Keppel DC REIT’s AJBU unit price is down to below $1.90 following the announcement of its results on the evening of October 16, when prices closed at $2.01. A couple of trading days earlier, KDC REIT’s price was at $2.07.
Some analysts point out that Neo Telemedia, the master lessee of KDC REIT’s data centres made a net loss in 1HFY2023 for the six months ended June. That is indeed the case. Neo Telemedia reported a loss of HK$123.7 million or a loss per share of 1.3 HK cents for the six months to June 30. This compared with a net profit of HK$40 million in 1HFY2022. Interestingly, Neo Telemedia recorded both positive operating cash flow and free cash flow.
However, on the bank loans and debt front, Neo Telemedia has some HK$842.7 million of loans (of which HK$548 million are bank loans) categorised as current liabilities, which are generally payable within a year.
According to the financial report for 1HFY203, Neo Telemedia states that HK$500.4 million of loans were guaranteed by property, plant and equipment (PPE) with net book value of HK$161.9 million. Neo Telemedia has HK$14 million in cash and its net assets stood at HK$836 million.
Following a sell-down on Oct 17, DBS Group Research issued an update note saying: “The spotlight has now turned to KDC REIT as the income contribution from the three data centres in Guangdong will account for approximately 10%-11% of their revenues. Many questions have emerged regarding the potential impact on KDC REIT should Neo Telemedia face financial difficulties or even bankruptcy in the worst-case scenario. As the Guangdong data centres (DCs) are master-leased to Neo Telemedia, KDC REIT lacks visibility into the assets' utilisation but continues to receive full rental payments.”
According to DBS, a worst-case scenario involving Neo Telemedia's bankruptcy could potentially have a maximum 16% impact on DPU. “However, it's important to note that Neo Telemedia has maintained current rental payments and has not indicated any payment delays,” DBS adds.
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Separately, in KDC REIT’s business updates presentation, two slides could have spooked market watchers. These are KDC REIT’s growth by acquisitions, and details of its $2 billion pipeline from its sponsor. Moreover, according to analysts at a KDC REIT briefing, two assets in that $2 billion pipeline are either stabilised or close to stabilisation. These are Keppel DC Singapore 7 (KDC SGP 7) and Huailai DC in Beijing.
Citi has a description of KDC REIT’s acquisition strategy, and its details may have further unnerved the market, albeit unwittingly. Citi says given that most of sponsor’s existing assets are operationally ready, going forward KDC REIT can work more closely with sponsor on acquisitions.
Within the pipeline shown in the slide, Citi highlighted KDC SGP 7 in Singapore, which was completed this year and ramping up is in process. “On track for stabilisation”, Citi says.
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Huailai DC in Greater Beijing is completed, and “ramp-up can be potentially quite fast”, Citi says. What relief then that Citi points out that Almere DC 2 in Netherlands is the least ready of these three assets.
“Despite the higher-for-longer interest rate climate, there are certain markets with favourable cap rate spreads, such as Singapore (due to shorter land tenure; esp. fully-fitted), Japan and China, with KDC REIT citing that there are still interesting markets to work on and it is optimistic of getting something across,” Citi says.
Perhaps it is the fear of acquisition as outlined by the Citi report that has caused KDC REIT’s unit price to fall. The tone of the Citi report, ironically, was neutral to positive.
As at mid-day on Oct 18, KDC REIT is trading at $1.82. Whether contrarians take this opportunity to pick up KDC REIT units remains to be seen. At its current price, its annualised DPU of 10.035 cents translates into a yield of 5.51%, with a P/NAV of 1.34x.
