The current earnings season that began back in January has kept most of us busy crunching the numbers and digesting surprises in Singapore’s real estate investment trust (REIT) space.
This is definitely a time for us to relook at the quarterly numbers to see if the performance fits into our investment thesis and whether dividends can continue to be paid out at their current levels.
One of the favourites among REIT investors in Singapore is Keppel DC REIT (SGX: AJBU). The data centre REIT released its second-half 2021 (2H21) earnings towards the end of January.
Here are five key takeaways for income investors from Keppel DC REIT’s latest earnings results.
1) Resilient earnings
While Keppel DC REIT managed to record slight growth of 1.6% for net property income (NPI) for the financial year 2021 (FY2021) to S$248.2 million from a year ago, earnings in 2H21 were actually lower.
This was due to non-cash adjustment and the drop-off in rental support from Singapore.
On a positive note, portfolio occupancy rate improved to 98.3%, its highest level since its initial public offering (IPO) at the end of 2014.
Source: Keppel DC REIT FY2021 Earnings Presentation
2) Stable returns to shareholders
Despite the moderate weakness in earnings during 2H21, Keppel DC REIT’s distribution per unit (DPU) was not affected.
In fact, DPU grew 2.8% year-on-year (YoY) in 2H21. For FY2021, DPU grew by 7.4% YoY to 9.85 Singapore cents.
This was as the weakness in earnings seen in the 2H21 were non-cash in nature.
It is worth noting that Keppel DC REIT’s return to shareholders via its dividend has been relatively stable and provides resilient growth.
Over the last five years, the DPU has grown at a compound annual growth rate (CAGR) of 9.9%.
Source: Keppel DC REIT, ProsperUS
3) Strong balance sheet
Meanwhile, investors can also find comfort in Keppel DC REIT’s strong balance sheet position.
By the end of FY2021, the company had aggregate leverage of 34.6%, providing sufficient debt headroom for further expansion.
The interest coverage is also at a comfortable level of 10.8 times while the REIT’s average cost of debt was at 1.6%.
Aside from that, the REIT also has a well-diversified debt maturity profile (see below).
In the fourth quarter of its financial year 2021 (4QFY21), Keppel DC REIT extended loans of S$275 million by two years (until 2027) and GBP 11.2 million for five years (until 2027).
Source: Keppel DC REIT’s Investor Presentation (February 2022)
The management has also been prudent in the management of its interest rate exposure with 74% of the REIT’s loans being hedged through floating-to-fixed interest rate swaps.
4) Expansion into China and its existing resilient portfolio
Aside from that, one of the key developments was the data centre REIT’s maiden acquisition in China in FY2021.
Keppel DC REIT made a strategic acquisition of Guangdong Data Centre to tap into China’s growing digital economy.
Demand for data centre space in China is strong and Guangdong is one of the fastest-growing locations in China for this demand.
This puts Keppel DC REIT in a good position to tap into the booming digital economy in China.
Elsewhere, the company also has a strong foothold in Europe. The company has further invested in the region via its strategic acquisitions of London Data Centre in the UK and the Eindhoven Campus in the Netherlands.
Source: Keppel DC REIT’s Investor Presentation (February 2022)
The portfolio’s weighted average lease to expiry (WALE) increased from 6.8 years as of 31 December 2020 to 7.5 years as of 31 December 2021, providing a defensive buffer to downside risks.
5) Proxy to the booming cloud and tech industry
According to Gartner’s market survey in October 2021, data centre systems spending in 2022 is forecast to reach US$207 billion, an increase of 5.8% YoY.
With the rollout of the global 5G network and the rapid growth of both enterprise and consumer-oriented cloud markets, this will benefit Keppel DC REIT.
However, given the competition in quality data centre assets, accretive inorganic growth opportunities will be harder to come by.
The REIT, however, has a diversified portfolio of assets globally with large and stable client base in the data centre space, which will allow it to serve as a proxy to the booming cloud and technology industry.
Defensive and growth play for long-term investors
Overall, I believe Keppel DC REIT is a good pick for investors looking for safety and growth potential.
With its value accretive investments over the years, the REIT has a diversified portfolio, which includes 21 data centre properties across nine countries.
This is good news for investors as the REIT is well-positioned to tap into the growth in data centres.
With a dividend yield of around 4%, investors who are interested in a solid long-term income investment could consider this pure-play data centre REIT.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
