Digital Core REIT (DC REIT) is the second pure play data centre REIT that is planning to has listed in Singapore. Here is a brief overview of the indicative offering details from DC REIT preliminary prospectus:
- IPO Price will be US$0.88
- IPO Date: 6 December 2021, 2pm
- Forecast distribution yield for 2022 is 4.75%
- There will be 267m units on offer in total. Public tranche of 13.3m units and placement tranche of 253.7m units
- The total number of Units in issue immediately after close of the offering will be 1,125m units. This implies a market capitalisation of US$990m.
- DC REIT will own 90% of each property with the Sponsor owning the remaining 10%. The sponsor will also continue to hold a 38.1% direct stake
Digital Core REIT IPO application timeline
The indicative timeline for public offer has been released. Here are the key dates to note:
- IPO Application opens: 29 Nov 21, 9pm
- Application will close: 2 December 2021, 12pm.
- Digital Core REIT will commence trading: 6 December at 2pm.
You can apply for it via ATMs, internet banking or mobile banking apps as per most IPOs.
Digital Core REIT Property Portfolio
The Digital Core REIT IPO Portfolio is comprised of 10 freehold data centres concentrated within top-tier markets in the U.S. and Canada with an appraised valuation of US$1.4 billion.
It is 100% leased to a roster of blue-chip customers, each with numerous deployments across the Sponsor’s global platform.
Lease expiry profile & Characteristics
The weighted-average remaining lease term is over six years and all of the lease agreements contain contractual annual cash rental rate escalations ranging from 1.0% to 3.0%, with a weighted average of approximately 2%.
In addition, approximately 85% of the IPO Portfolio is leased on a triple-net lease structure, providing additional insulation against operating expense growth.
Digital Core REIT’s Top 10 Tenants
Their top 10 customers are extremely high in quality. DC REIT has disclosed that their biggest customer has a AAA credit rating.
There are currently only two US corporations with a AAA credit rating, namely – Microsoft and Johnson&Johnson, of which only one of them is a software company. The 2nd biggest is likely to be Cyxtera as they have leased at least 17 locations from the sponsor while the 3rd is likely to be Meta Platforms.
Digital Realty, the sponsor of DC REIT has also generously disclosed their top 20 customers which should give an indication of the remaining customers in DC REIT’s Top 10:
Who is Digital Realty?
Digital Realty (NYSE: DLR), the sponsor of DC REIT is the largest global provider of cloud and carrier neutral data centre, colocation and interconnection solutions dedicated to the full customer spectrum.
DLR’s global platform offers customers consistency of deployment, operating model, form of contract and procurement experience, as well as a single responsible party capable of meeting their data centre requirements around the world.
Their top 20 customers have an average of over 40 deployments across 291 facilities in 47 metros throughout 24 countries on six continents. They are also one of the 10 largest U.S. listed REITs, with an equity market capitalisation of approximately US$44 billion.
Right of First Refusal (ROFR) Assets
The Sponsor is providing a ROFR to Digital Core REIT for assets majority owned by the Sponsor globally which fit Digital Core REIT’s investment mandate.
This amounts to more than US$15b.
Digital Core REIT’s Financial and capital management
DC REIT offers an attractive forecast distribution yield of 4.75% for Year 2022 and 5.00% for Year 2023
The appraised value of the assets was US$1,441 million and a 90% stake was purchased by DC Reit without any discount. The average capitalisation rate used in the appraised value was 4.25%. The Net Property Income forecast for 2022 is US$66.9m which represents a portfolio property yield of 4.6%.
Digital Core REIT is expected to have an aggregate leverage ratio of approximately 27.0%, which is significantly below peers. This also gives it between US$160 million, and US$596 million of debt headroom at an aggregate leverage ratio of between 35% to 50%. This provides ample headroom to fund post-IPO investments quickly via debt.
For future acquisitions, Digital Realty intends to co-invest with the REIT, with the sponsor holding 10% of the asset and the REIT holding the remaining 90%.
Singapore Data Centre REITs comparison
| Digital Core Reit | Mapletree Industrial Trust | Keppel DC REIT | |
| Properties | 10 | 143 | 19 |
| Portfolio Value | US$1,440m | S$7,428m | S$3,086m |
| Occupancy | 100.0% | 93.7% | 98.1% |
| WALE | 6.2 yrs | 4.3 yrs | 7.0 yrs |
| Gearing | 27.0% | 39.6% | 36.7% |
| Market Cap | US$990m | S$7,180m | S$4,050m |
| P/B | 1.05x | 1.52x | 2.05x |
| Yield | 4.75% | 5.05% | 4.19% |
Comparing to two other REITs in Singapore with data centre assets, it is clear that DC REIT has a favourable valuation.
This may be due to its smaller size, lower gearing and strategic IPO pricing which ensures there is sufficient retail interest.
What to take note of before you subscribe
It seems like DC REIT has a quality IPO portfolio that is well located with top tenants. The leases have rental step-up structures which gives visibility on future income growth and there is a strong sponsor with a huge ROFR pipeline.
There is also strong alignment of interests between the sponsor and minority unitholders due to the significant stake in the REIT and the offering is at an attractive valuation relative to its peers. There could also be a possibility of yield compression aligning it closer to its peers.
While there is a risk that the steepening yield curve may lead to financing costs. It may also lead to strengthening of an already strong USD, local investors may be faced with the unenviable dilemma of purchasing at IPO or waiting for the steepening yield curve to affect share prices but having to pay higher SGD equivalent price.
