Keppel-DC-REIT

Keppel DC REIT Review: Are Falling Share Prices Trouble Indicators?

Recent news spread like wildfire about Keppel DC REIT’s share price performance. From its all-time peak of S $3.03 per share, recent Keppel DC REIT prices fell to S $2.47 on 14 May 2021. Does this mean investors holding Keppel DC REIT are in big trouble because of the 12.63% price drop?

We believe that Keppel DC REIT’s slew of asset enhancement initiatives (AEI), recent acquisitions, and organic growth thanks to its adaptation to the worldwide pandemic’s effects will help it get back up to shape. However, Keppel DC REIT still has many risks that investors must know about. Let’s do a deep dive in this review.

 

Keppel DC REIT Company Profile


Executive Summary

Keppel DC REIT is a Singapore Exchange-listed data center-focused real estate investment trust, which is a fund that allows investors to own properties without managing or interfering in their operations. The REIT purchases and leases real estate assets in colocation, fully-fitted, and shell and core formats.

Portfolio and Assets

  1. Colocation Data Centres

The REIT has ownership of 19 data centres in the Asia Pacific and Europe. Currently, it has the following active assets.

  • Intellicentre 2 Data Centre
  • iseek Data Centre
  • Gore Hill Data Centre
  • maincubes Data Centre,
  • Keppel DC Dublin 1
  • Keppel DC Dublin 2
  • Milan Data Centre
  • Basis Bay Data Centre
  • Keppel DC Singapore 1
  • Keppel DC Singapore 2
  • Keppel DC Singapore 3
  • Keppel DC Singapore 4
  • Almere Data Centre
  • Cardiff Data Centre. Ltd.
  1. Asia Pacific Operations

On 26 July 2021, Keppel DC REIT had gained a data centre in Guangdong, China, for S $98 million.

On that date, Keppel DC REIT entered an agreement with Guangdong Bluesea Data Development Co. Ltd. (Bluesea) and parent company Guangdong Bluesea Mobile Development Co. Ltd. to acquire the Guangdong Data Center in Jiangmen, Guangdong Province for S $131.9 million.

Performance

Let’s take a look at Keppel DC REIT’s current financial situation.

December of  2020 2021 First Quarter 2022 First Quarter
Revenue (in SGD Millions) 266 297 310
Distribution Inc (in SGD Millions) 157 174 194
Distribution Growth(%) 39 11 12
PE (X) 24.5 24.2 22.2
Distribution Yield (%) 3.7 4 4.3
P/NAV (x) 2.1 2.0 2.0

 

The REIT’s data centre investments have paid off because the digital economy relatively remained unscathed throughout the 2020 pandemic crisis, which is still happening today. The world’s biggest internet companies, such as Facebook, Google, and other services, need more data centre infrastructure. This can explain the sudden rise of Keppel DC REIT’s revenue and distribution growth.

The approximately 0.3% growth of its distribution yield from 2020 supports our view that the company is continuing its growth towards new acquisitions, deals, and acquisitions in the Asia Pacific and Europe.

Gross Revenue and Distribution Per Unit (DPU)

The REIT’s gross revenue has increased by a remarkable 36.3% increase yearly. On the other hand, its DPU increased by 20.5%, which means that those who earned S $7.61 per DPU in 2019 have received S $9.17 in 2020. We believe that this increase is due to the profitable activities of Keppel DC Singapore 4 and DC1 in 2019. Furthermore, new data centre acquisitions in Europe last 2020 allowed it to increase DPU rates.

Gearing Ratio

Keppel DC REIT’s gearing ratio had seen a massive 6.5% increase from 2019-2020. Thanks to its wide debt headroom, it gained enough bank loans to push through its acquisitions. However, its gearing cap is still at 40%, with its income coming from its new colocation data centres from Singapore and Europe.

Portfolio Occupancy

Keppel DC REIT used several asset enhancement initiatives or AEIs in 2020 to increase its DPU. The following activities helped create the following:

  • Keppel DC Singapore 5 fit-out improvements increased its occupancy rates from 84.2% to 100% in 2020.
  • Keppel DC Dublin 1 efficiency and power capacity increased occupancy rates from 65.7% to 81.2% in 2020.
  • Keppel DC Singapore 1 completed its fit-out works and saw full leasing to 1-Net Singapore through a triple-net lease.
  • Keppel DC Dublin 2 became a special data hall with data centre purposes for a client.

