Keppel DC REIT's revenue slowed in its H2 2023 results, amidst payment issues with tenant Bluesea Data Development.
The company posted mixed results for the year, having seen a decline in distributions per unit representing an overall drop in 2023 of 8.1 percent. Distributable income also fell by 9.3 percent to $125m.
While the company's revenue did increase by 1.4 percent to $210m, a surge in finance costs by 56.1 percent to $36.2m significantly slowed this.
One contributing factor was Keppel's tenant dispute with Bluesea Data Development regarding the Guangdong DC1 and DC2 facilities, for which the data center REIT says owes Keppel around $6.8m for missed rental payments.
Keppel officially announced that it had issued a letter of demand to the customer for the payment on December 15, 2023. In that letter, Keppel requested $6.34m for rental arrears and coupon payments of four months, with the remainder accounting for late payment interests and real estate taxes.
In addition, Keppel is requesting a top-up of security deposits of $4.54m. Talks between the companies remain ongoing.
The Guangdong data centers were acquired by Keppel as a sale-leaseback from Guangdong Bluesea Data Development Co. Ltd. The first facility, DC1, was acquired in July 2021 for $98.1m, and then leased back to Bluesea on a triple net basis for 15 years. As part of the agreement, this was set to be the first of six data centers developed by Bluesea, with Keppel receiving the right of first refusal.
The second data center in question, DC2, was acquired the following year in addition to a third data center, DC3. That transaction was valued at $206m and saw Keppel receive another fully fitted data center (DC2) and a third set to be completed in Q3, 2024. Again, those facilities would be leased to Bluesea on a triple net basis for 15 years.
Citi Research analyst Brandon Lee noted at the time of the letter of demand: “[The] long-stop date of Oct 31 for Guangdong Data Centre 3’s (fully-fitted by 3QFY2024) framework agreement has passed and Keppel DC REIT has not extended it, hence it reserves right to cancel the deal, transfer core-and-shell to vendor and receive a refund of RMB100 million ($21.5m), but it has not exercised the right and is now working with advisors on its options.”
Lee goes on to state that the data centers are integral to Bluesea's operations, and that the company has historically paid on time, thus the companies are committed to negotiations. This was reiterated by Keppel DC REIT CEO Loh Hwee Long during the recent earnings call, who said the company was working on a roadmap instead of pursuing litigation.
"Based on our current assessment, the recovery roadmap is going to be the optimal way for us to move forward to work towards recovery of rental arrears as well as working collaboratively with the tenant to ensure it is being current with rental obligations,” he added.
Earlier this month, the Singapore High Court ruled in favor of Keppel regarding a dispute with DXC Technology Services, agreeing that the latter was in breach of its Standard Services Agreement (SSA) at a data center in Serangoon North.
