Keppel DC REIT, which invests in a diversified portfolio of incoming-producing real estate used primarily for data centre purposes, has been expanding its footprint since its listing in 2014.
In 1HFY2022 ended June 30, although Keppel DC REIT reported somewhat flattish revenues, rising 0.3% to $91.2 million from the same period a year ago, DPU rose 2.5% y-o-y to 5.049 cents. This was underpinned by a realised forex gain of $4.3 million and contributions from M1 of $4.1 million which was reflected as finance income.
In addition, Keppel DC REIT benefitted from the full contribution from acquisitions such as the London Data Centre and Guangdong Data Centre which were acquired in December 2021, and the Eindhoven Campus.
Indeed, Keppel DC REIT now has a European and Asia-Pacific footprint. Fifty-five per cent of Keppel DC REIT’s portfolio by value is located in Singapore with the remaining 45% spread between mainly Europe, the UK, Australia and most recently China.
To mitigate the impact of potential currency fluctuations, forecast foreign-sourced distributions have substantially been hedged till 2HFY2023 via foreign currency forward contracts.
In 2QFY2022, Keppel DC REIT’s manager also diversified its sources of funding with the issuance of EUR75 million ($105.56 million) fixed rate notes due 2028.
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As at June 30, Keppel DC REIT’s average cost of debt remained low at 1.9% per annum and the interest coverage ratio was 9.2 times, one of the highest among S-REITs. Aggregate leverage was 35.3% as at end June.
In 1HFY2022, the manager secured new, renewal and expansion contracts for Keppel DC REIT’s data centres in Singapore, Ireland, Malaysia and the Netherlands. For the remainder of FY2022, Keppel DC REIT has only 2% of contracts by lettable area are due to expire.
Expanding its China footprint
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In July 2021, the manager of Keppel DC REIT announced the acquisition of a Guangdong Data Centre which would be fully leased back to the developer on a triple-net basis for 15 years. The location in Guangdong is the Bluesea Intelligence Valley Mega Data Centre Campus, and the developer, Guangdong Bluesea Data Development Co (Bluesea), is a unit of Neo Telemedia, listed on the Hong Kong Exchange. This data centre has a gross floor area (GFA) of about 221,689 sq ft and was designed following the “Code for Design of Data Centre Grade A GB”, where Grade A is the highest standard for data centres in China. The acquisition of this data centre was completed in December 2021 and Keppel DC REIT has a right of first refusal (ROFR) for a further five data centres by the same developer. In July 2021, Keppel DC REIT’s manager indicated that the NPI yield of the Guangdong Data centre, acquired for the equivalent of $132 million, was in the high 8%–9% range, which is higher than the NPI yield of data centres in Keppel DC REIT’s other markets.
In June, Keppel DC REIT’s manager announced it was exercising the ROFR and acquiring two more data centres from Bluesea, both fully fitted. These are located at No. 6 Bluesea Intelligence Valley Data Centre, Shaping Street, Heshan, Jiangmen, Guangdong (Building 6) and No. 7 Bluesea Intelligence Valley Data Centre, (Building 7). Building 6 and Building 7 will cost $148.5 million each excluding VAT (value added tax) and $163.6 million each including VAT.
The terms and conditions for Building 6 and Building 7 are similar. The properties are leased to Bluesea for 15 years after the purchase consideration and VAT have been paid in full. The initial annual rent payable by the seller as lessee (plus VAT and subject to adjustment) from the commencement of the lease for Building 6 is around RMB63 million, which was equivalent to roughly $13.6 million at that time. Building 7 has similar rental terms.
“The data centres have a 100% master lease agreement with the vendor for 15 years on a triple-net lease basis. “If we acquired the asset on Jan 1, 2021, DPU would have increased by 2.7% to 10.113 cents,” says Anthea Lee, CEO of Keppel DC REIT’s manager.
Under the Building 6 Lease Agreements, Bluesea is granted an option to renew the term of the lease for a further five years from the lease expiry date, and also has the pre-emptive right to purchase Building 6 from the REIT.
In all, Keppel DC REIT will own three data centres in China, which according to Keppel DC REIT’s June announcement is the largest growing data centre hub in Asia. This is underpinned by demand from the rapid development of China’s digital economy in tandem with the Chinese government’s concerted digitalisation efforts.
OCBC dares to be different
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While analysts are relatively sanguine on the outlook for Keppel DC REIT, with many having lukewarm “buy” recommendations, OCBC Investment Research has taken a contrarian view.
“Although the two proposed acquisitions would be master leased to Bluesea on a triple-net basis for 15 years, we are more concerned over the credit standing of Bluesea, which is an entity of Hong Kong-listed Neo Telemedia. We note that Neo Telemedia reported a net loss of HK$71.4 million in FY2021, had a net gearing of 172%, and all its borrowings [of HK$1.8 billion] were classified as current liabilities, as at December 31, 2021,” OCBC cautions.
In fact, OCBC estimates that Bluesea will be Keppel DC REIT’s second-largest tenant once the acquisitions are completed. “Post-completion of these proposed acquisitions, we estimate that Bluesea would become Keppel DC REIT’s second-largest tenant and would account for a low-teens percentage of its NPI.”
When asked for further details about the master lessee and security deposits, all CEO Lee would say is that Neo Telemedia is listed in Hong Kong, although she is unable to share what the sum of the security deposit is for the 15-year period.
“We considered various factors when we entered into these data centre agreements, [including] the level of interest we received before looking into acquiring the assets. Guangdong DC1 is substantially contracted to the customer. As for DC2 and DC3 (Building 6 and 7), the master lessee has an agreement working with a telco. In terms of single-tenant risk, we considered the price we paid for rents we are getting to be very manageable and in the worst-case event, Keppel can take over,” Lee says during a results briefing on July 25.
OCBC acknowledges that a mitigating factor for the transaction is that the assets are and will be sub-leased to other end-users such as telco operators.
If the master lease works out and the rents are lower than market rents — although the campus is developed by Bluesea and is sizeable — and Bluesea defaults, the outcome would be positive. Given the uncertainties, OCBC says it is raising its DPU forecast slightly for FY2022 by 0.4% but lowering its FY2023 DPU projections by 1.7% because of higher interest costs. However, its fair value for Keppel DC REIT is lowered to $2.04 from $2.28 previously, which does not leave much upside.