Keppel’s long-term leases have 6.8 years on average, giving unitholders the strongest income stability possible within a long amount of time.

Share Price Fall

Our research analyst believes that Keppel DC REIT’s price fall is most likely due to its recent acquisitions and additional loans. Keppel’s share price became dented due to many investors believing its recent maneuvers as poorly-made. However, those who keep the Keppel DC in their portfolio are most likely to see increases in the share price within the coming years.

We will discuss the indicators of its imminent increase in the foreseeable future in the next section.

Strategies

  1. Keppel REIT’s Recent China Data Centre Acquisition for $98 million (S $131.9 million)

Keppel DC REIT has much more activity in China as it closes a deal in Guangdong for a data centre infrastructure. The deal has been closed, and it will allow Keppel DC REIT to increase its income within the next few years.

  1. M1 Network Asset Investments

About 2.6% of Keppel DC REIT’s portfolio has invested in M1 network assets using a special purpose vehicle (SPV) to acquire these assets at S $580 million. This is part of its expansion of investment mandate, which had scared off some investors because it makes Keppel DC REIT an impure REIT. However, the REIT explains that it will receive S $11 million per year because of its investment.

  1. Confidence Rise in Customer Retention Rate 

By the end of 2021, 6.9% of Keppel DC REIT’s local Singaporean data centres will end their leases. The trust is confident that many of these customers will renew their leases because the centres are essential for many businesses to continue operating. Furthermore, Keppel is a company that’s vastly experienced with developing, operating, and maintaining local data centres by having its own telecommunications arm.

  1. Data Centre Optimism

Investors are optimistic about Keppel DC REIT’s data centre acquisitions and investments and in the customer retention rate. The pandemic is far from over. Many people have increased their internet activity, which leads to high data consumption companies, such as Silicon Valley companies, increasing their activities and leasing much more data centres in the Asia Pacific and Europe.

What are the Risks?

Keppel DC REIT sees increased competition from larger third-party data centres. These large data centres can erect highly challenging financial situations that will force Keppel group to use more resources to keep up their performance. Other risks include higher share dilution and an unstable dividend payout in the last few years.

Our Verdict

Investors holding Keppel DC REIT have nothing to fear about the share price drop because it’s a temporal setback regarding investor sentiments about the REIT’s expansion. However, once again, we believe that its new investments in various data centres worldwide will make contributions that increase its value and encourage investors to continue supporting the company. We believe another factor of the share price drop is the increased number of loans despite Keppel DC REIT having a poor cash flow.

What We Think of Keppel DC REIT:

  1. Is Keppel DC REIT Overvalued?

We don’t think that KDCREIT is overvalued. It has high-performing data centre infrastructure investments in Asia Pacific and Europe. In addition, demand for data centres is most likely to increase in the coming years because of the continued pandemic restrictions and increased internet activity by many users worldwide.

  1. Should I Buy or Hold Keppel DC REIT?

Looking at the current Keppel REIT valuation, we highly recommend holding Keppel DC REIT until its valuation increases in the next few years. We’re confident that its current investment in the data centre and the market climate has an excellent correlation that can lead to higher share prices in the future.

  1. Will Data Centre Real Estate Properties Increase in Value The Next 5 Years?

Data centres are one of the fastest-growing businesses globally, and in five years from now, they will likely be worth more than ever. New technologies such as blockchain, social media, banking, internet connectivity, and storage-heavy activities demand more computing power.

Advanced data centre infrastructure only comes from experienced data centre infrastructure owners. Thus, demand for Keppel REIT’s properties will grow, and the company will keep making the best investments.

  1. How Soon Can I Expect Returns From My Keppel DC REIT Investments?

No report and current share price analysis can tell you the exact time to get your Keppel DC REIT returns. While you will always get great returns from Keppel with long-term investments over 10 years old, they might not be the best for short-term investments. However, with the correct investing fundamentals and a bit of knowledge in technical analysis, you can find out the exact time to expect returns from your Keppel investment.

To Sum it All Up:

  • Keppel DC REIT’s share prices have dropped significantly.
  • However, we believe it will still increase in value because of its recent investments in China and other gigantic data centres.
  • We believe that the possibly increasing demand for data centres due to the extended pandemic restrictions will increase the company’s share price value in the future.

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