Digital Core REIT - Pure-play data centre REIT at attractive valuation

Pure-play data-centre REIT

Digital Core REIT (DCREIT) owns and operates a portfolio of 10 data centres located in United States, Canada, Germany and Japan valued at US$1.62bn as at 31 December 2024. 

The sponsor, Digital Realty, is the largest global data centre owner and operator, offering DCREIT with a sponsor pipeline of assets worth more than US$15 billion.

As of end-2024, the portfolio’s reported occupancy rate was at 96.7%, relatively stable compared to 96.6% as of end-2023

Positive industry outlook

The outlook for the data centre industry remains positive amid the uncertainty of geopolitical tensions, global trade tensions and structurally higher inflation. 

The rising adoption of cloud computing, enterprise digitalisation and artificial intelligence (AI) applications are expected to drive demand for data centre capacity. 

Global colocation demand for critical IT load capacity is forecasted to grow at CAGR 27% p.a. during the period 2025- 2029.

Overhang from customer bankruptcies resolved

While DCREIT has been impacted by tenant defaults previously, they have been well-managed to minimise the impact on distributions. In the case of the Los Angeles facilities, DCREIT was able to re-lease the capacity at more favourable terms. 

DCREIT’s weighted average lease expiry (WALE) was 4.8 years as of 31 December 2024, providing visibility on cash flow. 

Reflecting strong industry fundamentals, DCREIT’s portfolio cash rental reversion was +4.3% in 2024. 

Diversifying beyond North America

To sustain a more resilient net property income, DCREIT has been actively diversifying into core global data centre markets beyond North America. 

In 2024, DCREIT raised its stake in the Frankfurt facility to 65% from 25%, increasing its presence in one of the fastest growing data centre markets in Europe. 

DCREIT also acquired an additional 10% stake in Digital Osaka 2. As a result of these acquisitions, the contribution of  U.S. to DCREIT’s portfolio fell to 62% as of end-2024 from 67% in the previous year. DCREIT intends to further diversify geographically by deepening its presence in the Asia Pacific region.

Initiate coverage with Buy

We derived the target price of US$0.63 per unit based on the dividend discount model, assuming a cost of equity of 10% and terminal growth rate of 2%. 

DCREIT is expected to offer a FY 2025 distribution yield of 7.3%, above the yield of other Singapore REITs with data centre exposure. 

DCREIT currently trades at a price-to-book valuation of 0.6x, a discount to its historical average and peer average. 

Key risks include customer concentration risk, technological obsolescence risk and operational risk, amongst others. 

Related links:

• Digital Core REIT share price and share price target
• Digital Core REIT dividend history and forecast

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