You know things are looking better when REITs start acquiring properties again. After years of rate hikes and declining net asset values and prices, it’s heartening to see a turnaround. While REITs are still far from their glory days, some higher-quality names are beginning to expand their portfolios – CapLand Integrated Commercial Trust acquired a stake in ION Orchard, and Parkway Life REIT added French nursing homes to its portfolio. Now, Keppel DC REIT (KDCR) is stepping up with the acquisition of two data centers—Keppel DC Singapore 7 and 8, located at Genting Lane.
Notably, Keppel DC 8 is a brand-new building that received its Temporary Occupation Permit in August 2024 and is expected to be fully occupied by the third quarter of 2025.
The acquisition price for these properties comes to S$1,066.8 million, with an option to extend the lease for another 10 years until July 15, 2050. This extension would raise the total consideration to S$1,380 million, subject to regulatory approval. The extension would allow KDCR to collect rent for 25.5 years instead of 15.5 years—a significant boost in the lease. Given the critical role data centers play in the digital economy and the high cost of replication, there’s little reason to expect regulatory obstacles.
Funding the Acquisition: Private Placement + Preferential Offering + Debt
With a total price tag of S$1.4 billion, KDCR needs substantial funding. The REIT plans to:
- Borrow S$450.9 million to finance the 10-year lease extension (once confirmed).
- Raise S$973.2 million from investors to cover the more immediate acquisition costs.
There will be two phases for number 2.
Phase 1: Private Placement
KDCR will conduct a private placement to raise no less than S$600 million. The placement units, priced between S$2.074 and S$2.128, are offered to institutional and high-net-worth investors. This phase opened on November 19, 2024, the same day the acquisition was announced, and closed on November 20, 2024. Private placements are typically open for only one day and are often fully subscribed, reflecting strong demand for the units and the book runners’ confidence in meeting the fundraising target.
(Update: The private placement was 3.4x covered and upsized to S$700 million at an issue price of S$2.09.)
Phase 2: Preferential Offering
The second phase is a preferential offering in which existing unitholders can participate. Units will be priced between S$2.03 and S$2.08, offering a slight discount. Unitholders will receive instructions on how to apply for these units at a later date, with applications conveniently processed through ATMs. The preferential offering is set to close on December 10, 2024, at 5:30 PM—don’t miss the deadline!
Approximately S$300 million is expected to be raised via this preferential offering. My only gripe is that the tranche is smaller than the private placement which typically isn’t the case. I would have liked to see unitholders have access to a larger share of the fundraising. However, the smaller allocation also highlights the high demand and desirability of KDCR units among institutional investors.
(Update: The issue price per Preferential Offering New Unit has been fixed at S$2.03 per New Unit and the allotment ratio is fixed on the basis of 86 New Units for every 1,000 Existing Units.)
Why This is a Good Deal
This deal is particularly appealing for several reasons:
- Scarce and Strategic Singapore Real Estate: Singapore’s limited land makes real estate highly valuable, and this is especially true for data centers due to the country’s strict energy consumption policies. At one point, Singapore halted the development of new data centers, making existing assets even more coveted. In this context, KDCR’s acquisition of not one but two data centers in Singapore is a golden opportunity that’s difficult to replicate. I’ve often highlighted my preference for Singapore-based properties because they tend to be more resilient compared to assets in other countries. This acquisition will increase KDCR’s exposure to Singapore properties from 53.1% to 65.5%, further strengthening its portfolio with high-quality, strategic assets in a prime location.
- Fair Valuation: Knight Frank and Savills valued the properties at S$1,033 million and S$1,054.5 million, respectively. The purchase price of S$1,030 million is below both valuations, confirming a fair deal.
- Yield Accretive: For unitholders, the most critical aspect of any acquisition is whether it increases distributions—and this deal does just that. The acquisition is expected to boost distribution per unit (DPU) by 11.1%. While this increment will moderate to 8.1% if the 10-year lease extension is granted, the overall yield improvement remains substantial and highly beneficial to unitholders.
- Room to Raise Rents: Another promising aspect is the upside potential in rental income. Current tenants at the two data centers are paying rents that are 15% to 20% below market rates, creating room for upward adjustments over time. Additionally, Keppel DC Singapore 8, being a newly constructed building, has untapped potential—1.5 floors of space can be converted into data halls, further boosting rental income.
- Deleveraging: The equity fundraising linked to this acquisition brings another advantage: reduced leverage. KDCR’s debt ratio will decrease from 39.7% to 33.3%. Lower leverage not only reduces financial risk in this high interest rate environment but also creates room for future debt-financed acquisitions when opportunities arise.
- Premium REIT Status: One of KDCR’s standout strengths is its ability to raise equity funding without eroding shareholder value. This is possible because KDCR trades at a significant premium to its net asset value (NAV)—a rarity in today’s REIT landscape. With a 13% year-to-date increase in share price, KDCR can capitalize on strong investor confidence to raise funds efficiently. This is a privilege many REITs lack, as those trading below NAV risk diluting shareholder value with equity issuance. KDCR’s ability to do so highlights its market strength and positions it as a premium REIT.
This acquisition is a solid move for KDCR. The assets are high-quality, strategically located, and accretive to unit holders. Moreover, the strong demand for KDCR’s equity fundraising reflects the market’s confidence. I believe the fundraising target will not only be met but could see oversubscription. Unit holders should be pleased with this deal, as it reinforces KDCR’s position as a premium REIT in the market.