Digital Core Reit proposes US$315.9 million North America asset sale, enters Singapore
It will make its entry into the Republic by acquiring a 2.5% interest in Digital Loyang 2 for S$87.4 million
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[SINGAPORE] Digital Core Reit is proposing a major portfolio revamp to set up a maiden presence in Singapore and deepen its foothold in Japan, funded by the divestment of mature North American assets.
The pure-play data centre real estate investment trust (Reit) on Wednesday (Aug 12) announced a series of agreements to divest partial interests in three North American properties to its sponsor, Digital Realty, for proceeds of about US$315.9 million.
The capital recycling initiative will see the proceeds redeployed into Asia-Pacific, alongside debt repayment and unit buybacks.
This is part of the group’s push to recalibrate its portfolio on the back of increased demand by shareholders for more exposure in the Apac region, said John Stewart, CEO of the manager of Digital Core Reit, in a media briefing on Wednesday.
“There was a very clear and pronounced preference for exposure in the region and in Singapore, in particular,” he said.
Should the agreements go through, its North America exposure would fall to 52 per cent, from the initial 65 per cent, while Apac exposure would double to 22 per cent, from 11 per cent.
These transactions are expected to be about 4.1 per cent accretive to the Reit’s distribution per unit (DPU), and will reduce aggregate leverage by roughly 290 basis points to 36.3 per cent.
Pro-forma assets under management (AUM) will fall from US$1.9 billion to US$1.8 billion.
Portfolio reshuffle
The proposed portfolio overhaul comprises two primary legs negotiated on a willing-buyer, willing-seller basis.
The divestment leg comprises the sale of Digital Core Reit’s entire 90 per cent interest in the 371 Gough Road facility in Toronto for C$180 million (US$126.9 million), and the North Nash Street co-location facility in Los Angeles for US$78.6 million.
Additionally, it will sell a 39 per cent interest in 8217 Linton Hall Road in Northern Virginia for US$110.4 million.
Digital Core Reit will retain a 51 per cent majority interest in Linton Hall, which recently secured a new 10-year lease with a global cloud service provider. The lease will begin on Dec 1 this year.
In Apac, the Reit will acquire a 2.5 per cent interest in Digital Loyang 2 (11 Loyang Close) for S$87.4 million, marking its Singapore entry.
Furthermore, the Reit will expand in Osaka by acquiring an additional 25 per cent interest in the freehold Osaka Data Centre (Digital Osaka 3) for 17.6 billion yen (US$108.5 million), raising its total ownership stake from 20 per cent to 45 per cent.
The manager intends to use the divestment proceeds and US$176 million-equivalent of new Singapore dollar and yen-denominated debt to:
- fund the acquisitions,
- repay the US$117.4 million euro and US dollar-denominated debt, and
- cover transaction costs.
Furthermore, up to US$20 million of the proceeds will be used to repurchase units on the open market, capitalising on current valuations, while US$2.5 million is earmarked for estimated professional and transaction fees.
A strategic shift
The US$176 million redeployment into Asia marks a geographic shift for Digital Core Reit as it seeks to expand on its US$3 billion Apac pipeline.
Stewart described Singapore data centres as “one of the best markets in the world”, citing its stable geopolitical environment and “very desirable location”.
Digital Loyang 2 is 94 per cent occupied and has a weighted average lease expiry (Wale) of 3.5 years, while the Osaka facility is fully occupied, freehold and has a Wale of 6.4 years.
“(Digital Loyang 2) is a trophy quality asset,” said Stewart, who noted that Digital Core Reit will retain the right of first refusal.
He also noted that the properties the Reit are divesting are older than the Apac data centres they are acquiring.
“We’re investing in high-growth assets, which we think will perform over time and help provide us with a runway to... grow our AUM,” said Dave Craft, chief financial officer of the Reit manager.
To fufil its Apac expansion plans, the group will continue focusing on “core markets”.
“Singapore is kind of the sweet spot,” said Stewart, noting that the Reit will most likely continue investing in mature markets such as Singapore and Osaka in the near future.
He noted that the group will maintain its long-term target of doubling its US$1.8 billion asset base and market capitalisation within the next three years.
“We view Digital Core Reit’s latest portfolio reconstitution positively,” said Brandon Lee, analyst from Citi, citing the higher DPU accretion and increased exposure to Apac.
Citi maintain its “buy” rating for the Reit, with a target price of US$0.68.
The proposed transactions constitute “interested person transactions” and are subject to unitholder approval at an upcoming extraordinary general meeting.
Management added that it expects the deal to close before the end of the year.
Units of Digital Core Reit closed 5.3 per cent or US$0.025 higher at US$0.50 on Wednesday, following the announcement.
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