Data centres are a growing asset class within the REITs space
The drought in the initial public offering (IPO) of real estate investment trusts (Reits) on the Singapore Exchange (SGX) through the later part of 2020 and into much of 2021 ended with the successful listings of Daiwa House Logistics Trust (DHLT) and Digital Core Reit (DC Reit) towards the end of 2021. The former owns logistics assets in Japan, while the latter own data centres in the United States (US) and Canada.
For Singapore retail investors, prior to the listing of Digital Core Reit, their only investment choice for pure-play data-centre Reit has always been Keppel DC Reit.
To invest in stock markets elsewhere, beyond the Singapore and Hong Kong stock markets would incur dividend tax. This is especially so for the US stock market which has a thriving and big Reit market. Non-resident aliens are subject to a dividend tax rate of 30% on dividends paid out by U.S. companies.
For dividend income investors like myself, data centre Reit seems to offer the best of both worlds, being part of a sun-rise growth segment of the digital economy while providing ‘stable’ dividend income annually. After all, data centres are an important component of the digital economy. Its demand is underpinned by the increasing adoption of cloud-based services as well as the shift towards 5G. The pandemic has only accelerated the adoption of these services.
For retail investors who have ‘missed the boat’ by not being an early investor of Keppel DC Reit (eg. during the start of the pandemic or way before the pandemic), they can only watch in dismay at the meteoric rise of Keppel DC Reit share price. See below.
There are also a few other Singapore-listed Reits with data centre properties in their portfolio, namely Mapletree Industrial Trust and Ascendas Reit.
Data Centres represent 52% of Mapletree Industrial Trust AUM (Asset Under Management). The majority of these data centres (49.4% of the 52%) are located in North America, the rest being in Singapore. See below.
Data Centres represent 10% of Ascenda Reit total Investment Properties. In early 2021, Ascendas Real Estate Investment Trust (Ascendas Reit) acquired 11 Europe data centres for $904.6 million; boosting the Reit exposure to data centres to 10% of its total investment properties, from 4%. See below.
The stock prices of Keppel DC Reit, Mapletree Industrial Trust, and Ascendas Reit have climbed since the March 2020 lows.
In 2021, there are other Singapore-listed Reits that have likewise increased their exposure to this growing segment (data centres).
S-REITs with Data Centres Amongst World’s Strongest in 2020 YTD (read here)
With the listing of Digital Core Reit at the end of 2021, Singapore retail investors now have another choice for pure-play data centre Reits. They can now choose between Digital Core Reit and Keppel DC Reit.
Please note that I am currently vested in Digital Core Reit.
Metrics Comparison between Digital Core Reit and Keppel DC Reit
I think both are good Reits, and if one has sufficient funds to diversify and invest in both, why not?
There are many articles pertaining to the review of Digital Core Reit and comparison to the other Data centre Reit (eg. Keppel DC Reit), and I do not think I need to add further to the analysis. Please see below for the key metric comparison between Digital Core Reit and Keppel DC Reit.
In terms of occupancy rate, Digital Core REIT wins on this aspect with a full 100% occupancy rate for its overall portfolio as compared to Keppel DC REIT’s 98.1%. Nevertheless, Digital Core REIT has a much smaller portfolio with only 1 tenant across most of their assets whereas Keppel DC REIT is more diversified with several tenants across most of its assets.
In terms of Weighted Average Lease Expiry (WALE), Keppel DC REIT wins on this aspect but by a small margin. Both REITs do have long WALEs which is a great point to take note of.
Moving onto key metrics, wuth the increase in Digital Core Reit stock price since IPO, we can see that Digital Core REIT has lower PB ratio but slightly lower yield as compared to Keppel DC Reit.
Digital Core REIT also has a very low gearing at 27% as compared to Keppel DC REIT’s 36.2%. Based on the IPO prospectus, Digital Core REIT has debt headroom of US$160m, US$424m, and US$596m before reaching a gearing of 35%, 45%, and 50% respectively. This represents many opportunities for Digital Core REIT over the next 24 months as they start acquiring from their sponsor’s ROFR pipeline.
Beyond the figures…
Beyond the fundamental metrics, I think many articles did not actually address the elephant in the room.
