Date: 28 October 2024
Broker: UOB Kay Hian

3Q24 Performance Overview

Digital Core REIT (DCREIT) reported its 3Q24 results with distributable income of US$12.0 million, reflecting a 19.4% year-over-year increase. This growth aligns with expectations and is supported by positive rental reversion across key markets, including Silicon Valley, Northern Virginia, and Toronto.

Leasing Progress in Los Angeles Data Centers

DCREIT achieved a 60% leasing rate for its two Los Angeles data centers, reaching an annualized rent of US$7 million, a figure 30% above previous in-place rent. Management aims to increase the leasing rate to 80% by year-end, which could potentially double the rent at these locations.

Strategic Acquisition in Frankfurt

DCREIT exercised its option to acquire an additional 10% stake in a Frankfurt data center, bringing its total interest to 59.9%. The estimated purchase price of €47 million (US$51.7 million) reflects a 17.8% discount against its refreshed valuation. This acquisition offers a Net Property Income (NPI) yield of 5.7%, enhancing portfolio strength and accretive to distributable income.

Capital Management and Debt Recast

In October 2024, DCREIT restructured US$716 million of its loan facilities to extend the average debt maturity by 2.5 years, now totaling 4.9 years. This includes a mix of USD and Euro-denominated loans with maturities stretching to 2030. The debt recast has improved its cost of debt to 3.9% and bolstered balance sheet resilience.

Financial and Operational Metrics

In 3Q24, DCREIT’s positive rental reversion rate averaged 10.5% across its portfolio. Key operating metrics included:

• Occupancy Rate: 96.6%
• Aggregate Leverage: 34.8%, up 30 basis points from the previous quarter
• WALE (Weighted Average Lease Expiry): Increased to 5.0 years, from 2.8 years

Additionally, DCREIT’s capital management saw it buy back 7.6 million units at a 12% discount to NAV, supporting DPU accretion and steady value growth.

Future Redevelopment Potential at Linton Hall Road

Management is considering a redevelopment of its data center at Linton Hall Road, Virginia, which supports high-density AI workloads. Plans include potentially increasing capacity from 10MW to 50MW, though this may temporarily affect DPU. As an alternative, a less disruptive expansion option could add a 30MW annex to the facility’s parking lot.

Earnings Forecasts and Valuation

Due to the successful leasing of vacant spaces in Los Angeles, UOB Kay Hian has raised its 2025 DPU forecast for DCREIT by 9%. DCREIT provides a 2025 distribution yield of 6.6%, outperforming comparable REITs like KDCREIT (4.3%) and MINT (5.8%). The broker maintains a “Buy” rating with a target price of US$0.95, supported by a strong distribution yield and ongoing acquisition strategy.

Key Growth Catalysts

• Yield-Accretive Acquisitions: Leveraging DCREIT’s sponsor’s data center pipeline.
• Rental Escalations: Expected cash rental growth of 1-3% annually, averaging 2%.
• Operational Enhancements: Increasing efficiency and portfolio resilience through strategic debt and capital management.