Sense of urgency for accretive acquisitions
- 1Q22 operating metrics stable and in line with forecasts
- Bankruptcy of tenants is a concern, but potential income loss mitigated by Sponsor’s support and strong market conditions in Toronto
- Average borrowing costs to double, but savings in other areas to partially offset the impact; FY22F DPU revised down by c.3%
- Maintain BUY with a revised TP of US$1.30
Investment Thesis
Maintain BUY, TP lowered to US$1.30. We have revised our projections for Digital Core REIT (“DCR”) to account for higher borrowing costs as the REIT has hedged 50% of its outstanding loans. Assumptions baked into our valuations are: (i) US$250m of debt-funded acquisitions in FY22, and (ii) a further US$500m of acquisitions funded by both debt and equity in FY23. These are expected to drive a 3-year DPU CAGR of c.5% during FY21-24F, which is 4-6% above IPO forecasts.
Earnings underpinned by solid fundamentals. With a portfolio of fully occupied data centres and a long WALE of c.5.5 years, this ensures income stability and visibility. In addition to the booming data centre industry, annual rental escalations of c.2% for its portfolio provides for organic growth in earnings.
A pipeline that could make DCR one of the largest S-REITs. With a strong commitment from its sponsor, DCR has been granted a Right of First Refusal (ROFR) to c.US$15bn worth of data centres globally. In addition, the sponsor has a further US$5bn worth of data centre developments that could potentially be made available to DCR when completed.
Valuation:
Our target price of US$1.30 is based on DCF with a WACC of 5.3% (risk-free rate of 2.0%). This implies a normalised target yield of 3.6% in the next two years. We have assumed a total of US$750m in acquisitions over the next two years.
Where we differ:
Execution of US$250m of acquisitions in FY22, and a further US$500m in FY23 to drive a three-year DPU CAGR of c.5%.
Key Risks to Our View:
Key risks to our view would be slower-than-anticipated acquisition growth and a further spike in borrowing costs.
