3 Singapore Data Centre REITs to Consider Amid the Market Decline

Data centre REITs should continue doing well over the long run.

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The stock market is getting spooked once again due to news that interest rates are set to rise to tame stubbornly high inflation.

US’ S&P 500 index is now down around 8% since hitting a record high in December last year.

Over in Singapore, the FTSE ST All-Share Real Estate Investment Trusts (REITs) Index — which consists of 35 Singapore REITs — has tumbled close to 10%.

However, for those with a long-term view of the stock market, the current market decline could be an opportunity to pick up shares in high-quality companies at a lower valuation.

With that, here are three strong Singapore REITs with data centre exposure to consider researching into.

But First, Why Data Centre REITs?

From uploading a file on Google Drive to big corporations creating online content, we are constantly creating data.

Those data have to be stored somewhere, and data centres facilitate the data storage.

The major attraction of data centre REITs, on top of dishing out regular dividends, is that they benefit from the continued expansion of data, a trend that has been accelerated by the COVID-19 pandemic.

The digitisation of the economy, adoption of new technologies, and trends such as streaming, social media, cloud computing, edge computing and artificial intelligence are fuelling demand for data centres.

And the demand should continue for many years to come.

There are a couple of trends that data centres are riding on, according to Keppel DC REIT (a data centre REIT that will be covered later):

“The rapid adoption of technology will continue to boost the digital economy, enhancing global connectivity and will strengthen the data centre landscape. The COVID-19 pandemic has reinforced the resiliency of the data centre sector, which is underpinned by strong digital trends including smart technology implementation, big-data analytics and the increasing use of 5G.”

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Singapore REIT #1: Digital Core REIT (SGX: DCRU)

Digital Core REIT is the latest REIT to go public in Singapore. Listed on 6 December 2021, the REIT invests in a stabilised and diversified portfolio of mission-critical data centres globally.

Digital Core REIT’s portfolio contains 10 freehold data centres located within top-tier markets of the US and Canada.

The properties are fully leased to high-quality clients, including Fortune Global 500 companies.

Source: Digital Core REIT IPO Prospectus

The REIT’s portfolio has a long weighted-average remaining lease term of over six years, giving the REIT stability.

The lease agreements of its properties also have built-in rental rate escalations of between 1% and 3%, with a weighted average of around 2%. This provides Digital Core REIT with organic growth.

In terms of inorganic growth, Digital Core REIT’s sponsor Digital Realty (NYSE: DLR) is providing a right of first refusal (ROFR) to Digital Core REIT for assets it owns globally.

The ROFR agreement ensures that Digital Realty offers its properties to Digital Core REIT first before offering them to any third-party companies.

With a low gearing ratio of 27%, Digital Core REIT has plenty of room to take on more debt for acquisitions-driven growth.

Still on growth, according to the REIT’s IPO prospectus, the North American data centre market is expected to grow at an annualised growth rate of some 15% from 2020 to 2024. That’s not shabby at all.

At Digital Core REIT’s unit price of US$1.15, it has a price-to-book (PB) ratio of 1.4x and a distribution yield of 3.6%.

Singapore REIT #2: Keppel DC REIT (SGX: AJBU)

Keppel DC REIT is another data centre REIT with a portfolio of 20 data centre assets strategically located across nine countries in the Asia Pacific region and Europe.

Source: Keppel DC REIT Investor Presentation

Keppel DC REIT’s investment strategy is also to own real estate and assets needed to support the digital economy. On that front, it recently invested in bonds and preference shares issued by M1 Network Private Limited.

For Keppel DC REIT’s 2021 financial year, gross revenue grew 2.1% year-on-year to S$271.1 million while net property income (NPI) increased by 1.6% to S$248.2 million.

The increase in gross revenue was largely due to contributions from Dublin and Singapore assets after asset enhancements, full-year contributions from Kelsterbach DC and Amsterdam DC (both acquired in 2020), as well as the acquisitions of Eindhoven DC and Guangdong DC (acquired on 2 September 2021 and 16 December 2021 respectively).

