On 19 April 2024, Keppel DC REIT (“KDC”) have announced their 2024 first quarter business update. There were no significant changes to the financial position of KDC, although DPU continues to take a hit in this quarter from the uncollected rental income from the Guangdong DCs. This has caused my expected yield for 2024 to decrease by approximately 15% from the previous year, something investors should consider when assessing their risk appetite and margin of safety.
Take note on 16 April 2024, KDC have announced the divestment of their Intellicentre Campus in Sydney at a premium to Macquarie Data Centres Macquarie Park Property SubTST Pty Ltd. They will then reinvest the proceeds into an Australia Data Centre note that is issued by Macquarie Data Centres Group Pty Ltd. It is nothing new as KDC already have a portion of their assets as Notes Receivables. However with the trend of increasing exposure to Notes Receivables, KDC may become similar to a bond ETF than a REIT, which carry a different set of risks. While overall this transaction is expected to be accretive, there is a need for investors to take note of the slight fundamental shift in this transaction.
Website: Asset Acquisitions And Disposals::Announcement On Divestment And Note Subscription
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 | -13.7% | -8.1% |
DPU for the first quarter of 2024 decreased by 13.7% to SGD0.0219 per unit from SGD0.0254 per unit for the same period in the previous financial year. The decrease was mainly due to the loss of income from the Guangdong DCs, where their rental income continues to be recognised under “Gross Revenue” and correspondingly net off via loss allowance in “Property Expenses”. The impact of the Guangdong DCs to the DPU for the first quarter of 2024 is SGD0.00326 per unit, which is the bulk of the DPU decrease when compared to the first quarter of 2023.
This is partially net off by the settlement sum received in relation to the dispute with DXC, which will be distributed over the four quarters in FY2024. Together with positive reversions and escalations this translates to higher goss revenue which increased the net property income. It also explains why the higher net property income does not immediately translate to higher DPU for the quarter. While this course of action is favorable as it smoothens the trend, the overall fundamental decrease in DPU is Unfavorable.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 98.3% | 98.3% |
Occupancy rate as of 31 March 2024 remained constant at 98.3% and the metric remains Favorable.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 37.6% | 37.4% |
Gearing ratio increased slightly to 37.6% as of 31 March 2024. 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 | 4.6x | 4.7x |
The interest coverage stands at 4.7 times as of 31 March 2024. The metric is Favorable as the interest coverage is higher than my preference of 3.0 times. They have a margin of safety should interest rates increase, as the inflation data in April 2024 continues to suggest high inflation. This gives the Federal Reserve less incentive to lower interest rate after increasing the interest rates to a range between 5.25% and 5.50% on 26 July 2023.
Website: Wall Street pushes out rate-cut expectations, sees risk they don’t start until March 2025
I have thus performed a sensitivity analysis using the information as of 31 March 2024:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $1,500,000 |
| Debt Not Hedged (%) | 27.0% |
| Debt at Floating Rate Exposed | $405,000 |
| Distributable Income FY2023 | $167,718 |
Interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2023 Distribution |
|---|---|---|
| + 50 bps | -$2,025 | -1.2% |
| + 100 bps | -$4,050 | -2.4% |
| + 150 bps | -$6,075 | -3.6% |
| + 200 bps | -$8,100 | -4.8% |
| + 250 bps | -$10,125 | -6.0% |
| + 300 bps | -$12,150 | -7.2% |
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.
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 3.2 years | 3.4 years |
Weighted average term to maturity of their debt has shortened to 3.2 years as of 31 March 2024. This is still 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 | 1.29 | 1.27 |
The Price to Book (“P/B”) ratio has become more expensive at 1.29. This is computed using the closing share price of SGD1.71 on 30 April 2024 and the net asset value per unit of SGD1.33 as of 31 March 2024. 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 | 2.53% | SGD 0.043 |
| 2023 | 5.97% | SGD 0.102 |
| 2022 | 5.00% | SGD 0.086 |
| 2021 | 6.51% | SGD 0.111 |
| 2020 | 3.70% | SGD 0.063 |
| 2019 | 5.47% | SGD 0.094 |
The dividend payout is currently on a downtrend from 2023. With a dividend payout of SGD0.043 per unit for the first half of 2024, when annualised this will amount to SGD0.086 per unit for the calendar year 2024. Currently the DPU for the first quarter of 2024 is SGD0.022 per unit and is in line with the above expected amount.
With a closing share price of SGD1.71 as of 30 April 2024, this translates to a dividend yield of 5.03%. For my benchmark, a general reasonable range would be around 5.50% to 6.50%. KDC’s dividend yield is below my benchmark and the dividend yield is Unfavorable.
Website: Reasonable Dividend Yield 2024Q2
If using dividend yield of 5.50% as a benchmark, based on the dividend of SGD0.086 there is potential for KDC to see its share price drop by another 8.6% to SGD1.56. Investors will thus need to be mentally prepared that the share price might fall.
| Yield | Share Price | Downside |
|---|---|---|
| Current (5.03%) | 1.71 | – |
| 5.50% | 1.56 | -8.6% |
| 6.50% | 1.32 | -22.6% |
| 7.50% | 1.15 | -32.9% |
| 8.50% | 0.96 | -44.1% |
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 34.7% for the month of March 2024. 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 | -13.7% | Unfavorable |
| Occupancy | 98.3% | Favorable |
| Gearing Ratio | 37.6% | Favorable |
| Interest Coverage | 4.6x | Favorable |
| Debt Maturity Profile | 3.2 years | Favorable |
| Price to Book Ratio | 1.29 | Unfavorable |
| Overall | | Neutral |
Overall, the metrics indicate that it is neutral to invest in KDC. With the issue of the rental income for Guangdong DCs still unsettled, it is likely that the overall DPU for 2024 will remain lower than what was seen in 2023. Investors will need to assess their risk appetite accordingly and determine if the yield is favorable for them.
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 Full Year Result
