[Investing] Keppel DC Reit Downgraded to "Hold"

Some REITs (Real Estate Investment Trusts) have always been on my radar. One of them is Keppel DC Reit (AJBU).

AJBU is a data centre Reit, and has footprints also in Australia, Germany, Ireland, Italy, Malaysia, The Netherlands and United Kingdom. It was IPO-ed in 2014 at a price of $1.

As of writing, the price is $2.50. I hesitated to buy when it was $1.60.

Regardless, the recent developments around me made me start revising investment concepts. So I was revising some Reit evaluation methodology I learnt.

Based on my calculation, AJBU has

1. A gearing ratio of 31.4%
2. Distribution Yield of 3%
3. Cost of debt at 1.8%
4. Price/NAV at 2.19X
5. Fees/Distributable Income is 14.1%
6. Fees/Total Assets is 0.5%

Most of the items looks OK (perhaps the fees is slightly on the high side), but its Price/NAV is more than 2 times.

What does this mean? It means that for every dollar of net assets, an investor is paying $2 for it. That leaves little or no room for growth at all. Assets (mainly real estate) are the main source of income for Reits, but a high valuation like ABJU makes it not really a preferred choice now. 

To put this into perspective, it takes about 28 years of compounding a dollar at 3% to reach the value of $2.20. An investor would have already made 250% in capital gain if he had invested during IPO, of course. 

Not that I know of any other way Reits can generate revenue beside rental income, anyway.

Perhaps when the Price/NAV goes down, either because the price goes down (unlikely) or the Reit acquire more assets (likely). 

I think perhaps this is why DBS downgraded this Reit to "Hold". 

I also analysed Reits like the Mapletree Commercial Trust and the Fraser Centrepoint Trust, and shall share them in the future posts.

Stay tuned.

~ZF