Departing tenant a 'blank sheet of opportunities' for Digital Core REIT to 'capture higher value', says DBS

Given the market vacancy of less than 1% now in Northern Virginia, the region where this data centre is located, the REIT is likely able to sign up a new tenant at a higher rate within six months, figures DBS.

"The lease expiry provides a blank sheet of opportunities to capture higher value for the site," says DBS in a Jan 3 note.

"While a full redevelopment of the property is a possibility, this is likely to entail a divestment to its sponsor or third parties. 

Under the base case scenario put forth by DBS, DCREIT will hold on to this asset, put up with the near-term "pain" but work towards longer-term upside potential.

See also: Baijiu sales still sluggish around Lunar New Year, but Morningstar thinks these 10 liquor stocks are ‘undervalued’

While the Northern Virginia data centre is vacant and not generating income, DCREIT will see additional contribution this year from its Frankfurt data centre, after it raised its stake last year.

As such, earnings cut from the loss of this tenant in Northern Virginia will be much lower than anticipated, says DBS.

DBS estimates the REIT will see a drop of 8% in its DPU for the current FY2025 to 3.37 US cents, followed by a 3% increase in FY2026 to 3.75 US cents.

See also: Brokers’ Digest: SGX, UOB, Marco Polo Marine, Pan-United Corp, Food Empire, PLife REIT, Wilmar

UOB Kay Hian's Jonathan Koh is even more bullish on this counter. In his Jan 8 note, suggests that investors have overlooked the various recent positive developments for this REIT.

For one, it now has a higher stake in the Frankfurt data centre, and additional contribution is also seen from recently restored full occupancy at its Toronto data centre.

Koh has raised his DPU estimates by 3%, leading to a higher target price of 99 US cents, from 95 US cents previously.

Digital Core REIT changed hands at 58 US cents, unchanged for the day, and down 13.43% in the past 12 months.