On 31 January 2023, Keppel DC REIT (“KDC”) have announced their 2022 full year result. Their results can be seen to continue remaining stable, and my overall metrics weighting seems to remain in the favorable range. With a February 2023 dividend payout that is higher than the one in February 2022, their dividend yield for 2023 seems to on track to be higher than 2022.
They are still trading at a significant premium due to their data centre exposure, resulting in a lower dividend yield compared to some of its peers. This industry however in my opinion will be one that remain more resilient in the short term. Especially as the world continues to be more technologically integrated and there is continued demand for data.
One thing I can appreciate is the finance income KDC have recorded due to the income from the debt securities issued by M1 Network Private Limited (“NetCo”) and coupon income from Guangdong DC 3. It is able to offset the increases in finance costs for 2022. With signs that long term interest rates are starting to decrease, it seems like a good solution to mitigate any interest rate risks while securing a form of long term recurring income.
Website: Financial Statements And Related Announcement::Full Yearly Results
Background
KDC was listed on the Singapore Exchange on 12 December 2014 as the first pure-play data centre REIT in Asia.
KDC’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 and assets necessary to support the digital economy.
KDC’s investments comprise an optimal mix of colocation, fully-fitted and shell and core assets, as well as network assets through its investments in debt securities, thereby reinforcing the diversity and resiliency of its portfolio.
KDC is sponsored by Keppel Telecommunications & Transportation Ltd (“Keppel T&T”), a wholly-owned subsidiary of Keppel Corporation Limited. It is managed by Keppel DC REIT Management Pte. Ltd. (the “Manager”)., a wholly-owned subsidiary of Keppel Capital Holdings Pte. Ltd. (“Keppel Capital”). Keppel Capital is a premier asset manager in Asia with a diversified portfolio in real estate, infrastructure, data centres and alternative assets in key global markets through its listed REITs and Trust, as well as private funds.
The Keppel Group, through Keppel T&T and the private data centre funds has SGD3.7 billion assets under management and over SGD2 billion worth of data centre assets under development as at 31 December 2022.
Key Metrics
Distribution Per Unit (“DPU”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | +3.7% | +3.4% |
DPU for the full financial year 2022 have increased by 3.7% to SGD0.1021 from SGD0.0985 in the previous financial year. It is worth noting that the DPU increase was from higher finance income mainly due to interest income from NetCo Bonds and coupon income from Guangdong Data Centre 3. Although this is not directly related to their properties, the income is recurring and provides stable income for KDC.
This metric is Favorable.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 98.5% | 98.6% |
Occupancy rate as at 31 December 2022 stands at 98.5%. This is Favorable as it is above my expected healthy occupancy rate of 95% and KDC have been able to maximize utilizing their assets.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 36.4% | 37.5% |
Gearing ratio stands at 36.4% as at 31 December 2022. This to me is Favorable, as it is still a distance away from the MAS limit of 50% and with the long debt maturity profile, gives them opportunities to fund new acquisitions through debt.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 7.6x | 8.5x |
The interest coverage stands at 7.6 times as at 31 December 2022. The metric is Favorable as the interest coverage is higher than my preference of 5.0 times. They are well positioned to handle any further interest rate increases as the world looks to tackle inflation. The Federal Reserve on 1 February 2023 has hiked interest rates to a range between 4.5% and 4.75%, and gave little indication it is nearing the end of this hiking cycle.
Website: Fed raises rates a quarter point, expects ‘ongoing’ increases
As the interest rate may potentially increase further, KDC may be subjected to significant change in their cost of debt in the near future. In their presentation they have mentioned that 74% of their debt is also on fixed rates.
I have thus performed a sensitivity analysis using the information as at 31 December 2022:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $1,500,000 |
| Debt Not Hedged (%) | 26.0% |
| Debt at Floating Rate Exposed | $390,000 |
| Distributable Income FY2022 | $184,872 |
Interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2022 Distribution |
|---|---|---|
| + 50 bps | -$1,950 | -1.1% |
| + 100 bps | -$3,900 | -2.1% |
| + 150 bps | -$5,850 | -3.2% |
| + 200 bps | -$7,800 | -4.2% |
| + 250 bps | -$9,750 | -5.3% |
| + 300 bps | -$11,700 | -6.3% |
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, KDC may experience a fall in DPU accordingly. Their higher sensitivity is due to a significant portion of their debts are not hedged as compared to other REITs.
