Saturday 30 April 2022

The Risk of Holding On To Data Centre REITs Is Under-rated By Market- Digital Core REIT And Keppel DC REIT In Deep Trouble.

The astounding news that the 5th largest tenant of Digital Core REIT ("DCR") has filed for bankruptcy protection in the US sent out shockwaves to many investors out there who believed that Data Centre REITs are super resilient in earnings and with some proclaiming the nature of data centre REIT to be equivalent to government bonds. DCR's unit price which has been gravity defying since its IPO finally dropped below US$1 per unit to an intra-day low of US$0.95 per unit at one point, during market trading on the week of 22 April 2022. Keppel DC REIT itself is also not spared the bloodbath and in fact, its unit price suffered a worst fate than DCR and plummeted to a 52 week low of S$2.060 per unit. What ever happened to these data centres REITs once proudly proclaimed as precious jewels and infallible investments by investors? 
1. DCR's trouble with one of its top 5 largest tenant
While DCR's sponsor Digital Realty has guaranteed the cashflow of DCR in the event of any-near term shortfall arising from the tenant (Sungard Availability Services) bankruptcy, this is cold comfort. The invincibility myth of data centre REITs has been dispelled. Rising interest rates impact on bank borrowings and high energy prices posed a double whammy to the future performance of DCR.

The fortunate thing is that investors seem to have recovered from the initial shock and DCR has since recovered to US$0.995 per unit at the end of April 2022 last trading date. Many investors continue to keep faith in DCR and its sponsor. 

As for me, I continue to keep my distance away from DCR-please see my last post on this. My issue has always been about the unbelievable extremely low distribution yield of 4.18% and 4.63% expected from DCR at a price of US$1.00 per unit for the 1st year and 2nd year respectively projected during IPO and the US withholding tax risk that makes holding on to it not worthwhile. Not to mention that DCR just IPO and then in record time, we have a major tenant default risk event occurring, this does not bode well for its sponsor's reputation. 

Nonetheless, if DCR drops below IPO price of US$0.88, I may decide to re-consider adding some of its units into my current portfolio. 

2. Keppel DC REIT nose-dive that shell-shocked many retail investors
Interestingly, Keppel DC REIT unit price also plunged to a 52 week low of S$2.060 per unit. Despite the many acquisitions done in 2021, its Q1 Gross Revenue dropped by 0.9% and Q1 Net Property Income fell by 1.4% relative to Q1 of prior year. So what exactly happened? 
2.1 Current legal dispute with tenant DXC Technology
The current legal tussle with its tenant DXC Technology Services at the Serangoon North Avenue 5 data centre may have casted some shadow over the financial performance of Keppel DC REIT. Many investors were extremely disappointed over the negative revenue growth and Net property Income. But I think that it is prudent for Keppel DC REIT to stop recognizing any recurring disputed rental as well as making a provision for those that were already recognised.

2.2 Has the Keppel DC growth story stagnated and will it go below S$2 per unit?
Keppel DC REIT has 21 data centres worth S$3.5b spread across 9 countries as at 31 March 2022.  It has a geographically well-diversified portfolio. In addition, in the pipelines are over S$2b worth of potential data centre assets for acquisitions. Furthermore, right of first refusal has been granted for 5 other data centres within the Guangdong Data Centre campus. The future remains extremely bright for Keppel DC REIT. 
Personally, I think that Keppel DC REIT is better diversified geographically than DCR as well as having a much higher distribution yield of 4.77% relative to DCR's 4.18% . Hence its current pricing of S$2.070 as at 29 April 2022 seems more attractive relative to DCR. I think that there should be enough support from its future growth story and benchmarking comparative to DCR to prevent further free-fall of its unit's price. It is interesting to note that CGS-CIMB Research analysts are keeping their target price unchanged of S$2.62 per unit. 
Parting thoughts
The current headwinds are good for investors to do a self check and also serves to flush out those weaker investors who thought that data centre REITs are invincible, thereby, totally forgetting that data centre REITs are ultimately equity in nature and the associated routine business risks are always present. 

Wednesday 6 April 2022

Lendlease Rights Issue Part 2- Preferential Tranche Now Open And New Subscription Method Available.

For those who have not subscribed for their Lendlease Global Commercial REIT ("LREIT") preferential rights issue, please take note that the closing date is on 12th April 2022 (Tuesday) 5pm. As I had mentioned in my last post, unit-holders who have no money or refuse to subscribe will be severely diluted by the super low ball price of S$0.72 per unit which is a 20% discount to the January 2022 peak of S$0.90 per unit. Personally, my thoughts are to at least subscribe at S$0.72 first and then sell them off at the higher last traded price of S$0.795 per unit (as at 5th April 2022) upon issuance if cashflow are tight. 

Application options for LREIT Preferential Rights Offerings (for those who held units directly in their own CDP account)
Some folks have emailed me or posted query with regard to the subscription methods. The usual traditional participating banks for ATM application are (i) DBS (including POSB), (ii) OCBC and (iii) UOB.

There is a new payment method via PayNow that had been implemented by SGX-CDP. 
Extract of LREIT Rights application via PayNow

I do not really like the PayNow method as it is not intuitive enough in terms of user-friendliness. Those using it please read carefully on the instruction manual sent out to unit-holders on how to populate the fields after scanning the QR code using your bank payment App for PayNow. The parts that I think may pose some challenges to users:

(i)  One needs to know exactly how to key in the reference field using a mix of security counter code along with the last 8 digit of your CDP account number. Some unit-holders might forgot to key in the Lendlease counter code or key in full CDP account number. The ATM application is clearer on these aspect with the detailed step by step screen;

(ii) You also need to key in the dollar amount of the total amount of rights plus excess in the dollar value field- I am sure there will be some lost souls here who will key the number of units here instead of the dollar amount or just key amount for rights but forgot the "excess" rights one wanted;

(iii) You need to ensure your PayNow daily limits are set at an amount exceeding the amount you need to credit for this exercise.

Parting thoughts:
I will probably still stick to the traditional ATM application for the step by step instruction appearing on the ATM screen to guide one through the application process for the rights plus excess application. I hope that CDP will work on enabling the rights issue to be done via the internet banking interface in future instead of just ATMs. Last but not least, the initial huge decline in price of LREIT upon the announcement of the right issue has somewhat stabilized. It is intriguing to see that there is now an arbitrage situation with significant upsides arising from the rights pricing and most recent ex-dividend market trading price of LREIT. 

(Note: Recently, there is an interesting case of rights issue being priced higher than market trading price. Yup, I am talking about the Mapletree Commercial REIT fund raising exercise to pay for the acquisition of Mapletree North Asia Commercial REIT).