Digital Core REIT (DCREIT) has been quick to buy back some of its units following a series of proposed deals to help the REIT deal with the longdrawn bankruptcy of its second-largest tenant, Cyxtera Technologies.
On Nov 2, the day after DCREIT announced the plans, it bought back 175,000 units on the open market at 51.6 US cents (70 cents). On Nov 6 and 7, it acquired 106,300 units at 55 US cents each and 20,000 units at 55.75 US cents each respectively. This brings the total number of units bought back under the current mandate to just over 4.54 million, equivalent to 0.4045% of the total unit base.
On Nov 1, DCREIT announced it was selling certain assets and amending lease terms to a shorter end date. It will also take parts of the proceeds from the divestments to invest in Japan, a new market, and also increase its presence in Frankfurt. Most notably, an investor, Brookfield Investment Partners, also signed a deal to acquire a substantial portion of Cyxtera’s portfolio which includes assets leased from DCREIT.
Analysts say that the net effect of the transactions is that DCREIT will now have a more diversified portfolio of assets and be less susceptible to tenant risks. While short-term distribution per unit will be reduced, the long-term resiliency of the portfolio has been boosted as a result of lower tenant risk.
Dale Lai and Derek Tan of DBS estimate that DCREIT will see a 3% dilution in its FY2024 DPU of 3.72 US cents upon completion of the transactions. “However, we view this as a net positive for DCREIT as it actively investors’ concern of over-concentration risks of its tenant profile towards selected large tenancies,” the DBS analysts note, adding that DCREIT’s exposure to so-called investment-grade customers will increase to 87% from 77%.
Citi Research’s Brandon Lee is similarly positive about the developments. He calls this a “new chapter” for DCREIT as it can now trade closer to its normalised book value of 1.1 to 1.4x P/B, versus just 0.6x previously. Further positives are in the form of an ongoing buyback programme, says Lee, who has kept his “buy” call and 67 US cents target price.
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$14 billion plan
Sembcorp Industries has been buying back its shares recently as it announces ambitious plans to grow its renewable energy sector in the coming years. The most recent buyback was on Nov 3 when the company acquired 357,000 shares at $4.85 each on the open market. This brings the total number of shares bought back under the current mandate to nearly 6.55 million shares, equivalent to 0.367% of the total.
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Before Nov 3, Sembcorp also bought 357,000 shares each on Nov 1 and 2 for $4.74 each and $4.76 each respectively. On Nov 6, Sembcorp announced a new target of increasing the installed capacity of its renewable energy assets to 26GW come FY2028, up from 8.7GW now. If projects under development are included, the company has around 12GW of capacity now, with 6.3GW from wind, 4.7GW from solar and 8% or 909MWh from energy storage.
Given Sembcorp’s target mix of 50-50 mix between solar and wind, this means the company is expected to add about 7.8GW of capacity through solar projects by 2028, figures Lim Siew Khee of CGS-CIMB.
To grow its energy business, Sembcorp plans to invest some $14 billion over FY2024 and FY208, out of which $10.5 billion will be meant for boosting renewable energy capacity, $1.4 billion to be allocated to imports, and $0.7 billion for integrated urban solutions.
According to Lim, Sembcorp should be able to achieve an overall return on equity target of 12% by FY2028. In her Nov 7 note, Lim reiterates her “add” rating along with an unchanged target price of $6.85, which is pegged to 14x earnings. “Our current estimates have not included any potential accretion from the planned new investments,” she adds.
