THE manager of data centre-focused Keppel DC Reit on Wednesday (Oct 26) announced a 5 per cent increase in distribution per unit (DPU) to S$0.02585 for the third quarter ended September, from S$0.02462 in the corresponding period a year ago. 

 

Distributable income was 9 per cent higher at S$46.9 million, from S$43.1 million in Q3 last year.

 

The real estate investment trust (Reit) manager attributed the increase to contributions from new acquisitions and completed asset enhancement initiatives (AEIs), as well as renewals and income escalations, among others.

 

Q3 gross revenue rose 1.4 per cent to S$70.3 million, while net property income (NPI) was 0.5 per cent higher at S$64.1 million.

 

The increase in gross revenue was partially offset by net lower contributions from some of the Singapore colocation assets, the depreciation of the euro, Australian dollar and British pound against the Singapore dollar, and the divestment of iseek Data Centre.

 

Keppel DC Reit&rsquo s portfolio occupancy climbed 0.4 percentage point to 98.6 per cent as at Sep 30, with the weighted average lease expiry (WALE) extending to 8.7 years, from 7.6 years as at end June.

 

Aggregate leverage rose 220 basis points (bps) from the previous quarter to 37.5 per cent as at end September, with an average cost of debt of 2.3 per cent.

 

The increase in borrowings was mainly due to the financing of the acquisition of Guangdong Data Centre 2 and the premises of Guangdong Data Centre 3.

 

The Reit manager said that 74 per cent of its loans were hedged to fixed interest rates. It added that a 100 bps increase in interest rates would have an impact of about 2.1 per cent to Q3 DPU on a pro forma basis.

 

On the impact of rising electricity prices, the Keppel DC Reit manager said &ldquo significantly above 90 per cent&rdquo of electricity costs are passed through to its colocation clients, while its master lease clients contract electricity directly with the power suppliers.

 

On Oct 4, Keppel DC Reit Management Pte Ltd non-executive director Thomas Pang Thieng Hwi acquired 13,000 units of Keppel DC Reit : AJBU -5.62% at an average price of S$1.64 per unit. With a consideration of S$21,320, the acquisition increased Pang&rsquo s direct interest in the Reit to 97,188 units, which represents 0.01 per cent of the total number of issued units. This followed his acquisition of 13,800 units at S$2.15 per unit between Feb 4 and 7. Pang is currently executive director and the CEO of Keppel Telecommunications & Transportation Ltd (Keppel T& T), a position he has held since July 2014. Prior to that, from June 2010 to June 2014, he was CEO of Keppel Infrastructure Fund Management Pte Ltd, the trustee-manager of Keppel Infrastructure Trust. : A7RU -0.93%

 

As of June 30, Keppel DC Reit maintained S$3.5 billion of assets under management (AUM), through 21 data centres across nine countries, with 70 per cent of the AUM based in Asia Pacific and 30 per cent of the AUM based in Europe. In August, the manager maintained there was more than S$2 billion of potential data centre assets for acquisitions that were under development and management through Keppel T& T and Keppel&rsquo s private data centre funds. Keppel T& T has granted the Rights of First Refusal (ROFR) to Keppel DC Reit for future acquisition opportunities of its data centre assets.

 

KEPPEL Data Centre Fund II (KDCF II) has entered into a strategic partnership with Heying &mdash a wholly-owned subsidiary of Tianjin Zhengxin Group &mdash to jointly develop a greenfield data centre in Greater Beijing, China. 

 

KDCF II will acquire a majority stake in Huailai Data Centre and jointly develop the property with Heying, Keppel said in a press release on Monday (Jul 18). The total development cost of the project is approximately 1.4 billion yuan (S$292 million).

 

KDCF II is managed by Alpha Investment Partners Limited (Alpha), which is the private fund management arm of Keppel Capital. 

 

This latest development marks Keppel&rsquo s sixth project since entering mainland China&rsquo s data centre market in 2020. 

