On 16 October 2023, Keppel DC REIT (“KDC”) have announced their third quarter business update. Similar to other REITs, finance costs continue to weigh down on the DPU. However, the other fundamentals of KDC remain relatively stable. This is something that can give investors a peace of mind as long as they are comfortable with the relatively high tenant concentration.
On another note, KDC has priced SGD90 million in aggregate principal amount of floating rate notes due 2026 on 30 November 2023 under the SGD2 billion Multicurrency Debt Issuance Programme. This is expected to be issued on 8 December 2023. This is half of the available debt headroom before reaching their internal cap for aggregate leverage of 40%.
Photo source: https://www.keppeldatacentres.com/locations/asia-pacific/singapore/dc-1/
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.
Key Metrics
Distribution Per Unit (“DPU”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | -1.2% | – |
DPU for the 9 months ending 30 September 2023 have decreased by 1.2% to SGD0.0754 per unit from SGD0.0763 per unit in the same period of the previous financial year. The decrease was mainly attributable to the significant increase in finance costs which offsets the increase in net property income and finance income. This metric is Unfavorable.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 98.3% | 98.5% |
Occupancy rate as at 30 September 2023 decreased to 98.3% from the previous quarter. This is currently still 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 | 37.2% | 36.3% |
Gearing ratio stands at 37.2% as at 30 September 2023. 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. Take note however with the floating rate notes issued in December 2024, gearing is likely to increase further.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 5.4x | 6.0x |
The interest coverage stands at 5.4 times as at 30 September 2023. 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 should banks increase their interest rates for their borrowings.
The Federal Reserve on 7 November 2023 have indicated that interest rates need to stay high for a longer period of time and higher interest rates may be needed. This was after having increased the interest rates to a range between 5.25% and 5.50% on 26 July 2023, the highest level in 22 years.
Website: US Fed official expects further rate hike needed
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 72% of their debt is also on fixed rates.
I have thus performed a sensitivity analysis using the information as at 30 September 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $1,500,000 |
| Debt Not Hedged (%) | 28.0% |
| Debt at Floating Rate Exposed | $420,000 |
| 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 | -$2,100 | -1.1% |
| + 100 bps | -$4,200 | -2.3% |
| + 150 bps | -$6,300 | -3.4% |
| + 200 bps | -$8,400 | -4.5% |
| + 250 bps | -$10,500 | -5.7% |
| + 300 bps | -$12,600 | -6.8% |
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 30 September 2023. 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 | 1.58 |
The Price to Book (“P/B”) ratio currently stands at 1.41. This is computed using the closing share price of SGD1.92 on 1 December 2023 and the net asset value per share of SGD1.36 as at 30 September 2023. 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 | 5.32% | SGD 0.102 |
| 2022 | 4.46% | SGD 0.086 |
| 2021 | 5.80% | SGD 0.111 |
| 2020 | 3.29% | SGD 0.063 |
| 2019 | 4.88% | SGD 0.094 |
| 2018 | 3.70% | SGD 0.071 |
At 1 December 2023, with a closing share price of SGD1.92 and dividend payout of SGD0.102 for the full calendar year 2023, this translates to a dividend yield of 5.32%. For my benchmark, a general reasonable range would be around an average of 6.0% to 7.0% in the current environment. KDC’s dividend yield is below my benchmark.
Website: Reasonable Dividend Yield 2023Q4
If using dividend yield of 6.0% as a benchmark, based on the dividend of SGD0.102 there is potential for KDC to see its share price drop by another 11.5% to SGD1.70. Investors will thus need to be mentally prepared that the share price might further fall.
| Yield | Share Price | Downside |
|---|---|---|
| Current (5.32%) | 1.92 | – |
| 6.00% | 1.70 | -11.5% |
| 7.00% | 1.46 | -24.1% |
| 8.00% | 1.28 | -33.6% |
| 9.00% | 1.13 | -41.0% |
This is important to note as interest rate for long-term safe assets is on a downtrend towards the end of 2023. The latest upcoming January 2024 Singapore Savings Bond is set to be issued with a 10-year average interest rate of 3.07%. There is a chance for interest rates to continue to decrease moving forward, and the required dividend yield of investor may be lower than current.
Website: SBJAN24 GX24010F Bond Details
The dividend yield is Neutral.
Key things to note
Tenant profile
KDC have a high tenant concentration where the top 10 tenants contributing to 78.4% of their total gross rent with the top tenant accounting for 34.4% for the month of September 2023. 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 tends 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 | -1.2% | Unfavorable |
| Occupancy | 98.3% | Favorable |
| Gearing Ratio | 37.2% | Favorable |
| Interest Coverage | 5.4x | Favorable |
| Debt Maturity Profile | 3.7 years | Favorable |
| Price to Book Ratio | 1.41 | Unfavorable |
| Overall | | Favorable |
Overall, the metrics indicate that it is still favorable to invest in KDC. Although DPU have dropped, so has other REITs in the market. The fundamentals of KDC have remained stable and is a resilient passive income generator. Investors should decide based on their risk appetite whether KDC’s high tenant concentration and lower dividend yield suits their profile.
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): 2023 Half Year Result
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