Disclaimer: Deddy is not a professional whatsoever. This article is only based on his limited research, effort and experience and should not be taken as a piece of advice. This article is also not an indication of buying or selling of any mentioned investment assets.
This is my first writing on an attempt to do my version of stock analysis. The reason behind this is for my own revision and improvement as well as to instill a habit of having a proper research before any investment. I still have this FOMO feeling that I really want to get rid of by going through this routine. How have I survived so far? By suppressing that feeling! However, it is not a fool-proof thing as very often I would still feel FOMO because of price action.
Anyway, in this article, I attempt to analyse Keppel DC REIT, a REIT that purely invests in data center related properties or matter. However, it is not complete without comparing other businesses that have similar businesses, which are Mapletree Industrial Trust and Capitaland Ascendas REIT.
Let’s get started!
I use 2023 Annual Report as well as first quarterly report of 2024, which means the data is up to March 2024 only. However, any stock price used is based on July 2024 record.
Keppel DC REIT focuses on data center real estate investments, directly or indirectly. I would consider it as an established business, especially considering its sponsor being Keppel. It being a REIT listed on the Singapore market, it doesn’t have rapid growth. Especially for a REIT, it has to distribute at least 90% of their taxable income to its investors in the form of dividends. This also means they cannot invest in themselves even if they want to. So, moving on…
Despite all of that, it is still potentially good for investors who look for extra income or dividends due to its nature of having to distribute at least 90% of its taxable income. If that’s the case, how’s it? is it good? is it bad? It’s not so simple. We have to look at the details.
Keppel DC REIT
Looking through the financial analysis lens, on average it has been going up before going down from 2022 to 2023. For this, I am not as worried as the overall trend is still up and it is also due to the current macro economic situation that is not very favorable to REITs.
It has NAV of $1.33 and a P/NAV ratio of 1.39 (I used the price from 10 July 2024 which was $1.85). Personally, my first thought was that this is overvalued because deep inside me i feel that if the price is lower than the NAV that would be perfect. However, I started to think why people are willing to pay more and realised that maybe they are seeing the potentials that Keppel DC REIT might have. So, we look further…
Keppel DC REIT has P/FFO ratio of about 28.03. Again, this confirms my suspicion that it may be overvalued but for a reason. Perhaps, people do expect something out of this data center sector. I briefly checked the price range and it went way beyond $2 before, especially during the COVID period until now. Especially with all the technology that is going on, one doesn’t need to question much why, as the importance of data has been going on before AI boom. This in itself already plays a part.
The DPU growth rate, to me, has been hard to track since 2020 because there is a lot of other factors that pushed it way up and then down (cough interest rate cough). So, to be fair and with my own assumption that pre-2020 was more stable, it had about 4% growth rate which is not very fast, but good enough for potential dividend increase. As of writing, it also has a dividend yield of about 4.48%.
What about its debt profile and stuff? Well, it has gearing ratio of 37.4% which is alright. It also has interest coverage ratio of 4.6, which to me I think it is pretty strong (although it was even crazier, like 7x if I am not mistaken during the low interest rate time). When I tried to look for its cost of debt, I found 3.3%. If this is not right, do comment down below. Actually, if any of what I write here has mistakes, do voice out as well. This is because 3.3% to me is alright, I guess in the current economic situation?
Finance health and debts are done, next would be the source of the income, the tenants. Keppel DC Reit seems to have portfolio occupancy rate of 98.3%, which is pretty impressive to me. The Weighted Average Lease Expiry (WALE) is around 7.4 years, which means there would be income stability until the medium term at least.
What about its geographic diversification?
I wanted to say pretty diversified, but Singapore takes up 50%. Also, currently it is more skewed towards Asia Pacific. This could be a concern or could be not as one just have to believe in the managers.
For its tenant diversification, here it is:
#1 caught my eye. Having its rental income contribution to be 30% is relatively big I think. Let me know if the way I think is wrong. However, we just have to pay attention to it, it is not a red flag yet.
Additionally, out of curiosity, I wonder who owns this business and how much do they own it.
After looking at it, I don’t have any thoughts nor feelings for it, but I realise I want to know how much do the management level peeps own? Here is the answer:
The “Nil” caught my eyes. I mean, I would feel safe when I know they own not just a number but quite a big number of shares in the company that they are managing. But again, this is the first time that I take a look with much detail, so I have to be okay with it for now.
Mapletree Industrial REIT
This REIT doesn’t have full data centers as its portfolio. If I am not mistaken, it is about half, which is still quite substantial considering it is being labeled as a diversified REIT. I try to look at only the data center side to be fair to Keppel DC REIT.
Looking at its DPU for the past 5 years (which is beautifully displayed as a graph, which is a lot easier to see as compared to Keppel DC’s which I had to dig one AR after another), it seems to be increasing overall, but it hit its peak in 2021 before it decreases in 2022 and subsequently in 2023 as well. However, for the overall trend, it still is higher than the one in 2020.
It has NAV per unit of 1.76. For the past 5 years, it seems to be increasing overall, but the peak was in 2021 before it goes down in 2022 and subsequently in 2023 too. However, it is still higher than the one in 2020. Its P/NAV ratio is about 1.3, which is also on the over side. I am starting to see the similarity with Keppel DC REIT.
