On 26 July 2024, Keppel DC REIT (“KDC”) have announced their half year result for FY2024. DPU has increased with the distribution of proceeds from the settlement of DXC Dispute. With management intending to distribute this in two tranches on a half yearly basis for FY2024, there is visibility on the next distribution to be paid in the first quarter of the calendar year 2025. However, without the support, distributable income would have seen a decrease when compared to FY2023.
KDC has paid off a portion of their debt which allowed them to lower gearing. Presumably this will also translate to significant savings on finance cost as well given the current high-interest rate environment. At this point of time, I have not decided if paying off their debt is a good idea given the high speculation of interest rates for the next few months. The current market narrative is one that there will be at least a cut by the end of the year, which then KDC can take on new borrowings on lower cost if needed.
Website: Financial Statements And Related Announcement::Half 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 | -9.9% | -13.7% |
DPU for the first half of 2024 decreased by 9.9% to SGD0.04.55 per unit from SGD0.0505 per unit for the same period in the previous financial year. The decrease was mainly due to the same reason as reported in the previous quarter, where there is loss of income from the Guangdong DCs, higher finance costs and depreciation of foreign currencies against the SGD. The metric remains Unfavorable.
For comparison from another view, if you compare the DPU against the second half of FY2023, there is an increase by 5.0%. However, this is mainly due to the settlement amount received from DXC Dispute and that management intends for SGD11.2 million to be distributed in two equal tranches on a half-yearly basis for FY2024. The absence of this would likely translate to a DPU decrease as well.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 97.5% | 98.3% |
Occupancy rate as of 30 June 2024 decreased slightly to 97.5%, However, the metric remains Favorable.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 35.8% | 37.6% |
Gearing ratio decreased significantly to 35.8% as of 30 June 2024. This was due to repayment of SGD58.5 million debt for Intellicentre Campus and other EUR denominated debt to strengthen balance sheet for growth. The metric remains Favorable.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 5.1x | 4.6x |
The interest coverage increased to 5.1 times as of 30 June 2024. The metric is Favorable as the interest coverage is higher than my preference of 3.0 times. They have a margin of safety while waiting for interest rates to decrease.
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 3.1 years | 3.2 years |
Weighted average term to maturity of their debt has shortened slightly to 3.1 years as of 30 June 2024. This remains 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 | 1.49 | 1.29 |
The Price to Book (“P/B”) ratio has become more expensive at 1.49. This is computed using the closing share price of SGD2.04 on 7 August 2024 and the net asset value per unit of SGD1.37 as of 30 June 2024. The metric is Unfavorable as investors are paying a significant premium although this is a REIT with a strong sponsor.
Dividend
| Year | Yield | Total |
|---|---|---|
| 2024 | 4.35% | SGD 0.089 |
| 2023 | 5.01% | SGD 0.102 |
| 2022 | 4.19% | SGD 0.086 |
| 2021 | 5.46% | SGD 0.111 |
| 2020 | 3.10% | SGD 0.063 |
| 2019 | 4.59% | SGD 0.094 |
With the announcement of their half year result and dividend payout in September 2024, total dividend payout for the calendar year 2024 amounts to SGD0.089 per unit.
With a closing share price of SGD2.04 as of 7 August 2024, this translates to a dividend yield of 4.35%. For my benchmark, a general reasonable range would be around 5.75%. KDC’s dividend yield is below my benchmark and the dividend yield is Unfavorable.
Website: Reasonable Dividend Yield 2024Q3 – 5.75%
If using dividend yield of 5.75% as a benchmark, based on the dividend of SGD0.089 there is potential for KDC to see its share price drop by another 24.1% to SGD1.55. Investors will thus need to be mentally prepared that the share price might fall.
| Yield | Share Price | Downside |
|---|---|---|
| Current (4.35%) | 2.04 | – |
| 5.75% | 1.55 | -24.1% |
| 6.75% | 1.32 | -35.4% |
| 7.75% | 1.15 | -43.7% |
Interest Rate Sensitivity
The Federal Reserve on 1 August 2024 kept its key interest rate at 5.25% to 5.50% ever since raising it on 26 July 2023. However, citing “some further progress” toward its 2% inflation goal, Fed Chair Jerome Powell at the press conference said a rate cut in September is “on the table,” provided the inflation data continues to be encouraging.
Website: Fed recap: Chair Powell gives the September rate cut signal traders were hoping for
Should the interest rate increase further, KDC may be subjected to significant change in their cost of debt in the near future. The debt profile of KDC is as below:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $1,400,000 |
| Debt Not Hedged (%) | 26.0% |
| Debt at Floating Rate Exposed | $364,000 |
| Distributable Income FY2023 | $167,718 |
I have performed the interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2023 Distribution |
|---|---|---|
| + 50 bps | -$1,820 | -1.1% |
| + 100 bps | -$3,640 | -2.2% |
| + 150 bps | -$5,460 | -3.3% |
| + 200 bps | -$7,280 | -4.3% |
| + 250 bps | -$9,100 | -5.4% |
| + 300 bps | -$10,920 | -6.5% |
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.
Key things to note
Tenant profile
KDC have a high tenant concentration where the top 10 tenants contributing to 80.8% of their total gross rent with the top tenant accounting for 38.8% for the month of June 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 | -9.9% | Unfavorable |
| Occupancy | 97.5% | Favorable |
| Gearing Ratio | 35.8% | Favorable |
| Interest Coverage | 5.1x | Favorable |
| Debt Maturity Profile | 3.1 years | Favorable |
| Price to Book Ratio | 1.49 | Unfavorable |
| Overall | Neutral |
Overall, the metrics indicate that it remains Neutral to invest in KDC. Despite the operational challenges, KDC has managed to maintain a strong financial position and reduce their overall leverage. This should provide stability over the next few months while waiting for a clear direction for interest rates.
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): 2024 First Quarter Business Update
