Concerns on rising interest rates.
- With interest rates beginning its upward trend since the start of FY22F, concerns were raised on its impact to Digital Core REIT (SGX:DCRU)’s earnings, especially as the REIT’s entire loan book was on floating rates. Digital Core REIT subsequently worked on hedging 50% of its loan book and reported a doubling of its all-in financing cost to 2.1% in 1Q22.
- - Read this at SGinvestors.io -
- With interest rates expected to rise further, this will continue to pose a risk to Digital Core REIT's earnings. We have taken this into account in our revised projections and assumed higher all-in borrowing costs going forward.
First acquisition expected to be in Europe rather than the US.
- - Read this at SGinvestors.io -
- Digital Core REIT has previously highlighted its intentions to expand in the US, but with cap rate spreads now in the negative territory, we believe that any acquisitions will be unlikely or will have to be bundled into a portfolio with assets outside of the US, which still provides a positive spread.
- In our revised estimates, we continue to maintain our assumptions of US$250m in acquisitions in FY22F. Looking further ahead, we believe that acquisitions beyond the next six months could be more uncertain as interest rates continue to inch up, while cap rates for data centres continue to remain at record low levels. As such, we decided to adopt a prudent approach in our growth expectations for Digital Core REIT and removed all acquisition assumptions beyond FY22.
- In our revised estimates, we have also rolled back our assumption for the acquisitions to only contribute one quarter of earnings. For this US$250m in acquisitions in FY22F, we will still be maintaining the assumption that it will be a fully debt-funded acquisition, given Digital Core REIT’s ample debt headroom. We will also be maintaining our assumed NPI yield of 4.5% for acquisitions this year.
Sensitivity of acquisition yield on DPU accretion.
- Read more at SGinvestors.io.
