Keppel DC REIT removed from the STI. What’s next for the datacentre REIT?

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By Beansprout • 18 Jun 2023 • 0 min read

Keppel DC REIT will be removed from the Straits Times Index (STI) on 19 June 2023. Here's what unitholders of the datacentre REIT could look out for next.

Keppel DC REIT STI review removal

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What happened?

Keppel DC REIT will be removed from the Straits Times Index (STI) on 19 June 2023. 

The stock will be replaced by the Seatrium on the STI following the latest June 2023 quarterly review. 

The STI is widely followed by investors as the benchmark for the Singapore market, and is made up of 30 top eligible companies that are listed on the Singapore Exchange. Keppel DC REIT has a weightage of below 1% on the STI as at 31 March 2023

Keppel DC REIT’s removal came after Seatrium’s combination with Keppel Offshore & Marine raised its market capitalisation to above S$8 billion, making it the stock with the largest market value on the STI reserve list. 

Seatrium’s market value also exceeded several other stocks in the STI. In comparison, Keppel DC REIT only had a market cap of S$3.5 billion as of 16 June 2023. 

With Keppel DC REIT removed from the STI, let’s take a look at what to look out for next.

What you need to know about Keppel DC REIT

#1 – Keppel DC REIT’s operational performance remains resilient

Keppel DC REIT reported a 3% YoY increase in distributions per unit (DPU) in 1Q 2023. 

Its distributable income was boosted by the acquisition of Guangdong Data Centre 2 and 3, completed asset enhancement initiatives (AEI), as well as income escalations.

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Source: Company data

Keppel DC REIT’s portfolio occupancy has remained high at 98.5% in the first quarter of 2023, despite challenges faced by other REITs when their tenants face financial difficulties. 

For example, Digital Core REIT’s second largest tenant, Cyxtera, filed for bankruptcy in the United States recently. Cyxtera accounts for about 22% of Digital Core REIT’s annualised rental revenue.  

Compared to Digital Core REIT, Keppel DC REIT has a larger proportion of its datacentres in Asia Pacific. In fact, more than half of its portfolio of 23 data centres worth S$3.7 billion is located in Singapore. The stickiness of its tenants has been supported by a high cost of relocation as well as limited datacentre supply in the near term.

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Source: Company data

 

According to Keppel DC REIT, the majority of its rental income is derived from clients with investment grade or equivalent credit profiles. Its largest client is one of the largest tech companies globally. This means that these clients are likely to face a lower risk of running into financial difficulties. 

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Source: Company data

 

#2 – Keppel DC REIT is looking for potential acquisitions

According to management of Keppel DC REIT, they are looking out for potential acquisitions to boost distributions to unitholders. One of the markets that Keppel DC REIT is looking at to potentially acquire assets is Japan, where interest rates are relatively low. 

Keppel DC REIT could also acquire assets from its sponsor, which has more than $2 billion of data centre assets under development and management.

#3 - Risk from higher interest rates

With the Fed not expected to cut interest rates in 2023, investors are naturally concerned about the impact of higher interest rates on the distributable income of REITs.

Keppel DC REIT has a gearing of 36.8% as at March 2023. The REIT has also been managing the impact of higher interest rates proactively, with 73% of its debt on fixed rate, and no refinancing obligations for the rest of 2023. 

According to the company, a 100bps increase in interest rate is expected to lower DPU by around 2.2%.

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Source: Company data

 

What would Beansprout do?

Keppel DC REIT’s share price has fallen by about 2% after the announcement of its removal from the STI on 1st June 2023. 

Based on its market closing price of S$2.05 as of 16 June 2023, it has also fallen by about 9% from its recent high of S$2.24 in May 2023.  

This would largely reflect the weaker sentiment from being removed from Singapore’s benchmark stock index, as well as tenant concerns due to challenges faced by other datacentre REITs. 

However, Keppel DC REIT’s operational performance remains resilient, and it has been able to maintain a high occupancy rate and grow its distributions in the first quarter of 2023. 

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Source: Google 

 

Based on consensus forecasts as of 16 June 2023, Keppel DC REIT is expected to offer a dividend yield of about 5.0% in 2023. 

This is higher than the average 10-year return on the Singapore Savings Bond of 2.8%. 

However, it is below the dividend yield offered by other industrial REITs, such as Mapletree Industrial Trust (5.7%), Mapletree Logistics Trust (5.4%), and CapitaLand Ascendas REIT (5.2%).

The lower dividend yield offered by Keppel DC REIT compared to other industrial REITs suggests that investors may already be expecting its strong operational performance to continue. 

In the event that Keppel DC REIT's share price falls further with the STI removal, its dividend yield might then become more attractive when compared to other industrial REITs. 

We’d also be looking out for any potential accretive acquisitions the REIT is able to make to drive further distribution growth.  

If you would like to get exposure to REITs or the Singapore market without analysing individual REITs or stocks, learn more about how you can diversify your portfolio using a STI ETF or Singapore REIT ETF.

Join the Beansprout Telegram group for the latest updates on Singapore REITs, stocks, bonds and ETFs.

Sign up for the iFast Mid-Year Review on 8 July 2023 to learn more about how to position your portfolio and manage your personal wealth in the second half of the year.

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