Ascendas REIT has announced its long-awaited data centre transaction. The REIT had already carried out an equity fundraising exercise comprising a placement to raise $800 million and a preferential offering to raise $400 million that was completed on Dec 9, 2020. At the time of the announcement, Ascendas REIT’s manager had stated that $614 million would be earmarked for a data centre portfolio in Europe.
On March 17, Ascendas REIT’s manager finally announced details of the acquisition. As it turns out, the accretion from the fundraising exercise and the acquisitions in San Francisco, Sydney, Brisbane and more recently the data centres in London, Paris, Amsterdam and Switzerland is 2.4% according to William Tay, CEO of Ascendas REIT’s manager. This is at the upper end of the 2%–2.5% range accretion range indicated in a Nov 10, 2020 announcement.
In total, since the $1.2 billion in equity fundraising last year, and including the data centres, Ascendas REIT has acquired more than $2 billion in assets. These comprise two tech buildings in San Francisco for $768 million, a suburban tech office building in Macquarie Park of $284 million and a new logistics property, to be developed in Brisbane for $69.1 million. The cost of the data centre portfolio comprising 11 properties is $904.6 million, and $960 including expenses. Three properties are in London, one in Manchester, three in Paris, three in Amsterdam and one in Geneva. Digital Realty Trust is the vendor.
Ascendas REIT will use $612.5 million from the EFR with the remaining $347.5 million coming from debt. The net property income yield of the data centre properties is likely to be 5.7% including transaction costs, and 6% excluding transaction costs. Pro forma aggregate leverage rises from 32.8% as at Dec 31, 2020, to 37.1%.
The acquisition does a few things for Ascendas REIT’s portfolio. For a start, AUMs rise to $15 billion. Secondly, it raises the portfolio’s data centre exposure from 4% of AUM to 10% of AUM. The weighted average lease expiry of the data centre portfolio is 4.6 years by rental income is relatively long. Some 50% of the new portfolio by rental income has embedded annual escalations of 3%. Based on rental income, 58% of the portfolio is on a triple net lease basis, with the remaining 42% based on colocation data centres.
Ascendas REIT’s land tenure improves where the portion of freehold properties rises to 37.5% from 35.4%. The three London and three Paris properties are freehold. The Dutch properties are on land tenures that are automatically renewed - subject to land rent- on expiry.
According to Tay, average capitalisation rates for data centres in Europe range from 4%–7%. “This [portfolio] falls between 5.6% and 6.5%. No surprises given the location, the tiering as well as the quality of power supply and infrastructure,” Tay says.
The reason why capitalisation rates were higher, and accretion greater than expected is because of the age of some of the data centres. “Some of the builds are much older, from the 1980s where they could have been converted from warehouses or industrial facilities to data centres. The vintage is between 10-20 years and the last upgrading took place in 2012. They are all approved for data centre usage by the regulators which was one of the due diligence items we looked at,” Tay acknowledges.
“We are overall positive with this acquisition. The post-cost NPI yield of 5.7% is slightly higher than our analyst’s expectations of 5.25%. The high portfolio occupancy rate and annual rental escalations will provide income certainty and some organic growth for the portfolio. We currently have a buy recommendation on Ascendas REIT with a target price of $4,” DBS Research says.
With the latest acquisition, some 40% of Ascendas REIT’s portfolio is overseas. Tay says the key strategy is to identify drivers of the economy in the countries Ascendas REIT has a presence. “We look at the asset class that supports the driver of the economies in those countries. We entered the UK in logistics. With Brexit, there are disruptions of supply chains, and we’ve seen strong performance out of our logistics properties. In the US the strongest driver is technology and we decided to acquire business parks and tech offices in key tech cities. We’re sitting on very good assets in locations which support tech growth of cities,” Tay explains.
Data centre demand has been very strong in the US, Europe and most of all Asia. “In Singapore 4% of our AUM is in data centres, and we are the largest provider of data centre space based on [area]. Our aspiration for data centres is focused on Europe where there is the opportunity to enter and scale-up,” Tay continues. In Australia, Ascendas REIT started off with logistics assets and has diversified into suburban offices in tech parks such as Macquarie Park with a strong tech focus.