 

Located in Huailai County in the Hebei province, Huailai Data Centre is situated on a land plot that spans 3.3 ha. This plot forms part of a larger data centre campus spanning 29.7 ha.

 

Keppel : BN4 +1.56% said the development of the Huailai Data Centre is taking place &ldquo in phases&rdquo . When th data centre is fully developed by the end of Q1 2023, it will have an expected gross floor area, of 678,807 sq ft, which can fit more than 5,700 high-density racks. 

 

Huailai Data Centre has already received strong indication of interest from a major cloud service provider in China, said Keppel. 

 

Keppel noted that Greater Beijing&rsquo s data centre market reached 30 billion yuan in 2020, implying a 26 per cent compound annual growth rate (CAGR) from 2016 to 2020, and making it China&rsquo s largest data centre market. 

 

The group added that its Huizhou Data Centre located in the Tonghu Smart City in Huizhou in the Guangdong province has also officially opened.

 

Wong Wai Meng, chief executive of Keppel Data Centres, said: &ldquo Keppel Data Centres&rsquo strategy to work with strong experienced partners and in collaboration with Keppel Capital, enables us to harness synergies and scale up swiftly in developing and operating high quality data centres in our key growth markets. 

 

&ldquo This has helped place Keppel Data Centres in pole position to meet the requirements of cloud service providers, hyperscalers and technology firms in one of the world&rsquo s fastest growing markets, building on our strong data centre development and operational track record.&rdquo

 

  Alvin Mah, chief executive of Alpha, added that the fund will continue to add more quality assets in key global markets to its   portfolio that will deliver &ldquo optimal risk adjusted returns&rdquo to its investors.

 

DBS Group Research analysts Dale Lai and Derek Tan have kept a &ldquo buy&rdquo rating on Keppel DC REIT with a higher target price of $2.50 from $2.40 previously.

 

Keppel DC REIT just announced another two acquisitions in Guangdong valued at more than $320 million, following acquisitions in Amsterdam, Guangdong and London in FY2021 ended December 2021. This has resulted in an approximate 2.6% accretion to the REIT&rsquo s distribution per unit (DPU) for the FY2023.

 

The analysts see that the acquisitions are to be completed in two phases with sufficient debt headroom to tap on in FY2022. In addition, they believe that the relatively attractive yield of approximately 8.0% would drive DPU accretion over the next three years.

 

&ldquo Amid record low cap rates for data centres globally, Keppel DC REIT continues to deliver acquisitions that are accretive to distribution per unit (DPU),&rdquo write Lai and Tan. &ldquo These accretive acquisitions should add to earnings in addition to organic growth within its existing portfolio.&rdquo

 

At the same time, the analysts do anticipate near-term challenges for Keppel DC REIT, though the fundamentals on a whole are still positive. &ldquo Higher utility costs and rising interest rates will pose as near-term risks to Keppel DC REIT&rsquo s earnings,&rdquo they say. &ldquo Although accretion from recent acquisitions have been eroded by higher operating costs, we believe the bulk of the impact is already factored into the current share price.&rdquo

 

Going forward, Lai and Tan believe that growing demand for data centres and positive fundamentals in the sector will help Keppel DC REIT return to its organic growth path.

 

Keppel DC REIT' s current portfolio occupancy of more than 98% is the highest since its IPO in 2014. &ldquo The continued strong demand for data centre capacity amid the prolonged Covid-19 outbreak and rise of the digital economy would support higher occupancies and revenues across its portfolio in the foreseeable future,&rdquo the analysts say.

 

Citibank Group Research analyst Brandon Lee has kept a &ldquo neutral&rdquo rating on Keppel DC REIT with an unchanged target price of $2.40.

