To The Moon

In the real estate investment trust (REIT) world, Singapore investors have – in recent years – been gravitating towards data centre REITs. That’s because REITs that own data centres are viewed as both “recession-resistant” and tapping into a long-term structural trend that sees rising demand for its type of properties. One of the best-known, and most popular data centre REITs, among dividend investors in Singapore has been Keppel DC REIT(SGX: AJBU). Having listed in late 2014, the REIT – prior to Digital Core REIT’s (SGX: DCRU) IPO in late December 2021– was the only pure-play data centre REIT listed in Singapore. Last month, Keppel DC REIT announced its latest first-quarter 2022 earnings. The day after, Keppel DC REIT shares fell to finish the day down 3.9%. So, here’s what investors should know about why the REIT’s unit price fell in reaction to its latest quarterly earnings. Stagnant DPU As I’ve always stated, the most important metric at the end of the day (when assessing which REITs to buy) is the distribution per unit (DPU). Essentially, the REIT’s dividend, DPU is really a number that cuts through a lot of the “noise” of the PR spin that normally surrounds earnings releases from REITs. On that front, it was a disappointing quarter for Keppel DC REIT as its DPU was basically flat, rising only 0.2% year-on-year to 2.466 Singapore cents for the first three months of 2022. This came on top of revenue that fell 0.9% year-on-year to S$66.1 million and net profit income that dropped 1.4% year-on-year to S$60.1 million. However, this was attributed to provisions made for a client payment that’s under dispute at its KDC Singapore 1 property and higher electricity costs. Regardless, it was a disappointing DPU figure given distributable income had actually risen by 5.9% year-on-year. Other metrics remain solid On other metrics that investors can assess REITs on, Keppel DC REIT continued to show its strong fundamentals. Portfolio occupancy (as of 31 March 2022) actually increased to 98.7%, up form the 98.3% at the end of 2021. Meanwhile, its weighted average lease of expiry (WALE) continued to be robust at 7.7 years, up slightly from 7.5 years at the end of last year. In terms of its gearing ratio, this was relatively low at 36.1% and its average cost of debt also was at 1.8%, giving the REIT breathing room if it wants to make future acquisitions. Cheaper but short-term headwinds could persist Keppel DC REIT has certainly fallen back to more attractive levels, with its unit price down nearly 25% over the past year and 16% so far in 2022. That means that its price-to-book (PB) has fallen from well over 2.0x in 2021 to its current level of around 1.7x. That premium afforded it previously – being one of a select few data centre REITs – is no longer there as investors pay closer attention to its track record. Additionally, higher electricity costs – which were cited in its earnings release – may be around for a little while yet. That’s also because 13 of Keppel DC REIT’s 21 data centre properties are located in Europe – a region which is grappling with particularly higher energy prices given its reliance on Russian oil and gas. For investors who are bullish on data centres over the long term, Keppel DC REIT’s unit price is certainly much more attractive and it’s currently offering up a 12-month forward dividend yield of 4.7%. That may be good enough to entice dividend investors, even with all of the short-term headwinds. To sum up, I am still bullish on the stock. Source: Prosperus $KEPPEL DC REIT(AJBU.SI)$