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DBS keeps ‘buy’ call on Keppel DC REIT after ‘attractive’ Sydney divestment deal

Felicia Tan
Felicia Tan • 4 min read
DBS keeps ‘buy’ call on Keppel DC REIT after ‘attractive’ Sydney divestment deal
Intellicentre Campus in Sydney, Australia. Photo: Keppel DC REIT
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The team at DBS Group Research has kept its “buy” call and target price of $2.20 on Keppel DC REIT after the REIT announced, on April 16, that it has agreed to divest its Sydney data centre for A$174 million ($152.1 million).

The REIT manager entered into a sale and purchase agreement (SPA) on April 15 to divest its 100% freehold interest in Intellicentre Campus to Macquarie Data Centres Macquarie Park Property SubTST Pty Ltd, a wholly-owned subsidiary of Australian-listed Macquarie Technology Group Ltd. Macquarie Technology Group is the ultimate parent company of Macquarie Data Centres Pty Limited, which is the property’s existing tenant. The group also owns facilities which house data for some of the world’s biggest hyperscalers, clouds and 42% of the Australian Federal Government.

Intellicentre Campus is located within the Macquarie Park in the north of Sydney and is 12km from the Central Business District. Macquarie Park is a research and business park in Sydney with a high concentration of companies in the communications and information technology sectors.

The agreed value represents a 35.4% premium to the property’s valuation of A$128.5 million as at the REIT’s FY2023 ended Dec 31, 2023. The amount is also 148.6% higher than the data centre’s purchase price of around A$70.0 million. The divestment represents an exit cap rate of approximately 3.6%.

After the sale, the REIT says it will re-invest A$90 million of the proceeds into an Australia Data Centre note (AU DC note) issued by Macquarie Data Centres Group Pty Ltd and guaranteed by Macquarie Technology Group. The REIT will retain its exposure to the Australian data centre market and receive a regular income stream starting from about A$6.3 million per year through the AU DC note. The income stream comes with a consumer price index (CPI)-linked annual escalation mechanism for 8.5 years.

According to the REIT, the income from the note will mirror the rental the REIT would receive from Intellicentre Campus if the asset was held for another 8.5 years.

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In line with the sale, the REIT manager will repay its existing loans of about A$43.2 million relating to the original investment of the campus. The remaining net sale proceeds of about A$22.3 million, subject to closing adjustments, will be used for repaying debt, funding acquisitions, capital expenditures and, or working capital.

The transactions are expected to be accretive to Keppel DC REIT’s distribution per unit (DPU) by 0.7%. If the transactions had been completed on Jan 1, 2023, the REIT’s pro forma DPU would have been 9.446 cents, up from its reported 9.383 cents. They are expected to be completed by 4Q2024.

“As a whole, these transactions are DPU-accretive and present a unique opportunity for Keppel DC REIT to crystallise value from its investment in Intellicentre Campus at a highly attractive premium, while continuing to earn recurring income that mirrors the rents that we have been receiving from the asset,” says Loh Hwee Long, CEO of the manager.

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“They also attest to the manager’s proactive portfolio management strategy and commitment to optimise unitholders’ returns, while improving the resilience of Keppel DC REIT’s earnings. Post-transactions, Keppel DC REIT remains well-positioned to pursue further growth opportunities, supported by a strong balance sheet,” he adds.

In its April 16 update, the DBS team notes that the deal is “quite attractive” as it shows the REIT’s ability to unlock value within its portfolio by divesting its assets at healthy premiums and low exit cap rates.

“The investment into the AU DC note serves to offset the loss of income from the divested asset, providing a smoother income stream over the next 8.5 years,” the team adds.

Furthermore, the move will reduce the REIT’s gearing by 36.6%.

That said, the team remains sceptical, as it questions the REIT’s manager’s intentions on transitioning to a fixed-income investor from an equity and, or property investor.

Other questions include the Macquarie Group’s motivation behind the high premium and attractive coupon on the notes, as well as untapped potential that’s not yet been explored within the property.

As at 12.41pm, units in Keppel DC REIT are trading 2 cents lower or 1.18% down at $1.67.

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