The IPO portfolio has an appraised value of about US$1.57 billion, with a design IT load of approximately 90.7 megawatts (MW). Based on the prospectus, 53.9% of the portfolio valuation is based in California, 13.5% in Northern Virginia, 16.5% in Singapore and 16.1% in Vienna. Of the total IT load of 90.7 MW, 66.7 MW is in the US.
Hyperscale customers, comprising global cloud service providers and major international tech giants, account for 51% of the IPO portfolio’s total monthly base rent as of Dec 31, 2024.
An extensive list of colocation customers across a broad range of industries contributes to the remaining 49%.
As at Dec 31, 2024, the occupancy of the IPO portfolio stood at 94.3%, with a weighted average lease expiry of 4.8 years. The IPO portfolio has a well-balanced lease expiry profile, with no single financial year expected to see lease expiries exceeding 20% of the monthly base rent over the next five financial years.
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The problem with IPO yield
Unless units trade to compress yields, accretive acquisitions could be a challenge. Masayuki Ozaki, CFO of NTT DC REIT’s manager, aims to break the spell of S-REITs with US assets trading at a discount to book value and offering high yields.
When asked why the sponsor thinks NTT DC REIT will be different from other S-REITs with foreign assets that have not done well, Ozaki says: “It’s a function of who the sponsor was and the motivation behind listing a REIT. It’s likely also related to some of the sectors in which those REITs were involved. There could be some idiosyncratic reasons. But I don’t think it was because it was a foreign listing or a foreign asset listing. I think it was just more to do with each individual sponsor or the REITs themselves.”
See also: NTT DC REIT is different from other S-REITs with US assets, says manager’s CEO and CFO
At the US$1 IPO price, the market capitalisation is likely to be around US$1 billion. “The group ultimately decided on a US$1 billion market cap as a good size. It’s not too big for the market to absorb. We were looking at some of the other direct competitors’ performance, and, weighing all that landed on this valuation,” Ozaki explains.
He points out that the REIT could embark on exponential growth with the pipeline from the sponsor. “We have access to the sponsor’s 2.2 gigawatt (GW) of pipeline. We have an immediate pipeline of 130 MW, which we intend to acquire within the next three to five years. During that period, the IPO portfolio is expected to more than double. We go from 90 MW to 220 MW potentially,” Ozaki points out. He reasons that as the base grows larger, the debt also increases, allowing the REIT to acquire more substantial assets.
The danger of this strategy is the Manulife US REIT syndrome, where the manager continuously acquired assets until it could no longer do so and eventually collapsed.
In a note to its clients, CLSA says: “We believe acquisition opportunities for NTT DC REIT hinge on how the stock trades post listing, given the limited debt headroom (US$131 million to US$155 million) and data centres’ high dollar quantum. While its operating metrics are largely in line with peers’, NTT DC Reit’s 7.5% yield, in our view, balances the risk of a concentrated US portfolio, older assets, high debt concentration and tenancy concentration risk.”
NTT DC REIT’s aggregate leverage at IPO is 35% and the intention is to “not go beyond 40%”. Ozaki adds that the REIT does not have a target for assets under management, and growth will depend on market conditions. The average capitalisation rate is approximately 6.4%, as stated in the prospectus. However, the tightest rate is for a California property at 4.6% and the highest is for the Singapore property at Serangoon North Ave 4 (9.1%).
At its discretion, NTT DC REIT can extend the land tenure for the Singapore data centre from 2040 for a further 30-year term until 2070, subject to certain conditions. This includes the tenant making a fixed investment of at least $35 million, the gross plot ratio of the site being not less than 2.47 but not more than 2.50, and at the expiry of the initial lease term, provided there is no existing breach or non-observance of any of the tenant’s obligations.
Portfolio challenges and opportunities
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The average retention rate over the last three years was 98.3%. However, in May, one of the customers of the IPO portfolio, which has a contracted capacity of 8,000 kilowatts (kW) in Northern Virginia (VA2) and 638 kW in California (at CA1), served a notice of termination about its contracted capacity at CA1 with an effective date of Sept 30. This would result in occupancy declining to 93.6%. The tenant was acquired by NTT DC REIT’s third-largest tenant.
The third-largest tenant (including NTT) may be Microsoft, as it is AAA-rated by the rating agencies.
“We’re assuming a three-month vacancy. This is actually good because it allows us to capture market rent as our portfolio is fairly under-rented. Our colocation leases were about 20% under-rented. Our hyperscale leases were actually 40% under-rented. In this case, the tenants were a hyperscale lease. What our US sales team is saying is that they can convert this space to a colocation space and acquire colocation tenants so that we can charge a much higher rent than the hyperscale rent,” Ozaki explains.
