DBS Group Research analysts have kept their &ldquo buy&rdquo call and 90 US cents target price for Digital Core REIT, even though FY2022 earnings came in short of forecasts made when it listed in late 2021.

 

Due to lower distributable income, distribution unit was below forecast too. Portfolio occupancy of this data centre REIT declined, and there was a slight valuation loss too.

 

Nonetheless, in their Feb 3 note, analysts Dale Tan and Derek Tan maintain that they are &ldquo positive&rdquo on Digital Core REIT, mainly because the REIT was able to replace the space vacated by previous tenant SunGard at a property at Toronto, at a faster pace than expected.

 

&ldquo Although only approximately half of the space has been backfilled, we understand that demand in Toronto remains firm, with rents still on an uptrend.

 

&ldquo Also, demand and rents in Frankfurt also continue to grow, and we expect the Frankfurt data centre to report improved occupancy in the coming quarters,&rdquo note the Tans, referring to another data centre held by the REIT.

 

Digital Core REIT owns 11 data centres worth US$1.5 billion.

 

For FY2022 ended Dec 2022, distributable income was US$44.8 million, which was 5.8% below what the REIT forecasted at time of its IPO.

 

The REIT reduced trust expenses but the dip could not fully offset higher borrowing costs of around US$5.4 million.

 

Distribution per unit for 2HFY2022 was 1.92 US cents, 8.1% lower than 2.09 US cents paid for 1HFY2022. Full year DPU of 3.98 US cents was 4.8% below forecast.

 

DPU was somewhat supported by share buyback of some 10.7 million units, leading to an accretion of 0.04 US cents.

 

The REIT&rsquo s manager, according to the DBS analysts, will continue to consider buybacks as a tool to generate accretion but such a move will be weighed relative to gearing and debt headroom.

 

&ldquo There is no denying that the higher interest rates will continue to put downward pressure on earnings in the coming year, but Digital Core REIT has proven that they are able to improve earnings and have some cost savings, which helps to partially buffer the higher financing costs,&rdquo the analysts note.

 

They estimate that Digital Core REIT will see a further 7% dip in its DPU for FY2023 because of higher financing costs, this forecast might change depending on whether there are further share buybacks made or if accretive acquisitions are executed.

 

&ldquo As such, we will be maintaining our &lsquo buy&rsquo recommendation with a target price of 90 US cents,&rdquo write the Tans.

 

THE manager of Digital Core Reit reported on Thursday (Feb 2) distribution per unit (DPU) of US$0.0192 for its second half ended December 2022, on the back of weaker-than-expected distributable income to unitholders.

 

The real estate investment trust (Reit) listed on the Singapore Exchange in December 2021. The manager noted in the bourse filing that DPU for H2 FY22 was lower than the US$0.0209 forecast disclosed in its initial public offering prospectus in November 2021.

 

For H2 FY22, the Reit reported gross revenue of US$54.9 million, up 3.6 per cent from its forecast. However, property expenses were also higher than expected.

 

This resulted in distributable income to unitholders of US$21.5 million for H2 FY22, lower than the US$23.8 million forecasted.

 

For the full FY2022, Digital Core&rsquo s DPU stood at US$0.0398, 4.8 per cent lower than the US$0.0418 forecasted.

 

Gross revenue for the full year came in at US$107.7 million, slightly higher than the US$105.9 million forecasted. Meanwhile, distributable income for the full year was 5.8 per cent lower than forecasted, coming in at US$44.8 million.

 

&ldquo Digital Core Reit delivered solid results in 2022 despite the rapidly evolving environment,&rdquo John J. Stewart, chief executive of the manager, said in a statement.

 

&ldquo We remain focused on leasing up vacancy, proactively managing controllable costs and investing accretively to continue to create sustainable value for unitholders.&rdquo

 

Digital Core Reit&rsquo s portfolio was 98 per cent leased as at Dec 31, 2022 with a weighted average lease expiration of approximately 4.5 years.

 

The Reit had US$500 million of total debt outstanding as at end-2022, consisting entirely of unsecured term loans due 2025-2027.

 

The manager added that aggregate leverage was 34 per cent and the weighted average cost of debt was approximately 3.9 per cent. Around 75 per cent of total interest rate exposure was hedged as at Dec 31, 2022, up from 50 per cent as at Jun 30, 2022.

 

Citi Research analyst Brandon Lee has resumed his &ldquo buy&rdquo call on Digital Core REIT following a &ldquo period of restriction&rdquo . The analyst has also given the REIT a target price of 82 US cents ($1.10), which is down by 18% from his previous report, with a higher risk-free rate of 3.5%.

