As I’ve been covering earnings results recently, investors in Singapore find themselves encountering a deluge of REIT results.
While there were two big Mapletree REITs reporting over the past two weeks (here and here), last Thursday was the turn of one of the few pure-play data centre REITs in Singapore.
I’m, of course, talking about Digital Core REIT (SGX: DCRU). The North American-focused REIT has a portfolio of 10 data centres spread across three US metro areas and Toronto, Canada.
This was the REIT’s first full half-year report for investors, given Digital Core REIT only listed its shares on the Singapore Exchange (SGX) in December 2021.
So, here’s what dividend investors need to know about this in-demand data centre REIT’s latest earnings.
NPI higher than projected, DPU slightly misses
For Digital Core REIT’s first-half 2022, net property income (NPI) came in at US$35.4 million, which was 5.9% higher than management’s Forecast H1 2022 figure of US$33.4 million.
That mainly came from lower-than-projected property expenses of US$17.4 million in H1 2022, which was 10.8% lower than the forecast figure of US$19.5 million for the period.
However, while profit attributable to unitholders came in higher than forecast, this was offset by higher-than-expected distribution adjustments. All this resulted in lower distributable income attributable to unitholders.
At the end of the day, what really matters for REIT investors is the distribution per unit (DPU).
On that front, Digital Core REIT announced a combined DPU of 2.06 US cents for the first half of 2022 and the stub period of 6-31 December 2021.
That was slightly lower than the forecast DPU of 2.09 US cents.
Portfolio occupancy healthy and low leverage
At the portfolio level, Digital Core REIT continued to display a robust leasing profile. That’s because the REIT ended the first half of 2022 with an occupancy rate of 100%.
Meanwhile it has a weighted average lease expiry (WALE) of a relatively lengthy 5.2 years.
With 100% freehold assets, and no lease expiries until 2024 at the earliest (see below), Digital Core REIT’s fundamentals on the leasing side look to be doing just fine.
Source: Digital Core REIT H1 2022 earnings presentation
Furthermore, Digital Core REIT only has a gearing ratio of 25.7%. That’s well below the MAS-mandated maximum ceiling of 50% gearing.
Even if it went up to 35% gearing, that gives the data centre REIT debt headroom of an extra US$194 million.
Management says that it will target new data centre assets in Europe and North America, with a focus on three core markets; Frankfurt, Chicago and Dallas.
Solid half-year but watch tenant concentration
It was a solid first half for Digital Core REIT but, as I mentioned following its Q1 2022 business update, the REIT still has sizeable tenant concentration risk.
Its top two tenants still make up a whopping 60.1% of its annualised rent. The REIT’s top tenant – which accounts for 36% of annualised rent – is only named as a “Fortune 50 software company”.
If, for any reason, the tenant decides to move (or let its lease expire), then the REIT could be facing a sizeable cut in its future income and DPU profile.
However, that risk aside, the first half of 2022 looked to be a strong one for Digital Core REIT and its investors.
Trading at around US$0.84 per unit, Digital Core REIT is offering dividend investors a 12-month forward yield of 4.9%.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.