In a report dated July 9, UOB Kay Hian says there room for sustained positive rental reversion. In Northern Virginia, the average rent of hyperscale contracts for VA2 is US$92.90/KW/month, which is 39.9% below market prices. Hyperscale contracts accounted for 81% of monthly base rent at VA2. In Northern California, the average rent of hyperscale contracts for CA1-3 is US$101/KW/month, which is 75.8% below market prices. The average rent of wholesale contracts for CA1-3 is US$169.70/KW/month, which is 20.8% below market prices. Hyperscale and wholesale (pass-through) contracts accounted for 60% and 14% of monthly base rent respectively.
In Singapore, the average rent of wholesale contracts for SG1 is US$277/KW/month, which is 48.4% below market prices. Wholesale (pass-through) contracts accounted for 81% of monthly base rent. "The higher market rents reflect potential upside when leases are renewed," the report says.
Separately, based on the prospectus, the largest customer is an electric vehicle company based in California, accounting for 31.5% of monthly base rent — no prizes for guessing the name; suffice to say the company’s share price is under some pressure after the largest shareholder announced he is starting a new political party in the US after falling out with President Trump.
Ozaki says: “Our intention is to try to make the REIT portfolio pretty much mirror our sponsor portfolio. We’re a little over-invested in the US right now. The next set of acquisitions will come from Europe, as well as some in Asia. We intend to further diversify the concentration of risk with the EV company and also regionally in Sacramento, which is about 50% of the portfolio. It is very much our intention to dilute that down as well.”
Differentiator
According to Yutaka Torigoe, CEO of NTT DC REIT’s manager, what differentiates the REIT from other data centre REITs listed on SGX is its sponsor, NTT, a global solution provider for services such as cloud, network and system integration, as well as data centres.
Torigoe is not new to Singapore. This is his second IPO involvement. NTT was a pre-IPO investor in StarHub and sold 81.7 million shares as part of StarHub’s IPO offering in 2004. “I remember we made a profit on StarHub,” he recalls fondly.
NTT has 133 buildings across 91 sites, with a total capacity of 1.4 GW in operation and 858 MW under construction. “On top of that, NTT has 3 GW of land in America (45%), Europe (30%) and Asia (25%). America is still the most attractive data centre market, followed by Europe. Asia Pacific is more medium to long-term,” Torigoe says.
The six data centres in the IPO portfolio were chosen because of their stability. The minimum occupancy requirement for the REIT is 80% and the properties have occupancies well above this number. Secondly, cash flow must be stable; therefore, assets should be well-maintained and there should be no significant capital expenditures in the near future. Geographically, the portfolio should reflect the sponsor’s location.
“Our data centres are generally very under-rented because the market price is rising sharply reasonably; therefore, now we have a very big opportunity for further revenue expansion,” Torigoe adds.
“I’ll just maybe reiterate that our sponsor is quite unique and it is not a financial services company, it is not a real estate company and it is not a REIT trying to set up a REIT. We are a purely IT services provider with a very strong data centre business, which is establishing this REIT to have a perpetual source of capital and a recycling vehicle. We will use that capital to continue funding the data centre development project, which is vast. There are 858 MW already under construction. The sponsor already has another almost 3 GW of land as well,” Ozaki says.
NTT DC REIT has a couple of technical differentiators. Its occupancy rate is measured by contracted IT load divided by the total design IT load, unlike its locally listed peers that often use net lettable area.
Additionally, unlike S-REITs that revalue their investment properties, NTT DC REIT uses depreciation with a revaluation approach. “Our data centres are classified as PPE instead of the more typical investment properties,” Ozaki says. (PPE refers to property, plant and equipment). The REIT will spend US$32.8 million, garnered from a revolving facility, on capex in FY2027. Following that, the distributable income payout, which is 100% in the first year, may not be 100% in subsequent years to keep some cash for maintenance. Colocation and fully fitted DCs require maintenance. This is similar to Keppel DC REIT’s policy.
Units in NTT DC REIT start trading on July 14, and it remains to be seen if it can break the spell that was cast on S-REITs with predominantly US assets. As a comparison, as at July 8, Keppel DC REIT is trading at a historic yield of 4.4%, while Digital Core REIT is trading at 6.8% based on its largely US portfolio.
“For NTT DC REIT, the market appears to be factoring in a range of potential outcomes and is currently seeking higher yields. The sponsor has accommodated this sentiment by aligning with the indicated IPO yield. That said, should execution proceed effectively, yields are likely to compress over time, paving the way for future acquisition and growth,” notes Vijay Natarajan, vice-president and head of real estate and REITs at RHB Bank.
It’s now up to Torigoe and Ozaki to execute well.