 

Lee&rsquo s report, dated Dec 27, comes after the REIT&rsquo s completion of its inaugural acquisition of a 25% stake in a freehold 34MW data centre in Frankfurt, Germany. The acquisition was made at a consideration of US$146 million paid via 100% debt, and resulted in a 2% distribution per unit (DPU) accretion.

 

&ldquo Most importantly, the acquisition opens up a new market &ndash Frankfurt, which is one of the fastest growing data centre markets in Europe, characterized by its status as a major financial hub, central location, and availability of land,&rdquo Lee points out.

 

&ldquo Post the acquisition, Digital Core REIT will enjoy a higher fixed/hedged debt proportion of 64%, with higher gearing (+7 percentage points) of 33%, still within its target 35%-40% and implying $0.2 billion of debt headroom before hitting 40%,&rdquo he adds. &ldquo Should capital markets&rsquo volatility stabilize, we expect Digital Core REIT to continue tapping into [its] sponsor&rsquo s pipeline of [over] US$15 billion for external growth.&rdquo

 

Digital Core REIT&rsquo s share buyback mandate, which commenced from Dec 6, 2021, is also a &ldquo positive signal&rdquo . The mandate should end in April 2023 before the REIT&rsquo s next annual general meeting (AGM). Some 9.2 million of units representing 0.8% of the REIT&rsquo s total units worth US$5.5 million or 59 US cents per share or 0.7x P/B were bought back and cancelled in December.

 

This move was seen as &ldquo positive&rdquo by Lee as it shows that the REIT&rsquo s valuation is undemanding. The move was also accretive to the REIT&rsquo s 1HFY2022 DPU by 0.2% and to its 3QFY2022 net asset value by 0.8%.

 

The REIT is still able to buy back another 103.3 million shares worth around US$61 million before its maximum limit of 10% is breached. This will bring its gearing to around 36% versus its current gearing of 33%, notes Lee.

 

REIT &lsquo unfairly punished&rsquo

 

With its unit price down by 54% year-to-date (ytd), Digital Core REIT has underperformed Singapore REITs (S-REITs) in general with its -15% performance, as well as its data centre peers, Keppel DC REIT and Mapletree Industrial Trust (MINT) and -28% and -18% respectively.

 

The share price underperformance has been attributed by Lee to several factors including its 100% US dollar (USD)-denominated debt structure and low fixed/hedged debt ratio, which has been raised to 64% from 50% previously. The REIT&rsquo s small market cap, poor liquidity, as well as uncertainty over US withholding tax pertaining to the sale/transfer of shares, which has since been clarified, were also factors that affected the REIT&rsquo s unit price.

 

In Lee&rsquo s view, the REIT has been &ldquo unfairly punished&rdquo despite its &ldquo solid execution&rdquo .

 

&ldquo We think Digital Core REIT&rsquo s purchase of [the] Frankfurt facility illustrates its ability to still able to execute DPU-accretive acquisitions in a tough environment, with its ongoing share buyback exercise providing a strong signal that stock is undervalued at 7.5/7.6% FY2022/FY2023 yield and 0.62x P/B,&rdquo he writes.

 

That said, he has cut his DPU estimates for the FY2022/FY2023/FY2024 by 3.7%/10.0%/7.4% to 3.97/4.01/4.17 US cents on higher US debt cost at 70 bps/240 bps/210 bps, mitigated by the Frankfurt acquisition.

 

FOR the five trading sessions that spanned Dec 9 to 15, the Straits Times Index (STI) gained 1.2 per cent, with the Hang Seng Index and FTSE Bursa MalaysiaKLCI both gaining 0.3 per cent.

 

Overall, institutions were net sellers of Singapore stocks for the five sessions ending Dec 15. Singtel, : Z74 -1.17% DBS, : D05 -0.35% Mapletree Pan Asia Commercial Trust, : N2IU -0.6% Singapore Technologies Engineering and UOB : U11 -0.49%led the net institutional outflow for the five sessions.

 

Share buybacks

There were 19 primary-listed companies conducting share buybacks over the five sessions ending Dec 15, with a total consideration of S$5.6 million, half the average weekly consideration for the preceding three weeks.

 

Digital Core Reit Management : DCRU +1.71% also continued to buy back units of Digital Core Reit on each of the five sessions, bringing the total amount of units bought back from Dec 1 to Dec 15 to 5,630,000 units, which represents 0.50 per cent of total issued units.

 

Director and substantial shareholder transactions

The five trading sessions saw over 60 changes to director interests and substantial shareholdings filed for more than 30 primary-listed stocks. This included 16 company director acquisitions with three disposals filed, while substantial shareholders filed nine acquisitions and nine disposals.