 

&ldquo We hosted Keppel DC REIT at Citi' s Asia-Pacific Property Conference 2022, which appears to be still in acquisitive mode after the recently-announced acquisition of two China data centres,&rdquo says Lee. &ldquo While data centre cap rates have not expanded like a few other asset classes in other geographies, they also have not compressed, which could facilitate Keppel DC REIT' s future acquisitions in markets whereby yield spreads remain positive, likely Japan, Europe and China in our view.&rdquo

 

Lee observes that the current gearing of 36.1% implies $250 million and $630 million of debt headroom before hitting 40% or 45% respectively, hence Keppel DC REIT has sufficient debt headroom to fund the two aforementioned China data centres purely by debt. &ldquo However, it could potentially explore equity fund raising (EFR) due to potentially more acquisitions,&rdquo he adds.

 

On a whole, despite share price weakness of technology companies, Keppel DC REIT has not seen and does not expect any impact on their business, with demand driven by acceleration of cloud migration and increased prominence of cloud computing, according to Lee.

KEPPEL DC Reit has entered into conditional transactions to acquire 2 data centres in Guangdong, China, for a total price of about 1.6 billion yuan (S$338.3 million), the company said in a bourse filing on Monday (Jun 20). 

 

These acquisitions are expected to be accretive to the Reit&rsquo s distribution per unit. They will also bump up the Reit&rsquo s portfolio occupancy rate to 98.9 per cent from 98.7 per cent as at end-March, and raise its weighted average lease expiry to 8.8 years from 7.7 years. 

 

Keppel DC Reit will acquire these 2 facilities located at Bluesea Intelligence Valley Data Centre at Shaping Street in China from Guangdong Bluesea Data Development Co and its parent company, Guangdong Bluesea Mobile Development Co. The properties will be leased to Bluesea on a triple net basis for 15 years. 

 

The first property, located at No 6 Bluesea Intelligence Valley Data Centre, is a 7-storey fully-fitted data centre building with a gross floor area of some 20,310 square metres (sq m). 

 

The total purchase consideration for this property was 690.3 million yuan. Savills Valuation and Professional Services had valued this property at 698 million yuan as at Jun 1 based on the income capitalisation and discounted cashflow analysis methods. This transaction is expected to take place in H2 this year. 

 

The second property, located at No 7 Bluesea Intelligence Valley Data Centre, is a 7-storey data centre building with a gross floor area of about 20,610 sq m. 

 

The total purchase consideration for this property stood at 690.3 million yuan. As at Jun 1, the property was valued at 691 million yuan on a fully-fitted basis, according to a valuer commissioned by the trustee of Keppel DC Reit. 

 

In line with the framework agreement, the seller is responsible for the internal decoration of the building&rsquo s premises, as well as the installation of facilities and equipment for it to be rendered a fully-fitted data centre. 

 

While partial payment will be made for this property, Bluesea will pay Keppel DC Reit rent for the building shell and an interest on the partial payment, with the remainder to be paid when the fit-out works are completed. The handover of this facility is expected to take place by Q3 2023. 

 

The construction of the shell and core of the buildings was completed in 2020, with each of them having a 50-year leasehold land tenure expiring in January 2067.

 

The total consideration, as well as the value-added taxes, for both properties will be paid fully in cash. Keppel DC Reit&rsquo s manager intends to fund the purchase considerations with a mix of debt, equity and existing cash.

 

Keppel DC Reit&rsquo s aggregate leverage is expected to rise to 37.2 per cent after the completion of the transactions, up from 36.1 per cent as at end-March. 

 

On a pro-forma basis, if the transactions had been completed on Jan 1, 2021, Keppel DC Reit&rsquo s DPU for the fiscal year ended Dec 31, 2021 would have been S$0.10113 instead of S$0.09851. 

 

If the transactions were completed on Dec 31, 2021, the Reit&rsquo s net asset value per unit as at that time would have been S$1.36, compared to S$1.34 without the transactions. 

