Keppel DC REIT (SGX: AJBU) is Singapore’s first pure Data Centre REIT as well as the 2nd most overpriced REIT, with a PB of 1.62x @ $2.27/share, trailing behind Parkway Life REIT (SGX: C2PU) which has a PB of 1.64x. Many investors have avoided Keppel DC REIT (KDC) due to its rich valuations but could this be a mistake? Based on the REIT’s track record, it has been consistently improving year over year by double-digit figures and it has not shown any signs of slowing down. Let’s take a deep dive into the 5 important takeaways from Keppel DC REIT 1H 2023 results.
1. Stable Growth In Gross Revenue and NPI
| Year on Year Difference | 1H FY2023 | 1H FY2022 |
|---|---|---|
| Gross Revenue | S$140.464 million (+3.6%) | S$135.54 million |
| Net Property Income (NPI) | S$127.353 million (+3.3%) | S$123.235 million |
Jumping right into the results, Keppel DC REIT has posted yet another strong set of results, growing its Gross Revenue as well as NPI in the low single digits. This level of growth is expected with the current high interest rate environment, growth opportunities will definitely lessen. On top of this, KDC has been able to consistently grow its Gross Revenue and NPI over the past few years. With Data Centres being the next big trend, Keppel DC REIT will continue to see a huge demand for its assets, allowing them to maintain high occupancy rates and increase its rental reversion rates as time passes.
2. Exceptional Growth In Distributable Income and DPU
| Year on Year Difference | 1H FY2023 | 1H FY2022 |
|---|---|---|
| Distributable Income | S$91.311 million (+0.2%) | S$91.158 million |
| Distribution Per Unit (DPU) | 5.051 cents (+0.04%) | 5.049 cents |
Despite the stable growth in NPI, the Distributable Income and DPU saw minimal growth at 0.2% and 0.04% year over year respectively. This is mainly due to the higher facility expenses, coupled with the higher cost of debt which will be elaborated on further in the next section. It is important for investors to note that KDC’s recent acquisition of Guangdong Data Centre 3 was completed in August 2022 and is expected to be fully fitted by Q3 2023 so we can definitely expect bigger growth in 2H 2023.
3. Solid and Stable Financials
| As at 30 Jun 2023 | As at 31 March 2023 | As at 31 Dec 2022 | |
|---|---|---|---|
| Aggregate Leverage | 36.3% | 36.8% | 36.4% |
| Interest Coverage | 6.0x | 6.8x | 7.6x |
| Average Cost of Debt | 3.3% | 2.8% | 2.7% |
Moving onto the financials, we can see that the aggregate leverage has decreased slightly to 36.3% from 36.8% last quarter, and from 36.4% 6 months before. The current aggregate leverage is at a comfortable level because, with the current high interest rate environment, accretive acquisitions will be scarce. It will make more sense for the management to lower their debt which is growing to be more expensive over time.
As you can see from the table above, the average cost of debt has grown substantially from 2.7% in FY2022, to 2.8% in Q1 2023, to 3.3% in 1H 2023. Of course, the management has been proactively controlling the cost of debt by allocating 73% of their debt to fixed rates. With the remaining 27% on floating rates, a 100bps increase in rates would have an approximately 2.2% impact on KDC’s Q2 DPU on a pro forma basis.
With the FEDs expecting to close FY2023 with interest rates near 5%, it’ll be wise for REITs to pay down their debt during this period. This lowers their cost of debt as well as opens up more debt headroom in case of accretive acquisitions appearing.
4. Portfolio Stability
Looking at Keppel DC REIT’s portfolio, we can see that it is very resilient and stable with a long WALE of 8 years. The portfolio is very diversified across multiple tenants in different industries as we can see below.
The total occupancy rate stands at a rock solid 98.5% with the majority of its leases (53.6%) expiring in 2028 and beyond. KDC has managed to maintain this high occupancy rate since 31st December 2022 which is a fantastic thing. Not to mention that more than 50% of KDC’s portfolio have built-in income and rental escalations so even if KDC doesn’t make any acquisitions moving forward, the NPI is still expected to grow at a reasonable rate.
5. Growth Potential
As with all investments I make, I want an investment that grows over time rather than stays consistent and flat line over the next 3-5 years. Let’s take a look at some of the growth potential that Keppel DC REIT has.
More Acquisitions in China
With the increased demand for everything to move onto the cloud, the demand for Data Centres are also increasing rapidly. Keppel DC REIT expects the European Data Centre market to grow by >40% to over US$25b by 2024 despite the limited new supply. APAC Data Centre spending is also expected to surpass US$35b by 2024 to account for >35% of the global market.
With China slowly reopening its borders, starting with Singapore, we might see KDC venture deeper into China for more acquisitions to grow its exposure in the market. KDC’s maiden acquisition into the China market was in 1H 2021, right after releasing its 1H 2021 results. The strategic acquisition of Guangdong Data Centre in Jiangmen, Guangdong Province, proves to be a fantastic acquisition with a triple net lease for 15 years and the acquisition price representing a 7.8% discount to the independent market valuation.
Given the right circumstances, I believe KDC can venture deeper into the China market should suitable opportunities arise.
Final Thoughts
Without much saying, Keppel DC REIT has yet again performed way past expectations, kicking off the year strong with a solid set of results for 1H 2023. Although the REIT’s nature is highly defensive, it has definitely performed remarkably well. Keppel DC REIT is one of the prime examples of low risk with high reward as long as you can hold on and stay the course.
Keppel DC REIT is currently trading near its average 5-year dividend yield (4.35%) and below its average 5-year Price/Book (1.75x). Some investors will definitely argue that the yield is too low or there are better opportunities. Perhaps there are better opportunities elsewhere but, I don’t think you can find a REIT that grows at this pace anywhere in the Singapore market.