Keppel DC REIT: Why I Like its Yield And Growth Prospects

Keppel DC REIT (SGX: AJBU) wasn’t the first REIT that I bought.

When I first started out investing, Suntec REIT (SGX: T82U) was my virgin investment.

It felt exciting to be part of the launch of a new asset class as Suntec was, back then in December 2004, only the fourth REIT to be launched in the Singapore market. Being my maiden investment, I was pleased to be allotted some shares from its IPO and proceeded to track the business closely.

Fast forward to 2017: my portfolio still contained the Suntec REIT shares I had purchased 13 years ago, but surprisingly, the rest of my portfolio was made up of non-REIT companies.

Over the years, as I learnt more about value investing and honed my ValueGrowth strategy, I became more interested in delving into various types of businesses in different industries. REITs did not come into the picture mainly because I did not find the time to try to understand them better and felt that it was a highly-geared business model.

But I was about to find out exactly how wrong I was. Luckily, it wasn’t too late.

The pivot to REITs

A casual meet-up with an old friend convinced me that my portfolio needed adjustments. It was very concentrated and filled with old-school businesses that were small and illiquid.

There was nothing anything fundamentally wrong with these underlying businesses, but I had to admit the risks were high as small businesses generally do not have the same clout and reputation to negotiate for great deals and lower costs as compared to larger firms.

The idea for a REIT came up because of the stability of the income this asset class provided, as well as the underlying trends fuelling certain REITs’ growth. The Global Financial Crisis had allowed me to observe how well-run REITs differ from the weaker ones, and the subsequent years of growth in both distribution per unit (DPU) and share price of the well-managed REITs convinced me to study them in greater detail and to consider including a few within my portfolio.

Data is the new oil

Keppel DC REIT is a unique REIT with a niche asset class: data centres — and that formed the backbone of my investment thesis.

From my extensive reading, tech companies were investing in data centres as the need for data storage has exploded in our hyper-connected world. With smartphones being ubiquitous, data is now the new oil and customers are demanding ever more data in order for them to surf the internet, watch videos on demand or send photos on Instagram.

Around mid-June, I purchased shares in Keppel DC REIT at an average price of S$1.275.

At the time, Keppel DC REIT owned a portfolio of 12 data centres and had just acquired its twelfth data centre Keppel DC Singapore 3 along with tax transparency granted for its income.

Next, I will discuss the few key factors that led to my investment decision.

The stars are aligned

The REIT manager for Keppel DC REIT, Keppel DC REIT Management Pte Ltd, is 50% owned by Keppel Capital (the asset management arm of Keppel Corporation Limited), with the remaining 50% owned by Keppel Telecommunications and Transportation (T&T).

With a strong parent in Keppel, the Keppel DC REIT had a great pipeline of data centre assets to acquire from its sponsor. The presence of Keppel provided the REIT with growth opportunities that a non-sponsored REIT will not have.

Other pertinent factors that led to my investment decision were (in no particular order of importance):

    1. A high occupancy of 95% for the portfolio and a long weighted average lease expiry (WALE) of 9.2 years. The high occupancy rate meant that there was little idle capacity within the portfolio and the long WALE also provided certainly of rental income from the tenants.
    2. Low gearing level of 27.9% meant that the REIT would have sufficient debt headroom to borrow more in order to make DPU-accretive acquisitions. Also, the REIT’s cost of debt was very low at just 2.2%.
    3. At the time of purchase, the REIT had announced a DPU of S$0.0189 for the first quarter of 2017. Annualising the DPU implied that the full-year 2017 DPU would be S$0.0756, which would provide me with a dividend yield of around 5.9% at my purchase price of S$1.275.

A classic ValueGrowth example

My main purpose for buying Keppel DC REIT was for the healthy yield of close to 6% that it offered.

Any growth in the underlying portfolio and DPU was, for me, a bonus. I had observed that the stars were aligned for the REIT to be able to grow, and I was proven right when it announced a major acquisition of two data centres in September 2019.

The announcement was followed up by a secondary placement of shares and a preferential offering. I subscribed for and received my allotment plus excess shares at S$1.71 per share as I believe in the long-term growth prospects for the REIT. The estimated DPU as stated in the presentation slides would now be around S$0.0801, and this translates to around 6.3% at my original purchase price, and 5.87% at my new blended purchase price (after factoring in the preferential offering shares).

The takeaway here is that I received a consistent and steady income from holding on to Keppel DC REIT’s shares over the last two-plus years, plus the share price has also appreciated around 57% to S$2.00 since I purchased the shares back then.

If a great REIT is purchased using ValueGrowth concepts, we can enjoy both regular income and capital gains.

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None of the information in this article can be constituted as financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Disclosure: Royston Yang owns shares of Keppel DC REIT