Keppel DC REIT (SGX: ABJU) has not had an easy time.
The data centre REIT recently saw its unit price hit a 52-week low of S$1.60 and is down 15.8% in the past year.
Keppel DC REIT announced a downbeat set of earnings that saw its distribution tumble in the wake of a provision made for a tenant that failed to settle its rental.
With the shares languishing near year-low, could the data centre REIT present a bargain for income-seeking investors?
Distribution impacted by finance costs and a provision
Keppel DC REIT’s recent 2023 results could explain why its share price was hammered.
For the second half of 2023 (2H 2023), gross revenue dipped by 0.7% year on year to S$140.7 million.
Net property income (NPI) fell by 9.1% year on year to S$117.6 million because of an 85.6% year-on-year surge in property expenses to S$23.1 million.
The sharp increase in expenses was attributed to an allowance made for uncollected rental and coupon income of approximately 5.5 months for one of the REIT’s tenants, Bluesea.
This tenant occupies three of the data centres in Guangdong, China.
Finance costs also saw a large increase due to the sharp rise in interest rates over the past 18 months, jumping by 43.5% year on year to S$25.8 million for 2H 2023.
These two items caused the data centre REIT’s distribution per unit (DPU) to tumble by 16.1% year on year to S$0.04332.
For 2023, DPU weakened by 8.1% year on year to S$0.09383, giving units of Keppel DC REIT a trailing distribution yield of 5.5%.
Grey skies for Bluesea
Keppel DC REIT announced back in December 2023 that a letter of demand was issued to Bluesea for rent and coupons owing for an amount of RMB 48.3 million.
The REIT manager also requested a top-up of security deposits of RMB 32.2 million.
As a recap, Keppel DC REIT first acquired a Guangdong data centre back in July 2021 for around S$132 million with the property leased back to Bluesea on a triple net lease basis for 15 years.
Subsequently, in June 2022, the REIT purchased another two data centres in Guangdong for around S$297.1 million which were also leased to Bluesea for 15 years on the same terms.
The REIT manager updated that since the letter of demand was issued, Bluesea has settled part of the arrears of just RMB 0.5 million, a paltry sum compared to the RMB 48.3 million owed.
It is also working with this tenant on a recovery roadmap to get the best possible outcome for Keppel DC REIT.
Solid industry fundamentals
This Bluesea saga is an unfortunate event but is part of the risks associated with operating a portfolio of properties.
Despite this setback, Keppel DC REIT reported solid portfolio occupancy of 98.3% as of 31 December 2023.
The manager also secured positive rental reversions for new, renewal and expansion leases for its data centres in Singapore, Australia, Ireland, and the Netherlands.
What’s more, Keppel DC REIT’s portfolio valuation inched up slightly from S$3.59 billion in 2022 to S$3.6 billion in 2023, demonstrating strong demand for its properties.
Cloud service providers continue to drive demand for colocation data centres with growth of 45% from 2018 to 2023.
Long-term tailwinds in the form of cloud computing, digitalisation, big data, and artificial intelligence act as catalysts that will sustain the demand for data centres.
In established markets such as Seoul, Tokyo, Amsterdam, and London, hyperscale operators are increasingly turning to leasing space in colocation facilities to complement their self-owned data centres, and also partly because of the difficulty in obtaining planning permits.
Get Smart: Rough seas in the short-term
The two events – Bluesea and higher interest costs have dented Keppel DC REIT’s DPU for 2023.
Fortunately, interest rates look to stabilise this year with the US Federal Reserve possibly cutting interest rates should inflation return to the 2% level.
Bluesea remains a problem for now but the REIT is working to actively address this issue.
Investors can look forward to more than S$2 billion of potential assets for acquisition with Keppel DC REIT’s sponsor Keppel Ltd’s (SGX: BN4) strong pipeline.
It is rough seas for now for Keppel DC REIT, but investors who are confident in the REIT’s ability to recovery and are looking for exposure to data centres can consider scooping up some units on the cheap.
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Disclosure: Royston Yang owns shares of Keppel DC REIT.