It’s time once again to size up two REITs to see which is the more attractive one.
As a sponsor, blue-chip conglomerate Keppel Corporation Limited (SGX: BN4) has a total of three REITs and a business trust under its belt.
They are Keppel DC REIT (SGX: AJBU), Keppel REIT (SGX: K71U), Keppel Pacific Oak US REIT (SGX: CMOU), and Keppel Infrastructure Trust (SGX: A7RU).
Today, we turn our attention to the first two of this quartet to determine which qualifies as the better buy.
With both Keppel DC REIT and Keppel REIT having released their fiscal 2022 (FY2022) earnings recently, it is a timely opportunity to look at what each REIT has to offer.
Portfolio composition
We first look at each REIT’s portfolio composition.
Keppel DC REIT is a pure data centre REIT with 23 properties in nine countries.
Data centres are industrial assets that serve a wide variety of technology-related clients.
With the explosion in data storage requirements, these properties are more valuable than ever as companies require ever-increasing storage space to cope with burgeoning data requirements.
Keppel REIT, on the other hand, has a diversified portfolio of prime commercial assets in Singapore (78.5%), Australia (17.4%), South Korea (3.1%) and Japan (1%).
Office properties are viewed as resilient as many companies require their workers to come back to the office as the pandemic recedes.
Keppel DC REIT has almost double the number of properties when compared with Keppel REIT and is also present in many more countries, giving its portfolio greater diversity.
Although Keppel REIT may have a higher asset under management (AUM), diversity is important in buffering against unforeseen events as the REIT sector grapples with high inflation and surging interest rates.
Winner: Keppel DC REIT
Financials
Turning to each REIT’s financials, it’s a relatively close fight between the duo as gross revenue and net property income (NPI) inch up in low single digits year on year.
It’s admirable to see both REITs continue posting growth in both revenue and NPI as the environment in 2022 became much tougher.
A crucial metric, however, is the REIT’s distribution per unit (DPU) as this is the attribute that income-seeking investors look at.
Keppel DC REIT posted a higher year on year increase in DPU compared to Keppel REIT.
Also, investors should note that Keppel REIT’s DPU included a S$10 million “anniversary distribution”.
Excluding this, DPU would have fallen by 2.9% year on year for the office REIT.
Winner: Keppel DC REIT
Debt metrics
Another crucial area for REITs is their debt metrics as these determine if the REIT can continue borrowing for yield-accretive acquisitions.
Keppel DC REIT has the more attractive debt profile as it has a lower gearing ratio compared to Keppel REIT along with a much higher interest coverage ratio of 7.6 times.
The data centre REIT also has a slightly lower cost of debt at 2.2%, though the fourth quarter of 2022’s cost of debt has risen to 2.7%.
Both REITs have roughly the same proportion of their loans (~three quarters) on fixed rates.
However, Keppel DC REIT seems better positioned to weather a DPU decline, posting just a 2.1% dip in DPU with a 1% rise in interest rates.
Winner: Keppel DC REIT
Operating metrics
Keppel DC REIT also enjoys a slightly higher occupancy rate than Keppel REIT.
The data centre REIT also has a longer weighted average lease expiry (WALE) of 8.4 years compared with Keppel REIT’s six years.
Winner: Keppel DC REIT
Distribution yield
Moving on to each REIT’s distribution yield, Keppel REIT has a higher distribution yield of 6.3% compared with Keppel DC REIT’s 5%.
Even if you exclude the commercial REIT’s anniversary distribution, its historical yield still reports in at 6%, a full percentage point higher than its data centre peer.
Winner: Keppel REIT
Get Smart: Sponsor’s pipeline and acquisition track record
All in, Keppel DC REIT wins on more metrics but Keppel REIT boasts a higher distribution yield.
Looking at just the headline distribution yield isn’t sufficient, though.
If you plan to include one of these REITs in your investment portfolio, it’s recommended to review each REIT’s pipeline and acquisition track record.
These attributes provide some indication of what to expect moving forward.
For Keppel DC REIT, it has more than S$2 billion of potential data centres to acquire from its sponsor.
Keppel REIT, however, makes no mention of a pipeline in its latest earnings.
For acquisitions, Keppel REIT completed just one acquisition of an office asset in Japan last year.
As for Keppel DC REIT, it has concluded the acquisition of a data centre in Guangdong, China, and is slated to complete the acquisition of a similar data centre in the third quarter of this year.
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Disclosure: Royston Yang owns shares of Keppel DC REIT.