REITs are commonly thought of as reliable income instruments, and for good reason.
After all, these securitised bundles of real estate are obliged, by law, to pay out 90% of their earnings as dividends to enjoy tax benefits.
But some REITs have turned out to be effective growth vehicles as well, chalking up a mix of capital gains and distributions for the lucky investor.
One such REIT is Keppel DC REIT (SGX: AJBU).
The REIT, whose sponsor is Keppel T&T, a wholly-owned unit of blue-chip conglomerate Keppel Corporation Limited (SGX: BN4), owns a total of 19 data centres worth S$3.1 billion as of 30 June 2021.
Unitholders who invested S$10,000 in the REIT would have seen this more than double in just three short years.
How did this happen, and could investors enjoy continued growth from owning this REIT?
The best of both worlds
Around mid-October of 2018, Keppel DC REIT was trading at around S$1.31.
Recently, the unit price of the REIT closed at S$2.51, clocking up a gain of 92% in under three years.
But let’s not forget the distributions a unitholder would have received along the way.
These amounted to around S$0.2551, thus taking the total gain to around 112%.
By holding on to the REIT, you would have enjoyed the best of both worlds — capital gains as well as a steady, passive income source.
Growth of the portfolio
The impressive performance of the REIT didn’t happen by accident.
Since its IPO back in December 2014, management has focused on consistently growing the REIT’s portfolio.
When it was listed, Keppel DC REIT owned just eight data centres worth S$1 billion.
Within three years, the REIT had grown its asset base by 50% to S$1.5 billion.
Fast forward to today, and its portfolio has doubled again to S$3.1 billion. The number of data centres within has also more than doubled from its IPO to the current 19.
This steady growth in its asset base has contributed to higher levels of gross revenue and net property income, resulting in ever-increasing distribution per unit (DPU).
DPU in the fiscal year 2015 stood at S$0.0651, while annualised DPU for 2021 has jumped to S$0.9848.
Continued robust demand for data centres
As the world increasingly consumes more data, more and more data centres are needed to house this explosion of information.
The rise of numerous software-as-a-service (SaaS) companies has also driven up the demand for cloud storage as more businesses digitalise.
The onset of the pandemic has accelerated this demand as a large swath of the world has migrated online due to movement restrictions.
As a result, global data centre infrastructure is projected to hit US$200 billion this year, up 6% from 2020, as data centres continue to be built worldwide.
Investment in data centres is estimated to exceed US$26 billion by 2025, demonstrating that data centres will continue to be a much-sought-after asset class.
Another catalyst for the surge in data centre demand is the growth in 5G, which is projected to account for 44% of all mobile phone subscriptions by 2026.
Keppel DC REIT is poised to ride this wave of digitalisation as its data centres enjoy high occupancy along with robust demand.
Acquisition-led growth
Keppel DC REIT has also announced two acquisitions in recent months.
The first was a seven-storey data centre in Guangdong, China, for around S$132 million, with expected completion in the second half of 2021 (2H2021).
The second is a data centre in the Netherlands with 100% occupancy that was purchased for around S$59.9 million.
These two acquisitions promise to further boost DPU.
The REIT has also widened its investment mandate to invest in non-data-centre assets and has proposed an investment in debt securities and preference shares of telecommunication company M1’s network assets.
It has also just completed the development of a data centre in Sydney, Australia for S$26.6 million two months ago, and started a 20-year triple-net lease with Macquarie Data Centres.
These moves should help to keep DPU on an upward trajectory and will also continue to grow the REIT’s portfolio of assets.
Get Smart: Still a market leader
Keppel DC REIT was one of the best-performing REITs last year.
However, its run may not end there.
With numerous growth initiatives in place and continued strong demand for its data centres, the REIT seems poised to continue delivering increases in DPU that may be accompanied by further unit price gains.
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Disclaimer: Royston Yang owns shares of Keppel DC REIT.
