Date: October 28, 2024
Broker: UOB Kay Hian
Company Overview
Digital Core REIT (DCREIT) is a specialized Real Estate Investment Trust (REIT) focusing on data centers. It maintains a portfolio of ten freehold data centers located across prominent markets in the U.S. (Northern Virginia, Silicon Valley, and Los Angeles), Canada (Toronto), Germany (Frankfurt), and Japan (Osaka). As of the latest valuation, the portfolio is appraised at USD $1.5 billion. Digital Realty, the REIT’s sponsor, is the largest global owner and operator of data centers.
Stock Data
- Ticker: DCREIT SP
- GICS Sector: Real Estate
- Market Cap: USD $778.9 million
- Shares Issued: 1,298.1 million
- 52-Week Price Range: USD $0.675 (high) / USD $0.495 (low)
- Share Price: USD $0.60
- Target Price: USD $0.95 (representing a 58.3% potential upside)
- 3-Month Average Daily Turnover: USD $2.0 million
- Major Shareholders: Digital Realty Trust (30.9%), Sumitomo Mitsui Finance (5.4%), Cohen & Steer (7.0%)
3Q24 Financial Highlights
Digital Core REIT reported the following key financials for the quarter ending in September 2024:
- Gross Revenue: USD $23.7 million (-9.9% year-over-year) due to divestment of two Silicon Valley data centers.
- Net Property Income (NPI): USD $14.8 million (-6.4% year-over-year).
- Cash NPI: USD $15.1 million (-5.5% year-over-year), with increased contributions from the Frankfurt and Osaka data centers.
- Distributable Income: USD $12.0 million, representing a 19.4% year-over-year increase, driven by a 20.6% reduction in finance expenses.
Leasing and Rental Performance
DCREIT achieved robust leasing results:
- Los Angeles (LA) Data Centers: 60% of the LA data center space is now leased out, surpassing management expectations. New colocation leases have yielded triple-digit rental reversion, with projected leasing of 80% capacity by year-end.
- Portfolio-Wide Performance: A positive rental reversion of 10.5% was achieved across the portfolio, with renewal leases worth USD $30 million at an average 2-3% increase, mainly from hyperscalers in Silicon Valley, Northern Virginia, and Toronto.
- Overall Portfolio WALE: Weighted Average Lease Expiry (WALE) doubled from 2.8 years to 5.0 years as of 3Q24.
Strategic Acquisitions and Growth Plans
- Frankfurt Data Center: DCREIT exercised an option to increase its stake in the Frankfurt data center by an additional 10%, which brings its aggregate holding to 59.9%. The acquisition was priced at a 17.8% discount to the latest appraised value and offers a Net Property Income (NPI) yield of 5.7%. Management is considering further increases in stake, potentially up to 40%, depending on market conditions.
- Potential Redevelopment of Linton Hall Road Data Center: The 24 MW data center in Northern Virginia could undergo redevelopment upon lease expiry in June 2025. Management envisions expanding capacity from 10 MW to as much as 50 MW, with options for a less disruptive 30 MW build-out on an annex. This data center accounts for 11.4% of DCREIT’s annualized rents.
Financial Restructuring and Capital Management
DCREIT undertook significant refinancing initiatives:
- Loan Recast: The REIT restructured USD $716 million of loan facilities on October 9, 2024. This restructuring includes:
- USD $363 million senior unsecured multi-currency term loan maturing in 2030.
- EUR 70 million (USD $78 million) senior unsecured term loan maturing in 2029.
- USD $275 million senior unsecured revolving loan facility maturing in 2029.
- The average debt maturity increased by 2.5 years to 4.9 years, and the REIT also reduced its average cost of debt by 30 basis points to 3.9%.
- Capital Management Activities: DCREIT bought back 7.6 million units during 3Q24 at a 12% discount to NAV, resulting in a 50 basis point DPU accretion. The aggregate leverage as of September 2024 stood at 34.8%, with further reduction in USD-denominated debt by converting USD $50 million into euro-denominated loans.
Valuation and Recommendations
- Distribution Yield: DCREIT offers an estimated distribution yield of 6.6% for 2025, which is competitive compared to peers such as Keppel DC REIT (4.3%) and Mapletree Industrial Trust (5.8%).
- Target Price and Rating: UOB Kay Hian maintains a “BUY” rating with a target price of USD $0.95, based on a Dividend Discount Model (DDM) with a cost of equity of 6.5% and a terminal growth rate of 2.5%.
Future Catalysts and Outlook
- Yield-Accretive Acquisitions: Further acquisitions, particularly in data centers, could enhance yield through DCREIT’s partnership with its sponsor, Digital Realty.
- Organic Rental Growth: Anticipated annual cash rental escalations are estimated at 1-3%, which should support stable growth across the portfolio.
This report, crafted by UOB Kay Hian, reflects an optimistic outlook on DCREIT’s strategic expansions, refinancing achievements, and long-term potential in the growing data center REIT market.
