Keppel DC REIT – Worth having a look

Contributed by: warriortan

(Note: I am personally vested in this reit)

kepdcreit($1.165 at CoB 3 March 2017)

Why I Think It Is Worth A Look For Passive Income Investors Now

(1) I like to diversify the sources of income from my portfolio of Reits and Keppel DC Reit offers that

DC REIT (KepDC) is the first and only pure-play data centre REIT listed in Asia on the Singapore Exchange. It allows us to invest in this specialised sector.

I believe data centre are usually customised for the customers, hence, there is a significant switching cost for the customers if they want to do so. This can be seen in the long weighted averaged lease expiry (WALE) of 8+ years which adds to the stability in their returns.

Unlike warehouses or industrial properties, the number of data centres available are fewer and thus its customers have limited choices.

Furthermore, digitisation and/or data is the “name of the game” now and this sector will only grow as demand for data increases in the world from both end users like us and businesses.

(2) I feel that Keppel DC Reit is doing well as a company and I like the fact that it is growing. Its global footprint is another means of diversification and its growth is not restricted to Singapore.

KepDC is not only income focused but it is also a growth company. Since last year, they had been able to acquire a few assets, which were yield accretive (i.e. at a yield higher than what it was trading then).

Its gearing is relatively low at ~ 30% and it is able to obtain loans at a low-interest rate of ~2.5%. Its balance sheet looks solid and it is in a good position to grow and acquire new assets.

Its ability to source and acquire assets that are yield accretive is a great credit to the management team. Their data centres are located in South East Asia, Australia and Europe.

(3) I am happy to have a stable and consistent 5.7% yield coupled with the possibility of future growth through yield accretive acquisitions

KepDC has been able to consistently outperform its forecast stated in its IPO prospectus, i.e. delivering its promises to its shareholders who invested at point of IPO.

Its 2016 distribution was 6.68 cents, which works out to be 5.7% dividend yield at current price. I think that is a fair return for a growing company with stable dividend distribution.

Although Price/Earning ratio is generally less relevant for a REIT, it is also reasonable at 17-18 times.

(4) Why now? I think it looks attractive from the near term historical price trend

From the trading perspective, its stock price has declined significantly from its peak of $1.28 in October to $1.165 now. Its current share price is at its lowest in the last 9 months. Its share price received a boost after the announcement of its results in April 2016 – it created a step jump in terms of share price level.

 

From the chart analysis over the same period, the $1.15 level seems to have pretty strong support. KepDC share price came down to this level twice and then bounced back to $1.25+ before declining.

To be conservative, one can wait till the share price drops to < $1.10.

(5) I am not alone in thinking that Keppel DC REIT is a buy at current level

According to DBS, among the analysts polled, 10 recommended Buy, 1 Hold and Zero Sell. DBS has a target price of $1.30 for KepDC, using discounted cash flow evaluation and a projected growth of distribution at 5% per annum.

risk_9 Are there no risk in investing in Keppel DC Reit? DEFINITELY THERE ARE. In my opinion, the risks are:

(a) As in all REITs, it is exposed to interest rate increase, which is almost a certainty this year. While it may be able to fix its interest rate now, but it can probably do so only for this cycle before the loans need to be renewed.

(b) Normal business cycles

(c) Country and foreign currency risks – it is a double-edged sword. While it offers diversification, it is also exposed investors to foreign currency risks. Income is earned in foreign currency while distributions are in Singapore dollars$

(d) Relatively higher maintenance capex due to the shorter lifespan of a datacentre’s infrastructure. It is possible that the REIT may have to rely on borrowings to fund maintenance capex at certain properties, which could impact gearing.

(e) It is not a big “FISH” in this market. The data centre market is dominated by several large international operators which have been aggressively expanding into markets where KepDC has a presence.

imho

Weighing all these together, I think the current moment is a good point to enter to initiate a small position in Keppel DC REIT.

If its share price decline further (e.g. below $1.10), I will consider accumulating more. Otherwise, I am happy to hold this in my portfolio and collecting a stable and consistent 5.7% yield every year.

I will digest the annual report when it is published to see if I have missed out any material considerations. I will update this if necessary after that.

I hope you find this useful. Have a great weekend!

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For your information:
1.  About Keppel DC REIT

Keppel DC REIT is the first pure-play data centre REIT listed in Asia on the Singapore Exchange.

Keppel DC REIT’s investment strategy is to principally invest, directly or indirectly, in a diversified portfolio of income-producing real estate assets which are used primarily for data centre purposes, as well as real estate related assets, with an initial focus on Asia Pacific and Europe.

As at 31 December 2016, the REIT has a portfolio valued at approximately $1.20 billion comprising 11 high-quality data centres strategically located in key data centre hubs. With an aggregate lettable area of approximately 843,000 sq ft, the portfolio spans nine cities in seven countries in Asia Pacific and Europe.

Keppel Telecommunications & Transportation Ltd (Keppel T&T) is the Sponsor of the REIT. It has also granted Rights of First Refusal (ROFR) to the REIT for future acquisition opportunities of its data centre assets.

The stated key objectives by the Managers for the REIT’s Unitholders are to provided them with regular and stable distributions, as well as achieve long-term growth while maintaining an optimal capital structure.

You can find out more about Keppel DC REIT from this website: http://www.keppeldcreit.com/en/

2. What is a Reit

A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.

REITs allow anyone to invest in portfolios of large-scale properties the same way they invest in other industries – through the purchase of stock. In the same way shareholders benefit by owning stocks in other corporations, the stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy or finance property.

More on REIT: https://www.reit.com/investing/reit-basics/what-reit

3. The DBS Report on Keppel DC Reit

https://www.dbs.com.sg/treasures/aics/EquityArticle.page?dcrPath=templatedata/article/equity/data/en/DBSV/012014/KDCREIT_SP.xml

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