With that, distributable income improved by around 9% and distribution per unit (DPU) increased by 7.4% to 9.851 Singapore cents.

Keppel DC REIT ended off the financial year with a strong balance sheet.

Its gearing ratio stood at around 35%, as of 31 December 2021, while its interest cover ratio was high at almost 11x.

Source: Keppel DC REIT Investor Presentation

Looking ahead, Keppel DC REIT said:

“Keppel DC REIT is well-positioned to benefit from the positive industry trends. … Keppel DC REIT’s Sponsor and Keppel’s private data centre fund have more than $2 billion of assets under management and development. Keppel DC REIT may look to potentially acquire these assets if it is beneficial to the Unitholders.”

At Keppel DC REIT’s unit price of S$2.16, it has a PB ratio of 1.6x and a distribution yield of 4.6%.

Singapore REIT #3: Mapletree Industrial Trust (SGX: ME8U)

Mapletree Industrial Trust is a REIT with a portfolio of 86 properties in Singapore and 57 properties in North America (which includes 13 data centres held through the joint venture with its sponsor Mapletree Investments Pte Ltd).

Interestingly, over half of Mapletree Industrial Trust’s assets under management (AUM) are in data centres.

Source: Mapletree Industrial Trust Investor Presentation

In terms of geographical asset breakdown, there’s an almost even split between Singapore and North America.

One aspect I like about Mapletree Industrial Trust is that it has shown steady growth in DPU over the years.

Its DPU has increased from 3.45 Singapore cents in FY10/11 (financial year ended 31 March 2011) to 12.55 cents in FY20/21, as seen from the chart below.

Source: Mapletree Industrial Trust Investor Presentation

For Mapletree Industrial Trust’s latest quarter of 3QFY21/22, its gross revenue surged 31.3% year-on-year to S$162.4 million, and NPI grew 24.1% to S$122.7 million.

The REIT’s strong performance was largely driven by contribution from the acquisition of 29 data centres in North America.

Meanwhile, DPU continued marching on higher, increasing by 6.4% to 3.49 Singapore cents.

Mapletree Industrial Trust said in its earnings release that its “large and diversified tenant base with low dependence on any single tenant or trade sector will continue to underpin its portfolio resilience”.

At Mapletree Industrial Trust’s unit price of S$2.51, it has a PB ratio of 1.4x and a distribution yield of 5.4%.

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Disclaimer: This information provided in this article is purely based on my opinions and is not intended to be personalised investment advice. The ideas discussed here are not recommendations to buy/sell any stock. The writer Sudhan P owns units in Keppel DC REIT.

What Investors Should Know About SPACs on Singapore Exchange (SGX)

Here’s a quick lowdown on SPAC investing in Singapore.

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Singapore has created stock market history with the listing of our first special purpose acquisition companies (SPAC) here.

On Thursday 20 January, Vertex Technology Acquisition Corporation Ltd (SGX: VTA), a SPAC sponsored by Singapore state investor Temasek-owned Vertex Venture, became the first SPAC to be listed on the Singapore Exchange (SGX).

It opened for trading at S$5.25 per share, up from its offer price of S$5.

The following day, Pegasus Asia (SGX: PGU), a SPAC backed by European asset manager Tikehau Capital and the family office of LVMH owner, took its first breath as a listed entity. It opened at S$5.01 on its debut day.

To help Singaporeans learn more about SPACs, Ryan Huang from MONEY FM 89.3 invited me to discuss the hottest topic in the Singapore stock market right now.

For those who may not be aware, SPACs are basically “blank cheque” shell companies that allow private companies to turn public without going through the traditional initial public offering (IPO) process.

Ryan and I covered topics such as why would investing in SPACs be attractive for retail investors, what an investor gets by buying SPACs, the various stages of a SPAC listing up till de-SPAC, the risks involved with SPAC investing, and a quick background of the SPACs on the pipeline.

