On 18 October 2024, Keppel DC REIT (“KDC”) have announced their third quarter business update for FY2024. The information provided showed that their fundamentals remained relatively unchanged, except for the completion of the major acquisition of Tokyo Data Centre 1 on 31 July 2024. This seems to be fully funded by their new JPY borrowings, which increased their leverage significantly to 39.7% this quarter. It does help to lower their average cost of debt, given that borrowings denominated in JPY are currently still lower than those of other currencies. This may in turn may translate to being DPU accretive for the portfolio. Investors can monitor the results over the next few quarters.
Management have disclosed less than their previous quarterly announcements, removing the nine months DPU comparison as well as balance sheet breakdown. This is similar to the practice of some other REITs given that SGX no longer mandates quarterly reporting for majority of the companies listed on SGX.
Photo source: https://www.keppeldatacentres.com/locations/asia-pacific/singapore/dc-1/
Financial Highlights
Distribution Per Unit (“DPU”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | -6.5% | -9.9% |
DPU for the nine months ending 30 September 2024 was not explicitly disclosed by management in this quarter business update. If calculated by addition of DPU for this quarter with the half year DPU in the previous announcement, it is noted that DPU for the nine months ending 30 September 2024 decreased by 6.5% to SGD0.0705 per unit from SGD0.0754 per unit for the same period in the previous financial year. The year-on-year comparison is also relatively unchanged, though noted that this quarter has saw improvements compared to the previous quarter. The metric remains Unfavorable.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 97.6% | 97.5% |
Occupancy rate as of 30 September 2024 remained relatively unchanged at 97.6% and the metric remains Favorable.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 39.7% | 35.8% |
Gearing ratio increased significantly to 39.7% as of 30 September 2024. This was due to the JPY 7-year loan facility of JPY 9.95 billion in connection with the acquisition of Tokyo Data Centre 1. The metric has shifted towards Neutral.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 5.1x | 5.1x |
The interest coverage remained unchanged at 5.1 times as of 30 September 2024. The metric remains Favorable as the interest coverage is higher than my preference of 3.0 times.
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 3.4 years | 3.1 years |
Weighted average term to maturity of their debt has lengthened to 3.4 years as of 30 September 2024. KDC only has 6.3% of their debt due for renewal in 2025. 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 | 1.64 | 1.49 |
Based on the announcement on 18 October 2024, net asset value (“NAV”) was not included in the business update for the third quarter of 2024.
The Price to Book (“P/B”) ratio has become more expensive at 1.64. This is computed using the closing share price of SGD2.25 on 18 October 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.
As of 18 October 2024, the Market Capitalization is approximately SGD3,882 million.
Dividend
| Year | Yield | Total |
|---|---|---|
| 2024 | 3.95% | SGD 0.089 |
| 2023 | 4.54% | SGD 0.102 |
| 2022 | 3.80% | SGD 0.086 |
| 2021 | 4.95% | SGD 0.111 |
| 2020 | 2.81% | SGD 0.063 |
| 2019 | 4.16% | SGD 0.094 |
With a closing share price of SGD2.25 as of 18 October 2024 and dividend payout for the calendar year 2024 of SGD0.089 per unit, this translates to a dividend yield of 3.95%. For my benchmark, a general reasonable range would be around 5.00%. KDC’s dividend yield is below my benchmark and the dividend yield is Unfavorable.
Website: Reasonable Dividend Yield 2024Q4 – 5.00%
If using dividend yield of 5.00% as a benchmark, based on the dividend of SGD0.089 there is potential for KDC to see its share price drop by another 20.9% to SGD1.78.
| Yield | Share Price | Downside |
|---|---|---|
| Current (3.89%) | 2.25 | – |
| 5.00% | 1.78 | -20.9% |
| 6.00% | 1.48 | -34.1% |
Interest Rate Sensitivity
The Federal Reserve on 18 September 2024 have slashed interest rate by half a point to a range of 4.75% to 5.00%, the first time since raising it to its highs on 26 July 2023. This is a good indicator of potential future rate cuts which will greatly benefit REITs in reducing their finance costs.
Website: Fed slashes interest rates by a half point, an aggressive start to its first easing campaign in four years
As KDC have debts that are exposed to floating rate, any change in interest rate will result in KDC experiencing changes to their cost of debt. The debt profile of KDC is as below:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $1,600,000 |
| Debt Not Hedged (%) | 29.0% |
| Debt at Floating Rate Exposed | $464,000 |
| Distributable Income FY2023 | $167,718 |
I have performed the interest rate sensitivity analysis as below:
| Change in Interest Rates | Change in Distributable Income (SGD’000) | Change as % of FY2023 Distribution |
|---|---|---|
| 50 bps | $2,320 | 1.4% |
| 100 bps | $4,640 | 2.8% |
| 150 bps | $6,960 | 4.1% |
| 200 bps | $9,280 | 5.5% |
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to change by the basis points above, it will translate to the respective changes in distribution as above.
Key things to note
Tenant profile
KDC have a high tenant concentration with the top 10 tenants contributing to 77.3% of their total gross rent and the top tenant accounting for 42.0% for the month of September 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.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | -6.5% | Unfavorable |
| Occupancy | 97.6% | Favorable |
| Gearing Ratio | 39.7% | Neutral |
| Interest Coverage | 5.1x | Favorable |
| Debt Maturity Profile | 3.4 years | Favorable |
| Price to Book Ratio | 1.64 | Unfavorable |
| Overall | Neutral |
Overall, the metrics indicate that it remains Neutral to invest in KDC. KDC still has a relatively strong financial position to capitalize on the continued growth of the data centre sector, driven by an increasing digital transformation and adoption of technologies, including generative Artificial Intelligence (“AI”). Combined with the potential further decrease in interest rate, this may translate to increases in DPU in the future.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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.
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