 

These properties are 2 of 6 data centre buildings which have been or are to be developed within the Bluesea Intelligence Valley Mega Data Centre Campus. These are in addition to Guangdong Data Centre which was acquired by Keppel DC Reit on Dec 16, 2021. 

 

Following the completion of the transactions, Keppel DC Reit will own 3 of the aforementioned 6 data centre buildings, and will continue to have a pre-emptive right of first refusal to acquire the remaining data centre buildings to be developed within the campus.

 

Anthea Lee, chief executive of Keppel DC Reit&rsquo s manager, said: &ldquo Data centres are a critical part of the digital infrastructure that supports many other industries and growth areas.

 

&ldquo The acquisition will increase the number of data centres in the portfolio that are leased on a master-leased basis resulting in higher portfolio weighted average lease expiry and occupancy.&rdquo

DBS Group Research on Friday (Jun 3) lowered Keppel DC Reit&rsquo s target price to S$2.40, after cutting its estimates to account for increasing utility costs and interest rates, and the partial default by DXC Technology.

 

Despite cutting its target price, the research team said Keppel DC Reit&rsquo s 5 per cent yield in its FY2022 estimates were &ldquo too attractive to ignore&rdquo . It has maintained its &ldquo buy&rdquo call on the data-centre focused real estate investment trust (Reit).

 

Keppel DC Reit&rsquo s new target price implies a target yield of between 4.2 per cent and 4.5 per cent over the next 3 years, which DBS believes is fair as Keppel DC Reit offers growth &ndash although at a slower pace.

 

It also represents a potential upside of 18.2 per cent from the counter&rsquo s Thursday&rsquo s trading price of S$2.03 as at 3.30 pm. The counter was up S$0.04 or 2 per cent at the time.

 

While accretion from its recent acquisitions have offset increasing operating costs, DBS believes that the bulk of these impacts have &ldquo already been felt and factored into the current share price&rdquo .

 

That being said, DBS estimates a partial loss of income from Keppel DC Reit&rsquo s litigation suit against DXC for a partial default of rental payment. The amount disputed is around S$14.8 million.

 

As legal proceedings tend to be long drawn out, the research team has assumed there will be an absence of S$3.7 million in revenues per annum in the next 3 years.

 

DBS also believes that higher operating costs from increasing utility costs and rising interest rates will pose risks Keppel DC Reit&rsquo s near-term earnings. However, the Reit&rsquo s interest rate exposure is substantially hedged, with about 76 per cent of Keppel DC&rsquo s borrowings hedged to fixed rates.

 

In the medium term, foreign exchange volatility may have some impact on earnings. As Keppel DC Reit typically hedges its income in foreign currencies by up to 2 years in advance, such volatility will likely only be felt in the later half of FY2023, the report noted.

 

The research team has lowered its distribution per unit projections by 7 per cent over the next 2 years, after revising its earnings estimates to take into account the partial default and higher operating costs.

 

In a separate sector report, DBS noted that the price correction of data-centre-focused S-Reits provides an opportunity to &ldquo buy growth at attractive prices&rdquo .

 

&ldquo We remain convinced that data centres remain the &lsquo oil&rsquo for the digital world post Covid-19, with demand exceeding supply, which translates into a continuously tight transaction market with improving operating metrics,&rdquo said DBS analyst Dale Lai.

 

He noted that yields for 4 data-centre-focused S-Reits have expanded to more than 5 per cent on average after the most recent price correction. The market also appears to have discounted the &ldquo superior growth&rdquo these Reits offer to investor, especially when selected S-Reits have significant pipelines that can be acquired from their respective sponsors.

 

Keppel DC Reit, along with Digital Core Reit, stands out as DBS&rsquo s preferred plays in its value metrics, as they have sponsors which are both owners and operators of data centres.

 

Meanwhile, Ascendas Reit and Mapletree Industrial Trust provide diversified exposure to a wider &ldquo new economy&rdquo spectrum of assets, but with a more steady but sustainable growth profile.