Should You Invest In Keppel DC REIT [Fundamental Analysis]

In this article, we'll be conducting a fundamental analysis of Keppel DC REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having a high degree of capital preservation ability.

Information Is Accurate Up To May 24

Business Description

Keppel DC REIT is an Industrial REIT that was listed in 2014 and owns 23 industrial properties across 9 countries that are mainly designed to be data centres.

What I Like About Keppel DC REIT:

Distribution per unit has been rising consistently (CAGR: 5~%) despite the increase in units thereby signifying the manager's capabilities to deliver yield accretive acquisitions
Overall portfolio’s WALE is high & occupancy rate is resilient (Figure 11)
Strong pipeline from sponsor that could contribute to future portfolio expansion.

What I Do Not Like About Keppel DC REIT:

52% of the portfolio has an underlying land lease of less than 30 years (All the data centres in Singapore)
Too richly valued for a long duration of time despite the low underlying land lease and the high risk of lease decay (Figure 10)
High levels of tenancy concentration risk (Figure 12)

Updates From Recent Performance (FY 2023)

General Comments:

Distributable income experienced a decrease of -9.3% due to higher borrowing costs and loss allowances for the uncollected rental income from Guangdong Data Centers.
The interest cover ratio had deteriorated significantly (7.6x to 4.4x) as a result of higher borrowing costs.
Portfolio occupancy remained healthy at 98.3% with healthy WALE
The manager is working with the tenant on the recovery roadmap and reserved its rights in respect of the acquisition of Guangdong Data Centre 3.
Divestment of Sydney Data Centre (Intellicentre Campus) at A$174mil which is a 35.4% premium to FY 2023 valuation and 148.6% higher than the original investment. A$90mil will be used to reinvestment into an Australian Data Centre note while the rest will be used for debt repayment. The move is estimated to be 0.7% yield accretive to DPU

Positive Headwinds:

Global colocation data centre demand is expected to remain strong and is estimated to grow at a CAGR of 19.2% from 2023 to 2027.

Negative Headwinds:

Market re-pricing of Keppel DC REIT given the higher for longer risk-free rate and slowing growth expectation may result in a further downside in share price until it has reverted to its mean.
Uncollected rental arrears and tenant woes over Guangdong Data Centre 1 to 3 might result in a performance drag for the next few years if not resolved promptly. (DBS Oct 2023 Analys Report: worst case scenario -16% in DPU)

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- Work In Progress -

Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).

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