Digital Core REIT (DCREIT): A Pure-Play Data Center REIT

Digital Core REIT (DCREIT) is a specialized real estate investment trust (REIT) focused exclusively on data centers. Its portfolio includes 10 freehold data centers strategically located in premier markets across the United States, Canada, Germany, and Japan. With an appraised valuation of US\$1.5 billion, DCREIT’s properties are situated in high-demand areas such as Northern Virginia, Silicon Valley, Los Angeles, Toronto, Frankfurt, and Osaka. The REIT is backed by Digital Realty, the largest data center owner and operator globally.

Target Price and Recommendation

The report maintains a “BUY” recommendation for DCREIT, with an increased target price of US\$0.99, up from the previous target of US\$0.95. This reflects an impressive upside of 81.7% from the current share price of US\$0.545. The recommendation is based on DCREIT’s strong fundamentals, attractive distribution yield, and promising growth prospects.

Key Developments Driving Performance

Frankfurt Data Center Acquisition

In December 2024, DCREIT acquired an additional 15.1% stake in its Frankfurt data center, increasing its ownership from 49.9% to 65.0%. The acquisition was valued at €71.0 million (US\$75.1 million) and is expected to be accretive to distribution per unit (DPU) by 3.1%. This move diversifies DCREIT’s geographical exposure, increasing its annualized rent contribution from Germany and Japan to 39%, while reducing reliance on North America from 66% to 61%. The Frankfurt data center has near-full occupancy at 98.5%, with positive rental reversions and a remaining vacant space of only 1.5%.

Backfilling Success in Toronto

DCREIT successfully backfilled its Toronto data center by signing a three-year lease with a next-generation AI computing developer. This new tenant occupies 33% of the center’s capacity, restoring its occupancy to 100%. The lease is expected to generate an annualized rent of US\$4.2 million, increasing the property’s rental contribution by 45%. By Q1 2025, the Toronto data center is projected to account for 13% of DCREIT’s annualized rent, up from 10.6% in Q3 2024.

Los Angeles Data Center Leasing Progress

DCREIT assumed operations of its two Los Angeles data centers in October 2024 and has made significant leasing progress. It signed colocation leases with 60 end-user customers, achieving a 60% occupancy rate. These leases generate annualized rent of US\$7 million, which is 30% above the previous in-place rent. Management expects the occupancy rate to reach 80% by year-end, with annualized rent projected to grow 70% year-on-year due to strong demand.

Redevelopment Potential at Linton Hall Road

DCREIT is preparing for the expiration of a lease at its Linton Hall Road data center in Northern Virginia. This data center, which accounted for 11% of annualized rents as of September 2024, is expected to experience six months of downtime before securing a new tenant by Q1 2026. Management is considering a redevelopment plan that includes building a 20MW annex, which would not disrupt existing operations. The redevelopment cost is estimated at US\$200 million, with completion targeted for 2027.

Financial Highlights

• 2024F Net Turnover: US\$94 million (down from US\$103 million in 2023).
• 2025F Net Turnover: Projected to rise to US\$166 million due to new leases and acquisitions.
• 2024F DPU: 3.5 US cents, offering a yield of 6.4%.
• 2025F DPU: Expected to increase to 3.7 US cents, with a yield of 6.8%.
• Aggregate Leverage: Projected to rise to 36.6% post-acquisition of the Frankfurt stake.

Market Dynamics and Growth Drivers

Microsoft’s planned US\$80 billion investment in AI-enabled data centers underscores the growing demand for high-power density facilities. DCREIT is well-positioned to capitalize on this trend, given its specialized portfolio and strong presence in key markets. Additionally, the low vacancy rate of below 1% in Northern Virginia and healthy leasing momentum in Los Angeles further support its growth outlook.

Valuation and Competitive Yield

DCREIT’s distribution yield of 6.8% for 2025 outpaces its peers, including Keppel DC REIT (4.7%), Mapletree Industrial Trust (6.2%), Digital Realty (2.7%), and Equinix (1.8%). The REIT’s target price of US\$0.99 is derived using a dividend discount model with a cost of equity of 6.5% and terminal growth of 2.5%.

Conclusion: A Strong Investment Opportunity

The combination of yield-accretive acquisitions, successful backfilling efforts, and strategic redevelopment plans positions Digital Core REIT as a compelling investment in the data center sector. With a robust pipeline of opportunities and strong sponsorship from Digital Realty, DCREIT is well-equipped to deliver sustainable growth and attractive returns to investors.