Yield-accretive data centres spur DPU, NAV and AUM growth

Since the start of September, four real estate investment trusts and one business trust have announced equity raisings. So far this year, S-REITs have raised more than $3 billion in equity fundraisings, excluding REIT IPOs (see Table 1).

First off the block was Keppel Pacific Oak US REIT, which announced an acquisition on Sept 6, and possible equity fundraising to part-finance it. But that got somewhat lost in subsequent data centre transactions.

Data centres are clearly hot, and they will get hotter as REITs source for existing data centres, given the likely curbs on future data centre construction.

Mapletree Industrial Trust (MINT) and sponsor Mapletree Investments formed a 50:50 joint venture to acquire 10 Powered Base Building® data centres in North America (the Powered Shell Portfolio) from Digital Realty for US$557.3 million ($774.2 million). In addition, MINT, Mapletree Investments and Digital Realty are co-investing in three existing Digital Realty Turn-Key Flex® hyperscale data centres in North America (the Turn-Key Portfolio) for US$810.6 million. The total transaction value of the properties for MINT and Mapletree Investments is US$1,367.9 million. MINT’s share of the investment is $965 million, including expenses.

The transaction for the Turn-key Portfolio will be completed in 4Q2019, and that for the Powered Shell Portfolio, next year. MINT’s assets under management (AUM) will rise to $5.8 billion from $4.8 billion as at June 30. The Powered Shell Portfolio’s occupancy rate is 100% and weighted average lease to expiry (WALE) is nine years, with 92.2% of leases likely to expect rental escalations of 2% a year. Moreover, 91.5% of the portfolio comprises triple net leases, where the tenant pays the expenses.

After the acquisitions are completed, 31.5% of MINT’s portfolio by valuation will comprise data centres. Of these, 7.2% are in Singapore and 24.3% in the US and Canada.

According to MINT’s manager, the acquisition is accretive to distribution per unit (DPU) and net asset value (see Table 2). Based on Digital Realty’s announcements, net property income (NPI) yield is 6.6% for the Powered Shell Portfolio and 6% for the Turn-key Portfolio, which makes the acquisitions accretive.

MINT raised $400 million via a placement of new units to fund the acquisition. Thus, existing unitholders will receive advance DPU of 2.91 to 2.95 cents, based on the proration of the estimated 2QFY2020 distribution for the period July 1 to Sept 25, as the new units will list on Sept 26. Maybank Kim Eng has retained a “buy” recommendation for MINT, and forecasts DPU of 12.3 cents for FY2020 and 13.9 cents for FY2021, which is when MINT will benefit from the acquisitions. These projections translate into yields of 5.12% and 5.8% respectively.

Keppel DC REIT announced on Sept 16 the acquisitions of two data centres in Singapore, which require unitholder approval, as they are interested-party transactions. KDC REIT will be acquiring 99% of Keppel DC Singapore 4 (KDC SGP 4) for $384.9 million, and 1-Net North Data Centre, Singapore (1Net North DC) for $200.2 million. Both trans

actions are likely to be completed in 4Q.

The yields are high and the acquisitions are accretive even though KDC REIT is financing the transactions with a mix of 80% equity and 20% debt. KDC SGP 4 is being acquired at an initial NPI yield of 7% (inclusive of a first-year rental support of $8.7 million), while 1-Net North DC is being acquired at an NPI yield of 9%.

KDC REIT says the acquisitions are as much as 12.4% accretive should the REIT receive tax transparency for KDC SGP 4 (see Table 3). Existing KDC REIT unitholders will receive their advance distribution for the period from July 1 to the date immediately prior to the date on which the new private placement units start trading.

CGS-CIMB upgraded KDC REIT to a “buy” after it announced the two acquisitions. Citi has retained a “neutral” rating. The US bank has trimmed its FY2019 DPU by 1% to 7.8 cents because of a mismatch in timing. KDC REIT will be completing its fundraising and issuing 277 million units this month, but it will benefit from the acquisitions only next year. Thus, Citi is lifting next year’s DPU by 8% to 8.8 cents. The revisions translate into yields of 3.96% and 4.47% this year and next respectively.

Manulife US REIT took a step closer to being included in the FTSE EPRA NAREIT Developed Market Index on Sept 19. The US office REIT announced the planned acquisition of 400 Capitol, a Grade A building in Sacramento’s CBD, for US$198.8 million, or US$397 psf. MUST plans to use a mix of equity (71%) and debt (29%) to finance the purchase. The equity portion will be through a placement, where the book has been covered, and a preferential equity offering.

“After this acquisition and our US$142 million equity fundraising, our free float will be US$1.3 billion. So, we are optimistic that if the share price stays where it is, we will qualify for the FTSE EPRA NAREIT Developed Market Index. The next review is in December, and we have to be eligible by mid-November,” says Jill Smith, CEO of MUST’s manager. The main eligibility criterion for MUST is to have a free float market cap of US$1.22 billiion, as it fulfils all the other requirements.

This month sees the hottest REIT IPO of the year, in the form of Lendlease Global Commercial REIT, with AUM of $1.4 billion. Sponsor Lendlease Group is looking to raise $740.3 million by issuing 387.5 million units to the public and 453.8 million units to cornerstones at 88 cents piece. The IPO statistics have yet to be confirmed. According to the preliminary prospectus, the annualised DPU for this year is likely to be 5.1 cents, with a yield of 5.8%, based on the IPO price of 88 cents. The prospectus forecasts DPU of 5.29 cents for FY2020, translating into a forward yield of 6.01%.

The IPO portfolio comprises 313@somerset, a well-known, well-frequented mall on Orchard Road, and Sky Complex, which comprises three office buildings in Milan. The Singapore property is likely to contribute 65% to NPI, and the Milan property, 35%. The latter is leased to a single tenant until 2032. For the portfolio, base rent comprises 98.4% of total rent, and turnover rent, just 1.6%. The WALE of 313@somerset is 1.6 years, based on gross rental income.

The REIT’s manager is headed by CEO Kelvin Chow, formerly chief financial officer of Keppel REIT’s manager, so it is in safe hands. E