Digital Core Reit in US$315.9 million asset sale to fund Singapore, Osaka expansion

[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.

The comprehensive transaction is expected to be about 4.1 per cent accretive to the Reit’s distribution per unit and will reduce aggregate leverage by roughly 290 basis points to 36.3 per cent.

Transactions breakdown

The proposed portfolio overhaul comprises two primary legs negotiated on a willing-buyer, willing-seller basis.

For the North American divestments, the Reit will sell a 90 per cent interest in the fully-fitted 371 Gough Road facility in Toronto for C$180 million (US$126.9 million).

In Los Angeles, it will divest a 90 per cent interest in the 200 North Nash Street co-location facility 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 controlling stake in this Virginia property, which recently secured a new 10-year lease with a global cloud service provider.

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On the acquisition front in the Asia-Pacific, the Reit will make its Singapore entry by acquiring a 2.5 per cent interest in Digital Loyang 2 (11 Loyang Close) for S$87.4 million.

This five-storey facility operates in one of the most supply-constrained data centre markets globally, it said.

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 to 45 per cent.

Financial impact

The US$176 million redeployment into Asia marks a geographic shift for Digital Core Reit.

Upon completion, its concentration in the Asia-Pacific region will double from 11 to 22 per cent of its assets under management (AUM), while its North American exposure will decrease from 65 to 52 per cent.

Osaka will also emerge as the Reit’s third-largest market, accounting for 18 per cent of its AUM.

“This transaction marks our entry into Singapore and strengthens our presence in Japan – a pivotal step in our strategy to expand in the Asia-Pacific region,” said John Stewart, CEO of the Reit’s manager.

He added that the multi-faceted transaction allows unitholders to “participate in near-term embedded growth from stabilised investments while reducing near-term CapEx funding requirements yet preserving the ability to participate in long-term development potential” by keeping a majority stake in the Northern Virginia asset.

The transaction is expected to generate net proceeds of about US$140 million. The manager intends to utilise these funds to fortify the balance sheet by allocating US$117.4 million to repay Euro- and US dollar-denominated debt.

Furthermore, up to US$20 million 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.

Gregory Wright, chief investment officer of Digital Realty, noted that the tactical enhancements to the portfolio mix and leverage are designed to better position the Reit for the ongoing investment cycle in the data centre sector.

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 flat at US$0.475 on Tuesday, before it called for a trading halt.