Digital Core REIT IPO: Another Data Centre REIT to Be Listed Here on 6 Dec

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30 Nov 2021

There’s going to be another pure-play data centre real estate investment trust (REIT) that will be listed in Singapore, joining Keppel DC REIT (SGX: AJBU) on the local stock market.

Digital Core REIT, as the REIT will be called, has filed its final prospectus with the Monetary Authority of Singapore.

Here’s what we know about Digital Core REIT’s initial public offering (IPO)!

TL;DR: Digital Core REIT’s IPO Deets

Here are some details about Digital Core REIT from its IPO prospectus:

Digital Core REIT’s IPO portfolio contains 10 freehold data centres located within top-tier markets of the US and Canada, and the properties are fully leased to blue-chip clients.
The lease agreements of its properties have annual cash rental rate escalations of between 1% and 3%.
Digital Core REIT is expected to have a gearing ratio of around 27%, below its listed peers in Singapore.
At its IPO price of US$0.88, Digital Core REIT’s distribution yield is estimated to be 4.75% for the year ending 31 December 2022.

What’s Digital Core REIT About?

According to its IPO prospectus, Digital Core REIT invests in a stabilised and diversified portfolio of mission-critical data centres globally.

The REIT’s investment strategy also includes investing in assets needed to support the digital economy.

Digital Core REIT’s IPO portfolio consists of 10 freehold data centres located within top-tier markets of the US and Canada.

*Source: Digital Core REIT IPO Prospectus*

Digital Core REIT’s sponsor is Digital Realty (NYSE: DLR), the largest global provider of data centre, colocation and interconnection solutions.

Digital Realty is one of the 10 largest US-listed REITs, with a market capitalisation of around US$48 billion currently.

The REIT’s sponsor will be its largest unitholder with a 39% ownership stake. The sponsor will also have a 10% direct ownership stake in Digital Core REIT’s properties at IPO.

For future acquisitions, Digital Realty intends to co-invest with Digital Core REIT, with the sponsor holding 10% of the asset and the REIT holding the remaining 90% of it.

Key Investment Highlights of Digital Core REIT

Digital Core REIT’s major attraction is that it benefits from the continued expansion of data, a trend that has been accelerated by the COVID-19 pandemic.

The North American data centre market is expected to grow at an annualised growth rate of around 15% from 2020 to 2024.

The digitisation of the economy, adoption of new technologies, and trends such as streaming, social media, cloud computing, edge computing and artificial intelligence are fuelling demand for data centres.

In terms of Digital Core REIT’s properties, they are also fully leased to blue-chip clients, including Fortune Global 500 companies.

Its customer base includes a social media platform, which contributes to around 19% of its base rental income (as of 30 June 2021).

According to its IPO prospectus, the social media platform is a company listed on the NASDAQ.

It “engages in the development of applications for people to connect through mobile devices, personal computers and other surfaces”.

The description of the company fits that of Meta Platforms Inc (NASDAQ: FB).

Digital Core REIT’s customers have numerous deployments across the sponsor’s global platform called PlatformDIGITAL, which allows its customers to efficiently scale their digital business.

The REIT’s IPO portfolio has a long weighted-average remaining lease term of over six years.

The lease agreements of its properties have contractual annual cash rental rate escalations of between 1% and 3%, with a weighted average of around 2%.

In addition, around 85% of Digital Core REIT’s IPO portfolio is leased on a triple-net lease structure (based on net rentable square feet as of 30 June 2021).

A triple-net lease structure means that the client pays all outgoing expenses on top of rent. This provides Digital Core REIT with additional insulation against operating expense growth.

Digital Core REIT’s sponsor Digital Realty is providing a right of first refusal (ROFR) to Digital Core REIT for assets it owns globally.

Since the REIT has plenty of room to gear up for future acquisitions, there’s inorganic growth potential for the REIT.

Digital Core REIT is expected to have a gearing ratio of around 27%, which is significantly below its peers such as Keppel DC REIT, Mapletree Industrial Trust (SGX: ME8U) and Ascendas REIT (SGX: A17U).

Risks to Note for Digital Core REIT

Here are some risks for Digital Core REIT that potential investors should note:

Future technological developments such as enhanced computing power with a reduction in physical space may affect the economics and infrastructure of data centres.
Any decline in the demand for data centres may affect the REIT’s business.
The REIT is exposed to exchange rate fluctuations since revenue received from its properties is in US and Canadian dollars while expenses and distribution to unitholders are in Singapore dollars.

Local investors are also exposed to exchange rate fluctuations if they wish to buy the REIT post-IPO from the stock market since the units will be quoted in US dollars.

Unitholders will receive their distributions in Singapore dollars (unless the investor elects to receive the distribution in US dollars) so there’s exchange rate exposure there as well.

Investors should understand all the risks involved with Digital Core REIT by reading its prospectus before applying for the IPO.

Timeline of Digital Core REIT IPO

Digital Core REIT is looking to raise gross proceeds of around US$977 million from the IPO.

The following shows the timeline of Digital Core REIT IPO:

Timeline of Digital Core REIT IPO	Details
Offering price	US$0.88 (or S$1.21) per unit
Units offered	267,034,000
Opening time and date of IPO	29 November 2021, 9pm
Closing time and date of IPO	2 December 2021, 12pm
Balloting of applications for IPO	3 December 2021
Commence trading	6 December 2021, 2pm

Even though the IPO is priced in US dollars at US$0.88 per unit, investors applying for it will have to pay in Singapore dollars at S$1.21 per unit (based on the exchange rate of US$1 to S$1.375).

The minimum initial subscription is 1,000 units. Any larger number of units will be in multiples of 100.

How to Apply for Digital Core REIT IPO?

For a start, investors need to have a Central Depository (CDP) account to apply for the IPO.

After which, the investor can apply for the IPO through:

ATMs of DBS, POSB, OCBC or UOB
Internet banking websites of DBS, POSB, OCBC or UOB
Mobile banking apps of DBS, POSB or UOB
Application form part of the IPO prospectus

Digital Core REIT’s Distribution Details

REITs are well-known to be able to dish out distributions to unitholders regularly.

On that note, Digital Core REIT’s prospectus has mentioned that its distributions will be made on a semi-annual basis.

The REIT’s distribution policy is to distribute 100% of its annual distributable income from its listing date to the end of projection year 2023 (which is till 31 December 2023).

After that, Digital Core REIT will distribute at least 90% of its annual distributable income for each financial year.

At its IPO price of US$0.88, Digital Core REIT’s distribution yield is estimated to be 4.75% for the forecast year 2022 (year ending 31 December 2022) and 5% for projection year 2023.

Meanwhile, Digital Core REIT’s price-to-book (P/B) ratio will be 1.05x at its IPO price.

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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer doesn’t own shares in any companies mentioned.

About Sudhan P

It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.

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