Digital Core REIT (SGX: DCRU), or DCR, is on a roll.
The data centre REIT recently announced that it plans to up its stake in two data centres within its portfolio.
Its unit price has also performed well, rebounding strongly by 25% in the past year to close at US$0.60.
Shares are, however, around 12% down from their 52-week high of US$0.68 achieved back in February.
Can DCR revisit the high of close to US$1.20 back in early 2022? Let’s find out.
A resilient set of earnings
The REIT reported a resilient set of earnings for 2023 despite the troubles it had with one of its major tenants declaring bankruptcy.
Gross revenue dipped by 4.8% year on year to US$102.6 million while net property income fell by 9.1% year on year to US$63.1 million.
DCR’s distribution per unit (DPU) tumbled by 7% year on year to US$0.037.
The REIT manager announced a list of transactions to address its customer bankruptcy, including amending and terminating leases, divesting two data centres, and redeploying the proceeds to purchase stakes in two data centres.
These two data centres include a 25% stake in a Frankfurt data centre and a 10% stake in an Osaka data centre.
Meanwhile, the REIT’s portfolio occupancy stood high at 97% as of 31 December 2023, showcasing the strong demand for its properties.
Increasing its stakes in two data centres
In early March, DCR announced that it plans to acquire an additional 24.9% stake in the Frankfurt facility.
This is a freehold, full-fitted data centre with 14 customers and an occupancy of 92%.
The REIT will pay approximately US$131.3 million to up its stake in this data centre to 49.9%.
This transaction is expected to add 3.2% to the pro-forma DPU of DCR after adjusting for the transactions related to the bankruptcy along with a private placement conducted in February.
Earlier this month, DCR also announced that it will up its stake in the Osaka data centre from 10% to 20%.
This data centre is sitting on freehold land, is fully fitted, and has an occupancy of 95%.
The total acquisition outlay will be US$52.2 million.
This purchase will build on the accretion from the previously-announced Frankfurt transaction and add another 2.3% to DCR’s pro-forma DPU to arrive at US$0.0358.
Conducting a private placement and arranging debt financing
DCR has completed a private placement of new units to fund these acquisitions and transactions.
A total of 192 million new units were issued in early February at an issue price of US$0.625 per unit to raise US$120 million.
Aside from this fundraising, the REIT manager also completed acquisition-related financing to arrange for a Japanese Yen-denominated loan for its Osaka data centre.
DCR fixed the rate on the incremental borrowings at a cost of borrowing of just 1.5% for four years.
This is in sharp contrast to the REIT’s average cost of debt of 4.7% as of the end of 2023.
Elsewhere, the data centre REIT also repaid US$140 million of variable-rate debt that sports a high interest rate of 6.4%.
Sponsor’s pipeline and growth opportunities
DCR has a strong sponsor in Digital Realty Trust (NYSE: DLR) as the latter has an impressive pipeline of more than US$15 billion of assets.
Slightly more than half of this portfolio is in the US but Digital Realty Trust also has data centres spread across Latin America and the Asia-Pacific region.
This huge pipeline puts DCR in a good position to rely on its sponsor for future asset injections into the REIT.
The REIT also has other growth opportunities.
It has the potential to further increase occupancy and cash flow as the Frankfurt and Osaka data centres are not fully occupied.
Its leases also have built-in rental escalation clauses that range between 1% to 3% for these two data centres.
In addition, strong demand for data centres should translate to positive rental reversions, thereby allowing rental income to grow organically.
Get Smart: Positioned for growth
DCR has been through a tough year with surging interest rates along with a customer bankruptcy.
However, the REIT manager pulled off a series of transactions to help resolve the bankruptcy and put the REIT back on firm footing.
With the recently announced acquisitions to increase its stakes in two data centres, DCR now looks well-positioned for growth in the years ahead.
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Disclosure: Royston Yang owns shares of Digital Core REIT.
