Is Digital Core REIT A Good Buy In 2025? [Fundamental Analysis]

In this article, we'll conduct a fundamental analysis and review of Digital Core REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having high capital preservation ability.

Business Description

Digital Core REIT is an industrial REIT that was listed in 2021 and owns data centers mainly located in the Western Hemisphere.  

What I Like About Digital Core:

• The tenant contract is designed in a way that enables 100% of utilities to pass through which reduces the volatility of energy prices in REIT’s operating performance. (Figure 11)

  
  

• Most lease agreements generally contain annual contractual rent rate escalations ranging from 1% - 3%.

What I Do Not Like About

• I’ve my suspicion on the intention of the REIT’s sponsor – Digital Realty – which is one of the 10 largest US-listed REITS. It puzzles me why there is a need for a REIT listed in the world’s largest and most established market, to spin off and have a listing in Singapore. As such, it is reasonable to expect that there may be a conflict of interest between the sponsor and the unitholders. That said, the actions of the management thus far has been aligned with the unitholders.

  
  

• The REIT itself is very new and the management is not proven.

  
  

• The weighted average lease expiry is very low as far as data centres go (Figure 11)

Updates From Recent Performance (FY 2024)

General Comments:

• The management repurchased 27mil units at 14% discount to Net Asset Value (average price of $0.5760) which generated 1.8% DPU accretion.

  
  

• On the other hand, the management did equity fundraising of 192mil units in Feb 2024 at an issue price of $0.6250 for acquisitions and partial debt repayments.

  
  

• DPU from operations grew by 7.50% driven by higher contributions from the Frankfurt Facility and Osaka Data Centre and lower interest rate on borrowing.

  
  

• Reported DPU decreased by 4.15% as a higher portion of management fees are paid in cash instead of in the form of units.

  
  

• The aggregate leverage improved by 6.5% to 34% and the cost of borrowing decreased by 0.6% to 3.90%.

  
  

• Leasing activity in FY2024 is healthy following the resolution of their second largest customer bankruptcy in November 2023.

Positive Headwinds:

• Nil

Negative Headwinds:

• The weakening of USD due to a flight to other safe alternatives away from the USD due to the ongoing trade war might result in lower dividends (In SGD terms).

  
  

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Disclaimer:

This article is meant to be the opinion of the author

This article is for information purposes only

This article should not be seen as financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore