Company Review - Keppel DC REIT

 

With Keppel DC REIT's 2H 2020 Results just out, I thought I'd take the chance to do a company review instead of just the results summary! For those who aren't aware, KDC declared 4.795 cents distribution for 2H 2020, translating to an annualized yield of 3.3% (assuming unit price of $2.91). KDC has always traded at a low yield, owing to the fact that it is the only pure-play data center REIT in SGX, which translates to other benefits.

Portfolio Overview

KDC owns and rents out a slew of data centers across multiple regions, with slightly half of the portfolio in Singapore. They count on Keppel T&T as a sponsor, and will have right of first refusal (ROFR) for the pipeline of data centers for future acquisitions.

Lease Characteristics

Apart from a geographic breakdown, it is also useful to take a look at a breakdown of lease types. Colocation involves KDC managing the facilities and renting out their facilities to multiple clients, while fully-fitted and shell-&-core lease types are leased to single tenants, where the tenant manages much of the operational aspect of the facilities. 

The different lease types bring different benefits. Colocation (renting to multiple clients) help to reduce tenant risk and helps to spread out the lease expiry dates, while the other two lease types enjoy longer leases and hence income stability.

A closer look at KDC's expense obligations for the 20 different properties can be found here:

Because of the double and triple net leases, KDC only needs to handle tax and insurance for roughly 70% of the properties, along with roughly 61% for operating and capital expenses. While not as impressive as ParkwayLife's triple net lease heavy portfolio, this is pretty decent already, compared to most other REITs.

Performance

KDC has been going on an acquisition spree over the past few years, tripling AUM in 6 years.

We can see from the below table that the management's focus isn't on AUM, but also in making sure that unitholders benefit as well in terms of growing DPU. Based off the last FY alone, there has been strong growth in revenue, while expenses have been kept under control.

Because of that, unitholders have seen DPU increase by close to 50% in 5 years, from 6.14 cents in 2016 to 9.17 cents in 2020.

Apart from the above metrics, total portfolio occupancy and WALE stands at a healthy 97.8% and 6.8 years respectively. Borrowing is also healthy, at 13.3x interest coverage ratio and an aggregate leverage of 36.2%.

Catalysts

Project Completions, AEI

Near term, KDC should see growing DPU again for the next two years. IC3 East DC Sydney's completion in the first half of 2021 will bolster 2021's revenue partially, and fully kick in by 2022. There's also ongoing asset enhancement initiatives (AEIs) at DC 1 Singapore and Keppel DC Dublin 2, which should help to a smaller extent.

Acquisition Pipeline

In the long run, KDC is in a healthy position to acquire more data centers from her sponsor, with roughly 6 data centers that could be purchased over. KDC's gearing of 36.2% leaves it with some debt headroom before hitting the 45/50% regulatory limit. Alongside the recent updating of the $500 million MTN Programme to a $2 billion Debt Issuance Programme early this year, it is not inconceivable for KDC to undergo more acquisitions this year.

Innovation

Keppel Data Centres Holdings Ptd Ltd (under Keppel T&T) signed various MOUs with partners in 2020 to explore the possibility to build a Floating Data Centre Park in Singapore. With this project, they are looking to leverage sea-water cooling as well as thee usage of LNG and hydrogen for power. The proposed modular design also allows for flexible upgrading and switching of equipment. 

KDC stands to benefit from being a part of the Keppel family, as Keppel group's collective expertise could help to develop the next generation of data centers that can help set them apart from competitors.

Risks

Regulatory

In 2020, a moratorium was issued by the Singapore government to put all data center build projects on hold, which could potentially last through 2021. This highlights a potential risk, where the regulatory landscapes for the other regions which KDC are exposed to could change and affect her pipeline negatively.

Slowdown in outsourcing

As KDC relies heavily on colocation based clients at 72.7%, a slowing trend in outsourcing, where companies decide to go with a 'personalized'/'private' data center instead, could impact KDC's ability to maintain a high occupancy rate for her existing colocation data centers.

Conclusion

KDC sits at a relatively low 3.3% dividend yield, compared to her S-REIT peers. I think that partly reflects investors' confidence in the stability and continued growth of the data center landscape, which KDC is a great proxy for. Potential investors should weigh whether the low current yield is worth the perceived safety, and whether they can wait a few years to see if KDC can continue with the acquisition and growth record. While KDC is the only pure-play DC REIT in SGX, one can also consider Mapletree Industrial Trust amongst others as a weaker proxy to data centers (39% of MINT's portfolio is classified as data centers).

Cheers,

InvestingNugget

Author's note:

At the point of writing, I am a shareholder of Keppel DC REIT. I have put in my best effort to ensure that the facts are accurate, but I do not guarantee it. Opinions are my own and do not constitute any recommendations.