Citi Research analyst Brandon Lee has kept his “buy” call on Keppel DC REIT with a lowered target price of $2.18 from $2.30.
The analyst lowered his target price after attending a call for analysts held by the REIT.
The manager of Keppel DC REIT announced that it had issued a letter of demand (LOD) to its tenant, Guangdong Bluesea Data Development Co., Ltd, about the lease agreements for Guangdong Data Centres 1, 2 & 3 on Dec 15.
In a previous report dated Dec 14, Lee said that the LOD came as no surprise given the tenant’s weak financial metrics and low utilisation rate of 21.9% of its self-developed data centres, of which Lee had flagged in a Dec 10 report. For the 2QFY2023, Guangdong Bluesea had a net gearing of 0.99x and a 9MFY2023 net loss of HK$179.6 million ($30.7 million).
According to Keppel DC REIT, if the rent, coupon and recoveries concerning the properties cannot be recovered, the REIT will suffer from a negative impact of around 0.655 cents to its FY2023 distribution per unit (DPU). Based on Lee’s estimates, this represents 6.7% of his FY2023 estimates and 6.5% of the REIT’s annualised 9MFY2023 DPU based on his forecast.
In his Dec 17 report, Lee notes that Guangdong Data Centre 1 is largely stabilised at 70% to 80%, but Guangdong Data Centre 2 is still undergoing a ramp-up process and is not stabilised.
See also: Keppel DC REIT issues letter of demand to Guangdong data centre tenant
“Contractually, Keppel DC REIT cannot reveal underlying tenants, but both data centres (each [around] 4,000 server cabinets) are largely anchored by two major telco operators,” he writes. “[The] long-stop date of Oct 31 for Guangdong Data Centre 3’s (fully-fitted by 3QFY2024) framework agreement has passed and Keppel DC REIT has not extended it, hence it reserves right to cancel the deal, transfer core-and-shell to vendor and receive refund of RMB100 million ($21.5 million), but it has not exercised the right and is now working with advisors on its options.”
“In October, a third major telco operator in China agreed to operate 1,300 cabinets (33% utilization) in Bluesea Intelligence Valley Mega DC, where these three data centres are,” he adds.
In his view, Keppel DC REIT can take back the assets if the master leases are terminated and take over the tenancies or start over on a clean slate. However, there will be differences on the downtime and operating margin, the analyst notes.
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“Sponsor Keppel Corporation BN4 has resources to assist operations of Guangdong Data Centre 1 & 2, but negotiations are still ongoing with Guangdong Bluesea and Keppel DC REIT will make further announcements if [and] when material developments occur,” the analyst points out.
“As both assets are integral to Guangdong Bluesea’s operations, it is committed to discussions on resolving the arrears and have historically paid rents timely. In-place rents are in-line with market,” he adds.
For now, Lee has cut his DPU estimates for FY2023, FY2024 and FY2025 by 1.6%, 8.3% and 8.3% on its lower China occupancy and the removal of Guangdong Data Centre 3. He expects the REIT’s occupancy for its China portfolio to drop by 16.7 percentage points, 74.9 percentage points and 34.9 percentage points for the FY2023, FY2024 and FY2025 respectively to 83.3%, 25.1% and 65.1%.
As at 2.12pm, units in Keppel DC REIT are trading 10 cents lower or 5.29% down at $1.79.
