With interest rates poised to decline, many REITs have been more active in acquisitions and capital recycling.
One of these REITs is Keppel DC REIT (SGX: AJBU).
The data centre REIT announced a major acquisition of two data centres in a S$1.4 billion transaction involving its sponsor, Keppel Ltd (SGX: BN4).
Income investors will be pleased to know that the purchase will increase Keppel DC REIT’s distribution per unit (DPU).
Here are five aspects of this deal that investors should know about.
Details of the acquisition
Keppel DC REIT will acquire a 99.49% interest in two colocation data centres in Singapore – KDC SGP 7 and KDC SGP 8.
The purchase consideration for this stake is around S$1.03 billion and is below two independent valuations done by Knight Frank and Savills.
In addition, the REIT will fork out an additional S$350 million to Keppel’s joint venture shareholders should a 10-year land tenure lease extension to 2050 be approved by the authorities.
In total, Keppel DC REIT will pay S$1.38 billion (including acquisition-related fees) and the purchase will be executed in stages up till the end of 2025, when the REIT will own a 100% stake in both data centres.
Both KDC SGP 7 and 8 enjoy 100% contracted occupancy.
Data centres are AI-ready
These two data centres are designed to handle artificial intelligence (AI) inference workloads.
They both have high power connection and are close to nearby cable landing stations, thus providing ultra-low latency connectivity (i.e. low downtime).
Being located within the Keppel Data Centre Campus, SGP 7 and 8 can also benefit from the adoption of green data centre solutions.
Structural tailwinds such as cloud adoption, e-commerce, and 5G rollout will boost demand for data centres and AI, thus creating healthy tailwinds for the REIT.
Transaction is DPU-accretive
The purchase will immediately increase Keppel DC REIT’s assets under management (AUM) from S$3.9 billion to S$5.2 billion post-transaction.
In particular, its Singapore AUM will shoot up 67% from S$2.1 billion to S$3.4 billion and occupy 65.5% of its enlarged portfolio, up from the current 53.1%.
The good news is that the acquisition will be immediately DPU-accretive.
The pro-forma DPU accretion for the first half of 2024’s (1H 2024) DPU is 11.1%, going from S$0.04549 to S$0.05055.
However, the payment of the land lease extension will reduce this accretion to 6.7% to S$0.04852.
The REIT will apply for tax transparency for the data centres and if this is granted by the authorities, then the DPU accretion will be 8.1% to S$0.0492.
Potential for further growth
The manager intends to optimise returns for these two data centres through proactive portfolio and asset management.
The contracted rentals for both data centres are estimated to be at least 15% to 20% below comparable market colocation rents.
The current rental rate ranges from S$335 to S$516 per kW/month and is sharply higher than the 2020-2022 range of between S$169 to S$452.
What’s more, rents are expected to trend upwards in the next few years with the tight demand-supply situation.
There is also the potential conversion of around 1.5 floors of unutilised space at KDC SGP 8 into data halls.
The manager has a good track record of asset enhancement initiatives (AEIs) to unlock value and allow for organic rental income growth.
An advance DPU and equity fundraising exercise
Keppel DC REIT intends to fund 70% of the acquisition price through an equity fundraising exercise involving a private placement and preferential offer of new units.
The remaining 30% of the transaction will be funded by debt.
Post-transaction, the REIT’s aggregate leverage will fall from the current 39.7% to just 33.3%.
An advance distribution of between S$0.04063 and S$0.04103 for the period from 1 July 2024 to 27 November 2024 will be declared and finalised.
The private placement received an enthusiastic response and the manager triggered the upsize option so that the funds raised will increase to approximately S$1.09 billion from S$985 million.
The private placement was 3.4 times covered at an issue price of S$2.09 per unit with a total of 334,929,000 units to be issued.
As for the preferential offer, it will be on the basis of 86 new units for every 1,000 existing units at an offer price of S$2.03 per unit.
A total of 148,413,063 preferential units will be issued.
Get Smart: A worthy billion-dollar acquisition
The transaction is attractive for unitholders on many fronts as detailed above.
Keppel DC REIT is the next REIT to embark on a billion-dollar acquisition, coming close on the heels of CapitaLand Integrated Commercial Trust (SGX: C38U) when it purchased a 50% stake in ION Orchard Mall for S$1.85 billion.
Investors can look forward to stronger operating and financial metrics that will gear Keppel DC REIT for further growth in the years to come.
In our latest report, we dive into five standout Singapore REITs offering distribution yields exceeding 5.5%. Why settle for less? Get more dividends hitting your bank account with our REITs guide. Click here to download for free now.
Follow us on Facebook and Telegram for the latest investing news and analyses!
Disclosure: Royston Yang owns shares of Keppel DC REIT.
