The Singapore Exchange has been a hotbed for Real Estate Investment Trusts (REITs) as of late. The latest is the announcement by Digital Core REIT that touts itself as a pure-play on data centre S-REIT that is sponsored by one of the world’s largest global owner, operator, developer and acquirer of data centres – Digital Realty.
Investors may be eagerly looking forward to Singapore’s second pure-play data centre REIT, given the robust demand for data centres internationally and how resilient data centre operators were throughout the pandemic period.
We break down the 9 key details you need to know about Digital Core REIT before you decide to invest.
Read Also: Guide To Understanding & Analysing REITs in Singapore
Details of Digital Core REIT
| Company to be listed | Digital Core REIT Management Pte Ltd |
| Business | Pure-Play Data Centre REIT |
| Issue Price | US$0.88 per unit / SG$1.21* |
| Valuation | US$1,340 Million (Market Cap) |
| Forecasted distribution Yield for 2022 | 4.75% |
| Total Units under Offering Singapore Public Offer |
267,034,000 units 13,352,000 units |
| Opening date and time for the Public Offer | 29 November 2021, 9 am |
| Closing date and time for the Public Offer | 2 December 2021, 12pm |
| Commence trading on a “Read” basis | 6 December 2021, 2 pm |
*Based on a US-SGD conversion rate of 1.37.
#1 What Is Digital Core REIT?
Digital Core is an S-REIT established by Digital Realty for the purpose of investing, whether directly or indirectly in a diversified portfolio of real estate located globally which are primarily used for data centres as well as assets that support the digital economy.
#2 Assets Owned By The REIT Are Based In the US And Canada
The current portfolio of Digital Core REIT consists of 10 freehold institutional quality data centres that have a 100% occupancy rate. These properties are held in the United States and Canada.
| Digital Core REIT Portfolio | ||||
| Region | Number of Properties | Size (SqF) | Valuation (US$`000) | Occupancy Rate |
| Silicon Valley | 4 | 414,000 | $479,000 | 100% |
| Los Angeles | 2 | 197,000 | 129,000 | 100% |
| Toronto | 1 | 104,000 | 203,000 | 100% |
| Northern Virginia | 3 | 494,000 | 629,000 | 100% |
The 10 properties that are part of the IPO portfolio have an attractive Weighted Average Lease Expiry (WALE) of 6.2 years based on the base rental income for the month of June 2021. There are no meaningful lease expirations till 2023, giving Digital Core REIT sufficient time to source and on-board new customers for future expiring leases.
Lease agreements for data centres are usually 5 to 15 years, with anchor tenants often taking up leases longer than 10 years. Approximately 89.3% of the IPO portfolio has been leased on new or renewal lease agreements since 2017 and has a well staggered lease maturity profile. Moreover, 100% 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% by base rental income for the month of June 2021.
Additionally, around 85% of the properties, based on the net rentable square feet (NRSF) as of 30 June 2021 are leased on a triple-net lease structure, which means the tenant pays for all the expenses of the property including the real estate taxes, building insurance and maintenance. This provides additional protection for Digital Core REIT against any potential increase in operating expenses.
Overall, the tenure of the properties, the long WALE and lease structure provide a stable and predictable long-term cash flow for Digital Core REIT.
#3 Valuation of Digital Core REIT
The IPO portfolio has an average appraised valuation cap rate of 4.25%, valuing the 10 properties at US$1,440 million. Based on the current valuation and Offer price, the REIT is offered at 1.0 times to Net Asset Value (NAV) basis.
#4 The Sponsor Is Digital Realty, One Of The Largest REITs In the US
Digital Realty (NYSE: DLR) is one of the largest publicly traded US real estate investment trusts, with a market capitalisation of approximately US48 billion as of November 29. It has been listed on the New York Stock Exchange (NYSE) for 17 years and was included in the S&P 500 index in 2016.
Digital Realty is the largest global provider of cloud-and carrier-neutral data centre, colocation and interconnection solutions dedicated to the full customer spectrum, from the enterprise to the hyperscale cloud service provider.
It also owns the PlatformDIGITAL® global data centre platform, which provides a trusted platform to support the digital transformation initiatives of over 4,000 of its customers, which include well-known brands from a wide range of global industries. The platform offers customers consistency of deployment, operating model, form of contract and procurement experience as well as a single responsible party to meet their data centre requirements around the world.
Digital Realty’s top 20 customers as shown below have an average of over 40 deployments across its 291 facilities in 47 cities throughout 24 countries on 6 continents.
Digital Realty has a proven public market track record, raising approximately US$28 billion of equity capital, more than any other data centre REIT.
#5 The Sponsor (Digital Realty) Will Retain 39% Ownership Of Digital Core REIT
Digital Realty as the Sponsor will be the largest unitholder of Digital Core REIT with a US$390 million or approximately 39% ownership stake as at the listing date. The assets that make up the IPO portfolio are core to the Sponsor’s investment strategy and would continue to hold a 10% direct ownership stake in the Digital Core REIT properties.
