ASX code: AJD
Share price: $1.40
Industry: Specialty Real Estate
Forecast FY2017 Distribution: 10c
When the Reserve Bank cut interest rates by 25 basis points to 1.75 per cent, the chase for yield returned to the forefront of investors’ minds. The effect of this cut on term deposit income will be felt by deposit investors as their deposits mature and roll over. Given that cash rates are already at historical lows the 25-basis-point cut equates to a 10-15 per cent reduction in income earned. As such, the constituents of the REIT index (the ASX index that follows property trusts) have performed well with effective yields coming down as investors seek safe, income-generating assets with reoccurring cash flows.
Asia Pacific Data Centres is an Australian-listed REIT with a twist, being the first listed data-centre REIT in the nation. AJD owns three investment properties in the Melbourne, Sydney and Perth markets, along with the infrastructure at each of these. Its properties are within their respective city’s industrial parks, averaging just over 10km from the CBDs.
AJD leases out the entirety of its three centres to data centre services group NextDC, its sole tenant, who then essentially sublets servers and services to other companies. NextDC has experienced strong growth in its customer base and revenues since listing in 2010 and maintains a solid balance sheet with ample cash flow generation. Some of NextDC’s clients include RBS Morgans, Amazon, Telstra and Microsoft. The barriers to entry in the data centre space are quite high due to the necessity of being within a reasonable distance of its clients, requirements regarding location near the grid due to high power requirements and the initial capital investment required to build purpose-built infrastructure to house servers.
Asia Pacific’s most recent half-year results showed steady progress, with its distributions growing during the period, gearing maintained at a conservative levels and CPI reviews leading to rent increases across the portfolio. Net tangible assets came in at $1.24 for the half, though there were no revaluations undertaken for this period.
We equate fair value for AJD to be between $1.40 and $1.44 and on any material weakness from these levels, it could be an attractive portfolio addition.
Written by Gareth Abernethy, Equities Analyst