Lai and Tan have a target price of US$1.20 ($1.57) on NTT DC REIT, 20% above its IPO price of US$1. Units in NTT DC REIT sank to a low of 92 US cents in August, before climbing in mid-September. After notching a high of US$1.06 in October, NTT DC REIT units have returned to US$1 as at Nov 4.
NTT DC REIT is a pure-play data centre REIT with an initial portfolio comprising six co-location data centres with an appraised value of US$1,572.8 million as at end-2024. Three of the assets are in Northern California, US (CA1-3), one in Northern Virginia, US (VA2), one in Vienna, Austria (VIE1) and one in Singapore (SG1).
The properties are freehold, save for SG1, which is a leasehold property with an initial lease term until August 2040, and an option to extend for a further 30-year term until 2070.
Assets need enhancements
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The DBS analysts bring up an oft-overlooked point about NTT DC REIT’s assets; its initial portfolio has an average Power Usage Effectiveness (PUE) of around 1.34, “significantly lower” than the global average of 1.56.
PUE measures the energy efficiency of a data centre. A lower PUE implies that the assets can serve the same customer capacity requirements more cost-effectively, leading to higher operational margins, say Lai and Tan.
At NTT DC REIT, the PUE of each individual property ranges from 1.24 to 1.53, with the newest asset having lower PUE while older assets have a slightly higher PUE.
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With an average portfolio age of 12 years, VIE1 is the newest property, only constructed in 2023. All the remaining five properties that were constructed between 2001 and 2015 have undergone refurbishment over the past 15 months.
According to DBS, future asset enhancement initiatives (AEI) will help improve power efficiency and margins from these six data centres.
As an example, the AEI at CA1 to replace the Uninterruptible Power Supply system in 2023 led to a 9 percentage point (ppt) increase in the property’s power efficiency to approximately 97%, leading to a 280 megawatt-hour (MWh) reduction in energy consumption in FY2023/FY2024, write Lai and Tan.
CA2 has been identified as the next property with the potential to undergo similar AEIs to reduce energy consumption intensity and improve earnings.
NTT DC REIT has a March 31 financial year end.
‘Healthy’ occupancy, Wale
Still, Lai and Tan like NTT DC REIT’s “healthy” occupancy rate and weighted average lease expiry (Wale).
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“The initial portfolio has an occupancy rate of 94.3%, which allows for revenue growth by leasing out vacant spaces. Global data centre commissioned power has increased at a Cagr of 28.1%, from 18.2 gigawatts (GW) to 49.1GW, over five years until 2024. It is projected to grow by a further 27.5% Cagr between 2024 and 2027,” the analysts write in a Nov 4 note.
The portfolio's relatively long Wale of 4.8 years, secured by high-credit-rated global enterprises, also ensures income stability in the near term, say the analysts. “NTT and related entities account for 11.8% of NTT DC REIT’s base rents, and these leases are expected to be rolled over as they come due.”
Lease types
Lai and Tan also like NTT DC REIT’s “well-balanced breakdown” of co-location and hyperscale leases.
Hyperscale leases make up 51.0% of the REIT’s base rents, while co-location leases account for the remaining 49.0%.
“Hyperscale tenants typically have larger and longer leases, anchoring the portfolio with a long Wale and attracting co-location customers. Co-location leases, on the other hand, provide tenant base diversification and usually command higher rents with built-in escalations,” say the analysts.
The typically shorter lease terms also allow NTT DC REIT to capitalise on rising rents during lease renewals, they add.
Approximately 74.6% of contracts in the initial portfolio have fixed escalations of 3.3% on average, and 3.0% of contracts with CPI-linked escalations. NTT DC REIT has no lease expiries exceeding 20% of its monthly base rent in any of the next five financial years.
No loans due for three years
NTT DC REIT currently has a “healthy” gearing ratio of 35.0%, with some US$131.1 million of debt headroom before leverage increases to 40%.
Its debt comprises 45% Euro-denominated loans, 30% of US dollar-denominated loans and 25% Singapore dollar-denominated loans. The all-in interest cost is 4.4%, with about 70% of loans hedged to fixed rates.
“Looking ahead, expectations of further interest rate cuts will provide a downward bias on borrowing costs in the near- to medium-term,” say Lai and Tan.
There are no refinancing requirements within the next three financial years, as all US$550.5 million in borrowings are due only in FY2028/FY2029.
However, the loans have two built-in 12-month extension options, and NTT DC REIT has the option to extend all three loan tranches (Euro, USD and SGD) for up to 24 months.
Alternatively, NTT DC REIT can choose which tranche to extend and refinance first, depending on the interest rate environment, and this will also help stagger its debt maturity profile, say the DBS analysts.
Rising rents, bigger portfolio
NTT DC REIT is projected to deliver a distribution per unit (DPU) Cagr of some 5% over the next two years.
Rising rents and higher occupancy rates are expected to drive NTT DC REIT’s earnings growth. Rents in Northern California have been increasing rapidly, and rents at the CA1-3 properties are significantly below current market rents.
Hyperscale rents have been on the rise in Northern Virginia and Vienna, while co-location rents in Singapore have also significantly increased, say the DBS analysts.
Moreover, co-location leases within NTTDCR’s portfolio have a built-in annual rental escalation ranging from 1.5% to 7.0%.
“Specifically, much of the earnings growth in the near-term is projected to come from the CA1-3 properties as the anchor tenant increases utilisation over the next two years,” say the DBS analysts.
NTT DC REIT could potentially grow its portfolio by up to 2.5 times over the next five years. This is because it has a Rofr from its sponsor on all existing and future assets.
Over the next five years, they have identified several operational assets close to stabilisation, with an IT load of up to 130MW.
“We understand that 10% of these assets will be in the US, with the remaining 90% equally split between Europe and Asia Pacific,” say Lai and Tan. “Over the longer term, the sponsor’s Rofr pipeline includes assets in various stages of ramp-up and under construction, totalling 2,000MW.”
