DBS Group Research has reiterated its “buy” call on Digital Core REIT (DCREIT) with a target price of 75 US cents, despite the impending departure of a key tenant at its Northern Virginia data center. The tenant, responsible for 11% of the REIT’s revenue, has opted not to renew its lease upon expiry in June, leaving DCREIT with a potential short-term vacancy challenge.

Vacancy as a Growth Opportunity

The affected property, located at 8217 Linton Hall Road, is currently leased at rates 10% to 20% below market levels. DBS views this vacancy as an opportunity to capture higher rental values, given the region’s robust demand and a market vacancy rate of less than 1%.

“The lease expiry provides a blank sheet of opportunities to capture higher value for the site,” DBS noted in a Jan 3 report. The firm anticipates that the REIT will secure a new tenant at higher rates within six months of the lease’s end.

Potential Redevelopment and Strategy

While DBS outlines the possibility of a full redevelopment for the property, it considers this scenario unlikely in the near term, suggesting that DCREIT will retain the asset and weather short-term challenges to achieve long-term gains.

Under its base-case scenario, DBS expects DCREIT to leverage the vacancy to renegotiate terms and maximize the site’s value.

Offsetting Losses with Frankfurt Gains

The short-term earnings impact from the tenant’s exit is mitigated by increased contributions from DCREIT’s Frankfurt data center, where the REIT raised its stake last year. This diversification offsets some of the income loss from the Northern Virginia property.

DBS projects a temporary 8% decline in distribution per unit (DPU) for FY2025 to 3.37 US cents, followed by a 3% rebound in FY2026 to 3.75 US cents.

Stock Performance

As of Jan 3, DCREIT’s shares traded at 58 US cents, unchanged for the day but down 13.43% over the past 12 months. Despite this, DBS maintains its optimistic outlook, citing the tight market conditions in Northern Virginia and the REIT’s ability to generate higher rental income from the property in the long term.

Why DBS Remains Bullish

DBS believes that DCREIT’s strategic asset management and diversification efforts position it well for future growth. The impending vacancy, rather than a setback, is viewed as an opportunity to unlock greater value from a prime asset.

Investors are encouraged to look beyond the immediate disruption and focus on the REIT’s long-term potential, supported by its strong portfolio and proactive management strategy.

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