Now, with the pandemic technically still not over, one would expect data-centre centric Reits stock prices to be still resilient, if not rising.
In the US markets, there are a number of data-centre centric Reits, and according to the National Association of Real Estate Investment Trusts (NAREIT), there are only four REITs focused primarily on owning and operating data centres in late 2021. Namely CoreSite Realty, CyrusOne, Digital Realty and Equinix. The biggest is Equinix followed by Digital Realty.
Digital Core Reit is sponsored by Digital Realty, one of the largest owners, operator, developer and acquirer of data centres globally.
Now let us look at their 1-year stock price performance.
For these 4 data-centre centric Reits, in general, their stock price has been (nothing but) trending up for the whole of 2021, although there is a stock price dip for Digital Realty and Equinix on Jan 22.
If you are an investor vested in any of these Reits, good for you.
On the other hand, when we look at Keppel DC Reit share price chart, it paints a totally different picture.
For the most part of 2021, the share price has been trending downwards since Feb 2021. In fact, it is aound 22% down from its peak in Feb 2021.
To add on, Keppel DC Reit assets are spread over 8 countries (not solely limited to Singapore). In terms of the properties’ values, around 43% are in Europe and Australia.
This downward trend is especially glaring when seen from its long term share price performance. Moreover, like I said earlier, the pandemic is technically not over yet. And compared to its US counterparts, the share price performance is even more puzzling.
In fact, over a 1-year period, the share price of Keppel DC Reit has underperformed compared to the share prices of Mapletree Industrial Trust, Ascendas Reit and the STI ETF.
If you visit online forums or posts by retail investors of Keppel DC Reit, it would not be surprising to read many unhappy comments from disgruntled investors who are vested in this once stellar Sg Reit.
Stock markets are forward-looking, and as retail investors, we are all too familiar with the term that past performance does not guarantee future performance. There are many examples of stock darlings that suddenly ‘lose steam’ and subsequently crash or drop indefinitely, leaving current investors holding the bag.
A dive into what caused the price drop
Keppel DC REIT (SGX:AJBU): 5 reasons why its share price is still down and should you be watching? (read here)
I think Tan Zhi Rong from Dr Wealth wrote a good article highlighting the potential reasons on why Keppel DC Reit stock price dropped. You can read his article as listed above.
I feel among his many points, 2 key points stood out.
1) Failure to meet investors’ expectations
2) Expansion of mandate (which is linked to the Proposed investment in M1 network assets)
1) Failure to meet investors’ expectations.
Investors in general are a pragmatic bunch. After all, there are many other alternative investments / Reits in the market. A lousy year or a lousy quarter can adversely affect the sentiments of investors, leading to drops in stock prices.
Keppel DC REIT did perform admirably in the first quarter of 2021. For the first quarter of 2021, it achieved $42 million in distributable income, up 17.5% year on year.
Similarly, its Distribution Per Unit (DPU) has risen 18.1% to 2.462 cents year on year. With a long Weight Average Lease Expiry (WALE) of 6.6 years, its portfolio occupancy has remained resilient at 97.8%.
However, if you compare this performance to its FY2020 results, it will tell you a different story
In FY2020, Keppel DC REIT’s earnings recorded 38.6% growth in distributable income to $156.9 million and DPU increment of 20.5% to 9.17 cents. This growth is way higher than its Q1 2021 growth, which signifies that Keppel REIT growth has slowed down.
While its occupancy remains high at 97.8%, its WALE has seen a slight drop from 6.8 years to 6.6 years.
In a year, with the tailwind of the pandemic still intact, Keppel DC Reit’s growth appears to be decelerating. For investors used to the stellar growth of the past year, the ‘good’ performance of 1st quarter 2021 appears to be ‘bad’.
2) Expansion of mandate (which is linked to the Proposed investment in M1 network assets)
Maybe I am a bit biased, but I think as an asset class, Reits generally appeals more to the older generation of retail investors (eg. retirees), who look forward to steady and growing dividend income annually. They generally do not like sudden drastic changes as compared to the younger generation who are more into growth stocks or crypto. Well, there is no hard truth in this, just a thought.
