Analysts from UOB Kay Hian and DBS Group Research have maintained their “buy” calls and target prices on Digital Core REIT (DCREIT) despite forecasting higher borrowing costs for the REIT.
UOB KH and DBS’s target prices are maintained at 98 US cents ($1.38), and US$1.15 respectively.
Earlier in July, The Edge Singapore reported that Digital Core REIT had US$350 million of total debt outstanding as of June 30 consisting entirely of an unsecured term loan due December 2026.
In April 2022, DCREIT entered into floating-to-fixed interest rate swaps to hedge a portion of its floating rate exposure.
Consequently, 50% of total interest rate exposure was hedged, while the remaining 50% was unhedged.
UOB Kay Hian’s Jonathan Koh, in a July 29 note, calls this a “conservative level of gearing,” noting that aggregate leverage is low at 25.7%.
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As at June 30, DCREIT’s debt headroom based on an aggregate leverage of 35% is US$188 million, with its weighted average debt maturity standing at 4.4 years.
Koh is of the view that the impact of higher interest rates is already priced in, despite forecasting that its cost of debt will rise from 2.3% in 2QFY2022 to 3.6 in 2023, assuming the US Fed Funds Rate hits 3.25% by end-2022.
Management estimates that every 50 basis points increase in interest rates will reduce distributable income by US$700,000 per year.
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Koh says that DCREIT’s 1HFY2022 results are “in line with expectations”, with all 10 data centres remaining fully occupied.
The REIT has also reported a DPU of 2.37 US cents, which comprises 2.06 US cents for 1HFY2022 and 0.31 US cents for the stub period from the listing date of Dec 6, 2021 to Dec 31, 2021.
DCREIT provides a distribution yield of 4.9% for 2023, compared to 5.1% for both Keppel DC REIT and Mapletree Industrial Trust.
Its management will also be activating its unit buyback programme, authorised by the board in July. DCREIT has an existing unit buyback mandate to repurchase up to 10% of total units outstanding, and this will be funded by its undrawn revolving credit facility of US$200 million at an interest rate of 3%.
On the acquisition front, DCREIT had also disclosed acquisition targets in three core markets, namely Frankfurt, Chicago and Dallas. The sizes of the acquisition range from US$150 million to US$650 million depending on conditions in financial markets.
Koh is still confident on his investment case for DCREIT, noting that despite the bankruptcy of DCREIT’s fifth largest tenant, the REIT and sponsor Digital Realty has entered into a
cash flow support agreement, whereby Digital Realty will make good any cash flow shortfall due to the customer bankruptcy till Dec 2023.
DCREIT will repay the cash flow support received interest-free, at DCREIT’s discretion in terms of timing and amount, from Jan 1, 2024 till Dec 31, 2028.
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DBS’s Dale Lai and Derek Tan also broadly agree with Koh’s investment thesis, noting its strong sponsor pipeline and its earnings that are underpinned by solid fundamentals.
Lai and Tan also noted that DCREIT’s operations were “stable”, and its 1HFY2022 DPU were also “in line with our expectations”.
They do point at some savings in property expenses that led to its 1HFY2022 Net property income of US$35.4 million, 5.9% above IPO forecasts.
However, they do warn that there will be downside risks to 2HFY2022 earnings, due to rising financing costs.
As at 11.25 am, units of DCREIT were trading at 88 US cents, with a FY2022 P/NAV ratio of 1 and dividend yield of 4.8%, according to DBS’s estimates.
