The rising interest rate environment in the US, along with higher inflation, have affected most real estate investment trusts (REITs) negatively in 2022.
In Singapore, Keppel DC REIT (SGX: AJBU) was among one of the REITs players that was impacted by the negative sentiment.
The unit price of Keppel DC REIT has fallen by 24.3% year-to-date to S$1.87.
While there is concern that rising interest rates will continue to drag on into 2023, dividend investors should take advantage of the current market weakness to accumulate a position in Keppel DC REIT for the long term.
Here are five reasons why I believe investors should buy Keppel DC REIT in 2023.
1. Resilient financial performance
Despite of rising interest rates and higher inflation, Keppel DC REIT has maintained a resilient financial performance with a mild improvement in its revenue and net property income (NPI).
During its latest quarter, gross revenue and NPI rose by 0.7% and 0.5% to S$205.9 million and S$64.1 million, respectively, from a year ago.
2. Manage higher utility cost better
One of the advantages that Keppel DC REIT has is its ability to pass through significant electricity costs to its tenants.
Management has guided that the electricity cost at Keppel DC REIT’s Shell & Core (S&C) and Fully Fitted (FF) assets are entirely borne by its data centre tenants.
S&C and FF assets account for 11% and 22.8% of Keppel DC REIT’s rental income with the remaining generated from assets in Singapore, Australia, and Ireland.
3. Strong portfolio occupancy
Keppel DC REIT continues to benefit from the strong demand for data centres across all markets.
This is seen by the strong portfolio occupancy that improved to 98.6% in Q3 2022.
The improvement was mainly due to the inclusion of the master-leased Guangdong DC 2 and 3 data centres, as well as higher occupancy at Keppel DC Dublin 1.
Only 2.6% of the portfolio leases remain to be renewed in Q4 FY2022 and a further 13% of leases are due in FY2023.
Keppel DC REIT’s weighted average lease expiry (WALE) is also quite long at 8.7 years and more than half of its leases have rental escalations based on Consumer Price Index (CPI), or similar indexations.
This allows Keppel DC REIT to pass on the higher cost to its tenants in an inflationary environment.
4. Well-managed debt to buffer against higher interest rates
Keppel DC REIT’s weighted average debt tenor is 3.9 years, indicating that the majority of its debts will expire in 2026 and beyond.
Meanwhile, 74% of its borrowings were based on fixed interest rates as of the latest quarter.
This will help to partially mitigate the impact of rising interest rates. Keppel DC REIT also has a healthy gearing ratio of 37.5%.
5. Acquisitions and structural growth of data centres to drive higher DPU
Keppel DC REIT has recently acquired two data centres in Guangdong, China, that will help lift the distribution per unit (DPU) by 2.7%.
The higher gearing ratio of 37.5% was mainly due to the drawdown to fund the Phase 1 acquisition of the Guangdong DC 2 and 3 acquisition.
The phase 2 of the acquisition will happen in Q3 FY2023, giving Keppel DC REIT the flexibility to fund the acquisition.
Even if phase 2 of the acquisition is funded entirely through debt, the REIT’s gearing ratio would remain at around 39%.
Aside from new acquisitions, the structural growth of the data centre sector globally will also drive growth for Keppel DC REIT.
Tenant stickiness due to the high costs of relocation, and limited data centre supply, also benefit Keppel DC REIT in the near term.
Attractive entry price for Keppel DC REIT
Despite the near-term challenges for REITs, I believe that the current entry price for Keppel DC REIT is attractive for dividend investors.
At its current price, Keppel DC REIT is trading at a 12-month forward distribution yield of 4.7%.
The long-term structural growth story for data centres will also benefit Keppel DC REIT. The strong demand is reflected in its high portfolio occupancy rate.
Investors, however, should remain cautious of the downside risk in the near term, which includes rising interest rates, the persistent inflationary environment and a potential recession in 2023.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.