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Keppel DC REIT is favourite among analysts but curbing emissions remains a challenge

The Edge Singapore
The Edge Singapore  • 3 min read
Keppel DC REIT is favourite among analysts but curbing emissions remains a challenge
Keppel DC REIT's upside is likely to be from a further $700 million in acquisitions which could boost DPU by 9%.
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Keppel DC REIT (KDC REIT) is the brightest spot within Keppel Corp, which itself has been impacted by impairments from the Keppel O&M segment. In 3QFY2020 ended Sept 30, KDC REIT’s DPU surged 22% to 2.357 cents and its nine month DPU rose 16.5% to 6.732 cents, underpinned by acquisitions.

In 1HFY2020, the manager of KDC REIT completed the acquisitions of the remaining 999-year leasehold land interest in Keppel DC Dublin 1 and Kelsterbach Data Centre, increasing the REIT’s assets under management to around $2.8 billion as at end June. In 4QFY2019, KDC REIT acquired Keppel DC Singapore 4, a data centre in Tampines. The REIT has obtained tax transparency treatment for its share of taxable income from Keppel DC Singapore 4 and exercised the option to extend its land lease title by 30 years to June 2050.

With the latest acquisitions, 58.2% of its $2.8 billion AUMs are in Singapore, 10.4% in Australia, 4.5% in the UK, and 0.9% in Malaysia, with the remainder in Europe.

Since KDC REIT is the only pure-play data centre REIT listed in Singapore, Credit Suisse says, “We believe KDC REIT is best positioned to capture this growth both organically and inorganically.” Its leases benefit from annual escalations, and strong demand for data centres has allowed the REIT to raise occupancy and capacity through AEIs, the Swiss bank adds.

“On acquisitions, we believe KDC REIT has the strongest inorganic growth potential while the REIT has a strong track record on acquiring both sponsor pipeline and third party assets. Assuming an acquisition size of $700 million, (similar to 2019), with a capitalisation rate of 6.5%, we estimate KDC REIT could see DPU accretion of around 9%,” Credit Suisse reckons.

The main drawback is the REIT’s greenhouse gas (GHG) emissions. These consist primarily of Scope 1 which is direct emissions from fuel consumption and Scope 2, or indirect emissions from grid electricity consumption. The majority of KDC REIT’s electricity is supplied from the grid, and fuel consumption is mostly diesel from back-up generators.

See also: Elite UK REIT enters into GBP80 mil facilities agreement

GHG emissions have been rising sharply since KDC REIT has started monitoring them in 2016. The surge in GHG emissions in 2019 is attributed to a full-year contribution from Keppel DC Singapore 5. This year, GHG emissions could well rise further with more fuel and electricity consumption, due to KDC REIT’s two acquisitions. However, the REIT’s sustainability report points out that 18.1% of electricity was sourced from renewable sources.

In addition to fuel and electricity grid consumption, data centres require water for cooling purposes. Water consumption has also been moving sharply higher (see charts).

See also: Sabana REIT's Trustee attributes internalisation costs to additional EGMs

KDC REIT’s manager has said it is working with Keppel Data Centres to reduce the environmental impact of its data centres.

Singapore’s carbon tax is set at a rate of $5 per tonne of GHG emissions (tCO2e) from 2019 to 2023. Singapore will review the carbon tax rate by 2023, with plans to increase it to between $10 and $15 per tonne of GHG emissions by 2030. In FY2019, KDC REIT’s GHG emissions stood at 1,033 tCO2e for Scope 1 and 132,431 for Scope 2.

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