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AnalysisSGX

8 things I learned from the 2022 Keppel DC REIT AGM

Keppel DC REIT (KDC REIT) is a data centre REIT that has been listed on the Singapore Exchange since 2014. Within a span of less than eight years, the REIT has expanded its portfolio from nine to 21 data centres and tripled its assets under management from S$1.1 billion to S$3.4 billion in 2021. Its data centres are located across nine countries in Asia Pacific and Europe.

Here are eight things I learned from the 2022 Keppel DC REIT AGM.

1. Keppel DC REIT posted a commendable financial result in 2021 amid the pandemic. Revenue increased 2.1% year-on-year to S$271.1 million in 2021 while distribution per unit (DPU) increased 7.4% to 9.851 cents in 2021 from 9.170 cents in 2020. This was mainly due to:

  • Accretive acquisitions in 2020 and 2021 in Germany and the Netherlands
  • Development of a data centre in Australia
  • Asset enhancement initiatives in data centres in Singapore and Ireland

Rental support was only derived from the recent acquisition of London Data Centre until 2024 and totalled less than S$1.0 million, which is insignificant.

2. FY2022 will see additional contributions from the newly acquired data centre in Guangdong, China in December 2021, and London Data Centre in the United Kingdom in January 2022. The REIT will stand to benefit from the robust demand for data centres in light of growing trends such as remote work, e-commerce, and cloud computing. The investment in bonds and preference shares issued by M1 Network Private Limited will also provide the REIT with an annual cash flow of S$11.0 million (comprising both principal and interest) for 15 years without bearing any operational management risks.

3. In Q1 2022, the REIT’s distributable income improved 5.9% year-on-year to S$44.5 million because of additional contributions from the two data centres mentioned. The distributable income was offset by cessation of rental support for Keppel DC SG 4 and higher repair and maintenance expenses in its data centres in the Netherland as well as provisions for trade receivables amounting to S$14.8 million from a client in one of its data centres in Singapore. The amount was equivalent to about 2% of its 2021 distributable income.

4. The ongoing Russia-Ukraine war caused a hike in oil and gas prices and the subsequent surge in electricity costs. In general, electricity costs rose 27% year-on-year in Q1 2022 but are largely recoverable from clients. For its colocation assets in Singapore and Ireland, more than 90% of its electricity costs are pass-through in nature. Increasing electricity costs will not impact its assets with master leases as power is contracted by these clients directly with respective suppliers.

A 10% hike in electricity costs will reduce Q1 2022 DPU by 0.009 cents, which is less than 0.01% of its 2021 DPU. In general, KDC’s leases have built-in rental escalations that are adjusted based on a consumer price index or so to mitigate any inflationary impact on the business.

5. Gearing ratio remained manageable below its internal cap of 40%. Occupancy rate remained stable as more than two-thirds of its data centres were fully occupied in March 2022. Weighted average lease expiry (WALE) continued to improve as the REIT acquired more data centres with long leases. Cost of debt remained low at below 2.0% because of the Keppel brand name and its strong sponsor.

IndicatorsDecember 2020December 2021March 2022
Gearing36.2%34.6%36.1%
Occupancy97.8%98.3%98.7%
WALE by lease area (years)6.87.57.7
Cost of debt1.6%1.6%1.8%

6. In view of the rising interest rate environment, the REIT hedged 76% of borrowings through floating-to-fixed interest rate swaps in March 2022. The remaining unhedged borrowings were denominated in euros. According to the management, every 100-basis point hike in interest rates will reduce DPU by 1%.

7. A unitholder pointed out that KDC’s financials only grew at single digits year-on-year in the latest quarter compared to double-digit growth of about 20% and 30% previously. CEO Anthea Lee Meng Hoon explained that the REIT’s portfolio has grown. As a result, new acquisitions that were DPU-accretive were proportionally smaller to the REIT. The management will continue to grow the portfolio as seen by the increasing DPU year after year since the REIT was listed. KDC can also look to data centres from the sponsor’s pipeline worth more than S$2 billion.

8. The low occupancy rate of its Basis Bay Data Centre (at 63.1% in March 2022) in Cyberjaya, Malaysia continued to draw shareholders’ attention and this AGM was no different. The management explained to unitholders that this asset accounted for less than 1% of assets under management. The asset’s occupancy rate was somewhat in line with the industrial average at mid-60% in 2020 amid new supply of data centre space in the next two years in Malaysia.

The fifth perspective

Keppel DC REIT’s ability to provide unitholders with increasing DPU year after year since it was listed is a strong track record. Its resilience in the past two years as well as DPU-accretive acquisitions are signs that the REIT is well managed as it continues to benefit from the overall growth of the data centre industry.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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