Data continues to be the new oil.
The demand for data centres remains strong, driven by trends such as cloud computing, artificial intelligence, and machine learning.
Keppel DC REIT (SGX: AJBU) is a direct beneficiary of this strong demand.
The data centre REIT, which owns 23 data centres across nine countries worth S$3.7 billion, continued to post an impressive set of earnings for the first quarter of 2023 (1Q 2023).
Here are five highlights from the data centre REIT that investors need to know.
1. An encouraging set of financials
Gross revenue for the REIT continued its upward momentum, rising by 6.5% year on year from S$66.1 million to S$70.4 million.
This increase in revenue came from the acquisitions of two Chinese data centres – Guangdong Data Centre 2 and the building shell of Guangdong Data Centre 3.
Net property income (NPI) for 1Q 2023 increased by 6.3% year on year to S$63.9 million.
Finance income derived from the ownership of M1’s bonds and preference shares jumped 43.8% year on year to nearly S$3 million, helping to boost distributable income by 4.1% year on year to S$46.3 million.
DPU inched up 3% year on year to S$0.02541 for the quarter, boosted by around S$1 million of tax savings as the REIT’s bond holdings received approval to be classified as Qualifying Project Debt Securities (QPDS).
The data centre REIT’s trailing 12-month DPU stood at S$0.10289, giving its units a trailing distribution yield of 4.9%.
2. A high-quality portfolio
Keppel DC REIT continued to enjoy a very high occupancy rate of 98.5% as of 31 March 2023.
It also enjoyed a long portfolio weighted average lease expiry (WALE) of 8.2 years by gross floor area.
More than half of the REIT’s portfolio contained leases with built-in income and rental escalation clauses based on the inflation rate or a similar index.
Such features should help the REIT’s rental income to keep pace with inflation.
Keppel DC REIT has also assured that the majority of its rental income comes from clients with investment grade or equivalent credit profiles.
This commentary is timely given that its peer, Digital Core REIT (SGX: DCRU), faced problems when its second-largest customer, which accounted for more than a fifth of the REIT’s total annualised rent, suffered a credit rating downgrade.
Investors should note that there is concentration risk for Keppel DC REIT as its largest client took up 35.5% of the REIT’s rental income for March 2023.
3. Refinanced all its 2023 loans
On the gearing front, the manager has announced that it had completed the refinancing of all loans due this year.
This move leaves just 4% of Keppel DC REIT’s debt up for refinancing in 2024, thus mitigating a sharp rise in finance costs.
Keppel DC REIT’s aggregate leverage remained healthy at 36.8% with a cost of debt of 2.8% for the quarter, inching up slightly from the 2.7% reported in 4Q 2022.
73% of the REIT’s loans are on fixed rates and a one percentage point increase in base rates will reduce 1Q 2023’s DPU by approximately 2.2%.
4. Scouting for more growth
The manager continues to keep a lookout for suitable acquisition opportunities and has sufficient debt headroom to tap into loans for yield-accretive purchases.
Sponsor Keppel T&T, a wholly-owned subsidiary of Keppel Corporation Limited (SGX: BN4), also has around S$2 billion worth of data centre assets that can potentially be injected into Keppel DC REIT for further growth.
The REIT is also looking to diversify its geographical exposure for income resilience and to seek out more growth.
Management has pointed out that the markets in Asia and Europe have strong demand for data centres, and new data centres are being planned and built to cater to this growing demand, thus opening up acquisition opportunities for the REIT.
5. Strong data centre market fundamentals
The data centre industry is forecast to exhibit strong growth moving forward, with the worldwide cloud market forecasted to continue growing after expanding by US$47 billion last year.
Meanwhile, US hyperscale cloud companies continue to report healthy growth of between 20% to 32% for 2022.
These robust fundamentals will bode well for Keppel DC REIT as it strives to continue growing its asset base and DPU.
Did you know there are 5 REIT sectors with a high potential for creating passive income? If you are building retirement wealth, this is crucial information. We have a new report that details all you need to know about them. Find out which sector to pay attention to, and see if you can fit them into your portfolio. Click HERE to download the guide here for free.
Disclosure: Royston Yang owns shares of Keppel DC REIT and Digital Core REIT.