Keppel DC REIT: Entering Japan With a Tokyo Data Center Acquisition

Narrow-moat Keppel DC REIT is acquiring a SGD 201 million data center in West Tokyo, Japan, with its sponsor, Keppel Ltd. The trust will have an effective interest of 98.47% while the remaining will be held by Keppel Ltd. The data center is currently fully leased to a hyperscaler that is a Fortune Global 500 company. The lease still has seven more years to run, and management expects to achieve a positive rental reversion on renewal given that the in-place rents are currently 10%-15% below market rents. The acquisition will be fully funded by Japanese yen debt, which gives the trust a natural currency hedge. Given Japan’s lower borrowing cost, this should reduce the trust’s overall average cost of debt, but aggregate leverage will rise to 39.4% from 37.6% as at March 31, 2024 (including the use of net proceeds from divestment of the Intellicentre Campus to repay debt and subscribe to the Australia Data Centre Note). Assuming the acquisition was completed on Jan. 1, 2023, distribution per unit, or DPU, should increase by 1.1%. We retain our fair value estimate of SGD 1.80 per unit while our DPU estimates are largely unchanged. We think the units are fairly valued currently and encourage investors to wait for a better entry price.