Reits, as a whole, have been under pressure due to rising interest rates.
The US Federal Reserve just raised rates by half a percentage point this month to combat inflation, its largest increase in 22 years.
The prospect of more rate hikes in the future by the central bank has further dampened sentiment for the asset class.
$KEPPEL DC REIT(AJBU.SI)$is no exception and has seen its unit price fall steadily in the last year to a 52-week low of S$1.91.
The data centre REIT’s unit price peaked at S$3.04 back in August and October of 2020 and has been on a decline since then.
Should income investors be concerned with this persistent decline?
Is it time to sell? Or should you consider buying more?
Growth in DPU and property portfolio
Let’s take a step back and review what happened with the REIT since the middle of 2020.
As of 30 June 2020, Keppel DC REIT owned a total of 18 data centres across eight countries with an asset under management (AUM) of S$2.8 billion.
This level of properties was more than double the eight data centres it started with at its IPO in December 2014, and AUM had also nearly tripled from the S$1 billion back then.
In the 21 months since then, the REIT has further grown its asset base to 21 data centres spread across nine countries, with AUM rising to S$3.5 billion.
Distribution per unit (DPU) has also grown in tandem with the growth in the REIT’s asset base.
Annualised DPU stood at S$0.0875 back in June 2020, and Keppel DC REIT’s recent fiscal 2021 (FY2021) earnings showed that DPU has risen to S$0.09851, an increase of 12.6%.
The momentum has carried forward into the first quarter of 2022 (1Q2022), with DPU inching up by 0.2% year on year to S$0.02466.
The conclusion here is that the unit price has been declining against a backdrop of rising AUM and DPU.
Inflation and higher electricity costs
As data centres are known for consuming vast amounts of electricity, investors are rightfully worried as to the impact of higher electricity costs on the REIT’s distributable income.
CEO Anthea Lee has shared that these expenses are recoverable from clients of colocation data centres, of which the bulk are in Singapore, due to the cost pass-through nature of the contracts.
As for overseas data centres that are master-leased, the master lessee is in charge of contracting with their power suppliers, so any increase in electricity costs will have no impact on Keppel DC REIT.
Unitholders need not worry about inflation either.
There are built-in income and rental escalation clauses based on the consumer price index or a similar index that can help to mitigate the effects of rising costs.
A strong sponsor and pipeline
Let’s not forget that Keppel DC REIT is also backed by a strong sponsor in Keppel Telecommunications and Transportation Ltd (Keppel T&T), which is a wholly-owned subsidiary of offshore and marine conglomerate $KEPPEL CORPORATION LIMITED(BN4.SI)$.
The presence of a reputable sponsor should provide confidence to unitholders that the REIT will receive financial assistance should it fall on tough times.
Both Keppel Corporation and Keppel T&T have a pipeline of more than S$2 billion of potential data centre assets for injection into Keppel DC REIT in the future.
The REIT had conducted a total of four acquisitions for 2021 — with three data centres in Guangdong, the Netherlands, and London, as well as an investment in the bonds and preference shares of telco M1.
All these purchases are yield-accretive and will benefit DPU for 2022 and beyond.
Higher distribution yield
It’s worth noting that Keppel DC REIT is now trading at a much higher distribution yield than it was back in August 2020.
Distribution yield based on the annualised DPU of S$0.0875 stood at just 2.9% back then.
Based on an annualised DPU of S$0.09864 using 1Q2022’s DPU, the forward distribution yield has jumped to 5.1%.
Get Smart: Short-term worries
The simple analysis above shows that Keppel DC REIT has been steadily growing both its AUM and DPU over the last two years.
Yet, the unit price of the REIT has tumbled due to short-term worries such as inflation and higher interest rates.
As a result, the distribution yield has now exceeded 5%, and Keppel DC REIT is also backed by a reputable sponsor with an impressive pipeline of assets that acquired in time to come.
The REIT’s aggregate leverage of 36.1% as of 31 March 2022 leaves sufficient room for more yield-accretive acquisitions.
The market may be obsessed with short-term problems at the moment, but we believe the REIT should perform just fine over the long term.
$KEPPEL DC REIT(AJBU.SI)$share price $1.93 down by &0.02 or 1.03% at 24 May 11.59sm.
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