Digital Core REIT gains following deals to address tenant's bankruptcy

DCREIT can now trade closer to its normalised price to book value ratio

Digital Core REIT's unit price opened higher by 2% at 51 US cents, upon resumption of trading at 1.15pm on Nov 2, after it announced a series of transactions to deal with the bankruptcy of its second largest tenant, Cyxtera Technologies.

For months, DCREIT has been weighed down by the Chapter 11 filing of its Cyxtera.

On Nov 1, DCREIT announced a series of transactions that include selling certain assets and amending lease terms to a shorter end date. In addition, it plans to take parts of the proceeds from the divestments to invest in a new market, Japan and also increase its presence in Frankfurt.

An investor, Brookfield Investment Partners has inked a deal to acquire a substantial portion of Cyxtera's portfolio (including some of the data-centres that are held by DCREIT), as part of its multi-party talks with other data centre landlords affected by the bankruptcy of Cyxtera.

Following the announcements on Nov 1, DBS Group Research and Citi Research analysts have kept their positive views given that DCREIT will now have a more diversified portfolio of assets and be less susceptible to tenant risks.

DBS estimates that DCREIT will see a 3% dilution in its FY2024 DPU of 3.72 US cents upon completion of the transactions.

"However, we view this as a net positive for DCREIT as it actively investors’ concern of over-concentration risks of its tenant profile towards selected large tenancies," says DBS, noting that DCREIT's exposure to so-called investment grade customers will increase to 87% from 77%.

"The overall transactions will effectively remove the cloud of uncertainty surrounding the tenant's bankruptcy and represent a strategic trade-off that enhances DCREIT's geographical and tenant diversification," says DBS, which has a "buy" call and 90 US cents target price.

In addition, DCREIT's move into Japan via the acquisition of a data centre in Osaka from its sponsor Digital Realty and Mitsubishi Corp, will result in a new growth pipeline.

DBS points out that with the amended leases, DCREIT can potentially fetch a higher rental at the affected properties as it is no longer tied to the longer leases at a lower rate.

"This is in line with our understanding that the data centre industry continues to benefit from structural tailwinds driven by technologies such as machine learning and artificial intelligence," says DBS.

Citi Research's Brandon Lee is similarly positive about the developments. He calls this a "new chapter" for DCREIT as it can now trade closer to its normalise book value of 1.1 to 1.4x P/B, versus just 0.6x now.

Further positives are in the form of an ongoing share buyback programme, says Lee, who has kept his "buy" call and 67 US cents target price.



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