Digital Core REIT responds to unitholder queries about Frankfurt acquisition

Queries include questions about its valuation and factors on size acquisition.

Digital Core REIT Management Pte. Ltd., the manager of Digital Core REIT, responded to queries by unitholders about its acquisition of an additional stake in a data centre in Frankfurt, Germany.

The manager first answered questions about factors influencing the specific size of the acquisition as the proposed transaction involves acquiring an additional stake in the Frankfurt Facility ranging from 0.2% to 40%.

In its response, Digital Core REIT’s manager said that it would primarily take into account the cost and availability of debt and equity financing. The manager said that based on the current market, conditions, the acquisition of a 10% interest represents its approximation of the best balance between delivery to Unitholders of the benefits from the transaction with preserving balance sheet flexibility, assuming a fully debt-funded transaction.

Unitholders also question the increase in valuation from €504m ($713.79m) to between  €563m ($797.35m) and €580m ($821.43m).

The manager said there were several factors such as an increase in leasing activity in the  Frankfurt Facility’s occupancy from 92% to nearly 99% and an increase in its WALT from 2.7 to 5.5 years, noting that these renewals significantly strengthened the size, stability and duration of the property’s cash flow.

Another was the termination of a lease at the facility with a customer who had filed for bankruptcy. The US$10m ($13.39m) lease termination fee payment was recorded as a liability in the 2023 year-end valuation and the settlement of this liability caused the Frankfurt Facility’s net asset value to increase.

Finally, the retention of existing end-user customers exceeded underwriting expectations and bolstered the property’s cash flow and valuation.

The unitholders also questioned the market value of the facility which was at €470m ($665.43m), representing a 17%-19% discount to the independent valuations. Unitholders asked how was the agreed value determined, considering the sponsor's accountability to its shareholders and if this represent a favourable deal for Digital Core REIT.

The manager responded that a year ago, the sponsor granted Digital Core REIT the option to purchase up to 89.9% of the Frankfurt Facility at a 6% discount to its appraised value at that time. In April 2024, the option was exercised to acquire a 24.9% interest at the Agreed Value. The REIT also had the option to acquire additional interest within six months at the same price, highlighting the Sponsor’s strong support for Digital Core REIT’s long-term success. The Agreed Value reflects a 17%-19% discount to updated independent valuations, driven by the Frankfurt Facility’s recent operational outperformance, including higher occupancy, lease renewals with quality tenants, and improved cash flow stability, providing significant value for unitholders.

The fourth question by unitholders was if the manager would be seeking to achieve a 100% occupancy for the facility to which the manager responded that it would continue to work closely with the Sponsor’s sales and portfolio management team to lease up the remaining vacancy.

Meanwhile, regarding geographical diversification, the manager explained that achieving scale and reducing customer and geographic concentration remain key strategic priorities. Following the proposed acquisition, the manager expects to focus more on investing in Osaka, in line with its strategy to expand its presence in Asia, similar to the approach taken with the Frankfurt Facility.

On the method of financing for the proposed acquisition, the manager confirmed that the acquisition will be fully debt-funded through borrowings from Digital Core REIT’s multi-currency credit facilities. This will increase leverage by approximately 130 basis points, from 34.5% to 35.8%. The manager also mentioned that the interest rate for the loan is expected to be around 3.2% per annum. Despite decreasing interest rates in Europe, the Manager emphasized that the acquisition must be completed by early December 2024, and the final decision on the acquisition size will be made before closing.