Scaling Up Presence Overseas While Lowering Leverage
DCREIT continues to expand overseas by acquiring an additional 4.9% stake in a Frankfurt data centre and a 10% stake in Osaka data centres. The acquisitions funded by private placement are accretive to pro forma 2023 DPU by 1.8%. This reduces aggregate leverage by 6.7ppt to 33.8% after factoring in the divestments of two Silicon Valley data centres. DCREIT provides 2025 distribution yield of 5.8% (KDCREIT: 5.3% and MINT: 5.7%). Maintain BUY. Target price: US$0.79.
WHAT’S NEW
• Continued expansion overseas for geographical diversification. Digital Core REIT (DCREIT) plans to invest US$76.4m to:
a) Strengthen presence in Frankfurt, Germany. It intends to acquire an additional 4.9% interest in Wilhelm-Fay Straße 15 and 24, a fully-fitted freehold data centre in Frankfurt, from sponsor Digital Realty for €23m or US$24.9m, which brings its aggregate interest to 49.9%. The acquisition is expected to complete in 2Q24.
b) Strengthen presence in Osaka, Japan. We expect DCREIT to acquire another 10% interest in a fully-fitted freehold data centre located in Osaka from Mitsubishi Corporation for ¥7.725b or US$51.5m, which brings its aggregate interest to 20%. The acquisition is expected to complete in 1Q24.
• Strengthen servicing of hyperscalers operating in Frankfurt and Osaka. We have assumed that the two acquisitions are transacted at the same pricing compared with those announced on 1 Nov 23. The acquisitions provide built-in contractual rental escalations of 1- 3%. Contributions from hyperscale service providers are expected to increase from 62% to 72% of annualised rent post-acquisitions.
• Successfully completed equity fund raising. DCREIT has completed the private placement of 192m new units at US$0.625 each in Feb 24. It raised gross proceeds of US$120m. We expect DCREIT to utilise US$76.4m to finance the two above-mentioned acquisitions and US$22.5m to repay bank borrowing.
• Potentially embarking on more acquisitions in 2024. Data centre transaction cap rates have begun to creep up, while interest rates appear to be levelling off. Similarly, the gap between public and private markets valuations has narrowed significantly. These divergent trends could enable DCREIT to capitalise on its acquisition pipeline from sponsor in 2024.
STOCK IMPACT
• Performing in line with expectations. DCREIT reported DPU of 1.78 US cents for 2H23 (- 7.3% yoy), which is in line with our expectation.
