Keppel DC Reit eschews lawsuit for ‘collaborative’ approach to 48-million yuan arrears by Guangdong tenant
KEPPEL DC Reit is taking a “collaborative but firm” approach as it seeks to resolve the current situation of rental arrears at its Guangdong data centres (GDC), after reporting a S$10.5 million loss allowance in the second half of 2023.
Speaking at an earnings briefing on Friday (Jan 26), chief executive of the manager Loh Hwee Long said this would be the “best way forward” to safeguard the best interest of the Reit, and is preferable to litigation.
Last month, Keppel DC Reit said it issued a letter of demand to the tenant of GDC 1, 2 and 3 – Guangdong Bluesea Data Development – to recover sum in arrears-to-date of 48.3 million yuan (S$9 million) as well as a request for top-up of security deposits of 32.2 million yuan.
“The tenant remains very committed to resolve the situation with us,” Loh said on Friday. He noted the tenant has made a partial payment of the sum in arrears, amounting to 0.5 million yuan in December.
“We are also working with the tenant on a recovery road map, which we believe will translate to earnings to Keppel DC Reit sooner than if we were to go into litigation, which we know can be a very long drawn process,” he added.
Keppel DC Reit’s distribution per unit (DPU) for the half year ended Dec 31 fell 16.1 per cent to S$0.04332.
This came as its H2 distributable income fell 18.5 per cent to S$76.4 million on higher finance costs and loss allowances.
Finance costs for the period rose 43.5 per cent to S$25.8 million, from S$18 million a year earlier. Meanwhile, property expenses increased 85.6 per cent on year to S$23.1 million, with S$10.5 million included as loss allowance for doubtful receivables to account for the uncollected rental income from the GDCs.
The manager noted that the loss allowance impacted FY23 DPU by S$0.00649.
DBS analysts noted last month that an absence of rents from all three GDCs would lead to “significant downside” to future DPU, with estimates for the impact to amount to 16 per cent of FY24 DPU.
Keppel DC Reit acquired its first data centre in China from Guangdong Bluesea Data Development – a unit of Neo Telemedia – for 635.9 million yuan in July 2021. Around a year later the Reit acquired two more data centre facilities for 1.6 billion yuan.
Neo Telemedia is the master tenant of the GDCs. The Hong Kong-listed company reported a net loss of HK$179.6 million (S$30.8 million) for the first nine months of 2023. Its independent auditors also highlighted in its 2022 annual report that there was material uncertainty that may cast significant doubt on the group’s ability to continue as a going concern.
During the earnings call on Friday, analysts asked for a timeline on when the situation would be resolved.
Loh did not provide a fixed timeframe, but said that it would be a “key focus” in terms of the discussions with the tenant.
Questions were also raised on when the manager may decide to take over if the tenant is unable to deliver.
Loh noted that the Reit retains rights to terminate the master leases, and its sponsor Keppel has the resources to take over the operations if appropriate.
“On the assessment of the current situation, given that it is a live data centre, with clients already inside, we do have to be thoughtful around how we execute the plan,” he said.
The properties are master lease assets but the manager has sought further disclosures on the underlying performance of both GDC 1 and 2. Loh added that the tenant has agreed to share regular updates on their leasing progress and business plans.
“This will provide us with insights on the underlying performance of GDC 1 and 2, without us terminating the master lease arrangements and taking back vacant possession to start from a clean slate as a foreign player in China.”
Gross revenue for H2 slipped 0.7 per cent to S$140.7 million. Net property income (NPI) fell 9.1 per cent on year to S$117.6 million.
For FY2023, the Reit’s DPU stood at S$0.09383, 8.1 per cent lower than the S$0.10214 in FY2022. Distributable income fell 9.3 per cent on year to S$167.7 million.
NPI slid 3 per cent to S$245 million for the full year, despite a 1.4 per cent rise in gross revenue at S$281.2 million. This was due to higher property expenses, which rose 46.3 per cent to S$36.3 million.
As at the end of December, the aggregate leverage of the data centre-focused Reit stood at 37.4 per cent, with an interest coverage ratio of 4.7 times. Some 74 per cent of its borrowings were hedged to fixed rates.
The manager also noted that about 89 per cent of the debt would expire only in 2026 or later. Meanwhile, portfolio weighted average lease expiry (Wale) stood at 7.6 years as at Dec 31, 2023.
Units of Keppel DC Reit closed at S$1.76 on Friday, down 2.2 per cent or S$0.04.
