Keppel DC REIT Makes Landmark S\$707 Million Acquisition of Hyperscale Data Centre in Japan: Game-Changer for Portfolio Growth and Earnings

Overview: Major Expansion into Asia’s Largest Data Centre Market

Keppel DC REIT has announced a transformative acquisition of a newly built hyperscale data centre (“Tokyo Data Centre 3”) located in Inzai City, Greater Tokyo, Japan. This blockbuster deal, valued at JPY 82.1 billion (approximately S\$707 million), marks one of the REIT’s largest investments to date and signals a strategic pivot to deepen its footprint in the high-growth Japanese data centre market. Keppel DC REIT will hold a 98.47% effective interest in the property, which translates to an outlay of approximately JPY 80.8 billion (S\$696.1 million) for its share of the acquisition.

Key Investment Highlights

• Prime Location & Asset Quality: The property is a freehold, five-storey, Tier III-equivalent hyperscale data centre, with a gross floor area of ~197,872 sq ft and net lettable area of ~74,465 sq ft. It is built to the latest seismic standards, featuring a base isolation system for earthquake resilience.
• Long-Term Lease Security: The entire facility is fully contracted to a Fortune Global 500 hyperscaler for 15 years, with an option to renew for up to five years. The lease includes annual rent escalation, offering robust income visibility and resilience compared to the typical fixed-rent contracts in Japan.
• Third-Party Operator Expertise: The data centre will be managed by a highly experienced global operator with over two decades of track record in Japan, ensuring operational excellence.

Transaction Structure and Financials

• Complex Japanese Real Estate Structure: The acquisition leverages a TMK (tokutei mokuteki kaisha) structure, common in Japanese real estate. Keppel DC REIT, via its subsidiaries and joint investment with Keppel Japan KK, will control 98.47% of the asset and operating company (“OpCo”), with Keppel Japan holding the remainder.
• Valuation: The purchase price is at a 1.1% discount to the independent valuation by JLL (JPY 83.0 billion, ~S\$714.7 million), indicating prudent negotiation and immediate value uplift.
• Total Outlay: The all-in acquisition outlay is JPY 82.2 billion (S\$708.3 million), including acquisition costs and fees.
• Funding: The deal is financed through a mix of JPY-denominated debt (providing a natural currency hedge), proceeds from a preferential offering, and the issuance of new Units for the acquisition fee. Aggregate leverage will increase from 30.0% to 34.5%, leaving a healthy debt headroom of S\$559 million (up to 40% leverage), preserving flexibility for future growth.

Strategic Impact: Portfolio Transformation & Growth

• AUM Growth: The acquisition boosts portfolio assets under management from S\$5.0 billion to S\$5.7 billion, and expands the number of data centres to 25 across 10 countries.
• Japan Exposure: The proportion of Japanese assets jumps from 4.3% to 16.4% of AUM, positioning Keppel DC REIT to ride the structural tailwinds of Asia’s largest data centre market outside China.
• Income Diversification & Resilience: Portfolio occupancy rises from 95.8% to 95.9%, and WALE (weighted average lease expiry) extends from 6.9 to 7.2 years. Rental income from the top client drops from 45.3% to 42.1%, reducing concentration risk and enhancing income stability.
• DPU Accretion: The deal is immediately accretive, with pro forma FY2024 DPU rising by 2.8% (from 9.451 cents to 9.712 cents), supporting potential share price re-rating.

Japan Data Centre Market: Massive Growth and Supply Constraints

• Market Dynamics: Japan is the largest data centre hub in Asia Pacific (ex-China), with demand projected to reach 1.9 GW by 2028 (CAGR 16.1% from 2024-2028) driven by cloud adoption, AI deployments, and onshoring trends.
• Supply Bottlenecks: Power and construction constraints mean new developments often face wait times of 7–10 years for power allocation, with many unable to secure power until 2030 and beyond. This makes existing operational assets like Tokyo Data Centre 3 highly strategic and valuable.
• Location Advantage: Inzai City is a core data centre cluster, with robust connectivity and low seismic risk, and is a gateway for Asia-Americas interconnection via subsea cables.

Shareholder Considerations: Price Sensitive Factors

• Strong DPU Accretion and NAV Uplift: The acquisition delivers immediate earnings growth, supporting share price upside.
• Aggregate Leverage Increase: While debt jumps to 34.5%, this remains well within regulatory limits and leaves substantial headroom for future accretive deals.
• Discloseable Transaction Status: As the acquisition size exceeds 5% but is below 20% of market cap and profits, this is a discloseable transaction under SGX rules, ensuring transparency but not requiring unitholder approval.
• Interested Person Transaction: The joint investment with Keppel Japan (an associate of the controlling unitholder) and the related guarantees are classified as interested person transactions. The audit and risk committee confirms terms are fair and not prejudicial to minority unitholders.
• Potential Risks: Completion is subject to regulatory and client consents, and a suite of guarantees (including a corporate guarantee for 10% of purchase price) have been issued, but these are back-to-backed for Keppel Japan’s share, limiting Keppel DC REIT’s exposure.
• Directors and Substantial Unitholder Interests: No material insider holding changes; substantial unitholder Temasek Holdings remains at ~20%.

Investor Takeaways

This acquisition is a potential game-changer for Keppel DC REIT, offering immediate DPU accretion, significant portfolio diversification, and enhanced exposure to Japan’s booming data centre market. The deployment of JPY-denominated debt is prudent for currency risk management. These positives, together with the long-term contracted lease and robust market fundamentals, are likely to be price sensitive and could drive a positive re-rating of Keppel DC REIT’s shares.

Disclaimer

This article is for informational purposes only and does not constitute investment advice or an offer to buy or sell any securities. Investors should conduct their own due diligence and consider their own investment objectives and risk tolerance. Past performance is not indicative of future results. The value of investments and the income derived from them may fall as well as rise, and investors may lose all or part of their investment.

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