UNITHOLDERS of Digital Core Reit have bombarded the Reit’s manager with questions relating to its acquisition of a bigger stake in a data centre in Frankfurt, Germany, ahead of its extraordinary general meeting next month.
The Reit manager on Thursday (Nov 28) published responses to key questions received from unitholders, including explanations of how it came to decide the additional amount of stake to acquire in the facility; its valuation; how its market value was determined, and how the acquisition would be financed.
First, unitholders pointed out the wide range of the proposed additional stake in the Frankfurt data centre – which stands between 0.2 per cent to 40 per cent – and asked for an elaboration of the factors influencing the specific size of the acquisition.
The Reit, which now owns a 49.9 per cent interest in the facility, had announced in September its plans to raise its stake.
In response, the manager said that it had primarily taken into account the cost and availability of debt and equity financing in deciding the actual stake to acquire.
According to its estimations, the acquisition of a 10 per cent interest represented the “best balance” between delivering unitholders the benefits from the transaction and preserving balance sheet flexibility, it said, assuming current market conditions and that it would be a fully debt-funded transaction.
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Second, unitholders asked what led to the increase in the Frankfurt facility’s valuation to between 563 million euros (S$798 million) and 580 million euros, from its year-end 2023 valuation of 504 million euros.
Three reasons for the higher valuation
The manager cited three factors for the increased valuation.
One was an improved rent roll, due to an increase in leasing activity and the renewal of leases with anchor tenants for an additional five years at a positive 2 per cent cash rental reversion. “These renewals significantly strengthened the size, stability and duration of the property’s cash flow,” it noted. Another was termination of a lease at the facility with a customer who had filed for bankruptcy. The settlement of this US$10 million lease termination fee payment – which was recorded as a liability in the 2023 year-end valuation – caused the facility’s net asset value to increase. Lastly, the retention of end-user customers had bolstered the facility’s cash flow and valuation, the manager said.
Third, unitholders also asked how the agreed market value of 470 million euros for the Frankfurt facility was determined, considering the sponsor’s accountability to shareholders, and whether it represented a “favourable deal” for the Reit.
This is also considering the fact that the value represented a 17 to 19 per cent discount to the independent valuations.
Responding to this, the manager reminded unitholders of the underlying arrangement, under which the sponsor granted the Reit to purchase 89.9 per cent of the facility at a 6 per cent discount to its appraised value at that time.
The Reit had exercised this option to acquire a 24.9 per cent interest in the facility at the agreed value in April 2024; it also had the option to during the six-month period after to acquire additional interest in the facility based on the same agreed value.
“This arrangement demonstrates the sponsor’s strong backing for Digital Core Reit, and its commitment to ensuring the Reit’s long-term success,” said the manager. “With higher occupancy, lease renewals with high-quality tenants and strengthened cash flow stability, the transaction underscores significant value for unitholders.”
Unitholders had also asked the manager how it intends to finance the proposed acquisition and the acquisition’s impact on the Reit’s leverage.
The manager noted that the proposed acquisition would need to be completed by early December 2024, and that it would need to determine the acquisition size before closing.
It said the proposed acquisition would be fully debt-funded by borrowings on the Reit’s multi-currency credit facilities. This will add an estimated 130 bps to its leverage, taking the pro forma aggregate leverage to 35.8 per cent from 34.5 per cent as at Dec 31, 2023.
Other replies to shareholders’ questions shared by the manager included details on its plans to fill up the remaining occupancy of the facility; the impact of artificial intelligence on the demand for data centres; and whether the Reit intends to take the same approach and raise its stake in the Osaka data centre following this acquisition.
Units of Digital Core Reit closed at US$0.63, up US$0.005 or 0.8 per cent on Thursday, before the release of the announcement.
