Keppel DC REIT’s proposed acquisition of two data centres, SGP DC 7 and SGP DC 8 is accretive to distributions per unit (DPU) of between 6.7% and 11.1% depending on various conditions and despite a $350 million payout to the sellers of the data centres in addition to the payment of the upfront land premium of $17.8 million to JTC. The net property income yield is likely around 6.5%, as indicated in a JP Morgan report.
JP Morgan has summarised the conditions described in a 46-page announcement by Keppel DC REIT’s manager.
According to JP Morgan, the transaction is structured in three steps.
(1) Acquisition of 99.49% economic interest in both DCs via a notes structure for $1.03 billion by Dec 2024 for $1.025 billion at around an 8%-9% yield.
(2) Acquisition of the remaining 0.51% interest for $5 million, with the collapse of the notes structure to secure full 100% control of the two DCs, and to start the application for tax transparency by 2H2025.
(3) 10-year land extension with payment of $365 million (6.5-7% NPI yield), by 2H2025 with tax transparency expected by the end of 2025.
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“Post-acquisition in Step 1 and 2, KDCREIT will see immediate 11.1% accretion based on pro-forma 1H2024 DPU. After step 3 with the $365 million land lease extension payment, accretion will drop to 6.7% and rise to 8.1% post-tax transparency,” JP Morgan says.
“Concerns, in our view, include the payout to the sellers for the land tenure extension and also limited visible catalysts post-acquisition. We expect immediate positive share price reaction and share price support given that the non-renounceable preferential offering only goes ‘ex-pref’ on Nov 26. Buyers via the placement will not get access to the preferential offering,” JP Morgan notes.
The key positive for KDC REIT is that the two data centres could experience a rental uplift given that they are currently being rented 15%-20% below co-lationa rents, JP Morgan indicates.
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The Nov 19 announcement says that the agreed value of the two DCs is $1.03 billion based on a 15.5-year land tenure, and at $1.403 billion for a 25.5-year land tenure. The valuations are below both Knight Frank and Savills' valuations for the initial 15.5-year land tenure.
The $350 million valuation announced by Keppel DC REIT’s manager for the additional 10 years is above Savills' valuation of $329 million and below Knight Frank’s valuation of $370 million.
All the valuations are based on discounted cash flow and income capitalisation methods. In effect, and as with investment properties, unitholders are paying for 25.5 years of cash flow, capitalised at prevailing capitalisation rates.
According to Keppel DC REIT’s manager, the DPU accretions assume that it has received consent from JTC for the conversion of the company that owns the two data centres (Memphis 1) into a limited liability partnership, and it has received approval from IRAS for tax transparency.
JP Morgan has an overweight rating on KDC REIT with an upside target of $2.50.
Market watchers point to demand for the placement being "super hot" as the transaction is about a Singapore asset, accretion, and for data centres "anything goes".
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DPU accretion table:
Notes to DPU accretion table:
(1) The Land Tenure Lease Extension is assumed to be financed fully by debt. Together with that, there is a 1% Acquisition Fee on the Land Tenure Lease Extension amount which is assumed to be financed by issuance of Acquisition Fee in Units.
(2) Assuming 100% occupancy for the full year for KDC SGP 7 and KDC SGP 8.
(3) Distributable income includes Capex Reserves.
(4) Number of Units issued as at 30 June 2024.
(5) Includes (i) approximately 282 million new Units (at an illustrative issue price of $2.128 per Unit) issued from the private placement; (ii) approximately 144.2 million new Units (at an illustrative issue price of $2.08 per Unit) issued via the preferential offering; (iii) approximately 39.9 million new Units (at $2.128 per Unit) issued for the Sponsor Subscription; and (iv) approximately 4.7 million new Units issued to the REIT Manager for the Acquisition Fee and management fees for the financial period ended 30 June 2024. \
(6) After setting aside $3.2 million for the estimated additional upfront land premium for the additional 10 years to be paid to JTC
