On 19 Nov 2024, Keppel DC Reit announced the proposed acquisition in two artificial intelligence (AI) ready hyperscale data centres from a joint venture (JV) led by sponsor Keppel for S$1.4 billion.
The JV owns the Keppel Data Centre Campus at Genting Lane in Singapore (shown in picture above), which comprises the two data centres and a vacant land plot earmarked for a third data centre, which has been excluded from the deal.
Keppel DC Reit will purchase a 49 per cent interest in the JV, as well as subscribe for two new classes of securities issued by the JV for up to S$1.03 billion.
This will entitle Keppel DC Reit to 99.49 per cent of the economic interest from the two data centres, KDC SGP 7 and KDC SGP 8.
Keppel DC Reit will also be granted a call option, which the manager expects to exercise in the second half of 2025, to acquire the remaining 51 per cent stake in the JV from Keppel, which holds the remaining 0.51 per cent economic interest.
Keppel DC Reit shall pay an additional S$350 million should a 10-year land tenure lease extension to 2050 be approved for the Keppel Data Centre Campus by the relevant authorities. This will be paid to the JV's shareholders, Keppel's private fund Alpha Data Centre Fund and its parallel fund (collectively known as ADCF), and co-investors.
The deal is expected to be completed by end-2025.
Equity Fund Raising
Keppel DC Reit has launched an equity funding exercise to raise around S$1.1b. It comprises of a private placement to institutional investors which has closed on 20 Nov at $2.09 per share for 334.9 million new shares issued to raise proceeds of about S$700m, as well as preferential offering (PO) at $2.03 per share to retail investors to raise around S$300m, at an allotment ratio of 86 new shares for every 1,000 existing shares held. Another S$85m would be raised from the issuance of sponsor subscription shares.
Next course of action for retail investors?
As I hold 8,000 shares of Keppel DC Reit in OCBC SRS account, I received notifications from OCBC to subscribe for the preferential offer shares. This is earlier than the PO exercise for shares held under CDP or other custodian accounts, which would commence on 2 Dec 2024, 9am and end on 10 Dec 2024.
I decided to subscribe for 3,000 PO shares at $2.03 for $6,090 including my own entitlement of 688 shares.
There it goes.
The listing of new PO shares would commence on 18 Dec 2024, 9am hence the new PO shares would be credited to our accounts by then.
Benefits of this Acquisition
Keppel DC REIT's strategic acquisition of AI-ready hyperscale data centers in Singapore, a leading data center hub in Asia, positions the REIT for significant long-term growth fueled by the ubiquitous adoption of AI, cloud solutions and structural tailwinds.
Keppel DC Reit will expand its assets under management by 36 per cent to S$5.2 billion, with 25 data centres across Asia-Pacific and Europe.
This acquisition is expected to immediately accrete DPU by between 6.7% and 11.1% depending on various conditions and deliver strong positive cash flows.
The REIT's management is well-positioned to drive further value through rental uplifts and capacity expansion initiatives. Potential upside exists in the mid to long term from the conversion of unutilized space at KDC SGP 8 into additional data halls, subject to regulatory approvals.
Keppel DC Reit's aggregate leverage is also expected to fall to 37.9 per cent, from 39.7 per cent.
Together with other future asset enhancement initiatives, Keppel DC reit is well strengthened for sustainable growth and value creation.
Other concerns
Despite the rosy picture being painted, it would be unfair to consider only the merits of this deal as after all all investments come with risks.
Personally, I feel that Keppel DC Reit is over valued at more than 1.6 times book value of $1.32 and has its yield compressed to an unattractive level of around 3.8%. There are other better investments including the likes of local banks which offer greater income producing potential.
This Reit has a significant concentration of tenants, with a few large tenants accounting for a substantial portion of its rental income. If a major tenant were to default or reduce its occupancy, it could have a significant impact on the financial performance. Most recently, the Reit experienced a notable tenant default at its Guangdong data center. This event led to a significant impact on the REIT's financial performance, as it had to make loss allowances for the defaulted rent and took steps to restructure the payment plan with the tenant.
Also, the data center industry is highly competitive, with new entrants and existing players expanding their capacity. This can lead to increased competition for tenants and downward pressure on rental rates. The data center industry is subject to various regulations, including zoning laws, environmental regulations, and cybersecurity regulations. Changes in regulations can impact the cost of operations and the value of data center assets.
Systematically, Keppel DC Reit is sensitive to interest rate risks, currency risks, geographical and global economic uncertainties and so on.
It is important to note that these are potential risks and may not materialize. However, investors should be aware of these risks before investing or increasing our investments in Keppel DC Reit.
Thank you for reading.
With love & peace,
Qiongster
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