Citi Research analyst Brandon Lee has maintained his “buy” call on Keppel DC REIT (KDC REIT), with an unchanged target price of $2.29, after the REIT announced that it will be acquiring two data centres from Keppel. Morningstar equity analyst Xavier Lee also kept his "three star" rating with a higher target price of $2.34 from $2.10 previously.
In its release on Nov 19, KDC REIT announced the acquisition of two completed and fully contracted colocation next-generation artificial intelligence (AI) ready DCs at 82 Genting Lane, KDC Singapore 7 and KDC Singapore 8, for $1.38 billion.
This consists of $1.03 billion for the existing land tenure of approximately 15.5 years, as well as an additional $350 million for a 10-year land tenure extension.
This is at a slight discount compared to two independent valuations of $1.4 billion and $1.38 billion.
Keppel DC Singapore 7 (KDC SGP 7) is a seven-storey data centre that is fully leased to four clients with a weighted average lease expiry (WALE) of 3.9 years. It covers a net lettable area (NLA) of approximately 72,900 sqft and was completed in March 2023.
Keppel DC Singapore 8 (KDC SGP 8) is a six-storey data centre that is fully leased to three clients with a WALE of five years. It covers NLA of approximately 77,500 sqft and was completed in August this year.
See also: UOBKH calls Centurion Corp a stock for ‘growth-minded investors’
KDC SGP 8 is currently partially fitted and occupied with remaining data halls undergoing fit-out and is expected to be fully occupied by 3Q2025, with the nine-month gap supported by an income support of $8.7 million.
Lee notes that earnings growth could come from positive rent reversion, given that contracted rents are 15% to 20% below market rents, and conversion of the 1.5 unutilised floors at KDC Singapore 8 into data halls in the mid-to-long term.
After the acquisition, KDC REIT’s assets under management (AUM) will increase 36% to $5.2 billion, of which Singapore accounts for 65.5%, while the proportion of rental income from hyperscalers will increase by 12.7 percentage points (ppts) to 64.2%.
See also: With 300MW wind-solar project win in India, Sembcorp at 64% of 2028 renewable energy goal: CGSI
“We like that these are artificial intelligence-ready hyperscale data centres, which continue to ride on strong secular demand driven by increasing digitalisation, higher cloud adoption, and artificial intelligence,” says Morningstar's Lee in his Nov 19 report. “Singapore, where the data centres are located, remains power-constrained and management said the colocation vacancy rate was around 1% as of end-June 2024,” he adds.
According to KDC REIT, the acquisition will result in 1HFY2024 pro-forma distribution per unit (DPU) accretion of 8.1% and net asset value (NAV) per share accretion of 11.7% and gearing of 37.9%.
KDC REIT states that the acquisition will happen in three stages. First, the REIT will acquire an initial 40% and 9% interest in Memphis 1, a private company which directly holds the title to the data centres, from Cuscaden Peak Investments and its sponsor, Keppel’s connectivity division, respectively. KDC REIT will also subscribe to two new classes of securities and, or notes for up to $1.03 billion, which entitles the REIT to 99.49% of the data centres’ economic interest. This is expected to be completed in December 2024.
Second, KDC REIT will be granted a call option, which it expects to exercise in 2H2025 to acquire the remaining 51% interest in Memphis 1 from Keppel.
Lastly, KDC REIT will pay an additional $350 million in 2H2025 to Memphis 1’s shareholders, Alpha DC Fund and co-investors, given that the 10-year land tenure lease extension is approved by the relevant authorities.
Units in KDC REIT closed 9 cents higher or 4.11% up at $2.28 on Nov 20.
