Many REITs have expanded their investment mandates to cope with the challenges brought about by the pandemic.
Likewise, Keppel DC REIT’s (SGX: AJBU) decided to expand its investment mandate to diversify away from being a pure data centre REIT.
Last week, the REIT announced that it would enter into a bond subscription deed and a subscription and shareholders’ agreement to purchase S$88.7 million worth of bonds and S$1 million worth of preference shares, respectively.
As REITs typically acquire physical real estate, this move is rare, as it involves the purchase of financial assets.
Here are four interesting facts that investors should know about this unusual transaction.
1. Working with M1
M1 is owned by both Keppel Corporation Limited (SGX: BN4) and Singapore Press Holdings Limited (SGX: T39) after being privatised back in September 2018.
Source: Keppel DC REIT’s Presentation Slides
The diagram above illustrates the mechanics of the transaction between Keppel DC REIT and M1.
As part of the arrangement, M1 will incorporate a wholly-owned subsidiary known as NetCo that will own its mobile, fixed and fibre assets.
The telco will sell around S$580 million worth of these network assets to NetCo and these two parties will enter into a 15-year network services agreement.
NetCo will seek financing for S$493 million while selling bonds worth S$88.7 million to Keppel DC REIT at a coupon rate of 9.17% per annum.
In addition, NetCo will also issue S$1 million worth of preference shares to Keppel DC REIT’s wholly-owned subsidiary.
This setup’s purpose is to unlock the value of M1’s network assets and is in line with Keppel’s 2030 Vision as part of its strategic review.
2. No operational risks
Keppel DC REIT will not be undertaking any operational risks concerning its bond investment in NetCo.
M1 is in charge of performing the day-to-day operation and maintenance of the network assets, and will also be responsible for any related capital expenditures.
In turn, for Keppel DC REIT, this deal provides a long-term stable source of income of S$11 million per annum comprising the payment of both principal and interest over 15 years.
3. Diversifying its income sources
By purchasing these bonds, the REIT diversifies its income sources away from purely data centre properties to include network assets, too.
Prior to the deal with M1, the REIT’s had a 100% exposure to the data centre sector.
Once the agreement is completed, The REIT’s assets under management will also increase by 2.7% to S$3.3 billion, allowing it to have better access to capital and debt markets for future deals.
4. A boost to DPU
More importantly, unitholders of the REIT will also enjoy a higher distribution per unit (DPU) from this acquisition.
Using the fiscal year 2020’s (FY2020) DPU of S$0.0917 as a base, DPU is expected to increase by 3.8% to S$0.09519.
The pre-requisite for the 3.8% DPU increase is that the bonds are classified by the Monetary Authority of Singapore (MAS) as qualifying project debt securities (QPDS).
Assuming the QPDS is not approved, the bonds will be treated as ordinary bonds that are subject to the prevailing corporate tax rate of 17%.
Under the second scenario, the DPU then falls slightly to S$0.09457 but is still 3.1% higher than FY2020’s DPU.
Meanwhile, aggregate leverage will inch up from 36.7% to 38% post-transaction which is still significantly below the 50% threshold set by the MAS.
The net asset value of the REIT, however, will remain constant at S$1.19.
Get Smart: A beneficial transaction
Although the terms of this acquisition are somewhat unusual, unitholders of Keppel DC REIT can rejoice.
Not only does the REIT not have to take on any operating risk from this bond investment, but this deal also allows it to diversify its income sources and lowers its reliance on the data centre industry.
DPU will also witness a boost, and with Keppel DC REIT announcing two other data centre acquisitions in the last three months, unitholders can look forward to sustained increases in DPU that will bump up their passive income flow.
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Disclaimer: Royston Yang owns shares of Keppel DC REIT.
