UOB Kay Hian (UOBKH) analyst Jonathan Koh is keeping his “buy” call on Digital Core REIT (DCREIT) at a raised target price of 95 cents from 88 cents previously, following its 9MFY2024 ended Sept results.
“DCREIT reported distributable income of US$12.0 million ($15.9 million) for 3QFY2024, which is in-line with our expectation,” writes Koh in his Oct 28 report.
The REIT secured positive rental reversion of 2% to 3% for US$30 million in renewal leases with hyperscalers across North America. On a portfolio-wide basis, DCREIT achieved positive rental reversion of 10.5% in the period, and itt has also doubled its portfolio weighted average lease expiry (WALE) from 2.8 years to 5.0 years.
The REIT has also successfully backfilled its Los Angeles (LA) data centre, having signed direct colocation leases with 60 end-user customers and leased out 60% of the capacity. Together, these leases generated annualised rent of US$7 million, which is 30% above the previous in-place rent.
Come year-end, DCREIT expects the two LA data centres to be 80% leased and double the in-place rent.
Meanwhile, US$716 million in loan facilities were recast on Oct 9, comprising a US$363 million senior unsecured multi-currency term loan facility maturing in 2030, a EUR70 million ($100.4 million) senior unsecured term loan facility maturing in 2029 and a US$275 million senior unsecured revolving multi currency loan facility maturing in 2029.
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With this, the average debt maturity has lengthened by 2.5 years to 4.9 years.
DCREIT also bought back 7.6 million units in 3QFY2024 at a 12% discount to net asset value (NAV), generating 50 basis points (bps) of distribution per unit (DPU) accretion.
Aggregate leverage rose 30 bps q-o-q to 34.8% as of Sept.
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Koh notes: “DCREIT swapped US dollar-denominated loans of US$50 million into euro, thereby achieving a 30 bps q-o-q reduction in average cost of debt to 3.9% in 3QFY2024.”
Meanwhile, the REIT is increasing its stake in its Frankfurt data centre at a lucrative net property income (NPI) yield and steep discount to refreshed valuation.
The analyst notes: “DCREIT has exercised its option to acquire an additional stake of 0.2% to 40.0% in Wilhelm-Fay Straße 15 and 24, a fully fitted freehold data centre in Frankfurt, from sponsor Digital Realty.”
He continues: “Based on existing market conditions, DCREIT is likely to acquire an additional interest of 10.0%, which brings its aggregate interest in the Frankfurt data centre to 59.9%. The purchase consideration estimated at EUR47.0 million represents an attractive discount of 17.8% to the refreshed valuation. The latest valuation has increased 13% to US$628.7 million compared with US$556.4 million as of December 23. It generated an NPI of EUR13.4 million in 1HFY2024. The additional stake provides an attractive NPI yield of 5.7%.”
DCREIT has until early-December this year to decide on the size of stake to acquire. The acquisition will be fully funded by a euro-denominated term loan at an all-in cost of 3.6%, and is expected to be accretive to pro-forma 2023 DPU by 1.7%.
Additionally, NAV per unit would increase 4.5% to US$0.70, while the aggregate leverage would increase by 1.3 percentage points (ppts) to 35.8%.
“If market conditions improve, DCREIT could acquire up to 40% of the Frankfurt data centre. In this scenario, the acquisition would be accretive to pro forma 2023 DPU by 7.0%. NAV per unit would jump 6.0% to US$0.71 and aggregate leverage would expand 6.5 ppts to 41.0%,” writes Koh.
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Meanwhile, a lease for a fully-fitted water-cooled data centre at 8217 Linton Hall Road in Northern Virginia is due for expiry in June 2025. The data centre also has a 24 megawatt (MW) NOVEC substation on site, and it accounts for 11.4% of DCREIT’s annualised rents.
The REIT also sees potential long-term value creation by redeveloping the data centre Linton Hall Road, which sits on a 32-acre space of land.
“A full-blown redevelopment could potentially increase capacity from 10MW to 50MW but cause DPU disruption. Management estimated negative impact of US$0.06 to DPU for every month of downtime. A less disruptive alternative is to build an annex at the parking lot with a capacity of 30MW,” writes the analyst.
Overall, Koh raises his FY2025 DPU forecast by 9% due to rapid progress in the backfilling of vacant spaces at its two LA data centres.
Share price catalysts noted by him include yield-accretive acquisitions tapping on DCREIT’s sponsor’s extensive data centre pipeline and organic growth from cash rental escalation of 1% to 3%.
As at 2.25 pm, units in DCREIT are trading 1 cent higher or 1.63% up at 62.5 cents.
