Keppel DC REIT (SGX: AJBU) is the first pure-play data centre REIT listed in Asia. The REIT’s investment strategy is to invest in income-producing real estate assets used primarily for data centre purposes. Keppel DC REIT currently owns 15 data centres worth around S$2 billion as of 30 June 2019.
On 16 September, the REIT announced the proposed acquisition of a 99% interest in Keppel DC Singapore 4 and a 100% interest in 1-Net North Data Centre. The former will be acquired for around S$384.9 million while the latter will cost S$200.2 million, for a total transaction value of S$585.1 million.
These acquisitions will be funded by a combination of equity (raised from both a private placement and a preferential offering) as well as debt. An extraordinary general meeting will be convened for unitholders to approve the acquisitions in due course.
Here are four reasons why I believe these acquisitions will greatly benefit the REIT.
1. Strengthens the REIT’s Singapore presence
Source: Keppel DC REIT’s Acquisitions Presentation Slides
These acquisitions will strengthen Keppel DC REIT’s foothold in Singapore, which is one of the world’s fastest-growing data centre markets. Singapore currently takes up 51.1% of total assets under management (AUM), and this will increase to 62.7% post-acquisition.
Demand is expected to grow at a compound annual growth rate (CAGR) of 9.4% for data centres between 2018 and 2022, and the market is expected to continue to tighten in 2019 as a result of limited data centre supply.
2. Improvement in operating metrics
The REIT’s portfolio operating metrics should improve with these transactions. Portfolio occupancy is slated to rise from 93.2% to 94.1%, while the weighted average lease expiry (WALE) by leased area will improve from 7.8 years to 8.9 years. Lease expiries are well-spread out with less than 5% of leases up for renewal between 2019 and 2020.
3. More debt headroom for acquisitions
Aggregate leverage is expected to fall from 31.9% currently to 30.3% as a result of the equity fund-raising. The positive aspect of this fall in leverage is to allow the REIT to have higher debt headroom to pursue further growth opportunities. For smaller acquisitions, the REIT can fund this entirely through borrowings and as the maximum leverage allowed for REITs is 45%, this provides significant borrowing capacity for Keppel DC REIT.
4. Accretive to DPU
The acquisitions are expected to add significantly to distribution per unit (DPU) for future periods. Using FY 2018’s annual DPU of 7.32 Singapore cents, the acquisitions could provide additional accretion of 9.4% to boost the DPU to 8.01 Singapore cents.
An application has been made to the Inland Revenue Authority of Singapore (IRAS) to seek tax transparency for Keppel DC SGP 4. If granted, the total annual DPU could increase further to 8.23 Singapore cents. This is a total increase of 0.91 Singapore cents from 2018’s DPU level.
If I look at H1 2019, the DPU declared was 3.85 Singapore cents. Assuming this amount is annualised to 7.70 Singapore cents and adding the accretion from the acquisitions, total 2019 DPU could potentially hit 8.61 Singapore cents. At Keppel DC REIT’s last traded price of S$1.80, this represents a forward distribution yield of 4.8%.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang owns shares in Keppel DC REIT.
Motley Fool Singapore 2019