Digital Core REIT - DBS Research 2024-02-02: Tenant Bankruptcy A Thing Of The Past

• In FY23, Digital Core REIT (SGX:DCRU) faced challenges primarily attributable to the disruption in earnings caused by the bankruptcy of two of its tenants, Sungard and Cyxtera. This had a notable impact on the trust's financial performance, with FY23 revenue declining by 4.8% y-o-y to US$102.6m.
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• The concerns surrounding the bankruptcy of Cyxtera has since been resolved, and various transactions related to the restructuring of leases were completed in January 2024.

DPU of 3.70 US cents is in line with our projections.

• Both tenant bankruptcies and soaring interest rates faced by Digital Core REIT in FY23 were reflected in the 7.0% y-o-y decline in DPU to 3.70US cents. Additionally, the backfilling process at the Toronto DC has been slower than expected, contributing to the overall DPU decline.
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Portfolio occupancy remained stable at 97%, unchanged q-o-q.

• Digital Core REIT’s portfolio occupancy remained stable q-o-q, with only a marginal 40bps dip observed at the Toronto DC. The only remaining vacancies in the portfolio are currently in Toronto, Frankfurt, and Osaka.
• Looking ahead, approximately 26% of leases are set to expire in FY24, primarily stemming from three assets.
• In Toronto, short-term leases are due to expire this year, and lease amendments at two properties in LA will result in the master lease expiring in September 2024. Despite this, management expresses confidence in retaining some underlying tenants in both LA properties, assuming a 50% occupancy rate post-expiry.
• The robust demand for data centre space in key markets is anticipated to drive positive rental reversions when these leases come up for renewal, underscoring the optimistic outlook for Digital Core REIT’s portfolio.

Gearing maintained at a healthy 33.5% with a slight improvement in borrowing costs in 4Q23.

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Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2024-02-02 SGinvestors.io

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