DBS Group Research has kept its "buy" call and target price of 75 US cents on Digital Core REIT (DCREIT) even after one of its tenants said they will not renew their lease upon expiry in June.
The tenant for the property at 8217 Linton Hall Road now accounts for 11% of the REIT's revenue but is paying rent at around 10% to 20% below market rates.
Given the market vacancy of less than 1% now in Northern Virginia, the region where this data centre is located, the REIT is likely able to sign up a new tenant at a higher rate within six months, figures DBS.
"The lease expiry provides a blank sheet of opportunities to capture higher value for the site," says DBS in a Jan 3 note.
"While a full redevelopment of the property is a possibility, this is likely to entail a divestment to its sponsor or third parties.
Under the base case scenario put forth by DBS, DCREIT will hold on to this asset, put up with the near-term "pain" but work towards longer-term upside potential.
While the Northern Virginia data centre is vacant and not generating income, DCREIT will see additional contribution this year from its Frankfurt data centre, after it raised its stake last year.
As such, earnings cut from the loss of this tenant in Northern Virginia will be much lower than anticipated, says DBS.
DBS estimates the REIT will see a drop of 8% in its DPU for the current FY2025 to 3.37 US cents, followed by a 3% increase in FY2026 to 3.75 US cents.
Digital Core REIT changed hands at 58 US cents, unchanged for the day, and down 13.43% in the past 12 months.
