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Can Keppel DC REIT Live Up to High Expectations?

Keppel DC REIT (SGX: AJBU) has been on a tear this year, with its share price rising by 35% year to date from S$1.36 to S$1.78. Inclusive of S$0.0755 worth of dividends received, the total return for the REIT has been 37.4% so far this year. The REIT’s trailing-12-month dividend yield has fallen to 4.2% from 5.6% at the start of this year. With such a stellar performance, can the REIT really live up to investors’ high expectations?

Keppel DC REIT is the first pure-play data centre REIT listed in Asia, with a focus on investing in real estate assets used primarily for data centre purposes. Its current portfolio consists of 15 high-quality data centres with an aggregate lettable area of approximately 1.1 million square feet. The portfolio spans 10 cities in eight countries in Asia-Pacific and Europe.

Let’s take a look at how Keppel DC REIT intends to grow its business, as well as the prospects for the industry it’s in, in order to determine if investor expectations are justified.

Impressive portfolio growth

Source: Keppel DC REIT Investor Presentation September 2019

Keppel DC REIT has demonstrated impressive portfolio growth since its listing in December 2014. It has doubled its assets under management (AUM) from S$1 billion to S$2 billion in four years. Its number of data centres has also increased from 8 to 15, while the REIT is now more geographically diversified in eight countries as compared to six.

Potential asset injection

In August, the Alpha Data Centre Fund, which is a wholly-owned unit of Keppel Capital, announced that it had acquired a 3,840 square metre plot of freehold land in Gore Hill Technology Park to develop a data centre in Sydney. Keppel Capital is the asset management arm of Keppel Corporation Limited (SGX: BN4), the parent of the sponsor (Keppel Telecommunications and Transportation) for Keppel DC REIT.

This move demonstrates Keppel Capital’s commitment to building up its data centre portfolio, which could be injected into the REIT sometime in the future.

Data centre growth potential

In a recent research report by Cushman and Wakefield, Southeast Asia was flagged as the fastest-growing region for co-location data centres over the next five years, with a market size that will expand by a compound annual growth rate of 13% between this year and 2024. Singapore is also ranked as the third-most robust data centre market, up from seventh in 2017. This bodes well for the growth of Keppel DC REIT’s portfolio.

Room for DPU growth

I believe investors are rapidly pricing in the future growth of Keppel DC REIT’s AUM and distribution per unit (DPU). This is being reflected early in the share price due to the bullish sentiment surrounding data centres as a unique and growing asset class. While the yield may seem low at 4.2%, assuming the REIT manages to grow its asset base over the next few years, DPU can continue to rise in tandem with the growth of the industry. The REIT should, therefore, be able to live up to investors’ expectations, barring a significant deterioration in the global economic outlook that may crimp demand for data storage.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.