The recently proposed merger of Mapletree Commercial Trust (JMCT) and Mapletree North Asia Commercial Trust (MNACT) in a S$4.2 billion deal, has probably resulted in many disgruntled investors (who are currently vested in MCT).
The deal could raise MCT’s leverage, considering MNACT’s weaker leverage profile and the incurrence of incremental debt and perpetual securities to fund the merger’s cash consideration,
With the merger, MCT is no longer a pure Singapore play Reit, namely with the inclusion of: Festival Walk (Hong Kong Mall) and Gateway Plaza (Beijing Office) from MNACT.
Mapletree merger: Moody’s reviews MCT for downgrade, MNACT for upgrade (read here)
Why I am not buying Mapletree Commercial Trust at $1.84 (read here)
Consequently, after the above announcement, MCT stock price has been on a downward trend.
In the case of Keppel DC Reit, on 28 April 2021, with the announcement of the Expansion in Investment Mandate, its stock price started to slide.
With this announcement, Keppel DC REIT would no longer be a pure Data REIT play as it will now include real estate and assets in the digital connectivity sector. Keppel DC REIT’s official reason was that this expansion of mandate would allow Keppel DC REIT to continue to invest in assets with stable cash flows, attractive yields, and accretive returns.
Earlier in my article, I have been using the term pure-play data centre Reit loosely…as technically, Keppel DC Reit is now not a pure-play data centre Reit.
Together with this announcement, Keppel DC made another announcement on a proposed investment in M1. M1 is a subsidiary of Keppel Corporation. Likewise, Keppel DC REIT can be linked all the way back to Keppel Corporation.
With the announcement of its expansion of investment mandate, Keppel DC REIT has signed a non-binding term sheet on the proposed investment in M1 network asset.
For current investors with the original intention of being vested in the high growth data centre segment, they are now also vested in the telecommunication segment. In general, telecommunication stocks like Singtel has not performed well. Although Keppel DC Reit management has indicated that such infrastructure investment will unlikely exceed 10% of its asset. Nevertheless, rules can change again… and well, for an individual retail investor, on his own, he has very little voting rights. And if he cannot change the proposal which he dislikes, he will ultimately vote with his feet (eg. by leaving/selling off his holdings).
I do not have a crystal ball but given the choice…
As highlighted earlier, I am currently vested in Digital Core Reit.
I am unable to predict the future and I reckon there are many moving parts, and narratives could well change in the future. This is especially so for newly listed Reits; there is really not much historical data we can infer from.
With the above points highlighted, there remains one very important factor for dividend investors like me: The sustainability of the dividend payout / DPU – Distribution per Unit (growth).
Digital Core Reit is a newly listed Reit, so there is no past performance to speak of. The best we can do is to look at the past performance of its sponsor Digital Realty (and it really is a very strong sponsor).
The dividend growth of Digital Realty Reit has been good (if not stellar). As stated on its website, Digital Realty Reit is committed to a secure and growing dividend. It has 16 consecutive years of growing dividend increase (at 10% CAGR). I will probably be vested in this Reit if not for the 30% dividend tax.
In comparison to Digital Realty Reit, Keppel DC Reit is a relatively young Reit. Keppel DC REIT was listed on 12 December 2014, and it has been paying dividends. Its dividend yield has not been stable (perhaps because it is a young Reit), and the historical trend is far from upward trending. See below.
Digital Realty Reit stated that it is committed to a secure and growing dividend. Can Keppel DC Reit state the same?
Nevertheless, I may be wrong, as past performance is not indicative of future performance.
Is it a coincidence that Digital Realty chose to list Digital Core Reit at the end of 2021 when Keppel DC Reit share price has been sliding for most of the year 2021?
With the listing of Digital Core Reit, and perhaps other future potential pure-play data centre Reits, together with existing SG Reits increasing their exposure into the data centre segment, Keppel DC Reit is no longer the one and only data-centric Reit in the Sg Reit market. In fact, it is not even a pure data-centric Reit. The only pure data-centric Reit in town (Singapore and Hong Kong stock markets) is Digital Core Reit.
There will potentially be more investment options for retail investors looking to invest in this growing sector, and Keppel DC Reit needs to do more to stay ahead.
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