On 26 January 2024, Keppel DC REIT (“KDC”) have announced their full year result for 2023. There were no significant changes to the financial position of KDC, except for the loss allowance relating to uncollected rental income from the Guangdong DCs which caused DPU to decrease. Investors will need to monitor for any indication of settlement which will allow for the reversal of the provision. Should the outcome be unfavorable, it may lead to a write off of the uncollected rental income.
Edit (27th March 2024): A reader have informed me that I have made a mix up. The settlement for DXC Technology Services Singapore Pte. Ltd is a separate case and is unrelated to the Guangdong DC. As of the time of this edit, the Guangdong DC remains unsettled and will need further clarity on the matter. My apologies on the confusion.
Website: Financial Statements And Related Announcement::Full Yearly Results
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 | -8.1% | -1.2% |
DPU decreased by 8.1% to SGD0.0938 per unit from SGD0.1021 per unit in the previous financial year. The decrease was due to an increase in property expenses and finance costs, and the higher property expenses arose due to loss allowance of SGD10 million accounted for the uncollected rental income from the Guangdong DCs. This metric is Unfavorable.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 98.3% | 98.3% |
Occupancy rate as of 31 December 2023 remained constant at 98.3%. 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 | 37.4% | 37.2% |
Gearing ratio increased slightly to 37.4% as of 31 December 2023. This to me is still Favorable, as it is a distance away from the MAS limit of 50%.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 4.7x | 5.4x |
The interest coverage stands at 4.7 times as of 31 December 2023. The metric is Favorable as the interest coverage is higher than my preference of 3.0 times. This will likely improve over the next few quarters as the Federal Reserve on 20 March 2024 have voted to hold interest rates at a 23-year high for a fifth consecutive meeting, while signalling that it still expects to make three cuts this year. This was after increasing the interest rates to a range between 5.25% and 5.50% on 26 July 2023.
Website: US Federal Reserve holds key rate, pencils in 3 cuts this year
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 3.4 years | 3.7 years |
Weighted average term to maturity of their debt stands at 3.4 years as at 31 December 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 | 1.27 | 1.41 |
The Price to Book (“P/B”) ratio currently stands at 1.27. This is computed using the closing share price of SGD1.70 on 26 March 2024 and the net asset value per share of SGD1.34 as of 31 December 2023. 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 |
|---|---|---|
| 2024 | 2.55% | SGD 0.043 |
| 2023 | 6.01% | SGD 0.102 |
| 2022 | 5.03% | SGD 0.086 |
| 2021 | 6.55% | SGD 0.111 |
| 2020 | 3.72% | SGD 0.063 |
| 2019 | 5.51% | SGD 0.094 |
The payout in 2024 currently is lower due to the loss allowance that was made as of 31 December 2023. If the loss allowance is reversed, the payout in the second half of 2024 will be higher and the dividend amount may be consistent with 2023.
Assuming the above is true, with a closing share price of SGD1.70 as of 26 March 2024 and dividend payout of SGD0.102 for the full calendar year 2023, this translates to a dividend yield of 6.01%. For my benchmark, a general reasonable range would be around an average of 5.25% to 6.25% in the current environment. KDC’s dividend yield is within my benchmark and the dividend yield is Favorable.
Website: Reasonable Dividend Yield 2024Q1
Key things to note
Tenant profile
KDC have a high tenant concentration where the top 10 tenants contributing to 78.6% of their total gross rent with the top tenant accounting for 35.0% for the month of December 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 | -8.1% | Unfavorable |
| Occupancy | 98.3% | Favorable |
| Gearing Ratio | 37.4% | Favorable |
| Interest Coverage | 4.7x | Favorable |
| Debt Maturity Profile | 3.4 years | Favorable |
| Price to Book Ratio | 3.4 years | Unfavorable |
| Overall | | Favorable |
Overall, the metrics indicate that it is favorable to invest in KDC. However, with the issue of the rental income for Guangdong DCs still unsettled, investors will need to assess their risk appetite and monitor for any updates.
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 Third Quarter Business Update
