To The Moon

$DigiCore Reit USD(DCRU.SI)$

Digital Core REIT (DCREIT) announced an acquisition of two Data Center in Frankfurt and Dallas. The final effective stake in the two Data Center will depend if DCREIT is able to raise equity funding to partially finance the transaction.

In the case where there is no equity fund raising, DCREIT will only acquire 25% stake in the Frankfurt facility at agreed price for US$558m (100% basis, 4.3% annualized 1H22 NPI). Total purchase consideration would be US$140m fully funded by debt, which is approximately. In this debt-funded scenario, the DPU accretion would be 2% to 1H22 pro-forma DPU, assuming a 3.5% financing cost. In my opinion, this is the best scenario where DCREIT can make use of its large debt headroom to leverage up and squeeze the extra yield from the relatively lower Euro interest rate.

In the case where there is equity fund raising, DCREIT will acquire 89.9% stake in the Frankfurt facility and 90.0% stake in the Dallas data center (US$199m agreed price for 100% basis, 5.0% annualized 1H22 NPI yield). Total purchase consideration would be US$681m. DCREIT expects its DPU accretion to be 3.1% (based on 1H22 DPU pro-forma) assuming 60/40% debt/equity funding split with US$416m of new debt (3.5% interest cost) and at illustrative issue price of 83 US cents per unit.

This is the scenario where I disagree with the equity funding illustration from DCREIT. Currently, the trading price for DCREIT is 76 US cents, far below the illustrative price of 83 US cents. Factoring a 9% discount to the trading price for the issued price, which is typical for private placements, the final issued price could be ~70 US cents. The Manager revealed that DPU accretion goes down by 20bps for every 1 US cent decrease. Hence, putting all these considerations together, the DPU accretion could only be 0.5% instead of 3.1%. Take note: once the issued price goes below 67.5 cents the deal will be DPU dilutive. Also, under this scenario, the gearing will shoot up from 25.7% to 37.5%, using up quite a bit of debt headroom.

Given the current macro environment, investors will be more cautious on yield products such as REITs as investors typically look at the yield spread, esp. for lower-yield REIT such as DCREIT. Investors will also probably factor in a spike in interest cost as well and discount the bottom-line DPU, especially DCREIT has a 50% floating rate exposure. As such, I don’t think there will strong interest for private placement from both institution investors or investment bank underwriters, and the most probable scenario would be DCREIT purchasing a 25% stake in Frankfurt facilities fully funded by debt. As retail investors, it also important for us to review the REIT’s fundamentals in its entirety, not just the acquisition itself. Personally, given the Fed rate is projected to go 4.6% by 2023, I find it hard to stomach REIT with less than 5% yield now.

@TigerStars@Daily_Discussion