Digital Core REIT - Sense Of Urgency For Accretive Acquisitions
DIGITAL CORE REIT (SGX:DCRU)
- Digital Core REIT (SGX:DCRU)'s 1Q22 earnings were in line with forecasts and Distributable income was slightly ahead of IPO projections by ~2%. This was mainly due to some savings in certain trust expenses as well as lower profit attributable to non-controlling interests. Portfolio operating metrics were also in line with expectations with occupancy rates maintained at 100%.
- Just a few days ago, it was announced that Digital Core REIT’s 5th largest tenant (Sungard Availability Services) has filed for bankruptcy protection. The tenant occupies ~40% of the power capacity at Digital Core REIT’s data centre in Toronto and contributes slightly more than 7% of Digital Core REIT’s rental income. So far, Sungard has been current on its rental obligations to Digital Core REIT up to April 2022. In addition, Digital Core REIT’s Sponsor (Digital Realty) has committed to guarantee the cash flow to the REIT in the event of any near-term shortfall arising from the tenant bankruptcy.
- To tackle rising interest rate risks, Digital Core REIT has hedged 50% of its borrowings (US$175m) to fixed rates. Although this is a positive development and provides more certainty on earnings, the high margins (180 bps) on the interest rate swap translates to a doubling of average borrowing costs to ~2.1%.
- The doubling of borrowing costs poses downside risk to our projections, leading to an estimated US$3m increase in financing cost per annum. We do however note that management has in place several plans to mitigate some of the increase in costs. As such, we believe that these initiatives could mitigate approximately half of the increase in borrowing costs, or up to US$1.5m.
- There is no change to our assumptions of US$250m of acquisitions by mid-FY22, followed by a further US$500m in FY23. We believe that Digital Core REIT is still on track to deliver on these acquisitions.
- The bankruptcy filing of a major tenant as well as the doubling in borrowing costs came as a negative surprise to our projections. Although the loss of income from Sungard would mostly be mitigated by rising demand for data centres in Toronto, and the Sponsor’s support, the higher borrowing costs is a downside risk to our earlier projections. As such, we have revised our FY22 DPU projections for Digital Core REIT down by ~3% to account for higher borrowing costs, partially offset by cost savings in other areas.
- Once again, the strong commitment by its Sponsor and the ROFR pipeline is crucial for the performance and growth of the REIT. We acknowledge that there could be further downside risks to our projections if borrowing costs continue to creep up or if acquisitions are delivered later than anticipated (end of 2Q22).
- Although we are maintaining our BUY recommendation for Digital Core REIT, we have lowered our target price to US$1.30.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2022-04-22
SGX Stock
Analyst Report
1.30
DOWN
1.400
Read also DBS Research's most recent report:
2022-07-22 Digital Core REIT - Not US, but EU.
Check out the most recent target prices at Digital Core REIT Target Prices. Listing of analyst research reports at Digital Core REIT Analyst Report.
Relevant links:
Digital Core REIT Share Price History,
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Digital Core REIT Dividends & Corp Actions,
Digital Core REIT News Articles