Keppel DC REIT

Keppel DC REIT ("KDC" or the "Trust") is offering 261,138,000 units at $0.93 per unit (with over-allotment option). There will be 207.375m units for the placement and 53.763m for the public. There will also be an over-allotment option for 17.659m units. The IPO will close on 10 December at 12pm and start trading on 12 Dec 2014. The market cap will be around $1,116 million.

KDC is the first data centre real estate investment trust to be listed in Asia, further cementing SGX's position in the REIT sector. The IPO portfolio comprises of 8 high quality data centres located in key data centre hubs across seven cities in Asia Pacific and Europe.

Why Data Centres?

Have you ever been to the server room in your work place? You can imagine the Data Centre to be a "mega" server room where you need air conditioning, uninterrupted power supply, fire suppression, raised flooring, etc. In a new age space where data is now more "valuable" than voice, data centres look increasingly relevant. 

The charts below show you the growth in data and IP traffic.

Increasingly, companies are looking to outsource the in-house data centres to specialized centres. 

There are high barriers to entry due to substantial upfront costs and technical knowledge and expertise being required. Companies are outsourcing a critical function to outsiders, in this regard, they would prefer to outsource to a data centre providers with proven track record.

IPO Portfolio

It is good to see that the assets are diversified globally and not overly concentrated on a particular region. However, the Company will need to balance that with economies of scale.

Shareholders

According to the Finance Asia report on 5 Dec, the issue was priced at the top of the indicative range and was more than 10x oversubscribed.  It is interesting to note that allocations were largely determined by the management and were awarded on the basis of being known to the Company or have attended the roadshow. The units were spread fairly widely (not sure if this is a good thing) and 70% of the unit given to "long-only" institutions. In other words, not hedge funds.

9 Cornerstone investors subscribed to the IPO and they are Wellington Management, Fortress Capital Asia, Eastspring, DBS Private Bank, DBS Bank, SoilBuild owner Lim Chap Huat, Myriad Asset Management and Sing Haiyi's Gordon Tang. 

In addition to the cornerstone investors, some of the indirect investors will include

Dividend forecast

The increase in yield is purely from the build in rental revisions with any consideration from asset enhancements and acquisitions. The company intends to distribute every half-yearly and has to distribute more than 90% of its income given that it is a REIT.

I would say that this is a stock that can go into my long term SRS account for passive income.

Pipeline assets

It is good to see that the ROFR assets are located in existing locations. This will help the Trust to build up track record and economies of scale in those locations.

What i like about the Trust

• I like the sector's macro trends where proper data management gets increasingly more critical. The world is now more on data than anything else. You can see that in cloud computing, online commerce and storage services proliferating globally.
• The outsourcing trend continues whereby companies are outsourcing this function for better cost efficiency and expertise.
• Data centres cost requires more capex and specialized knowledge and equipment. For many companies, the reliability of the data centres are more critical as it has an implication on the branding if the services are impacted. As such, clients are highly selective and sticky and are inclined to enter into long term contracts. The weighted average lease expiry of KDC is more than 7.8 years ensuring stability and recurring income. The customer retention rate is ~98%.
• KDC's clients are diversified among the blue chip names who will pay for quality services.
• Data centres don't have to occupy prime land but requires excellent network connectivity to be important. In this aspect, the Company will be able to house its equipment in cheaper locations as long as it meets the other technical requirements. 
• The balance sheet is not overly geared at 27.8% with a strong sponsor in Keppel T&T.
• No funny financial engineering like income support but with built in rental revisions in the contracts with customers that range between 2~4% on average. The rental revisions also helped ease some concerns of a rising interest rate environment.

Some of my concerns

• KDC paid out cash to its shareholders prior to the listing... keke this is somewhat expected since they are selling you the hard assets and not the "cash" in it.
• Any breakdown in services may result in law suits that is disproportionate to the rental received. For example, it was reported that the recent outage affecting SGX was from one of KDC's data centres. I am assuming that the compensation, if any, is likely to be covered by insurance.
• The income earned in Europe and Australia may be subject to weakening forex rate against the SGD. While the prospectus mentioned that the foreign currency exposure will be hedge, there will be costs involved in such hedges and the "costs" are borne by unit holders anyway.
• Investors are paying a slight premium to the appraised value by 1.07x and that benefited the prior investors, one of which is the Securus Fund (owned by Brunei). The NAV per share is $0.87.

Fair value

There is no direct comparable REIT with the same concentration in Data Centers. In this regard, i will use Ascendas REIT and Mapletree Logistics REIT as they have some data centers in their portfolio. According to REIT Data, they are currently trading at yields of 6.3% to 6.5%.

In this regard, the fair value range of Keppel DC REIT will be around 97c to 100c (versus the IPO price of 93 cents).

Mr IPO ratings

Please note that I have an immaterial 8 lots from the placement tranche and will likely apply for more at the IPO public tranche. 

I quite like this IPO. I think it is pretty unique and is priced to leave some upside for IPO investors. It will be a good stock to keep for passive income. I will give it a 2 Chilli Rating given that this is more of a yield play and is not going to give you a big pop (less than 10%). Investors are welcomed but flippers beware. There will be more long term upside if the Company is able to acquire and convert acquisitions into Data Centers.

Happy IPO clouding.