Digital Core REIT - DBS Research 2022-10-27: Acquisition Of Frankfurt Data Centre On The Horizon

Digital Core REIT - Acquisition Of Frankfurt Data Centre On The Horizon


Distributable income improved 0.9% q-o-q.

  • 3Q22 revenues increased ~5.8% q-o-q, mainly due to rental escalations.
  • Despite the higher financing costs, Digital Core REIT's distributable income improved 0.9% q-o-q. This is likely due to some savings in operating and trust expenses. We understand that it was also from the straight-lining of earnings that contributed ~US$1.5m to US$2.0m in 3Q22.

Portfolio remains 100% occupied

  • Digital Core REIT's portfolio occupancy maintained at 100%.
  • An agreement has been reached with Sungard (at 371 Gough Road) who is currently undergoing bakruptcy proccedings.
    • Tenant will vacate premises at the end of this year; tenant still current with rent payments to date.
    • Support agreement in place from Sponsor to guarantee cashflows through December 2023.
    • Digital Core REIT has commenced marketing of the vacated space and are seeing some enquiries.
  • Vacancy rates across all markets continue to compress.

3Q23 borrowing costs increased to 3.1%

  • Impact to Digital Core REIT is more pronounced due to the relatively low proportion of debt hedged to fixed rates (50%)
  • Digital Core REIT's gearing remains healthy at 26.2%, and could go up to ~33.5% if the acquisition of the 25% stake in the Frankfurt DC is funded by debt.
  • On a more positive note, Digital Core REIT will not have any loans due for maturity up until FY26.

Likely to embark on debt funded acqusitiion of Frankfurt DC

  • Given where Digital Core REIT's share price is trading at currently, they will likely embark on the debt funded scenario to acquire a 25% stake in the Frankfurt DC. Management reiterated that Digital Core REIT will not raise equity at such a steep discount to NAV. Total consideration of the acquisition is ~US$146m, and with estimated DPU accretion of ~2.0%
  • Could surprise on the upside if Digital Core REIT pursues a larger stake in the property.
  • EGM will be held in mid-November 2022, and completions of acquisition will follow in end-November 2022.

No lease expiries until FY24.

  • No leases are due to expire until FY24. Only vacancy will be the space that will be vacated by Sungard, which account for ~7% of portfolio. Management is confident of backfilling the space given the tight vacancy rates in the Toronto market.

Our thoughts on Digital Core REIT

  • We continue to remain positive on Digital Core REIT’s operating performance given its 100% occupancy and long WALE. With demand still robust is the markets where they operate, we believe Digital Core REIT will be able to continue maintaining its full occupancy and could also benefit from some positive rental reversions.
  • On its capital management, Digital Core REIT’s impact from rising interest rates have been more pronounced as on 50% of their loans have been hedged to fixed rates. On the backdrop of the rapid rise in interest rates in recent weeks, we have revised our projections to account for expectations of further increase in interest rates. Our revised estimates takes into account higher all-in financing costs this year, followed by a 110 bps increase over the next two years.
  • Given the uncertain backdrop and difficulty in carrying out accretive acquisitions, we have also taken the opportunity to assume that Digital Core REIT will only emabark on the US$140m debt acquistiion (25% stake in the Frankfurt DC), and removed all other acquisitions assumptions. However, a slower-than-anticipated pace in interest rate hikes and a larger debt-funded acquisition will create some upside risk to our revised estimates.
  • As such, we have revised down our target price for Digital Core REIT to account for expectations of further rise in interest rates and the smaller quantum of debt-funded acquisition. However, on a valuation perspective, Digital Core REIT offers a forward yield of between 6.5% to 6.7% over the next 2 years, the highest level since their IPO. We will be maintaining our BUY recommendation on Digital Core REIT with a revised target price of US$0.90.

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 | 2022-10-27
SGX Stock Analyst Report BUY MAINTAIN BUY 0.90 DOWN 1.150

Read also DBS Research's most recent report:
2022-11-21 Digital Core REIT - To Buyback Or Not To Buyback?

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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