Digital Core REIT is a Must-Buy with a 68% Upside Potential!”

2H24: Strong Leasing Performance and Positive Rental Reversion

Digital Core REIT (DCREIT) reported a solid performance for the second half of 2024, with new and renewal leases covering more than 90% of its portfolio. The company achieved a positive rental reversion of 4.3% during the year, with management expecting this figure to improve to double digits in 2025. Additionally, DCREIT recorded a significant revaluation gain of US$251.6 million. The REIT offers an attractive 2025 distribution yield of 6.9%, which compares favorably against its peers: KDCREIT (4.9%), MINT (6.6%), Digital Realty (3.0%), and Equinix (2.0%). The recommendation remains a BUY, with a target price of US$0.90.

2H24 Financial Results (Year ending Dec 31)

Key Highlights

• High Leasing Activity: DCREIT successfully secured leases representing US$74 million in annualized rent, covering more than 90% of its portfolio. The portfolio’s Weighted Average Lease Expiry (WALE) was extended by two years to 4.8 years.
• Toronto Data Center Backfilling: DCREIT signed a three-year lease with a next-generation AI computing developer for its Toronto data center, bringing occupancy from 66% to 100%. The lease will commence in 1Q25 and is expected to generate US$4.2 million in annualized rent, boosting the center’s revenue by 45%.
• Los Angeles Data Centers Recovery: The two LA data centers were 80% leased by end-2024, generating US$8.6 million in annualized rent, a 75% increase. The facilities primarily serve 60 enterprise clients from the media and entertainment industry.
• Unit Buybacks: DCREIT repurchased 4.8 million units in 4Q24, bringing its total 2024 buyback to 27 million units at an average price of US$0.576, resulting in a DPU accretion of 1.8%.

Future Growth and Redevelopment Plans

• Linton Hall Road Data Center (Northern Virginia)
  • The tenant at 8217 Linton Hall Road opted not to renew their lease, expiring in June 2025. This facility accounts for 11% of DCREIT’s annualized rents.
  • DCREIT plans to re-lease the facility, which is currently 20% under-rented, with a six-month expected downtime.
  • The redevelopment option includes US$20-40 million capex to upgrade its electrical infrastructure to accommodate high-power-density AI workloads.
  • A potential expansion could add a 20MW annex, requiring an investment of US$200 million for completion by 2027.

Financial Forecasts and Valuation

• The BUY recommendation is maintained with a target price of US$0.90, based on a Dividend Discount Model (DDM) with a 6.75% cost of equity and 2.5% terminal growth rate.
• DCREIT remains a pure-play data center REIT, with an all-freehold portfolio across North America, Europe, and Asia.

Investment Catalysts

• Yield-accretive acquisitions leveraging Digital Realty’s extensive data center pipeline.
• Organic rental escalations of 1-3% annually, with a weighted average of 2%.

Key Operating Metrics (4Q24)

Portfolio Breakdown

Rental Income by Core Market

• Frankfurt – 30%
• Northern Virginia – 26%
• Silicon Valley – 16%
• Toronto – 12%
• Los Angeles – 9%
• Osaka – 7%

Debt Profile & Capital Management

• Debt to Total Capital: 98.6% (2024), expected to rise to 107.4% by 2027.
• Debt to Equity Ratio: 99.2% (2024), projected at 108.1% in 2027.
• Net Debt to Equity Ratio: 75.4% (2024), expected to decline to 56.9% in 2027.
• Interest Coverage Ratio: Expected to remain stable at 9.5x-11.1x.

Conclusion

Digital Core REIT demonstrated resilience in 2H24, securing long-term leases, successfully filling vacant spaces, and maintaining positive rental reversions. The REIT’s strong asset base, strategic expansion plans, and attractive distribution yield make it a compelling investment. The BUY recommendation is maintained with a target price of US$0.90, representing a 68.2% upside from the current US$0.535 share price​.

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