The REIT sector has faced strong headwinds over the past two years due to rising inflation and a rise in interest rates.
Income investors fear that REITs will have to reduce their distribution per share (DPU) due to rising financing and operating costs.
However, industrial REITs have held up better than most other REIT subsectors as e-commerce demand remains strong.
Data center REITs in particular have shown resilience as technology companies require enormous amounts of storage space due to the explosion in digitization and the use of electronic devices.
Keppel DC REIT (SGX: AJBU) and Digital Core REIT (SGX: DCRU) are benefiting from this trend.
Both REITs are pure data center REITs, but we compare each REIT based on various metrics to determine which is the better buy.
Portfolio composition
First, let’s look at the composition of each REIT’s portfolio.
Keppel DC REIT has almost twice as many data centers as Digital Core REIT.
At 3.7 billion Singapore dollars, the value of Keppel DC REIT’s real estate is almost twice that of Digital Core REIT.
In addition, Keppel DC REIT’s properties are located in nine countries, while Digital Core REIT is only present in four countries – Germany, the USA, Canada and Japan.
Winner: Keppel DC REIT
Financial indicators
Digital Core REIT had a difficult time in 2023 due to the bankruptcy of one of its major tenants.
Fortunately, the data center REIT managed to avoid bankruptcy through a series of transactions by selling the troubled data centers and using the proceeds to acquire additional data centers.
Due to this disruption in rental income, gross revenue and net property income (NPI) decreased year-on-year.
Digital Core REIT’s DPU also fell 7% year-over-year to $0.037.
Keppel DC REIT reported year-on-year improvement in both revenue and NPI as organic rental growth and acquisitions contributed to the increase.
However, the REIT also saw its DPU decline from 2022 levels due to a provision for unpaid rent from one of its tenants, Bluesea.
As a result, its DPU fell 8.1% year-on-year to S$0.09383.
Keppel DC REIT is still the winner in this category as it saw an increase in its revenue while Digital Core REIT saw a decline.
Winner: Keppel DC REIT
Debt ratios
Now, if we look at the debt ratios of each REIT, we see that Digital Core REIT has a lower debt ratio of 33.5% than Keppel DC REIT at 37.4%.
However, Digital Core REIT has higher debt costs and a lower interest coverage ratio.
Both REITs are roughly on par and have invested almost three-quarters of their debt at fixed interest rates to mitigate the rise in interest rates.
In the current environment of rising interest rates, the REIT has a clear advantage with its lower borrowing costs.
Winner: Keppel DC REIT
Operating figures
Both data center REITs had high utilization rates of over 95%. Keppel DC REIT’s utilization rate was slightly higher at 98.3% than Digital Core REIT’s at 97%.
However, there were large differences in the weighted average lease terms (WALE) of the individual REITs.
Keppel DC REIT entered into long-term leases with its tenants, resulting in a WALE of 7.6 years, more than double Digital Core REIT’s 2.8 years.
Winner: Keppel DC REIT
Evaluation
Next, we compare the valuation of each REIT to see which one offers better value for money.
Digital Core REIT had a price-to-book (P/B) ratio of just 0.65, possibly reflecting pessimism over the recent bankruptcy of a client and the complicated structure of the series of transactions to resolve this issue.
In contrast, Keppel DC REIT’s P/B ratio was a whopping 1.27 as the REIT’s share price represented a premium to the value of its assets.
The Digital Core REIT may be a bargain for investors, but they should also consider the REIT’s other characteristics when making their decision.
Winner: Digital Core REIT
Distribution yield
Finally, we turn to the distribution yield of each REIT.
Digital Core REIT has a higher distribution yield of 6.2% than Keppel DC REIT, which has a yield of 5.5%.
However, income investors need to consider the sustainability of each REIT’s DPU and not just look at total returns.
Winner: Digital Core REIT
Get Smart: Keppel DC REIT takes the win
Overall, Keppel DC REIT is the winner as it has more positive qualities than Digital Core REIT.
However, investors should also consider two other metrics – each REIT’s sponsor and its asset pipeline.
Keppel DC REIT has a strong sponsor in the blue-chip asset manager Keppel GmbH (SGX: BN4), while Digital Core REIT’s sponsor is an established data center REIT Digital Realty Trust (NYSE: DLR) is listed in the USA.
Keppel Ltd has a pipeline of data centre assets valued at over S$2 billion that can be contributed to Keppel DC REIT.
Digital Realty Trust has an impressive pipeline of over $15 billion worth of assets around the world that could be contributed to Digital Core REIT in the future.
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Disclosure: Royston Yang owns shares in both Keppel DC REIT and Digital Core REIT.
The post “Better Buy: Keppel DC REIT vs. Digital Core REIT” first appeared on The Smart Investor.
