Report Date and Broker Details
- Date: October 28, 2024
- Broker: UOB Kay Hian Private Limited
Company Overview
Digital Core REIT (DCREIT) is a pure-play data center real estate investment trust (REIT) with a focused portfolio of 10 freehold data centers. These assets are strategically located in top-tier markets across the United States (North Virginia, Silicon Valley, Los Angeles), Canada (Toronto), Germany (Frankfurt), and Japan (Osaka). The portfolio is valued at approximately US$1.5 billion, sponsored by Digital Realty, the world’s largest data center owner and operator.
Stock Data
- Share Price: US$0.60
- Target Price: US$0.95 (58.3% potential upside)
- Market Cap: US$778.9 million
- Bloomberg Ticker: DCREIT SP
- Major Shareholders:
- Digital Realty Trust: 30.9%
- Sumitomo Mitsui Financial Group: 5.4%
- Cohen & Steers: 7.0%
3Q24 Performance Highlights
- Distributable Income: US$12.0 million, marking a 19.4% year-over-year increase due to reduced finance expenses by 20.6%.
- Leasing Activity: Positive triple-digit rental reversion for new colocation leases, particularly in the Los Angeles data centers, and an overall portfolio-wide rental reversion of 10.5%.
- Backfilling Success: Los Angeles data centers reached 60% leasing capacity with new colocation tenants, with projections to achieve 80% capacity by year-end.
Strategic Acquisitions and Investments
- Frankfurt Data Center: DCREIT exercised an option to acquire an additional stake of up to 40% in the Frankfurt data center at a 17.8% discount to valuation, with a net property income (NPI) yield of 5.7%.
- Potential Scenario: The broker notes that if DCREIT acquires a full 40% interest, the accretion to 2023 pro forma DPU could reach 7.0%, with NAV per unit increasing to US$0.71 and leverage rising to 41.0%.
Capital and Debt Management
- Loan Recasting: DCREIT has restructured US$716 million in loan facilities, extending its average debt maturity by 2.5 years to 4.9 years. This includes multi-currency term loan facilities maturing in 2029 and 2030, contributing to a lower average debt cost of 3.9%.
- Unit Buybacks: In 3Q24, DCREIT repurchased 7.6 million units, generating a 50 basis points DPU accretion, while leverage rose slightly to 34.8%.
Future Growth Prospects
- Data Center Redevelopment: The Northern Virginia Linton Hall Road data center, set to expire in June 2025, has redevelopment potential, including options for high-density AI workloads and expansion from 10MW to 50MW capacity.
- Target Distribution Yield: For FY2025, DCREIT is expected to deliver a distribution yield of 6.6%, higher than comparable REITs KDCREIT (4.3%) and MINT (5.8%).
Financial Outlook
Key financial indicators for DCREIT through 2026 include steady increases in distributable income and expected expansion in DPU. With robust leasing and strategic acquisition activities, DCREIT’s projected growth is supported by an anticipated increase in gross revenue and net profit.
Investment Thesis
UOB Kay Hian maintains a “Buy” rating on DCREIT, citing the REIT’s consistent portfolio growth, yield-accretive acquisitions, and operational stability in data center markets. The target price of US$0.95 reflects the broker’s confidence in DCREIT’s potential for sustainable returns and portfolio expansion.
