Is Keppel DC REIT a Good Buy?

Keppel DC REIT is the first REIT in Singapore to focus solely on data centers in Asia. A data center is a physical facility that organizations or companies use to store their computer systems or data. Data centers are gaining traction and popularity around the world as more companies are switching to online platforms for their services and work. Due to the COVID-19 pandemic, many companies have switched to online platforms for work-related purposes to ensure their employees can work from home, resulting in an increase in demand for data centers. Keppel DC REIT portfolio consists of income-producing properties that are used mainly for data center purposes. They have 18 high-quality data centers strategically located in prominent data center hubs across eight countries in the Asia Pacific and Europe. Keppel DC REIT is currently trading at $3.060 per share and a market capitalization of $5 billion. I would be analyzing Keppel DC REIT using the top 5 things to look out for in REITs.

 

1. Consistent Dividend History 

Keppel DC REIT is a relatively new REIT that was only listed on SGX in 2014. They have a 6-year consistent dividend history which is good which means that they have been consistently paying out dividends to shareholders without defaulting. The last thing you would want as a dividend investor is for the company to default on its dividends or even stop paying dividends as it is a strong indicator that there is something majorly wrong with the company. In general, a longer consistent dividend history of a dividend stock would imply that it is a stable and high-quality investment. Keppel DC REIT has an acceptable consistent dividend history of 6 years. 

 

2. Sponsor

 

Keppel Capital has a 50% interest in Keppel DC REIT while the remaining interest is held by Keppel Telecommunications & Transportation (Keppel T&T). Keppel Capital is one of the largest asset managers in Asia with an asset under management value of $33 billion (2019) in real estate across the globe. A sponsor is a company that provides the properties into the initial portfolio of the REIT and may continue to provide more properties for the REIT in the future. Keppel Capital would be able to provide financial support in an economic crisis and continue providing profitable properties to Keppel DC REIT. As a result, Keppel DC REIT's credibility and stability are boosted due to its strong sponsor by Keppel Capital. 

 

3. Tenant Portfolio and Occupancy Rate

Keppel DC REIT has an extremely well-diversified tenant portfolio of many tenants across eight countries around the world. This means that no one tenant from its portfolio is responsible for a huge amount of its income. This helps to decrease the risk of a tenant defaulting its rent or not continuing its lease to significantly reduce its revenue. Furthermore, Keppel DC REIT has an occupancy rate of 93.6% (>90%) which is considered high among REITs. Overall, Keppel DC REIT checks these criteria by having a diversified tenant portfolio and a high occupancy rate. 

 

4. Debt Gearing Ratio 

Keppel DC REIT has a debt gearing ratio of 30.7% (<40%), which is one of the lowest among Singapore REITs. The debt gearing ratio refers to the REIT's debt against its net total assets (REITs often use debt as leverage to acquire new properties and expand its portfolio at a faster rate). This can be seen as a pro and con. Keppel DC REIT would not have to worry about changes in interest rate affecting its debt or not being able to repay its debt. On the other hand, it means they won't be able to expand their portfolio as fast as compared to if they take on more debt. I would say their low debt gearing ratio is attractive to me as I am a risk-averse investor. It may be unattractive if you are a higher risk investor looking for higher risk investments to increase the growth of your portfolio. 

 

5. Dividend yield

The average dividend yield for Keppel DC REIT is 2.4% and its expected dividend yield for 2020 is 3%. This is a rather low dividend yield compared to the average Singapore REIT dividend yield of 4-6%. However, they have been consistently increasing their dividend yield for the last 3 years which is always a good sign for dividend investors. They declared a Dividend Per Unit (DPU) of 4.375 cents for 1H 2020, 13.6% higher than 1H 2019’s 3.850 cents. Their dividends are definitely sustainable and have more potential to increase in the future as they have a healthy payout ratio of only 67.4% of their total profits which has room to increase in the future. Moreover, they have an extremely strong balance sheet where their total assets ($3.1 billion) outweigh their total liabilities ($1.2 billion) significantly. Keppel DC REIT's dividend yield may be low but they are highly sustainable and definitely have room to grow in the future. 

You can read more about Keppel DC REIT's 2020 annual report here.

 

Verdict

In conclusion, I would say Keppel DC REIT is a stable and attractive REIT that has both high share growth potential and sustainable dividends (that would most likely increase in the future). Its low dividend yield may deter some dividend investors but I believe it would definitely increase with time and be offset by its potential share growth earnings. However, I feel that Keppel DC REIT is currently too expensive and overvalued to buy at its current share price of $3.06 (P/B ratio of 2.61!) due to the hype surrounding its 2020 annual report showing profits and DPU increasing significantly. A good value to purchase Keppel DC REIT would be around $2.80 per share. 

 

What are your thoughts on Keppel DC REIT?

*Update: Keppel Corp (sponsor of Keppel DC REIT) shares recently dropped 13% due to Temasek abandoning its $3 million offer for the conglomerate following the company's poor financial results. Temasek's decision to abandon its offer for Keppel Corp results in a decrease in investors' confidence in Keppel Corp. However, I feel that Keppel Corp has a strong balance sheet and proven management that will be able to tide it over this COVID-19 crisis. This is evident from the share price stabilizing over the next few days after decreasing around 10%. You can read more about this issue here.