The recent completion of Digital Core REIT (DCREIT)’s acquisition of its Frankfurt and Osaka properties and healthy demand dynamics in its key markets has led to DBS Group Research maintaining its “buy” call with an unchanged target price of 75 US cents ($1.02).
Analysts Dale Lai and Derek Tan note that DCREIT is “back on track to deliver stable earnings”.
DCREIT’s 1QFY2024 results ended Mar 31, saw a more than 31% increase in net property income (NPI) q-o-q, primarily attributed to the full quarter’s contribution from the initial 10% stake acquired in the Osaka DC completed in November 2023, as well as one off adjustments recognised the previous quarter.
The REIT most recently completed the acquisition of an additional 24.9% stake in the Frankfurt DC and a 10% stake in the Osaka DC.
They note that DCREIT has the option to increase its stake in the Frankfurt DC, as well as other pipeline assets from its sponsor, which will further drive earnings.
“The large pipeline of assets from its sponsor will enable DCREIT to continue acquiring accretive data centre assets going forward,” they say.
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Notably, the REIT has been granted a right of first refusal, or a contractual right to match or refuse to match an offer on an asset after other offers have been made, by its sponsor for data centre assets in its pipeline valued at up to about US$15 billion.
The analysts say that this allows DCREIT to potentially grow into the largest pure-play data centre S-REIT.
“Its healthy debt headroom provides it the financial flexibility to embark on further accretive acquisitions. We believe that once markets become more conducive for further acquisitions, DCREIT will be able to grow further,” they add.
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DCREIT is a pure-play data centre REIT riding on structural tailwinds, as demand for data centres in key markets remains robust with the lack of available capacity.
In the event of any vacancy, DCREIT should be able to quickly backfill the space, given healthy demand dynamics in those markets, Lai and Tan note.
The analysts recap the resolution to the tenant bankruptcy and subsequent transactions. In response to the bankruptcy of one of their major tenants, Cyxtera Technologies, DCREIT undertook a series of transactions with Brookfield Partners to resolve the situation, they say.
Subsequently, following the resolution of the tenant bankruptcy, DCREIT initiated additional transactions aimed at safeguarding their earnings and achieving some earnings accretion.
Lai and Tan view the series of transactions as a positive development for DCREIT, especially considering the overhang caused by tenant bankruptcy over the past 12 months.
“The subsequent transactions have not only enabled DCREIT to stabilise its balance sheet but also facilitated the diversification of its earnings and allowed DCREIT to resume accretive acquisition growth. Moreover, the private placement has provided DCREIT with the opportunity to diversify its debt exposure and replace some of the more expensive debt with cheaper loans, which is crucial for optimising its financial structure,” they note.
With operating metrics “remaining healthy” characterised by a stable portfolio occupancy rate and revenue growth fuelled by rental escalations and positive rental reversions, they analysts say that the REIT now boasts a more diversified portfolio and healthy balance sheet.
It can now have the flexibility to pursue further distribution per unit-accretive initiatives such as acquisitions and share buy backs. Therefore, the analysts maintain their “buy” recommendation with a target price of 75 US cents.
As at 11.25am, units in Digital Core REIT are trading 1 US cent higher or 1.65% up at 62 US cents.
