It’s been a rough year for the REITs as a flurry of worries descends on the sector.
Keppel DC REIT (SGX: AJBU) is no exception as its unit price has slid to a 52-week low of S$1.87 recently.
This is a far cry from the 52-week high of S$3.04 back in August 2020 when the overall sentiment was more ebullient.
However, share price alone does not tell you how the REIT is performing or if it can withstand an economic slowdown.
It’s natural to feel worried when a REIT touches its 52-week low.
Rather than seeing this in a negative light, it’s also possible that you may be staring at a bargain and the potential to accumulate at an attractive valuation.
Let’s take a deeper dive into the REIT’s financial and operating metrics to determine if the worry is justified.
Inflation and interest rate worries
Two key concerns that are depressing sentiment for the data centre REIT are high inflation and rising interest rates.
Inflation raises the prices of goods and services, translating to higher salaries for the REIT manager’s team of staff and also higher electricity prices.
However, CEO Anthea Lee has shared that higher electricity costs can be recovered from the REIT’s tenants for its colocation data centres in Singapore.
For overseas data centres, the master lessee will contract with its power supplier, hence higher electricity tariffs will have no impact on Keppel DC REIT’s distributable income.
The data centre REIT also has built-in income and rental escalation clauses that are indexed to the inflation rate to ensure rental income scales in tandem with higher expenses.
Rising interest rates will raise the overall borrowing cost for REITs and reduce their distributable income.
Keppel DC REIT has hedged a little over three-quarters of its debt on fixed rates and also quantified the impact of a rise in rates on its distribution per unit (DPU).
A one percentage point increase in interest rates will reduce DPU by 1.6%, which is not a material effect that investors should lose sleep over.
Keppel DC REIT is backed by strong management and a healthy pipeline
Another factor to consider is a REIT’s sponsor.
A strong sponsor not only provides the REIT with much-needed financial support in the event of a crisis but also has a ready pipeline of properties that can be injected to grow its asset base.
Keppel DC REIT’s sponsor is blue-chip conglomerate Keppel Corporation Limited (SGX: BN4).
Through Keppel Corporation’s wholly-owned subsidiary Keppel Telecommunications & Transportation (Keppel T&T) and its private data centre funds, there is a more than S$2 billion pipeline that Keppel DC REIT can tap on for future acquisitions.
Acquisitions to the rescue
Investors should note that Keppel DC REIT has been very active in acquisitions over the past year.
Last year, the REIT made two yield-accretive acquisitions by purchasing a data centre in London and the Eindhoven Campus in the Netherlands, further growing its portfolio.
In addition, Keppel DC REIT also struck a deal with telco M1 to purchase its bonds and preference shares, in which the former boasts an attractive coupon rate of 9.17% per annum.
A few months earlier, the REIT strengthened its foothold in China with the purchase of two data centres in Guangdong for around S$284.4 million.
Both data centres are expected to lift DPU by 2.7%.
All these acquisitions will help to boost its DPU and mitigate any effects from higher inflation or more expensive debt refinancing.
Data is still very much in demand
Keppel DC REIT’s longer-term prospects still look bright as data is still in high demand.
According to research firm Gartner, worldwide spending on data systems will grow by 5.5% year on year to US$230.4 million next year.
End-user spending on public cloud services is also poised to climb by 20.4% year on year to nearly US$600 billion by 2023.
These trends bode well for the REIT as sustained demand will keep occupancy rates high and enable the REIT to enjoy positive rental reversions.
Get Smart: Short-term pain, long-term gain
It’s understandably painful to witness a sustained fall in the REIT’s unit price from its highs back in late 2020.
However, such pessimism may prove to be a golden opportunity to accumulate units in Keppel DC REIT on the cheap.
Some short-term pain is necessary so that you can enjoy a great long-term gain.
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.
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Disclaimer: Royston Yang owns shares of Keppel DC REIT.