uniquely-positioned REIT
KDCR is a unique REIT as it deals in highly-specialised data centre assets. Investors need to be comfortable with the fundamentals surrounding the cloud and data storage industry to fully appreciate the REIT’s strengths. The above points make a strong case for the REIT to continue to report higher DPU as the years go by, barring unforeseen circumstances that may severely crimp the need for data usage and storage.
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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 Royston Yang owns shares in Keppel DC REIT.