DBS maintains 'buy' on Digital Core REIT on full occupancy and long WALE

Khairani Afifi Noordin
2-min read
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The analysts have lowered their TP to 90 US cents ($1.27) to account for expectations of further rise in interest rates.

DBS Group Research analysts Dale Lai and Derek Tan have maintained their “buy” call on Digital Core REIT with a lower target price of 90 US cents ($1.27) from US$1.15 previously to account for expectations of further rise in interest rates and the smaller quantum of debt-funded acquisition.

In their Oct 27 report, the analysts say that they remain positive on the REIT’s operating performance, given its 100% occupancy and long weighted average lease expiry (WALE) of 5 years.

“With demand still robust in the markets where they operate, we believe Digital Core REIT will be able to continue maintaining its full occupancy and could also benefit from some positive rental reversions,” they add.

They highlight that the REIT has a pipeline that could make it one of the largest S-REITs. With a strong commitment from its sponsor, Digital Core REIT has been granted a right of first refusal (ROFR) for about US$15 billion worth of data centres globally.

In addition, the sponsor has data centre developments worth a further US$5 billion that could potentially be made available to Digital Core REIT when completed. Although the cap rate spreads in the US are in the negative territory currently, the REIT could look at pipelines in Europe and Japan, the analysts add.

On its capital management, the REIT’s impact from rising interest rates have been more pronounced as 50% of their loans have been hedged to fixed rates, the analysts point out.

DBS has revised their projections to account for expectations of further increase in interest rates amid the backdrop of the rapid rise in interest rates in recent weeks. The analysts’ revised estimates take into account higher all-in financing costs this year, followed by a 110 basis points increase over the next two years.

“Given the uncertain backdrop and difficulty in carrying out accretive acquisitions, we have also taken the opportunity to assume that Digital Core REIT will only embark on the US$140 million debt acquisition (25% stake in the Frankfurt DC), and remove all other acquisitions assumptions,” they add.

Meanwhile, on a valuation perspective, Digital Core REIT offers a forward yield of between 6.5% to 6.7% over the next two years, the highest level since their IPO, the analysts add.

As at 9.52am, units in Digital Core REIT are trading 2.5 US cents lower or 4.5% down at 52.5 US cents.

 

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