The Spirit Is Willing But The Market Is Weak
The timing of DCREIT announcing its maiden acquisition coincided with the Fed stating that it would be persisting with its hawkish stance. Steep rate hikes are expected to continue till end-22. We see the positive impact of DCREIT acquiring 25% of the Frankfurt facility (scenario A) being neutralised by steep rate hikes on 2 Nov (75bp) and 14 Dec 22 (50bp). DCREIT provides a distribution yield of 4.9% for 2023 (KDCREIT: 5.4% and MINT: 5.3%). Maintain BUY with target price at US$0.98.
• Embarking on maiden acquisition post-IPO. DCREIT has announced that it will be acquiring a data centre in Frankfurt, Germany valued at €558m (about US$558m) and a data centre in Dallas, Texas valued at US$199m from sponsor Digital Realty. There are two potential scenarios:
A. Acquisition of 25.0% of Frankfurt data centre fully funded by debt, which will increase its portfolio size by 10%. Aggregate leverage is expected to increase from 25.7% to 33.0%.
B. Acquisition of 89.9% of Frankfurt data centre and 90.0% of Dallas data centre, supported by an equity fund raising (EFR) exercise, which will increase portfolio size by 48%. The mix of debt and equity funding is expected to be 60:40. Aggregate leverage is expected to increase from 25.7% to 37.5%.
• Expansion into two new core data centre markets. Frankfurt is the second largest data centre market in Europe while Dallas is the fifth largest in North America. Both data centres are purpose-built and were completed within the past five years (average age: three years). They are fully integrated with sponsor Digital Realty’s global platform and tethered via dark fibre to Digital Realty’s interconnection hubs. Both data centres are powered by renewable energy (Frankfurt: hydroelectric power, Dallas: wind power).