DIGITAL CORE REIT (SGX:DCRU)
Digital Core REIT - Extending Footprint To Asia Pacific & Europe
- We expect Digital Core REIT to explore the acquisition of data centres in Asia Pacific (Singapore and Australia) and Europe (France, Germany, the Netherlands and the UK) from its sponsor pipeline. We raised our 2023F DPU forecast by 14.3% to 5.2 Ucents after factoring in the potential acquisition valued at US$500m as at end-22 with full contributions in 2023.
- Digital Core REIT will provide a distribution yield of 4.5% for 2023 (Keppel DC REIT: 5.0% and Mapletree Industrial Trust: 5.9%).
Digital Core REIT is Able to scale up rapidly due to sizeable sponsor pipeline.
- Sponsor Digital Realty is the largest global provider of cloud-and carrier-neutral data centres, colocation and interconnection solutions. It has a network of 291 data centres with net rentable square feet (NRSF) of 35.8m sf across 47 metropolitans in 24 countries on six continents. Digital Core REIT (SGX:DCRU) is the exclusive S-REIT vehicle of Digital Realty. The sponsor has granted Digital Core REIT a global right of first refusal (ROFR) on its growing data centre pipeline worth over US$15b (existing: US$10b, under construction: US$5b).
- Growth through acquisitions supported by strong balance sheet. Digital Core REIT’s ability to scale up through acquisitions is supported by its strong balance sheet with low aggregate leverage of 27%. It is able to tap on sponsor’s relationship banks and has a competitive cost of debt of 1.0%. Digital Core REIT is poised to scale up rapidly.
- Pursuing acquisitions to enhance geographical diversification. We expect Digital Core REIT to focus on stabilised data centres in developed markets. It will explore acquisition of data centres in Asia Pacific (Singapore and Australia) and Europe (France, Germany, Netherlands and the UK) from its sponsor pipeline. Digital Realty owns 75 data centres in these preferred markets that will enhance Digital Core REIT’s geographical diversification.
Digital Realty active in asset recycling.
- Sponsor Digital Realty constantly recycles its portfolio of data centres through acquisitions, development projects and Northern Virginia and Silicon Valley, which are the largest data centre markets in the US, accounted for 77% of its AUM.
Riding on dominance and growth from hyperscalers.
- Hyperscalers dominate the cloud services industry and have broad ambitions to expand their digital businesses in various related verticals. They develop infrastructure to support hundreds of millions and even billions of users. According to Synergy Research, there are 24 hyperscalers globally and they account for more than 50% of the cloud service market.
- Demand for hyperscale data centres is projected to grow at a CAGR of 23% in 2020-24, outpacing a CAGR of 15% for the broader North America data centre market. Digital Core REIT is a beneficiary as 68.5% of its base rental income was derived from the hyperscale segment as of Jun 21.
Impending acquisitions within 2022; decent boost to 2023 DPU.
- We have factored in acquisition of data centres valued at US$500m as at end-22 with full contributions in 2023F. We expect Digital Core REIT to acquire 90% interest in data centre REITs that are trading at an average P/NAV of 1.57x (Keppel DC REIT: 1.34x and Mapletree Industrial Trust: 1.80x).
- See
- Catalysts:
- Organic growth from cash rental escalation of 1-3% (weighted average: 2%).
- Yield accretive acquisitions tapping on sponsor’s large and growing data centre pipeline.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2022-02-14
SGX Stock
Analyst Report
1.32
UP
1.180
