Ascendas REIT Just Went Big into Data Centres: 5 Things Investors Should Know

2021-03-18     thesmartinvestor
Ascendas REIT Just Went Big into Data Centres: 5 Things Investors Should Know

Data usage is exploding around the globe.

And the pandemic just accelerated this trend.

Because of this, Ericsson estimates that 5G subscriptions will reach 3.5 billion by 2026 and account for nearly 54% of all mobile data.

Businesses are also reliant on cloud infrastructure for telecommuting, while an increasing number of software-as-a-service companies offer their subscription services through the cloud.

The resultant surge in internet traffic has led to strong demand for data centres to house all this data.

Ascendas REIT (SGX: A17U), one of the oldest industrial REITs listed here, has just announced that it will be acquiring a portfolio of 11 European data centres for S$904.6 million.

This move comes after Mapletree Industrial Trust (SGX: ME8U) had made two data centre acquisitions last year, one of a 60% interest in 14 data centres in the US, and another of a data centre and office property, also in the US.

Here are five things investors need to know about this acquisition.

1. Increased data centre contribution

The 11 data centres are located in the UK (4), the Netherlands (3), France (3) and Switzerland (1).

As a result of the acquisition, the data centre segment’s contribution to Ascendas REIT’s total asset value will rise from 4% to 10%.

The REIT’s assets will also jump from S$14 billion as of 31 December 2020 to S$15 billion, based on the hypothetical assumption that the transaction was completed at the end of 2020.

In terms of monthly rental income, data centres will now contribute 10.4% of total income, up from 4.4% before the acquisition.

Management is confident that demand for data centres will be sustained by technology trends such as big data analytics, the Internet of Things and e-commerce.

2. High occupancy rate with escalation clauses

The occupancy rate for the portfolio of data centres stands at 97.9%, and 83% of the leases come with in-built escalation clauses of between 1% to 3%.

This high occupancy is underpinned by robust leasing demand for data centres.

In 2020, 201 megawatts (MW) of colocation data centres were taken up, while only 174 MW of new supply came into the market.

For markets in the France, London, Amsterdam and Paris (“FLAP”) region, vacancy rates for data centres improved to 19% in 2020 from 21% in 2019.

The vacancy rate is poised to fall further in FLAP markets to 17% this year, demonstrating continued strong demand from corporations for data centre space.

3. Diversified, high-quality tenants

An important metric that unitholders look for is high-quality tenants with deep pockets that are resilient to crises.

This acquisition by Ascendas REIT comes with 14 high-quality, established customers.

The top 10 customers by rental income include big names such as HSBC Holdings (SEHK: 0005), Bouygues Telecom, a unit of Bouygues SA (EPA: EN), and Equinix Inc (NASDAQ: EQIX), a data centre REIT in the US.

The presence of these blue-chip tenants should instil confidence in unitholders that the flow of rental income should not get disrupted easily.

4. Strengthens portfolio metrics

The REIT will enjoy more robust portfolio metrics once the acquisition is concluded.

Of the 11 data centres, six have a freehold land tenure while five are on leasehold tenure.

As a result, the proportion of freehold land tenure properties within Ascendas REIT’s portfolio increases from 35.4% to 37.5%.

Also, before the acquisition, Singapore made up the bulk (64%) of the REITs total asset value.

Post-acquisition, Singapore’s contribution to asset value will decline slightly to 60% while the overseas properties component increases from 36% to 40%.

5. Uplift in DPU

The acquisition will result in a slight uplift to the REIT’s distribution per unit (DPU).

DPU is projected to improve by S$0.00189, for an uplift of 1.3%, assuming around 64% of the purchase price is funded by equity with the remainder paid for by additional borrowings.

First-year net property income yield post-transaction stands at around 5.7%, higher than the REIT’s current distribution yield of about 4.1%.

Get Smart: A savvy move

Ascendas REIT has executed a bold move to acquire this portfolio of data centres.

With data usage expected to remain strong for the foreseeable future, data centres should continue to experience robust demand.

This transaction increases the REIT’s exposure to this resilient and growing segment, promising stable and predictable rental income for unitholders.

The improvement in portfolio metrics is yet another major plus point that sweetens the entire deal.

Looking ahead, more REITs may embark on similar acquisitions as data centres remain a red-hot asset class to invest in.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

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