3 Singapore Data Centre REITs to Consider Amid the Market Decline

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.

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