With all Singapore REITs, including Keppel DC REIT and Digital Core REIT, dividends are derived from rental income they collect.
For data centres, companies essentially need a place for storing and processing data – even running high-performance computing.
Over the past few years, tech and generative AI have dominated headlines. It’s hard to ignore the stories of how large language models are able to pass the bar exam, or draft IPO prospectus in just a few minutes.
I mean, who wouldn’t be intrigued?
One thing for sure: Big data isn’t going away anytime soon. Both Keppel DC REIT and Digital own and lease out data centres – the digital backbone of AI today. Both are Singapore REITs that are essentially pure-play data centre REITs that are likely able to capture the big AI wave.
Keppel DC REIT is currently trading at ~S$2.28 at a S$5.14 billion market cap, while Digital Core REIT is traded S$0.64 (US$0.5), 5x smaller than its Keppel counterpart.
Yet both have been paying a steady stream of dividends.
So… which is a better buy for dividends? Let’s dive in.
Keppel DC REIT vs Digital Core REIT: Country Focus
While both Keppel DC REIT and Digital Core REIT own data centres, the biggest difference between both portfolios are their geographic concentration.
Keppel DC REIT has ~S$5 billion assets under management. Its portfolio is mainly concentrated in Singapore (66%). And it also has 10 out of its 24 data centres across Europe.
Credit: Keppel DC REIT’s financial presentation
On the other hand, Digital Core REIT has ~88% of its portfolio concentrated in North America. and Europe. Its only presence in Asia is Japan (12%).
Credit: Digital Core REIT’s financial presentation
Lease expiries and repricing power
Keppel DC REIT has a longer weighted average lease to expiry, or WALE of seven years. That’s great for income visibility. But slower to adjust to a higher rental.
Digital Core REIT? Its WALE is 4.7 years, which means leases expire faster. Now, a shorter WALE means that Digital Core REIT also has more opportunities to renegotiate rents as they expire earlier.
In fact, Singapore has the lowest vacancy rates within the APAC market – just 2%. This is because Singapore froze new data centre development between 2019 to 2022.
Its clear regulations are strict, and the government has been more receptive to “green data centres”, which makes it much harder for participants to enter the market.
Credit: Company’s financial statements
That’s why both Digital Core REIT and Keppel DC REIT assets are close to full occupancy. This reflects how limited data centre supply is.
Here’s the other thing. I believe data centre tenants are stickier than the average tenant. Why? Because there’s a lot of cost involved in outfitting the property, and infrastructure is critical. Businesses can’t function properly when their servers are down.
As we all know with markets, the future is way more important than historical values. We can’t assume that DC REITs will keep up those rental reversions.
Keppel DC REIT vs Digital Core REIT shares – Which is cheaper?
Let’s go into the financials.
In terms of net property income (NPI): Keppel DC REIT collects ~S$260 million of NPI. Meanwhile, Digital Core REIT collects ~S$79 million of NPI.
From a valuation perspective, Digital Core REIT is clearly cheaper. Keppel DC REIT trades at 4.3% dividend yield, and its trading at a premium NAV.
Over the last three years, Digital Core REIT trades at least a 5% dividend yield and at a steep discount of 0.73x NAV.
This means, investors are paying US$0.73 for every dollar in NAV.
Credit: Company’s financial statements
What’s more, aggregate leverage for Digital Core REIT is still manageable despite being higher than Keppel DC REIT.
Credit: Company’s financial statements
Why is Digital Core REIT trading at almost half the valuation of Keppel DC REIT?
Two things. First, Keppel DC REIT has a much longer track record of over ten years – having listed in 2014. Digital Core REIT has only three years of financial track record.
Next, Digital Core REIT has had some trouble with tenants. Recall in November 2024, Digital Core REIT’s second largest tenant filed for bankruptcy.
The same thing happened in 2022 for Digital Core REIT’s fifth largest tenant, Sungard, which also filed for bankruptcy.
My view is this: I believe the demand for data centre space and limited vacancies across the data centre industry, I’m sure Digital Core REIT will be able to replace the tenants without much problem. Vacancies are insanely low and demand is only expected to grow.
What’s more, Digital Core REIT’s aggregate leverage is ~34%, which is in my view still conservative and has plenty of room to grow more assets through borrowing
My final thoughts — which is a better buy for dividends?
I like both Singapore REITs. Data centres are riding the tailwind of a new tech revolution.
What’s more, with current supply constraints likely to persist, power concerns that prevent developers from hammering out more supply, and on top of the fact that it always takes years to build real estate…
And infrastructure is still key behind the AI boom.
If I had to overweight one between both Singapore REITs, I’d lean towards Digital Core REIT. There’s compelling value, fundamentals remain good – tight data centre supply, sticky tenants and dividend yields are higher.
Credit: Company’s financial statements
However, I say investing in Digital Core REIT is riskier between the two. But I have a long term investment horizon.
What I’ll note is Digital Core REIT hasn’t had a long track record yet. It has struggled with picking the right tenants in just two out of the four years it has been listed. But it’s a risk that I am willing to take.
Dear Willie,
I’m a long term investor of both Reits, KDC( Since IPO days in 2014) & Digital Core(DCRU) since 2022, so i have seen both babies grow up & is aware of their life stories:
1) Although both are DC Reits, but their performance couldn’t be more stark. KDC is like the A student, from the get go, till to date, it has outperformed & basked in the limelight.
2) The same couldn’t be said of DCRU. After starting the race, DCRU stumbled & fell, not once but twice( it’s 5th & 2nd largest tenants both defaulted on their rents, one after another) Like the saying goes, when it rains, it pours…
3) The saving grace for DCRU was she has a strong & willing DADDY( strong is not enough, willing is the critical factor when the baby is gasping for breath. MUST also has a strong Daddy, but was reluctant to resuscitate it’s “turning blue” baby). With the help from it’s sponsor, the DCRU baby has recovered & is back on it’s feet. MUST is still in the ICU….
Hey minx,
I appreciate your thoughts. I couldn’t agree more.
DCUR so far has proved itself its assets have been able to fill up vacancies fairly quick, and without huge impact. The strong points for both KDC and DCRU are its sponsors. The problem with data centre landlords is their tenants tend to be very concentrated in a small handful. That’s the risk investors have to accept, which is unlike retail and office assets.
A good indicator is to look at dividend yield to be well compensated for data centre investments. Thoughts?
Cheers,
Willie