Digital Core REIT - UOB Kay Hian 2023-02-06: 2H22 Business & Share Price Turning Around

• Digital Core REIT’s 2H22 results were in line with expectations with its 10 data centres maintaining occupancy of 98%. It has completed the acquisition of a 25% interest in a freehold data centre in Frankfurt for US$150m in Dec 22, which is accretive to DPU by 2.0%.
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• Digital Core REIT provides a distribution yield of 5.7% for 2023F (Keppel DC REIT: 4.9% and Mapletree Industrial Trust: 5.6%). Maintain BUY. Target price: US$0.97.

Digital Core REIT's FY22 Results

• Digital Core REIT (SGX:DCRU) reported DPU of US$0.0398 for 2022, which is 4.8% below forecast disclosed in the IPO prospectus but in line with our expectations.
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• Completed maiden acquisition in Dec 22. Digital Core REIT has completed the acquisition of a 25% interest in a state-of-the-art freehold data centre in Frankfurt for US$150m in Dec 22. Frankfurt is the second largest data centre market in Europe. Capitalisation rate is 4.5% for the Frankfurt facility. The Frankfurt facility’s occupancy is 91.3% as of Jun 22 (vacancy: 8.7%). The acquisition will add nine new customers, bringing Digital Core REIT’s total number of customers to 25 post-acquisition. Yield improves from 4.5% to 5.0% when the vacant spaces are leased-up and backfilled. The data centre has in-place contractual rental escalation averaging 1.6%. The deal is expected to be accretive to DPU by 2.0%.
• Creating value by buying back units. Digital Core REIT repurchased 10.7mil units under its unit buyback mandate at a 30% discount to NAV with an average price of US$0.585, which were initially held as treasury units and subsequently cancelled in Jan 23. The buyback of units delivered 1% DPU accretion but only added 0.4ppt to its aggregate leverage.
• NAV per unit dropped 4.6% to US$0.83. Digital Core REIT's portfolio valuation declined about 1.1% due to capitalisation rate expansion of 25bp to 4.5%, which was partially offset by increase in valuation for data centres in Northern Virginia due to market rent growth.
• Balance sheet flexibility is preserved with aggregate leverage at 34.0% post acquisition of 25% interest in Frankfurt data centre (Sep 22: 26.2%). Weighted average cost of debt deteriorated from 3.1% to 3.9%. The proportion of interest rate exposure increased from 50% to 75%.

Data centre fundamentals continue to strengthen.

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Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2023-02-06 SGinvestors.io

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