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Keppel DC REIT is an industrial REIT that owns 14 data centres in 10 cities across eight countries including Singapore, Malaysia, Australia, Germany, Ireland, Italy, the Netherlands, and the UK. As at 31 March 2018, Keppel DC REIT’s assets under management (AUM) totalled $1.66 billion.
Previously, I attended the 2017 annual general meeting of Keppel Telecommunications & Transportation (Keppel T&T) which is the sponsor of Keppel DC REIT. This time around, we decided to attend Keppel DC REIT’s annual meeting and find out more about the REIT’s past year’s performance and its outlook for year ahead.
Here are seven things I learned from the 2018 Keppel DC REIT AGM.
1. Gross revenue grew 40.3% year-on-year to $139.1 million in 2017 and net property income (NPI) grew 37.6% to $125.1 million. Likewise, distributable income grew 34.8% to $82.3 million. The growth was mainly due to contributions from the REIT’s acquisitions since the second half of 2016, higher variable income from Keppel DC Singapore 1, and a one-time capital distribution received in relation to the Keppel DC Singapore 3 acquisition.
2. Distribution per unit (DPU) grew 16% year-on-year to 7.12 cents. However, if you exclude one-off items and adjust for the impact of the preferential offering (to fund the acquisition of Keppel DC Singapore 3), the adjusted DPU for 2017 is 6.97 cents – a 4.3% increase from the adjusted DPU of 6.68 cents in 2016. Based on Keppel DC REIT’s share price of $1.42 as at 25 April 2018, its adjusted distribution yield is 4.9%.
3. Keppel DC REIT completed two acquisitions in 2017 – Keppel DC Singapore 3 and Keppel DC Dublin 2. In March 2018, the REIT completed its first acquisition in Germany with the purchase of mainCubes data centre for €84.0 million (approximately S$130.0 million). According to CEO Chua Hsien Yang, the acquisitions will strengthen the REIT’s income streams and expand its footprint in key data centre hubs in Asia and Europe.
Source: Keppel DC REIT 2018 AGM presentation slides
4. Portfolio occupancy rate as at 31 December 2017 is 92.6% and the weighted average lease expiry is 9.1 years. All data centres are fully occupied except for Basis Bay Data Centre (occupancy rate at 63.1%), Keppel DC Dublin 1 (56.6%), and Keppel DC Dublin 2 (87.3%). The CEO explained that the occupancy rate at Basis Bay Data Centre is due to the master lessee downsizing its operations from three floors of the data centre to two. The CEO pointed out the data centre is small one comparative to the REIT’s other assets, and the management is working hard on leasing the remaining floor. Keppel DC Dublin 1 is an older asset that’s undergoing an upgrade to improve its power efficiency which is expected to complete end-2019. Keppel DC Dublin 2 is expected to be fully occupied soon as a tenant has verbally committed to lease the remaining space at the date centre.
5. Gearing ratio as at 31 March 2018 is 37.4% and interest coverage ratio is at 9.7. A unitholder highlighted that the gearing is close to the regulatory limit allowed and wanted to know how the management planned to raise capital since the REIT has a target to reach $2 billion in AUM. Chairman Christina Tan replied that the management will look at both equity and debt financing and decide which, or a combination of both, is the best way to raise capital at that point in time. She shared that the REIT was also able to secure favourable loans from banks due to its strong asset portfolio and the fact that it is currently the only data centre REIT in Asia.
6. A unitholder wanted to know how the management makes its decision on whether to invest in an asset. The chairman shared the management looks at an asset from a ‘total returns perspective’ in both capital appreciation and yield accretion for the portfolio. The data centre industry is the fastest-growing one among all property types (among Singapore REITs) and its yield is relatively higher compared to the office sector. She added Keppel Corporation has a well-rounded ecosystem in the data centre industry: Keppel Land builds the core & shell of a data centre, Keppel Infrastructure builds the power and cooling systems, and Keppel T&T runs data centre operations and has connections with the major cloud providers — the top five cloud providers in the world are all customers of Keppel DC REIT. Because of this, the management knows in advance, before its competitors, of its customers’ requirements and where they’d like the data centres to be, which puts Keppel DC REIT well-placed to look for the best-in-class data centres.
7. Another unitholder asked if there were any potential acquisitions coming up from the sponsor’s pipeline. The CEO said that, at this point in time, the REIT has three right-of-first refusal assets in the pipeline from the sponsor and Alpha Investment Partners (a fund manager under Keppel Capital): Keppel DC Singapore 4, Keppel DC Frankfurt, and Almere Data Centre 2 in the Netherlands. When pressed by the unitholder if the REIT could acquire them in the next 1-2 years, the CEO replied that it was up to Keppel T&T and jested that the unitholder could question Keppel T&T directly if he was a shareholder.
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