REITs are a great asset class for income-seeking investors.
These bundled portfolios of properties are not only professionally managed but also have to pay out at least 90% of their earnings as distributions to enjoy tax benefits.
The distributions paid out by REITs act as a great source of passive income that can better prepare you for retirement.
Of late, the combination of high interest rates and inflation has dampened sentiment for the REIT asset class.
Despite these headwinds, several REITs have managed to report higher year on year distribution per unit (DPU).
One example is Keppel DC REIT (SGX: AJBU).
The data centre REIT has a total of 23 data centres spread across nine countries valued at around S$3.7 billion as of 31 March 2023.
Investors may be curious to know if the REIT can continue to up its DPU. Let’s dig deeper to find out.
A stellar track record
Keppel DC REIT was the first listed data centre REIT and went public back in December 2014 at S$0.93 per share.
Back then, the REIT’s portfolio comprised just eight data centres valued at S$1 billion.
Over more than eight years, Keppel DC REIT has managed to almost triple its number of properties with assets under management rising more than two-fold.
The REIT’s asset base was not the only metric that increased; its DPU also steadily increased over the years.
In 2015, DPU came in at S$0.0651 and would rise without fail over the next seven years to end at S$0.10214 in 2022.
The main driver of the increases? A mix of acquisitions, asset enhancement initiatives (AEIs) and rental escalations.
Some of these factors can help Keppel DC REIT to continue growing its DPU in future years.
Pursuing accretive acquisitions
Keppel DC REIT’s consistent acquisitions over the years have resulted in its portfolio and DPU rising over time.
In the first quarter of 2022, the REIT acquired a data centre in London and it followed this up with the purchase of two data centres in Guangdong, China in the third quarter.
In late 2021, Keppel DC REIT also struck a deal with telco M1 to purchase S$88.7 million of bonds and preference shares.
With a coupon rate of 9.17%, this acquisition helped the REIT to post higher finance income that could offset the effects of inflation and continue to contribute to rising DPU.
Case in point: for the first quarter of 2023, Keppel DC REIT saw its finance income jump 43.8% year on year to S$2.96 million while DPU inched up 3% year on year to S$0.02541.
An uplift from AEI and rental escalations
Let’s not forget that AEIs have helped the REIT to grow its rental income organically.
For 2022, completion of AEIs at DC1 (in Singapore) and the Dublin data centre helped to contribute to higher rental income.
Back in 2021, the completion of an AEI for this Dublin facility helped to increase the asset occupancy from 57.6% to 97.4% by end-2022.
Moving ahead, Keppel DC REIT could undertake further AEIs to boost rental income for new and existing assets.
Rental escalations also play a big part in helping the REIT to organically grow its rental income stream.
More than half of Keppel DC REIT’s tenancy contracts have built-in income and rental escalation clauses pegged to either the consumer price index or a similar index.
A pipeline of potential acquisitions
The manager has communicated his intention to seek the “disciplined pursuit of data centre acquisition opportunities”.
We take this to mean that the REIT manager will be scouting around for good, yield-accretive acquisition opportunities this year.
Data centre demand remains robust, driven by long-term trends such as cloud computing adoption and digital transformation initiatives.
Investors can also look forward to a healthy pipeline of potential acquisition opportunities of more than S$2 billion by the REIT’s sponsor, Keppel T&T, a wholly-owned subsidiary of blue-chip Keppel Corporation Limited (SGX: BN4).
Get Smart: High probability of increasing its DPU
From the facts above, it seems Keppel DC REIT has a good chance of continuing its DPU track record.
Data centres continue to be in demand as data has become the new oil.
A mix of acquisitions, AEIs and rental escalations should also help to boost rental income for the REIT, resulting in higher levels of net property income and, in turn, DPU.
What investors do need, however, is patience.
These initiatives will take time to pan out but the rewards could be worth the wait.
Not sure which REIT to put your money in? Use our 7-step REIT checklist to find one that fits into your retirement plan. Checklist is inside our latest FREE report “Singapore REITs Retirement Plan”. Click here to download it now.
Follow us on Facebook and Telegram for the latest investing news and analyses!
Disclosure: Royston Yang owns shares of Keppel DC REIT.
