Digital Core REIT - DBS Research 2022-07-29: Is There Appetite For More?

Digital Core REIT - Is There Appetite For More?


Digital Core REIT's 1H22 earnings highlights

Operations stable and 1H22 DPU of US$0.0206 in line with our expectations

  • Some savings in property expenses that led to Digital Core REIT (SGX:DCRU)'s 1H22 NPI of US$35.4m, 5.9% above IPO forecasts. Profit attributable to non-controlling interests also lower than forecasts by ~US$0.3m.
  • Although Digital Core REIT's 1H22 DPU of US$0.0206 was lower than IPO forecasts, it was in line with our projections (53% of FY22 estimates). However, we are mindful that there will be downside risks to 2H22 earnings on rising financing costs.

Capital structure is stable

  • Digital Core REIT's gearing improved ~30bps q-o-q to 25.7%.
  • Average cost of debt inched up from 2.1% to 2.3%, which is within our projections that assumes average cost of financing will rise to 2.8% in FY22.
  • Debt headroom of ~US$194m (35% gearing), or ~US$324m (40% gearing) still supportive of our assumptions for a US$250m fully-debt funded acquisition.

Cash flow support agreement with Sponsor executed

  • Bankrupt tenant (Sungard) is conducting a sales process for its assets and will have an update in August 2022. It remains current on its rental obligations to Digital Core REIT through July 2022.
  • Digital Core REIT has executed a cash flow support agreement with its Sponsor to guarantee 100% of rental payment through December 2023 in the event of any cash flow shortfalls from Sungard’s lease. However, any support received will have to eventually be repaid to Sponsor from FY24.
    • Repayments will be interest-free and repayment period will be at the discretion of the Manager.
    • Repayment may be in the form of cash or units, or a combination of both.

Has a mandate to carry out share buyback

  • Mandate for share buyback has been in place since IPO for Digital Core REIT to buy back up to 10% of units in issue.
  • Share buyback will be considered if share price falls significantly below NAV. This is an option that the Manager can consider supporting the REIT’s share price.

Maiden acquisition is taking longer than expected, but likely to commence in 3Q22

  • Digital Core REIT targets to execute on its maiden acquisition and hold an EGM in 3Q22. It has identified a portfolio of potential acquisitions in Frankfurt, Chicago, and Dallas which consist of high quality data centres in core markets valued at between US$150m – US$650m.
    • Size of acquisition depends on market conditions and ability to raise equity.
    • Any acquisition will be expected to be DPU accretive.
    • Likely to package Frankfurt property with any property in the US to remain accretive.
  • If equity fund raising is unconducive, acquisition will likely have to be only in Frankfurt and will be fully debt funded.

Sensitivity analysis of acquisition size on Digital Core REIT's DPU

  • Digital Core REIT has opened the doors to potential acquisitions in 3Q22 that range from US$250m to US$650m. Digital Core REIT highlighted that the size of the acquisition will depend on market conditions and whether it is conducive to raise equity for a larger acquisition. Management also guided that any equity fund raising will only be carried out at close to NAV. If market conditions are not conducive to tap the equity market, they will then carry out a fully debt-funded acquisition.
  • We did a quick sensitivity analysis on the implications of the various sizes and yields of the acquisition on Digital Core REIT’s DPU.
  • In our analysis, we have assumed that any equity raised will be carried out at ~US$0.88, and the debt-to-equity mix will be adjusted such that its gearing will be maintained at ~36.5% (similar to our current projections for a fully debt-funded acquisition).

Our view on Digital Core REIT

  • Digital Core REIT’s 1H22 results were in line with our projections as its operating metrics remain stable and its portfolio continues to enjoy 100% occupancy with a long WALE of ~5.2 years. Looking ahead, we expect that as interest rates continue rising, higher financing costs will put some downside pressure on its earnings in 2H22. Our estimates have pencilled in a ~US$250m fully debt-funded acquisition by the end of 3Q22.
  • With Digital Core REIT potentially considering an acquisition of up to US$650m with some equity fund raising, our sensitivity analysis above shows that an acquisition of ~US$500m would allow them to still beat its IPO forecasts. It also implies that acquisition yields will have to be closer to 5% to beat its IPO forecasts.
  • We understand that Digital Core REIT's manager is actively considering all options and deciding on the most ideal acquisition size based on market conditions for tapping the equity markets.
  • As such, we maintain our BUY recommendation on Digital Core REIT with a target price of US$1.15. We will revisit our projections and estimates once there are more details on the upcoming acquisition and its potential size.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @

Dale LAI DBS Group Research | Derek TAN DBS Research | 2022-07-29
SGX Stock Analyst Report BUY MAINTAIN BUY 1.150 SAME 1.150

Read also DBS Research's most recent report:
2022-09-23 Digital Core REIT - Delivers On Its Acquisition Promise

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,
Digital Core REIT Announcements,
Digital Core REIT Dividends & Corp Actions,
Digital Core REIT News Articles


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