Top Stock Highlights of the Week: Digital Core REIT, SATS and the US Fed Rate

Welcome to this week’s edition of top stock highlights where we feature interesting news and snippets from corporate events and announcements.

Digital Core REIT (SGX: DCRU)

Digital Core REIT announced its maiden acquisition since its IPO last November.

The data centre REIT has agreed to purchase a 25% stake in a freehold data centre in Frankfurt, Germany, for around US$558 million from its sponsor, Digital Realty Trust (NYSE: DLR).

In addition, Digital Core REIT will have the option to acquire up to an 89.9% interest in the aforementioned Frankfurt data centre and a 90% interest in a data centre in Dallas, US.

Whether the REIT manager will take up the option will depend on its ability to raise capital successfully to partially finance the transaction.

Should the fundraising not take place, the transaction will be purely debt-funded and only involve the 25% stake in the Frankfurt data centre.

The Frankfurt facility has a weighted average lease expiry (WALE) of 4.7 years and is 91% occupied, while the Dallas data centre has a WALE of 15.4 years and is fully occupied.

Should both transactions go through, Digital Core REIT’s portfolio will increase from US$1.4 billion to US$2 billion.

The debt-funded scenario will result in a 2% increase in Digital Core REIT’s fiscal 2022’s first half (1H2022) distribution per unit (DPU).

With equity fundraising, the accretion to DPU will be 3.1%, raising 1H2022’s DPU from US$0.0206 to US$0.0212.

Aggregate leverage stands at 25.7% currently and will increase to 33% under the debt-funded scenario and 37.5% under the equity fundraising option.

Either way, the deal appears to be within Digital Core REIT’s financial means.

US Federal Reserve

The US Federal Reserve has hiked the federal funds rate once again during its recent meeting, raising it by 0.75 percentage points.

It was the third consecutive 0.75 percentage point increase and takes the policy rate to a range of between 3% to 3.25%.

This move was a widely-anticipated one as the central bank vowed to push on in its fight against the highest inflation the country has seen in four decades.

Federal Reserve chairman Jerome Powell made it clear that “some pain” was necessary to bring inflation down to the central bank’s target of 2%.

These hawkish remarks imply that there are more rate hikes necessary for months to come if inflation does not decline.

This latest statement suggests that the central bank now sees the need for a more prolonged monetary tightening cycle that will not let up easily, contrary to what many had expected.

Back in the 1980s, it took numerous rate hikes and a recession to finally bring inflation under control.

Economists now project that the Federal Reserve will hike rates by another 1.25 percentage points this year with more next year.

They also expect that no cuts will be announced until at least 2024.

SATS Ltd (SGX: S58)

Bloomberg reported that SATS is in discussions to acquire air cargo handler Worldwide Flight Services for as much as US$3 billion.

The latter was founded in 1971 and operates in more than 160 major airports in over 20 countries.

The report also claimed that the Singaporean airline food caterer had sounded out financing options from Worldwide Flight Services’ private equity owner, Cerberus Capital Management.

In response, SATS released a terse statement about this potential acquisition, stating that no definitive terms or formal legal documentation have been agreed upon.

It also pointed out that the Bloomberg report contained “materially inaccurate facts”.

Meanwhile, shares of the ground handler fell sharply on the news, dipping by 5.1% from S$4.09 to S$3.88.

Investors should note that the transaction price mentioned by Bloomberg is equivalent to around S$4.26 billion.

SATS’ market capitalisation is now close to S$4.3 billion.

Assuming that the transaction takes place, SATS will be purchasing a company at a price that is close to its market capitalisation, implying that the transaction is very material.

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Disclaimer: Royston Yang owns shares of Digital Core REIT.

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