Digital Core REIT is gaining a slice of Digital Realty’s Loyang Close asset (Image: Digital Realty)
After watching its unit price slide by nearly 8 percent over the past year, Singapore-listed data centre trust Digital Core REIT received a boost today from a deal to trade most of its North American portfolio back to its sponsor in return for partial ownership of a data centre in its home city and an enlarged stake in an Osaka facility.
Digital Core REIT will sell three North American data centres to a unit of sponsor Digital Realty for combined proceeds of about $316 million, according to an announcement to the SGX today, with the manager planning to deploy that cash, along with freshly raised debt to acquire 2.5 percent of 11 Loyang Close in Singapore and an addition 25 percent of Digital Osaka 3 from other Digital Realty units, for about $176 million.
“We really think it checks a lot of boxes in terms of what investors are looking for,” chief executive John Stewart said, pointing to the deal’s establishment of a foothold in Singapore, which he called “a very highly sought-after data center market.”
Digital Core REIT’s manager, a unit of Digital Realty, announced the portfolio rejig as the decline in the trust’s unit price has outpaced SGX-listed peers Keppel DC REIT and NTT DC REIT on the exchange this year. Digital Core REIT units gained 5.26 percent today, the biggest increase since a 6.9 percent jump on 5 January.
Swapping North America for Asia
As it boosts its Asia footprint, Digital Core REIT is selling its 371 Gough Road property in Toronto and 200 North Nash in Los Angeles to its sponsor, Digital Realty, along with a 39 percent stake in its 8217 Linton Hall asset in Virginia. The REIT had originally purchased all three properties from Digital Realty.
Digital Core REIT CEO John Stewart
Digital Core REIT will use the combined proceeds from the three North American divestments, plus roughly $176 million of newly raised Singapore dollar and Japanese yen debt, to fund the two Asia acquisitions, with Digital Realty acting as the seller in these transactions. Part of the proceeds will also be used to pay down existing borrowings, according to the trust’s filing with the Singapore Exchange.
The Osaka purchase will cost the REIT about $108.5 million and bring its interest in the asset to 45 percent, while the deal includes about $67.6 million for the Singapore investment, the filing showed. Digital Core REIT will also spend up to $20 million on unit buybacks, while directing $117.4 million toward repaying existing US dollar- and euro-denominated debt that carries interest costs of about 4.4 percent. The new Singapore dollar and yen borrowings cost roughly 3 percent, chief financial officer Dave Kraft said Wednesday.
The deal will lower the trust’s pro forma aggregate leverage to 36.3 percent from 39.2 percent as of 30 June, even after accounting for the buybacks, the filing showed. Distributions per unit would rise to 4.16 US cents on a pro forma basis from 3.60 US cents currently, according to the filing — a figure that already reflects a lease-up at the trust’s Linton Hall, Virginia facility disclosed in January.
“We’re selling at a cap rate that’s approximately equal to the cap rate that we are investing in,” Kraft said, noting that the assets being divested are roughly 25 years old against five years for the Singapore and Osaka properties.
The manager pointed to lower borrowing costs and the potential to boost distributions as key benefits of the deal.
In a press briefing Kraft noted that, “The accretion of 4 percent that’s driven by the opportunity here to pay down debt and to swap some debt from 4.4 percent interest rate in US dollars and euros and borrow in yen and Singapore dollars at 3 percent. That differential in interest rate drives 3 percent accretion, and we’re buying back up to $20 million of stock, which takes that 3 percent all the way up to 4 percent.”
Aiming to Re-Rate
The $20 million of divestment proceeds which will go to finance a fresh round of unit buybacks, follow around $30 million in units repurchased since late 2022, according to the presentation.
According to Mingtiandi calculations, Digital Core REIT’s units carry a discount to net asset value of almost 40 percent, based on the REIT’s most recently disclosed NAV per unit — a gap which Stewart said rules out issuing new equity for now.
“If we were to go issue equity today, we’re trading at a huge discount to NAV,” he said. “That would be massively dilutive.” For now, buybacks remain the primary tool the manager has to close that gap.
In response to an inquiry from Mingtiandi as to whether the transaction was intended to help remedy the REIT’s price slump, Stewart posed this week’s deal as a way to win back investor confidence.
“That’s absolutely the hope,” Stewart said. “We aim to turn things around and re-rate, put us in a position where we can kind of go on offense. That’s what this is intended to be — certainly a big step in that direction.”