I also talked about why I wouldn’t invest in SPACs.

Do check out the interview below to understand more about SPACs before investing in them.

(Side note: You will hear the company MoneyWiseSmart — an investment educator that helps subscribers navigate the stock market with the long-term in mind — mentioned in the interview. I’ve joined MoneyWiseSmart as Head of Content Strategy from Seedly previously.)

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Disclaimer: This information provided in this article is purely based on my opinions and is not intended to be personalised investment advice. The ideas discussed here are not recommendations to buy/sell any stock. The writer Sudhan P doesn’t own shares in any companies mentioned.

Reflections From Howard Marks’ Memo on Selling Stocks

When should you sell your stocks?

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Howard Marks is a well-known American investor and writer who writes insightful memos to the clients of his investment firm, Oaktree Capital Management.

On Friday (14 January), Marks released his latest memo entitled “Selling Out”.

The memo explores one of investing’s most fundamental questions of when we should sell our investments.

Marks’ latest memo resonated with me so much that I thought I should spend some time reflecting on it.

Here are some of my favourite parts from the memo, together with my own commentary.

Too Much Activity ≠ Outperformance

One of the biggest myths in the stock market is that you have to actively buy and sell to do well in the stock market.

In his memo, Marks says that when we find an investment with the potential to compound over a long time frame, one of the hardest things is to be patient and maintain your position for as long as necessary.

Investors can easily be distracted to sell due to news and emotions such as fear and greed.

This reminds me of a research paper that was published in 2005 titled “Action bias among elite soccer goalkeepers: The case of penalty kicks”.

In the study, researchers performed an analysis of 286 penalty kicks in top leagues and championships worldwide.

They found out that penalty takers shoot the ball to the right of the goal 1/3 of the time, to the left 1/3 of the time, and to the centre 1/3 of the time.

The paper also revealed that a goalkeeper picks a side and dives 93.7% of the time and stands in the middle merely 6.3% of the time.

There was a clear bias towards action.

With 30% of the kicks right down the middle, the optimal strategy is to obviously stay in the middle.

However, by staying rooted without doing anything, the goalkeeper might feel he is portrayed as being incompetent, thus the need to dive.

The propensity to act even though the action may result in something less desired is termed “action bias”.

Similarly, the higher the activity in an investment portfolio, the higher the chance for our investments to do poorly.

So, the next best course of action (or inaction, in this case) is to just “sit on your ass”, in Charlie Munger’s words.

In his book, “Poor Charlie’s Almanack”, Warren Buffett’s partner Charlie Munger said (emphasis is mine):

“If you buy a business just because it’s undervalued, then you have to worry about selling it when it reaches its intrinsic value. That’s hard. But if you can buy a few great companies, then you can sit on your ass. That’s a good thing.”

Like the goalkeepers, you don’t need to “dive” just for the sake of diving. Sometimes, not doing anything is “doing something”.

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Selling Because Price is Up (or Down)

Most investors sell after a company’s share price runs up as they are afraid that the profits will vanish.

However, there comes a reinvestment risk when the released capital has to be deployed into another company (not considering the time taken to research into a new company again).

What if, decades later, the company that you sold would go on to produce a better return than the new one that you decided to recycle capital into?

So the best course of action would be to just hold on to the winners. You should never interrupt the power of compounding without any concrete reasons (more on that later).

In a podcast at the end of 2018, David Gardner, one of the co-founders of The Motley Fool, shared his takeaways from 200 months of stock picking for an investment newsletter service in the US.

One of his learning was you lose far more on a potential winner than you can on a loser. He said in the podcast (emphases are mine):

“But the real biggest loser for you, if you’re an investor and if you’ve been acting over the long term, I bet you realize that it’s not the bad-performing stocks. It’s the megawinners that you sold too early. It’s that you didn’t stick with big winners…

If you ever have had a wonderful winner in your portfolio and you sold it too early, that is by far a more criminal act on your portfolio. You’re doing far more abusive damage to your own financial future than if you pick a really bad stock and watch it lose most of its value.”

