Is Keppel DC REIT Still Undervalued Now?

Keppel DC REIT

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Listed in December 2014, Keppel DC REIT is the first pure-play data centre REIT to be listed in Asia. As of 1 June 2019, Keppel DC REIT is worth S$ 2.11 billion in market capitalisation. In this article, I’ll provide a coverage on its progress since its IPO listing, financial results, and valuation figures. Hence, here are 10 things to know about Keppel DC REIT before you invest:

1. Portfolio Valuation
   Keppel DC REIT has doubled its portfolio valuation from S$ 1.0 billion in 2014 when it was first listed to S$ 2.0 billion in 2018. The expansion is a direct result of a series of data centre acquisitions made by the REIT for the past 3 years. They are as follows:
   
   

No.	Acquisition of Data Centres	Period	Purchase Price (S$ Million)
1	Intellicentre 2, Australia	Aug 2015	46.6
2	Cardiff Data Centre, United Kingdom	Oct 2016	59.7
3	Milan Data Centre, Italy	Oct 2016	57.3
4	Keppel DC Singapore 3, Singapore (90%)	Jan 2017	202.5
5	Keppel DC Dublin 2, Ireland	Sep 2017	101.3
6	mainCubes Data Centre, Germany	Mar 2018	EUR 84 million
7	Keppel DC Singapore 5, Singapore (99%)	May 2018	295.2
8	Intellicentre 3 East Data Centre, Australia	Aug 2018	A$ 26 – 36 Million*

Source: Annual Reports of Keppel DC REIT

Note:
A$ 26 – 36 million* refers to development costs (not purchase costs).

1. Financial Results
   As a result, it has doubled its quarter revenue and distributable income in three years as shown in the graph below. On an annual basis, Keppel DC REIT has increased its revenues, up from S$ 99.14 million in 2016 to S$ 175.54 million in 2018. Its distributable income had gradually grown from S$ 61.05 million in 2016 to S$ 96.10 million in 2018, which in turn, has raised its distributions per unit (DPU) from 6.14 cents in 2016 to as much as 7.32 cents in 2018. It is attributable to multiple acquisitions of data centres as stated above in Point 1 over the last 3 years.
   
   
   

Source: Quarterly Reports of Keppel DC REIT

1. Balance Sheet Strength
   As of 31 March 2019, Keppel DC REIT has S$ 714.2 million in total debt. Its aggregate leverage is 32.5% and its average cost of debt is 1.7% per annum. 81% of its debt is based on fixed interest rates.
   
   
   
2. Income Visibility
   As of 31 March 2019, Keppel DC REIT has a portfolio occupancy rate of 93.2% and a long weighted average lease expiry (WALE) of 8.0 years. It has as much as 65.5% of its leases, by leased area, which would expire only after financial year (FY) 2023.
   
   

Year	2019	2020	2021	2022	2023	> 2023
% Leases	2.4%	4.9%	16.3%	7.6%	3.3%	65.5%

Source: Keppel DC REIT’s Q1 2019 Results

1. Asset Enhancement Initiatives (AEI)
   Keppel DC REIT has embarked on a couple of AEI works. All of them will be completed progressively in FY 2019 and 2020. They include:
   
   

No.	Data Centre	Description of AEI Works
1	Keppel DC 3 Singapore	Retrofit works to make way for expansion within a client’s premises. To be completed in mid-2019.
2	Keppel DC Dublin 1	To improve energy initiatives. To be completed in 2020.
3	Keppel DC Dublin 2	Power upgrade and fit-out works to make way for client expansion. To be completed in 2H 2019.

Source: Keppel DC REIT’s Q1 2019 Results

1. Intellicentre 3 East Data Centre, Australia
   On 7 August 2018, Keppel DC Centre has announced that it will expand its data centre asset with the construction of a new shell and core data centre on a vacant land within the Macquarie Business Park precinct in Sydney, Australia. The development of this data centre, to be named as Intellicentre 3 East Data Centre, will be carried out by its master lessee, Macquarie Telecom. The construction cost is expected to be A$ 26 – 36 million and would be completed by 2020. It would be leased on a triple net lease for 20 years upon its completion.
   
   
   
2. Leasehold Extension at Keppel DC 1 Dublin
   The acquisition of the remaining 999-year leasehold interest at Keppel DC Dublin 1 is scheduled for completion in 1H 2020. Presently, it owns a leasehold interest which would expire on 11 April 2041, and upon its acquisition, Keppel DC REIT would extend its leasehold interest to year 2998. The acquisition costs for this extension is S$ 47.3 million.
   
   
   
3. Land Lease Balances
   Keppel DC REIT has 15 data centre properties. Out of which, seven are freehold properties while the remaining eight are leasehold properties with land lease balances as followed:
   
   

No.	Data Centres	Land Lease Expiry
1	Keppel DC Singapore 1	30 Sep 2025
2	Keppel DC Singapore 2	31 Jul 2021
3	Keppel DC Singapore 3	31 Jan 2022
4	Keppel DC Singapore 5	31 Aug 2041
5	iSeek Data Centre, Australia	29 Sep 2040
6	GV7 Data Centre, United Kingdom	28 Sep 2183
7	Keppel DC Dublin 1, Ireland (Refer Point 7)	11 Apr 2041
8	Keppel DC Dublin 2, Ireland	31 Dec 2997

Source: Keppel DC REIT’s Q1 2019 Results

Note:
The three data centres in Singapore accounted for 35.15% of Keppel DC REIT’s portfolio valuation. These land leases come with renewal options for another 30 years upon expiry.

1. P/B Ratio
   As of 1 June 2019, Keppel DC REIT is trading at S$ 1.56 per unit. For Q1 2019, it has net assets of S$ 1.05 per unit. Thus, its current P/B Ratio is 1.49, the highest since its IPO listing in end-2014.
   
   
   
2. Dividend Yields
   For the last 4 quarters, Keppel DC REIT has paid out 7.44 cents in DPU. Thus, its gross dividend yield is 4.77% per annum, the lowest since its IPO listing.

VIA’s Verdict

Since 2014, Keppel DC REIT delivered solid financial results to its unitholders. It achieved growth in revenues and distributable income and hence, allowing it to steadily increase in dividend payments to its unitholders. This has resulted in an increase in stock prices and thus, lifting its market capitalisation from S$ 896.22 million in 2014 to S$ 2.11 billion presently.

Source: Google Finance

It has caused its stock price to trade at its highest in terms of P/B Ratio and also its lowest in terms of dividend yields. Moving forward, the REIT remains poised to capture an expected growth in demand for data centre spaces due to growth from cloud services, ecommerce, social media, online advertising, cloud gaming and VR & AR traffic globally.

Source: Keppel DC REIT’s Q1 2019 Results

Would you invest in Keppel DC REIT at today’s price of S$ 1.56 per unit?

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