Keppel DC Reit's IPO centres on attractive yield

Asia's first prospective data centre Reit has been launched at a generous pick-up to locally-listed peers and domestic government bonds.

Roadshows and bookbuilding began in Singapore on Tuesday for an initial public offering by Keppel DC Reit, a trust backed by data centre properties, that could raise as much as S$512.98 million ($410 million).

Barring a sudden downturn in global equity markets, Keppel DC Reit's IPO is likely to be well received given its attractive pricing, extensive cornerstone investor support and the strong brand name of its sponsor, Keppel Telecommunications and Transportation.

A total of nine cornerstone investors have signed up for 53% of the offering, which is being pitched at S$0.90 to S$0.93 per unit. They comprise Wellington Management (64.5 million units), Fortress Capital Asia (38.7 million), Asia pte (30.1 million), Eastspring Investments (27.96 million), DBS Bank on behalf of its private banking clients (48.34 million), DBS Bank (26.88 million), Solibuild owner Lim Chap Huat (21.5 million), Myriad Asset Management (16.13 million), and SingHaiYi Group director Gordon Tang (16.13 million).

There is also a 207.52 million-unit placement tranche, representing 37.6% of the offering, and a 53.76 million-unit domestic retail tranche. A greenshoe option could add a further 17.7 million secondary shares to the IPO.

Pre greenshoe, Keppel DC Reit will have a freefloat of 62.5% and 64.5% post shoe. Roadshows and bookbuilding with wrap up on December 3 when the deal is scheduled to price.

The retail offering for the Singapore-listed real estate investment trust, or S-Reit, will then run from December 5 to 10, with listing scheduled for December 12.

Yield pick-up to peers and Singapore government bonds

Pricing for the Keppel DC Reit IPO equates to a forecast 2015 dividend yield of 6.8% to 7.1% and a 2016 dividend yield of 7.1% to 7.4%. This means the company is offering a relatively attractive 13.3% to 18.3% pick up to the mid-point of consensus analyst 2015 fair value estimates of 5.5% to 6.5%. 

The S$0.90 to S$0.93 per unit range also represents a spread of 452 to 482 basis points over yields on 10-year Singapore government bonds, well above the S-Reit's long-term average around the 396bp level. 

Investors desire for a comfortable yield cushion reflects the long-anticipated-but-yet-to-materialise spike in US Treasury yields. Singapore government bonds closely mirror US Treasuries and both have continued on a declining trend. On Tuesday, Singapore's 10-year Treasuries were bid around the 2.28% level, down from the 2.57% levels seen earlier in the summer.

Keppel DC Reit has no direct peer in Asia as it is the region's first property trust to offer pure exposure to data centres. It nonetheless looks attractively priced compared with its two closest comparables Ascendas Reit (A-Reit) and Mapletree Logistics Trust (MPL). 

Both derive some of their income from the data centres sector, which makes up 7% and 9% of their respective asset valuations.

The two have also outperformed Singapore's benchmark Straits Times Index, which is up 4.5% so far this year. A-Reit has risen 5.9% and is currently valued on a forecast 2015 dividend yield of 6.4%, while MPL is up 10.4% and is now trading on a 2015 dividend yield of 6.5%.

Further afield, in the US, is the world's largest data centre operator, Digital Realty Trust. Its shares have performed very strongly over the course of the year, rising 39.8%. As a result, its forward yield has contracted sharply to 4.79%. 

Other smaller US-listed data centre trusts have also done well, with CyrusOne up 23.1% to yield 3.01% and QTS Realty Trust rising 32.6% to yield 3.9%.

Innovative but not yet understood

As Asia's first data centre trust, Keppel DC Reit has novelty appeal. Its underlying growth story also taps into a key trend -- the outsourcing of data and its move onto the cloud.

However, one key handicap may prove to be investors' unfamiliarity with the sector and in particular how it is valued -- the amount of energy leased rather than floor area. Digital Realty, for example now reports in megawatts of power leased per quarter. 

This is because data centres tend to run up against power constraints long before they run out of floor space to lease. On the plus side, they tend to run far longer tenancies given the critical nature of the data being stored, which makes it difficult for customers to jump from one provider to another. 

As a result, at 7.8 years Keppel DC Reit has one of the longest weighted-average-lease-to-expiry ratios of the S-Reit sector. Its portfolio comprises eight assets with an aggregate net lettable area of 524,900 square feet, an appraised value of S$1 billion ($800 million) and a 94% occupancy rate.

The group also has three potential assets in the pipeline, which could add at least 187,800 square feet. This includes one Keppel-related data centre being built next to its existing data centre in Singapore, one in Australia and one next to a second existing data centre in Amsterdam.

The overall portfolio has 34 tenants with 96.1% comprising multinationals or government-related entities. By industry type, 42.1% are IT services, 25.8% internet enterprises, 15.1% telcos, 12.9% in financial services, with the remaining 4% corporates.

The group is likely to argue that its rental income is extremely solid, not least because Keppel-related entities account for 30%. Co-locators account for a further 34% and triple or double net lessees are on 28%. Further, leases have been structured with annual income escalations of 2% to 4%.

The majority of the portfolio is located in Asia, with Singapore and Malaysia accounting for 45% of the overall valuation, followed by Europe on 30.6% and Australia on 24.4%.

Gearing at 27% is relatively low compared to the rest of the S-Reit sector, which currently averages 33.3%.

Syndicate analysts are forecasting revenue growth of 4% over the 2015 and 2016 financial years. There will also be a 100% pay-out ratio. 

Joint global co-ordinators for the IPO are Credit Suisse, DBS and Standard Chartered, with Deutsche Bank and Goldman Sachs also included as bookrunners.

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