DC Reit not exposed to SVB, First Republic; share price correction makes for attractive valuation: analysts

DIGITAL Core real estate investment trust’s (DC Reit) manager said on Friday (Mar 17) that the Reit did not have any customer or banking relationship with recently collapsed Silicon Valley Bank (SVB), First Republic Bank, or other US regional banks.

It also does not have any customers in the financial services or technology industry, the manager added.

This came despite Silicon Valley contributing an estimated 30 per cent of the Reit’s assets under management, said Citi analyst Brandon Lee.

Following this, analysts remained largely positive on the Reit’s prospects, with DBS and Citi recommending “buy” calls. DBS’ target price was US$0.90, while Citi’s was US$0.82.

Citi’s Lee noted that all the Reit’s tenants were well-capitalised.

Even in the worst-case scenario of a potential tenant default, he believes the sponsor could provide some form of income guarantee to cover a short-term cash flow shortfall, similar to what it did when one of the Reit’s largest tenants filed for bankruptcy protection in April 2022.

The point was echoed by DBS’ research team, observing that the Reit already backfilled almost half of the space that was vacated by the fallen company as demand for data centre spaces remained robust.

Given DC Reit ’s recent share price correction, analysts think the counter now provides an attractive yield.

Citi forecast the counter to yield a 9.2 per cent return in 2023 and a 9.5 per cent return in 2024, while DBS projected a forward yield of 7.5 per cent this year.

Besides an attractive valuation, Citi’s Lee said there are positive catalysts in DC Reit’s share price, as an index inclusion and share buyback could be on its cards this year.

He predicted that the Reit’s annual report – to be published in March – would likely satisfy the majority of the eligibility criteria for index inclusion into the FTSE EPRA Nareit Global Real Estate Series. Being included in the index would improve the stock’s investability, stock liquidity and cost of equity, said Lee.

DC Reit’s recent weak share price performance could draw a share buyback, Lee added, pointing to the 10.7 million share buyback event that its manager conducted in December last year.

DBS, on the other hand, had a more cautious outlook on the Reit, noting that Cyxtera – DC Reit’s second-largest tenant – was recently in the news after they approached lenders to push back maturities on its debt. 

Nonetheless, the research house maintained its confidence in the Reit’s ability to navigate the hurdle, taking guidance from its past efforts in doing so.

Despite assurances from the Reit that it was not exposed to SVB, corporate governance advocates Chew Yi Hong and Mak Yuen Teen wrote in a blogpost that unitholders should not have a false sense of assurance, given that the Reit’s managers did not address issues it is facing by Cyxtera, which is unrelated to the bank’s collapse.

Units of the Reit were trading 4.7 per cent or US$0.02 higher at US$0.45 as at 3.05 pm on Friday.