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6 Things You Should Know About Keppel DC REIT’s Upcoming IPO

Credit: Simon Cunningham

There’s certainly no shortage of real estate investment trusts in Singapore’s stock market, but Keppel DC REIT would still be a unique one given that it would be the first listed REIT in Asia which has a focus on data centres.

Keppel DC REIT, which is sponsored by Keppel Telecom. & Transport Ltd. (SGX: K11), would have eight high quality data centre properties in its portfolio upon listing. These properties, which have a collective appraised value of around S$1 billion, are located in Europe, Asia, and Australia

The graphic below (click for larger image), which is found in Keppel DC REIT’s initial public offering (IPO) prospectus, gives a clearer view of the location of the REIT’s data centres. It also points out  how the data centres are in close proximity to major hubs where there would be huge data flows.

Keppel DC REIT portfolio location

Source: Keppel DC REIT’s IPO prospectus

With all these as a backdrop, let’s dive into the six things you should know about Keppel DC REIT’s listing.

1. The nitty-gritty

Keppel DC REIT would be offering 261.138 million units at S$0.93 each under the IPO; of which, 53.763 million would be made available to the general public while the rest (some 207.375 million units) would be placed to institutional and other investors.

In a separate but concurrent deal, nine other cornerstone investors would be collectively subscribing for 290.316 million units at the listing price. These cornerstone investors include asset and wealth managers (like Eastspring Investments (Singapore) Limited and Fortress Capital Asset Management (M) Sdn Bhd), DBS Bank and its clients, and individuals like Lim Chap Huat and Gordon Tang. Lim happens to be the owner and executive chairman of property group Soilbuild Group Holdings Ltd, the parent of Soilbuild Construction Group Ltd (SGX: S7P). Meanwhile, Tang is a non-executive director at property developer SingHaiyi Group Limited (SGX: 5H0).

Keppel DC REIT would have a market capitalisation of S$821.12 million upon listing (882.93 million units at S$0.93 each). The REIT’s public offer opened last Friday and would close at 12 noon tomorrow. Trading of the REIT’s units is expected to start at 2 pm on 12 December.

2. Landscape of the data centre industry

If you think that data centres are merely properties catered to house data servers, you are not alone. I, for one, also had the same idea. But, there’s actually so much more to data centres.

According to Keppel DC REIT’s IPO prospectus, “data centres provide a highly reliable and secure environment with redundant mechanical cooling systems, electrical power systems and network communication connections.”

There are four main key highlights about the data centre industry given in the prospectus too:

  • Explosive growth in internet usage and internet-enabled devices is driving data creation, especially in the video streaming, file sharing, e-commerce, and social networking spaces. Global data created has grown from 0.4 zettabytes (1021 bytes) in 2008 to 4.0 zettabytes in 2013; the amount of data created is then forecasted to jump nearly seven-fold to 28.1 zettabytes in 2018
  • There’s a projected increase in organisations outsourcing their data centre needs as in-house data centres are less cost efficient and are becoming increasingly complicated to run. For an idea of how big the increase can be, the Asia-Pacific region is expected to see the proportion of outsourced data centres jump from 12.1% in 2013 to 38.5% in 2018.
  • With the increase in data creation (as seen above) comes the growth in data transmission. Keppel DC REIT’s prospectus contains forecasts for global growth in IP (internet protocol) traffic to expand at an annual compounded rate of 21.0% between 2013 and 2018.
  • According to the REIT, there are “high barriers to entry” in being a third-party data centre provider. That’s because ”substantial upfront costs and significant technical knowledge and expertise are required” and customers tend to prefer providers “with proven track records.”

The four key highlights about the future of the data centre industry seems to point toward a strong tailwind which Keppel DC REIT can enjoy.

3. Portfolio details and business model

Keppel DC REIT’s eight data centre properties at listing have a collective occupancy rate of 93.5% and a long weighted average lease expiry of 7.8 years (both figures are taken as at 30 September 2014).

It should be noted that the “majority of the existing leases and co-location arrangements” that the REIT’s properties have with their tenants contain built-in rental escalations ranging between 2.0% and 4.0% per year; this is something investors might like to see as it almost guarantees that the REIT can enjoy growing rent each year.

Given that Keppel DC REIT is a REIT with some unique assets, some explanation might be needed for the lease and co-location arrangements the REIT has with its tenants. Lease arrangements are “typically for a substantial portion of the whole data centre” and would see tenants pay rent and a portion or all of the property-related expenses such as property taxes and day-to-day maintenance. The tenants are also responsible for facilities management (includes the provision of power, security, and cooling).

Meanwhile, co-location arrangements “are typically entered into by end-users who use co-location space for the installation of their servers and other mission-critical information technology (“IT”) equipment. Most co-location arrangements do not cover the leasing of the whole or substantially the whole of the relevant Properties.” There’s also a big difference between co-location arrangements and lease arrangements, where the latter sees tenants mostly in-charge of running the show:

“Co-location arrangements will typically specify service level commitments which Keppel DC REIT, as the owner of the co-location space, is responsible for. These service level commitments typically cover power downtime and the maintenance of environmental standards such as ensuring that the humidity and temperature of the data centre are at specified levels. Failure to meet the service level commitments as specified in the co-location arrangement may result in rental rebates or service credits being granted to the end-users.”

4. Financials

Keppel DC REIT has delivered a set of impressive results over the past two years based on its pro-forma financials. Gross revenue had spiked by 24.6% from S$81.2 million in 2012 (the REIT’s financial year coincides with the calendar year) to S$101.2 million with net property income following suit with a 24.5% jump to S$88.8 million. The first nine months of 2014 also saw continued growth, as Keppel DC REIT’s gross revenue and net property income saw year-on-year increases of 10.8% and 11.4% respectively.

Despite heady double-digit historical growth rates, the REIT’s forecasts are less rosy. In 2016, gross revenue is projected to increase by only 2.1% from S$100.4 million in 2015 to S$102.5 million; net property income is expected to grow at a similar pace of 2.27% from S$85.1 million to S$87.0 million. For 2015 and 2016, the total return available for distribution is expected to come in at S$56.24 million and S$58.75 million respectively. With 882.93 million units outstanding, that works out to forecasted distributions of 6.36 and 6.65 Singapore cents respectively.

Based on Keppel DC REIT’s listing price of S$0.93, it would have forward yields of 6.8% an 7.1% for 2015 and 2016 respectively.

At the listing date, Keppel DC REIT would have S$295 million in borrowings with an aggregate leverage of 27.8% (excluding the finance leases pertaining to the land rent commitments for certain properties). With that low leverage ratio, one can say that Keppel DC REIT’s balance sheet is pretty solid and can be a foundation for future growth.

5. Use of proceeds

Keppel DC REIT’s listing would see it raise gross proceeds of S$821.1 million. And as mentioned earlier, the REIT would also draw upon S$295 million worth of borrowings. This would give the REIT a total sum of S$1.116 billion to work with.

Of that, S$537.9 million (48.2%) would go towards acquisition of the Singapore-based properties and the minority interests of the other properties in the portfolio. There are more details on this found in Page 102 of the prospectus.

The remaining sum (51.8%) would be used for redemption of certain investors in the REIT (30.5%), repayment of existing debt (18.6%), expenses related to the listing (2%), and working capital (0.7%).

6. Valuation

At the date of listing, Keppel DC REIT would have a net asset value (NAV) of S$0.866. This gives its units a price to NAV ratio of 1.07.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.