Allied Properties REIT has announced an all-cash agreement to sell its Toronto-based Canadian data centre portfolio to Japanese telecom firm KDDI Corporation for $1.35 billion.

The portfolio includes freehold interests in 151 Front St. W. and 905 King St. W. and a leasehold interest in 250 Front St. W.

The agreement comes five months after Allied  (AP-UN-T) announced its intention to sell the properties, which comprise a major hub for Canadian internet operability. 

KDDI is a Fortune Global 500 company which owns and operates data centres in Asia, Europe and the United States through its subsidiary Telehouse.

As a carrier-neutral data-centre provider, Telehouse hosts more than 1,000 connectivity partners, including leading internet exchanges, Tier 1 carriers, major mobile, cloud and content providers, enterprise and financial services companies. 

“With global data-centre operating capability, KDDI is an ideal successor owner-operator for our UDC portfolio,” Michael Emory, Allied’s founder and executive chair, said in the announcement Wednesday morning.

“We’ll work closely with KDDI over the next 18 months to transition local expertise in relation to the portfolio.

"We’ll also work collaboratively with KDDI as the site for Union Centre continues to evolve toward the large-scale development of urban workspace in the coming decade.” 

Emory was also Allied’s CEO when the sale process was initiated in January. He has now stepped back from that role and Cecilia Williams has taken over as president and CEO.

Allied to use $1B to retire debt

The sale price, Allied reports, is $118 million above its IFRS net value. The REIT intends to use $1 billion of the proceeds to pay down debt and the balance to help fund its upgrade and development plans over the next two years.

The REIT will also make a special distribution to its unitholders as of Dec. 31 due to the significant tax implications of the sale. Details on the distribution will be determined at a later date. 

Allied describes the data centres as “network-dense and carrier-neutral.”

“Allied has connected the properties through high-count, diverse fibre, enabling the portfolio to support more telecommunication, cloud and content networks than any other data-centre portfolio in Canada,” the announcement states.

The portfolio is unencumbered and the sale does not include 20 York S. or Skywalk, a 2.5-acre site for its Union Centre development that is zoned for just over 1.3 million square feet of urban workspace.

“As a public real estate entity committed to distributing a large portion of free cash flow regularly, we’ve funded growth primarily through equity issuance,” Emory said in the announcement.

“The sale proceeds will enable us to fund near-term growth, primarily in the form of upgrade and development completions, while maintaining unprecedented levels of liquidity and targeted debt-metrics. 

“In the longer-term, we plan to take advantage of a broader range of funding opportunities than we have in the past. Regardless of how we fund growth going forward, we’ll remain fully committed to our distribution program.” 

The data centre sale process

Allied acquired 151 Front in 2009 and has subsequently added 905 King and 250 Front to the portfolio.

It undertook a review of monetization alternatives for the portfolio through Scotiabank in the second half of 2022 before determining the best course of action financially and operationally was to sell the portfolio in its entirety. 

Scotiabank and CBRE Limited led the sale process, contacting 97 potential buyers worldwide and conducting a multi-round process which culminated in final bids on June 2. 

The sale is expected to close before the end of Q3 2023, subject to Competition Act approval and customary closing conditions. 

Pending completion of the sale, Allied expects its total indebtedness ratio to drop to 32.7 per cent, its net debt as a multiple of annualized adjusted EBITDA to be 8.0x and its interest-coverage ratio to be approximately 3.0x. 

Allied also expects its net debt as a multiple of EBITDA will decline steadily over the next three years as elements of its large-scale development activities are completed and the assets begin providing revenue. 

“Our debt-metrics will be back within targeted ranges and will continue to improve as our upgrade and development activity drives EBITDA growth,” Williams said in the announcement.

“The transaction will also be accretive to FFO and AFFO per unit, as the interest savings will more than offset the decline in NOI resulting from the sale of the portfolio.” 

Scotiabank, CBRE and Aird & Berlis LLP are acting as advisors to Allied in connection with the transaction. 

BofA Securities, Borden Ladner Gervais LLP and Nishimura & Asahi are acting as advisors to KDDI in connection with the transaction.