Keppel Secures S\$350 Million Lease Extension Consideration for Genting Lane Data Centres

Key Transaction Details and Potential Impact for Shareholders

Keppel Ltd. has announced a significant development relating to its former interests in two data centre buildings—KDC SGP 7 and KDC SGP 8—located at 82 Genting Lane, Singapore. The company, together with a consortium of sellers and noteholders, has secured a S\$350.0 million consideration for the extension of the land tenure on these properties by an additional 10 years, taking the lease expiry from 2040 to 2050.

Key Points of the Report

• Background: Keppel had previously divested its interests in KDC SGP 7 and KDC SGP 8 to Perpetual (Asia) Limited, the trustee for KDCR Singapore Sub-Trust 1 (the “Purchaser”), which is wholly owned by Keppel DC REIT. Following the exercise of a call option, Keppel no longer holds any direct economic interest in these data centres.
• Lease Extension: The original lease with JTC Corporation was set to expire in July 2040. The consortium, including Keppel and other stakeholders, submitted an application to extend the lease by 10 years. JTC has now approved this extension, subject to specific conditions, including the development of a third data centre (KDC SGP 9) on the site.
• Consideration: The Purchaser will pay S\$350.0 million for the lease extension, with approximately S\$70.9 million attributable to Keppel based on its effective economic interests.
• Payment Undertaking Deeds: In the event that the lease extension is not granted or certain negative conditions arise, Keppel and its partners may be subject to clawback obligations for their share of the consideration, finance costs, and other expenses, up to a specified cap.
• Side Agreements: Keppel has also entered into side agreements with its partners to cover a portion of their possible finance costs or expenses, for which Keppel will receive a 5% per annum fee on any amounts paid on their behalf.
• Amended Sub-Lease for KDC SGP 9: The sub-lease agreement for the planned third data centre has been amended to reflect the new lease expiry and to clarify that Memphis 2 (the developer) will not be liable for compensation if the lease extension fails due to its non-fulfilment of conditions.

Important Shareholder Information and Potential Price-Sensitive Issues

• Material Financial Impact:
  • If the transaction had been completed by the end of 2024, Keppel’s net tangible asset (NTA) per share would have increased from S\$5.12 to S\$5.16, and earnings per share (EPS) for 2024 would have jumped from 51.6 cents to 55.7 cents.
  • However, if Keppel were required to pay the maximum potential clawback amounts under the undertaking agreements, NTA per share would instead fall to S\$5.09 and EPS to 48.3 cents.
  • This means the transaction has a positive potential impact, but shareholders should be aware of the contingent liabilities that could partially offset these gains if adverse events occur.
• Conditionality and Risks:
  • The S\$350 million consideration is conditional on the lease extension terms not being prejudicial to Keppel DC REIT, Memphis 1, or the property value. If the extension is not confirmed, or if the terms are unacceptable, Keppel and its partners may have to return their portion of the consideration, including additional finance costs and expenses.
  • The maximum clawback for Keppel is capped at approximately S\$106.7 million in consideration and S\$18.3 million in finance costs and other expenses; for the entire consortium, the cap is S\$41.7 million for finance costs and expenses.
  • Shareholders should note that these contingent liabilities are material and could impact Keppel’s financials if triggered.
• Strategic Implications:
  • The successful extension and monetization of the Genting Lane data centre assets reinforce Keppel’s ability to unlock value from its data centre platform. The transaction also highlights the ongoing collaboration between Keppel, Temasek-related entities, and other partners in the digital infrastructure sector.
• Related Party Transactions:
  • Temasek Holdings, as Keppel’s controlling shareholder, has indirect interests in the transaction, but these are limited to its shareholdings in Keppel, Keppel DC REIT, and Cuscaden Peak Investments.
  • No Keppel directors have any material direct or indirect interest in the transaction, aside from possible shareholdings in the REIT or related funds.

Conclusion

This transaction is highly significant and price-sensitive. It represents a substantial gain for Keppel and its partners, with the potential to lift both earnings and asset values. However, investors should be aware of the contingent clawback provisions, which could partially or fully offset these gains if the lease extension is not confirmed or adverse conditions are triggered. The transaction further solidifies Keppel’s role in the data centre sector, which is a key growth area for the company.

Disclaimer: This article is based on publicly available information from Keppel Ltd.’s disclosures. It is not intended as investment advice. Investors should conduct their own due diligence or consult with a professional advisor before making investment decisions.

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