Yesterday evening (22 November 2021), the Securities Investors Association (Singapore), or commonly known as SIAS, held a virtual dialogue session with the management of Keppel DC REIT (attended by CEO Ms Anthea Lee, and CFO Mr Adam Lee) to discuss about the data centre REIT’s proposed investment in NetCo bonds and preference shares.

For context, Keppel DC REIT will be holding its EGM next Thursday morning (02 December 201) to seek unitholders’ approval on its proposed transaction to subscribe for bonds and preference shares issued by NetCo (a company established by M1 to hold its mobile, fibre, and fixed assets.) More details about the proposed transaction can be found in a separate post I’ve written here.

In this post, you’ll find a list of questions raised, along with a summary of responses provided by the CEO and CFO:

Question: What is the reason behind the REIT’s decision to invest in NetCo’s bonds and preference shares, instead of physical data centre properties?

Response: To clarify, CEO Ms Anthea Lee said that the REIT is not sacrificing any data centre deals with this investment – citing its recent data centre additions in China as well as in the Netherlands, and that they will continue to seek further acquisition opportunities.

As to the reason behind its decision to invest in NetCo’s bonds and preference shares, Ms Lee explained that it is a very good opportunity, as the returns are not only high yielding (at 9.17% per annum), but at the same time it provides a stable cash flow for the REIT over the next 15 years. On top of that, under the agreement of this proposed transaction, the REIT will not be responsible for any operational or capex obligations.

Question: Under what circumstances will the REIT be redeeming the bonds before its maturity?

Response: Ms Lee does not foresee the REIT redeeming the bonds before its maturity at this point in time due to the stability of this transaction (for it being high yielding, and at the same time, its ability to provide a stable cash flow for the REIT.)

Question: Should the Monetary Authority of Singapore (MAS) reject the REIT’s Qualifying Project Debt Securities (QPDS) application, will it still proceed with the proposed transaction?

Response: Ms Lee explained that even though the QPDS application is not approved by the MAS, the NetCo Bonds are still very accretive (at 3.1% DPU accretion.)

Question: Citing concerns surrounding Hyflux Preference Shares in the past, unitholders asked about the worst case scenario if one or both bonds were to default.

Answer: Ms Lee said that the proposed transaction only contributes less than 3.0% towards the REIT’s total Assets Under Management (AUM.) Not only that, their initial investment capital will be recovered in just 8 years.

She also added the network assets are critical to M1’s operations and as such, the management are not expecting any possibilities of a default. Additionally, to safeguard the interest of the REIT, it will also have representatives in NetCo’s board.

Question: Under what circumstances will the DPU be affected?

Response: Ms Lee shared that the only risk which may impact its DPU is counterparty risk (should M1 be no longer in business and therefore no longer require these assets.) However, she expressed her confidence in M1 as the company is currently the second largest telecommunications provider in Singapore, and have been in operations since 1997.

Question: Is there any possibility for the sum of S$89.7m to be used for the proposed transactions be put into more substantive use (particularly in the acquisition of physical data centres) instead?

Response: Ms Lee once again reassured unitholders that the REIT will not sacrifice any data centre acquisition deals because of the proposed transaction. She added that 90% of the REIT’s AUM will consist of data centre properties.

She also explained that the proposed transaction (which is a one-off opportunity) comprised less than 3% of the REIT’s overall AUM – which is not high in her opinion, but yet at the same time, it can generate a high DPU accretion.

Question: Can the Manager provide more clarity on NetCo model and its ability to generate cashflow?

Response: The assets held under NetCo are critical infrastructure to M1’s operation. On top of that, Ms Lee shared that the useful life of these network assets can last beyond 15 years with regular maintenance and capex being put in (both of them Keppel DC REIT will not be responsible for), and that close to half of the network assets are independent of mobile technology (meaning they will remain relevant regardless of whether it is 3G, 4G, or even 5G network.)

Also, Ms Lee shared that in terms of 5G network, developments are currently only in the initial stages, and that the country is still very reliant on both 3G and 4G networks. Even in the future when there’s more widespread use of the 5G network, she is of the opinion that the current 3G and 4G networks will continue to remain relevant as the telecommunications network cannot rely on the 5G network solely at any point in time.

Question: What is the current environment of the data centre market and how the REIT continues to sustain its growth.

Response: Ms Lee explained that the data centre market is a very unique one because of its mission critical feature, and on the whole, it has matured as an asset class compared to years ago. Particularly, she cited that the demand for data centre assets have increased significantly last year.

In terms of competition, while Ms Lee recognised that there are aplenty in the industry, but she said that that the REIT was able to sustain its competitive advantage in that, because they operated the data centres themselves, they were able to better understand their customers’ needs and cater to them (in acquiring suitable data centres that will best meet their needs.)

Question: Can the management share on the due diligence done on NetCo in a nutshell?

Response: CFO Mr Adam Lee said that legal and technical due diligence have been done on NetCo’s network assets. This was on top of an assessment of the proposed transaction by independent financial advisor.

Question: How is Keppel DC REIT funding the proposed investment?

Response: The proposed investment will be partially funded by leftovers in cash proceeds of $15m post the divestment of one of its assets, with the remainder to be funded by external borrowings.

Question: Is it risky for the REIT to maintain such a high concentration (of 90%) in data centre assets?

Response: Ms Lee explained that the REIT have diversified its investments across different geographical locations (it currently has data centre assets located n 9 different cities), income streams, as well as lease types (in that the data centre assets that the REIT has consists of both master leases, which have longer WALEs, and co-location, which have shorter WALEs.)

She also added that demand for data centres continue to remain resilient with limited supply everywhere.

In Summary

To conclude, Ms Lee once again stressed that this proposed transaction is a rare opportunity in that, not only is it both high yielding and DPU accretive, but at the same time, it comes with minimal operational risks. The only possible risk is counter-party risk.

Also, she re-assured unitholders that Keppel DC REIT is still very much a data centre player, with their focus continue to be on physical data centres.

Disclaimer: At the time of writing, I am a unitholder of Keppel DC REIT.

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