On the other hand, you shouldn’t sell stocks just because they have fallen.

Yes, it’s painful to see losses in our portfolio, but that’s just part and parcel of investing.

If the companies you have bought are of high quality in the first place, and there are no fundamental changes to the business, then any fall in the stock price provides an opportunity to own more of the company at a cheaper price.

Therefore, it’s plain foolish to sell just because prices are up or down. Most of the time, staying invested is ultimately “the most important thing”, in Marks’ words.

So, When Should You Sell?

Selling a stock should never be based on emotions; there must be concrete reasons for selling.

The reasons should be “based on the outlook for the investment – not the psyche of the investor – and they have to be identified through hardheaded financial analysis, rigour and discipline”, says Marks.

In Marks’ view, selling should be done only if:

1. “If your investment thesis seems less valid than it did previously and/or the probability that it will prove accurate has declined, selling some or all of the holding is probably appropriate.”

2. “Likewise, if another investment comes along that appears to have more promise – to offer a superior risk-adjusted prospective return – it’s reasonable to reduce or eliminate existing holdings to make room for it.”

But you shouldn’t look at selling in a vacuum. It should be evaluated in terms of “opportunity cost”.

Some questions to ask would be:

  • What will you do with the proceeds? Do you have something in mind that could produce higher returns?
  • What will you give up if you continue to hold the stock instead of making the change?

If you are looking to leave your proceeds in cash (not planning to reinvest), a key question to ask would be: Why would holding cash be superior to holding on to the stock that you just sold?

Marks goes on to explore the topic of selling your stock when there’s a temporary share price dip and buying it back later when the price recovers.

He says it’s not generally a good idea to sell for purposes of market timing, which I agree wholeheartedly.

Many studies have also shown that market timing doesn’t work.

For example, a study by Index Fund Advisors showed that for a 20-year period from 1994 to 2013, the S&P 500 index averaged an annual return of 9.2%.

A $10,000 initial investment would give around $58,000 at the end of 2013.

However, if an investor had missed out on just the 10 best days of the 20 years, the average return would have fallen to 5.5%, meaning the final investment amount would only be halved at about $29,000.

The pioneer of index funds, John Bogle, once mentioned:

“Sure, it’d be great to get out of stocks at the high and jump back in at the low… [but] in 55 years in the business, I not only have never met anybody who knew how to do it, I’ve never met anybody who had met anybody who knew how to do it.”

Therefore, it doesn’t pay to time the market; time in the market is more important.

The Cardinal Sin in Investing

Marks ends the memo by commenting:

“Usually, every market high is followed by a higher one and, after all, only the long-term return matters. Reducing market exposure through ill-conceived selling – and thus failing to participate fully in the markets’ positive long-term trend – is a cardinal sin in investing. That’s even more true of selling without reason things that have fallen, turning negative fluctuations into permanent losses and missing out on the miracle of long-term compounding.”

Enough said.

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40 Sites (And Counting) To Add to Your Investment Research Toolkit

Investment research tools galore!

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A week ago, I did a post — “Free Stock Data Sites to Use for Your Investment Research” — that talked about tools I use for my investment research.

Websites covered in the article include:

That article garnered lots of positive feedback and traction from the investment community.

So to benefit readers who are looking for more research tools to use for their investment research, I’m sharing more websites that a good friend of mine — Thomas Chua (owner of the Steady Compounding blog) — compiled.

Currently, the list contains 40 websites that range from tools to understand the trend of a company’s social media following to keeping track of your portfolio.

Source: Thomas Chua | Twitter

Be sure to check out Thomas’ compilation here.

He will revise the list whenever he finds something interesting.

To make your life easier, you can save a shortcut of the spreadsheet to your Google Drive to be updated with the latest version.

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