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 3.7 years | 3.9 years |
Weighted average term to maturity of their debt stands at 3.7 years as at 31 December 2022. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 1.41 | 1.37 |
The Price to Book (“P/B”) ratio currently stands at 1.41. This is computed using the closing share price of SGD1.97 on 15 February 2023 and the net asset value per share of SGD1.40 as at 31 December 2022. KDC still command a premium due to their data centre exposure. However, in the current macro-economic environment, there are REITs that are trading close or below book value. There is potential that if the results become significantly more unfavorable, they may experience a larger decrease in price.
The metric is Unfavorable as investors are paying a significant premium although this is a REIT with a strong sponsor.
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2023 | 2.62% | SGD 0.052 |
| 2022 | 4.34% | SGD 0.086 |
| 2021 | 5.65% | SGD 0.111 |
| 2020 | 3.21% | SGD 0.063 |
| 2019 | 4.75% | SGD 0.094 |
| 2018 | 3.61% | SGD 0.071 |
At 15 February 2023, with a closing share price of SGD1.97 and dividend payout of SGD0.086 for the full calendar year 2022, this translates to a dividend yield of 4.34%. However, as the dividends are increasing, we can use the dividend payout in August 2022 of SGD0.050 and February 2023 of SGD0.052 for an expected full year payout. The total dividend payout of SGD0.102 will therefore translate to a yield of 5.18%. For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5% in the current environment. KDC’s dividend yield is below my benchmark.
Website: Reasonable Dividend Yield 2023Q1
If using dividend yield of 5.5% as a benchmark, based on the dividend of SGD0.102 there is potential for KDC to see its share price drop by another 5.9% to SGD1.85. Investors will thus need to be mentally prepared that the share price might further fall.
| Yield | Share Price | Downside |
|---|---|---|
| Current (5.18%) | 1.97 | – |
| 5.50% | 1.85 | -5.9% |
| 6.50% | 1.57 | -20.3% |
| 7.50% | 1.36 | -31.0% |
| 8.50% | 1.20 | -39.1% |
Nonetheless, it is worth noting that interest for long-term safe assets are on a downtrend. The March 2023 Singapore Savings Bond being issued with a 10-year average interest rate of 2.90%, which is lower than the previous few months. There is a chance with the continued decrease interest rates, the required dividend yield of investor required may not be as high as before.
Website: SBMAR23 GX23030A Bond Details
The dividend yield is Neutral.
Key things to note
Tenant profile
KDC have a high tenant concentrations where the top 10 tenants contributing to 79.0% of their total gross rent with the top tenant accounting for 35.9% for the month of December 2022. This is risky as KDC is heavily reliant on their tenants for income. The withdrawal of any tenant will have a significant impact on their DPU. Furthermore their tenant profile tend to be in the technology industry, which is facing severe cost pressures in the current high interest rate environment.
Data centers are not directly affected as compared to office REITs, where a lower headcount translates to less office space needed. Data centers however are still a cost to the operations of the companies. Companies may therefore look for cheaper alternatives, which may in turn lower the overall outlook for KDC.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | +3.7% | Favorable |
| Occupancy | 98.5% | Favorable |
| Gearing Ratio | 36.4% | Favorable |
| Interest Coverage | 7.6x | Favorable |
| Debt Maturity Profile | 3.7 years | Favorable |
| Price to Book Ratio | 1.41 | Unfavorable |
| Overall | | Favorable |
Overall, the metrics indicate that it is favorable to invest in KDC. The fundamentals of KDC did not worsen during this quarter, and the share price have rebounded from the lows in October 2022 with the dividend payout in March 2023. There could be further opportunities for entry as the share price may continue to face downward pressure, now that is it post dividend ex-date and although interest rates are stating to decrease, the macro-economic conditions continue to look unfavorable in the short term.
KDC also has a lower dividend yield and a high tenant concentration compared to other REITs. Investors need to take note of their own risk profile and deem if it is worth the risk.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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Website: Keppel DC REIT (SGX: AJBU): 2022 Third Quarter Business Update