MIT’s P/FFO ratio is around 19.91 which is actually more on the fairer side but I also wonder if it is because MIT is not a full fledge data center REIT. This is because this can cause the investors’ expectation to be lower a bit as compare to Keppel DC REIT.
It has a gearing ratio of about 38.7% which is alright. Its interest coverage ratio is around 4.6, which is quite good, just like Keppel DC REIT. For its cost of debt (please double check as well), I found it as 4.25%. Now this is definitely higher than that of Keppel DC REIT. However, so far, this is still not a super big red flag for me, although can still pay attention to it.
MIT has portfolio occupancy rate of 91.3%, which is not as impressive consider I was shown 98% for Keppel DC REIT first, but it is still alright. It has WALE of 4.4 years on average. This is fine as well.
What about the tenant diversification?
To be frank, I look at those and I feel alright. Please flag out to me if I miss something.
AUM?
It seems to have more in the North America region, which is nothing wrong with it, but the concentration had me thinking.
What about the number of units held by the managers?
I am not gonna lie, the number of dashes really had me worried, even though a few of them have direct interest of 6 digits, but it is out of 11! Oh well.
Capitaland Ascendas REIT
This REIT seems to have data centers, but only ~9% of its portfolio? I believe that’s what it says in its report. Even though less than 10% and considered as a diversified REIT, still worth to take a look since it is still a popular REIT, having its sponsor as Capitaland.
Its DPU for the past 5 years has been increasing as seen from its report overall, but it peaked in 2022 before going down in 2023. This is starting to look like a trend too considering the other 2 REITs that I talked about earlier also suffered the same fate. Its revenue and NPI (net property income) are also looking good, which has been increasing for the past 5 years.
Ascendas has NAV per unit of 2.26, which peaked at 2021 before going down in 2022 and subsequently in 2023 as well. It has P/NAV ratio of 1.2, in which I used the price of $2.72 as of 14 July 2024. Honestly, this looks a bit overpriced but the other 2 were overvalued too based on this. Meanwhile for its P/FFO ratio, I am not sure if it was mistaken or what but it is ~61. 61! But to be frank, this is just one metrics of many, so moving on..
Ascendas has gearing ratio of 38.3% which is alright. Its interest coverage ratio is about 3.7 which is good too although not as high as the other two. Its cost of debt is also about 3.5% which is matching with what’s happening around here currently.
Looking at its portfolio occupancy rate, it is 93.3% which is what every investor is looking for probably. It has WALE of 3.9 years, which to me is about average. At least we know the dividends can still come in for the near to medium term.
I would say its geographical diversification is of “trying to” diversify side, as by looking at the following, Singapore still takes a bigger portion of the pie. Sector-wise, I think it is pretty alright.
Considering the fact that its data centers only make up 9%, lets take a look at where they are:
- Singapore
- UK/Europe
To me this looks normal, considering the locations of data centers now revolve around North America, Europe/UK, and Asia Pacific. However, we can still keep an eye on Ascendas whether they plan to increase their data center portfolio which potentially may benefit them further in the longer term.
For its tenant diversification, I was quite surprised to see that 3 out of 10 are actually not Singapore-based. I expected maybe 1 out of 10 was a foreign company. These top 10 customers also account about 16.7% of monthly gross revenue, which I think is still acceptable considering there is a risk of it going above 20%. Let me know what’s your threshold for this.
Lastly, it is the number of units owned by the directors. Here they are.
Yeah, even though this is the third one I have seen, I am still not used to the dashes shown. Although the CEO seems to have 6 digits number of units, the rest is looking kind of meh.
Conclusion
When looking at just the numbers, to be frank each of them seems to have its own pros and cons. The next to consider is probably relating to the probabilities of things that may bring each of this REIT down and how the managers can find against these probabilities and bring out more values for their investors.
At this point, I am not equipped with such knowledge yet and I don’t like to make assumptions as these things, I think, have to be monitored as it goes. Overall, they seem to be painting a not so bad picture here. But who am I to say, such reports can also fall victim to manipulation.
Wrap Up
I started looking into Keppel DC REIT with the reason being me looking for REIT stock to add and particularly for SREITs that have exposure to data centers. Keppel DC REIT being the one full data centers portfolio caught my interest.
I am aware that now there is another one similar REIT which is called Digital Core REIT, but I am not familiar with it at all considering it came from outside. I am unfamiliar with both the REIT listed in Singapore and its sponsor. Maybe it will be for another day, let me know in the comment section below.
As I searched for peers to compare to, Capitaland Ascendas and Mapletree Industrial Trust often appeared in my search, hence I decided to look into them. Another reason for looking into them because I know Capitaland and Mapletree (their respective sponsors) as well as me having seen their buildings around Singapore before.
Ultimately, this is for my own training, learning and knowledge about whether these REITs are a good add for me or not, hence I tried to go in from the angle of a new investor instead of an investor that wants to add more.
Last but not least, I am definitely open to any constructive feedback considering I plan to do more of such article so as for my own improvement as well. Do remember this is by no means an advice to buy or sell. This is just an unprofessional piece of analysis by unprofessional me. However, feel free to share to other people if you find this useful in any way.
Thank you for reading.
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