To The Moon

Pure-play data centre

[By Edmund Chan: CIO of Tiger Fund Management]

I remembered meeting the management of Keppel DC REIT (“KDCREIT ”) during their IPO roadshow in 2014. Since then, KDCREIT has always been a core holding in my REIT portfolio.

KDCREIT has done remarkably well, generating returns of 2.5x in less than 10 years. It has outperformed the STI Index by 216%. This is an amazing feat, considering KDCREIT is a dividend stock, and not a growth stock.

Early this year, with high interest surrounding ChatGPT, I was asked in an Lianhe Zaobao newspaper interview about AI-related stocks in Singapore. I immediately mentioned KDCREIT $KEPPEL DC REIT(AJBU.SI)$ .

Hence, I want to re-visit the thesis of Keppel DC REIT in this post (@$2.13; 10/07).

Here are some insights:

• Pure-play data centre

• High quality assets

• Secular growth in data usage

• Inexpensive valuation

Pure-play data centre

Keppel DC REIT is the first and also the largest data centre REIT listed in Asia with $3.7 billion of assets under management.

The company’s portfolio consists of 23 data centres across 9 countries that include Singapore (55%), Europe (28%), Australia (9%) and China (8%).

The company is Temasek-linked since Keppel Corp owns 20.2% stake of the company. The manager is Keppel DC REIT Management, a wholly-owned subsidiary of Keppel Capital.

High quality assets

KDCREIT is backed by a portfolio of high quality data centres. They possess extremely stable operating metrics:

• Almost full 98.5% portfolio occupancy

• Long Weighted Average Lease Expiry (WALE) of 8.2 years that is well spread out

KDCREIT has little tenant risk since the majority of rental income is derived from clients with investment grade or equivalent credit profiles.

The company has negligible credit risk with diversified debt across five currencies. Gearing is manageable at 36.8% aggregate leverage, anchored by low cost of debt at 2.8%. Its weighted average debt tenor is at 3.8 years, with the bulk of debt expiring beyond 2026.

KDCREIT’s largest asset is the Keppel DC Singapore 4 (KDCSGP4), located in the Tampines Industrial Park A.

Completed in 2017, KDCSGP4 is a five-storey carrier-neutral and purpose-built facility providing data centre colocation services for the end-clients utilise to install their servers and other mission critical IT equipment.

KDCSGP4 is valued at S$442m with a WALE of 2.4 years.

Secular growth in data usage

Data centers are witnessing a secular growth fueled by the widespread adoption of cloud computing, digital transformation initiatives, and the remarkable strides made in AI.

Notably, the advent of generative AI, exemplified by groundbreaking technologies like ChatGPT, has played a pivotal role in driving this trend.

The growth story extends to the hyperscalers. In 2022, American hyperscalers recorded remarkable growth rates ranging from approximately 20% to an impressive 32%. This upward trajectory continue to drive the demand of data centre assets.

Inexpensive valuation

KDCREIT has delivered consistent growth in dividends in the past one, three and five-years. This demonstrates high management quality and resiliency of data center assets.

Currently, the company is trading at 4.7% dividend yield, still better than the 3.2% of 10-year Singapore Government bond yield.

KDCREIT is trading at 1.56x P/B, near 1 standard deviation below its 3-year mean P/B. This is still inexpensive and there could be more upside from further yield-accretive acquisition.