Digital Core REIT Faces Tight Data Centre Market, Major Asset Refurbishment, and Attractive Valuation Opportunity

Key Highlights for Investors: Tightening Market, Strategic Asset Management, and Deep NAV Discount

Digital Core REIT’s Q3 2025 operational update reveals a dynamic landscape for data centre real estate, characterized by surging demand, constrained supply, and a significant refurbishment program for a major Northern Virginia asset. Investors should pay close attention to several developments that could materially impact the REIT’s valuation and future growth trajectory.

1. Data Centre Market Fundamentals Strengthen Further

• Explosive Growth in AI Workloads: The ongoing rise of artificial intelligence workloads is driving unprecedented demand for data centre capacity across global markets.
• Supply Chain Constraints: The sector is grappling with extended equipment lead times, skilled labor shortages, and persistent power availability issues, further tightening supply.
• Vacancy Rates at Historic Lows: Virtually all new supply in core global markets is pre-leased, pushing vacancy rates to the low single digits and giving landlords strong pricing power.
• Resilient Demand Drivers: In addition to AI, long-term trends like cloud migration and digital transformation underpin robust, relatively inelastic demand for data centre assets.

2. Portfolio and Market Update: Los Angeles and Virginia in Focus

• Los Angeles Momentum: Occupancy improved by 280 basis points in Q3, while cash rental reversions on renewals were up 3% for the quarter and a remarkable 143% year-to-date, reflecting strong leasing spreads.
• Major Asset Transition in Virginia: The lease for the 8217 Linton Hall facility, previously occupied by a AAA-rated global cloud provider, expired on June 30, 2025. The tenant vacated at lease end, and Digital Core REIT has embarked on a comprehensive, year-long refurbishment to modernize the 20-year-old, physically robust, but electrically outdated, data centre.
• Occupancy Impact: Excluding Linton Hall, portfolio occupancy remained high at 98% as of September 30, 2025. Including Linton Hall, total occupancy would have dropped sharply to 81%—a key figure for investors to note.

3. Strategic Refurbishment of Flagship Asset in Northern Virginia

• Largest Data Centre Market: Northern Virginia is the world’s largest, most supply-constrained data centre market, with vacancy below 0.5%. The Linton Hall facility’s refurbishment positions Digital Core REIT to capitalize on this acute supply-demand imbalance.
• Refurbishment Timeline and Leasing Prospects: The upgrade program is expected to take approximately 12 months, with the property slated to return to service in the second half of next year.
• Customer Interest and Urgency: The REIT is already seeing heightened interest and urgency from hyperscale, enterprise, and next-gen “neo-cloud” providers, especially those supporting AI workloads. The company anticipates re-leasing Linton Hall on favorable terms, potentially within six months of the property’s return to service.

4. Financial Position and Capital Management

• Balance Sheet Strength: Leverage aligns with a 35%-40% target range; all debt is unsecured, over 85% is hedged against rising rates, and the REIT owns the freehold for 100% of its assets.
• Credit Quality: Nearly 80% of the rent roll is investment grade (70% A-rated or higher), providing stability.
• Liquidity: Over US\$25 million in cash and US\$200 million in additional credit capacity, with a weighted average debt maturity of four years.

5. Growth Strategy and Deeply Discounted Valuation

• Organic Growth: Focus on leasing up remaining vacant space, capturing embedded rent growth, and driving operational efficiencies.
• Inorganic Growth: Plans to invest additional capital in existing assets and tap into a robust Sponsor acquisition pipeline for future expansion.
• Valuation Discount and Yield: Digital Core REIT units are trading at a nearly 40% discount to NAV and offer a 7.5% distribution yield—substantially higher than sector peers. This significant discount could present a compelling entry point for investors, especially given the underlying sector strength and company-specific catalysts.

6. Potential Share Price Movers and Key Risks

• Linton Hall Re-leasing: Speed and terms of re-leasing this flagship Virginia property are critical and may drive near-term share price movements, especially as the market awaits execution on this priority.
• Sector Dynamics: Any further tightening in data centre markets, particularly supply constraints and rent growth, could positively impact valuations.
• Execution and Capital Allocation: Effective use of balance sheet flexibility and successful deployment of capital into high-return projects or acquisitions would also be price sensitive.
• Public Market Discount: The persistent NAV discount and above-average yield may attract value-focused investors, but could also signal perceived execution or sector risks.

Conclusion

Digital Core REIT presents a high-conviction opportunity for investors seeking exposure to the data centre sector. The combination of an extremely tight demand/supply environment, a value-add refurbishment in a globally strategic market (Northern Virginia), robust balance sheet, and a steep NAV discount creates the potential for significant price movement in the coming quarters. Investors should closely monitor the pace of the Linton Hall re-leasing and management’s capital allocation decisions, as these will be the primary catalysts for share price re-rating in the near term.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should conduct their own due diligence and consult professional advisors before making any investment decisions. Past performance is not indicative of future results. The author and publisher accept no liability for any loss arising from reliance on the information presented.

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