The Sponsor will own 100% of Digital Core REIT Manager and will extend their insights and experience to Digital Core REIT, including the use of their PlatformDIGITAL® platform.
#6 It Offers An Attractive Dividend Yield
The forecasted distribution yield for 2022 is 4.75% and for 2023 it is 5%. Investors can expect to receive the first distribution on or before 28 September 2022.
The REIT is expected to pay out 100% of its annual distribution income from 2021 to end of 2023. Thereafter, it will be revised to give at least 90% of its annual distribution for each year.
#7 Tenant Profile Comprises Blue-Chip Companies
For the 10 properties packaged as part of Digital Core REIT’s portfolio, the tenant profile is made up of blue-chip companies in the Digital Economy industry. Most of the companies have a strong investment credit rating, which shows their ability to meet their rental commitments to Digital Core REIT.
| No | Customer | Rating | % of Base Rental Income for the month of June 2021 |
| 1 | Fortune 50 Software Company | AAA/Aaa | 35.9% |
| 2 | Global Colocation & Interconnection Provider | B-/B3 | 23.9% |
| 3 | Social Media Platform | Investment Grade Equivalent | 18.5% |
| 4 | Global Technology Solutions Provider | A-/A2 | 11.7% |
| 5 | IT Service Provider | Noted Rated | 7.4% |
| 6 | Global Cloud Provider | AA/A1 | 2.5% |
| 7 | North American Telecom Network Provider | A-/A3 | 0.07% |
| 8 | Global Telecom & Media Company | BBB/Baa2 | 0.06% |
| 9 | Global Fibre Network Provider | B/B2 | 0.04% |
| 10 | North American Telecom & Media Company | BBB+/Baa1 | 0.03% |
| Total for Top 10 Customers | 99.95% | ||
The Prospectus also provides a breakdown of the monthly rental income by trade sector, which shows around half goes to cloud service providers and another 23% goes to colocation providers. The global cloud computing market is expected to grow at a compounded annual growth rate (CAGR) of 17.5% from 2020 to 2025 as demand for cloud services grows. This bodes well for Digital Core REIT as the likelihood of most of its current customers extending their rental leases is high.
#8 The Growth Plans Will Benefit From The Sponsor
The Manager of Digital Core REIT expects to benefit from a deep pool of acquisition opportunities through the global right of first refusal granted by the Sponsor. This provides Digital Core REIT immediate access and the opportunity to acquire data centres from the Sponsor’s global platform and future development pipeline across the Americas, Europe Middle East and Africa (EMEA) and Asia Pacific. The Sponsor has a potential pipeline of over US$15 billion of existing and under construction data centres that Digital Core REIT can acquire for its growth post-IPO.
Moreover, as the current aggregated leverage stands at 27%, there is sufficient room to increase its gearing to as much as 45% to support its acquisition plans.
#9 The Gearing Is Currently 27%
At the time of listing, Digital Core REIT is expected to have US$550 million in available debt facilities to support acquisition opportunities. Of that, only US$350 million (known as the Term Loan Facility) will be drawn at the listing date. It represents an aggregated leverage ratio of 27% based on a market capitalization of US$1,340 (assuming the Offer price of US$0.88).
The Term Loan Facility which is US-denominated has a five-year debt maturity and is pegged to a floating interest rate, which is assumed to be at around 1.1% till 2023. However, the Manager after taking into account the interest rates and current forward secured overnight financing rate (SOFR) expects the weighted average interest rate on the borrowing for 2022 and 2023 to be around 1.4% per annum.
| As at Listing Date (US$ ‘000) | |
| Borrowings | 350,000 |
| Units in issue | 990,315 |
| Preference Shares | 125 |
| Total Capitalisation | 1,340,400 |
Moreover, the Digital Core REIT has a conservative debt structure as it is only permitted to borrow up to 45% of the value of the deposited property at the time of borrowing. However, the aggregate leverage can increase to a maximum of 50% provided the Digital Core REIT meets a minimum adjusted interest coverage ratio of 2.5 after taking into account the interest payment obligations arising from the new borrowings.
A debt structure like this ensures that the REIT does not overleverage and that it can meet its debt obligations.
Read Also: [2021 Edition] Complete Guide To Start Your REITs Investing Journey In Singapore
If you are interested in this IPO, you can apply via:
- ATMs and internet banking websites of DBS/ POSB, OCBC and UOB
- Mobile banking services of DBS and UOB
- The printed WHITE Public Offer Units Application Form which forms part of the Prospectus
Applications for this IPO has been open since 29 November and will end on 2 December (Thursday) at 12 noon.
| Opening Date and Time | 29 November 2021, 9 am |
| Closing Date and Time | 2 December 2021, 12pm |
| Commence trading | 6 December 2021, 2 pm |
Read Also: Step-By-Step Guide To Subscribing To An IPO (Through Internet Banking)
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