Revenue is up 9.8% at US$54 million net property income grows 12.6% to US$31.4 million

 

DIGITAL Core Real Estate Investment Trust : DCRU +0.98% (Reit) posted a distribution per unit (DPU) of US$0.018 for the six months ended Dec 31, 2024, up 1.1 per cent from the year-ago period.

 

The data centre-focused Reit&rsquo s revenue for the half-year was up 9.8 per cent year on year at US$54 million its net property income (NPI) rose 12.6 per cent to US$31.4 million.

 

Distributable income to unitholders grew 17 per cent to US$23.4 million over the same period.

 

The Reit manager on Wednesday (Feb 12) said the growth in revenue came largely from straight-line rent written off due to a customer bankruptcy in H2 2023.

 

Cyxtera Technologies, a global co-location and interconnection provider, filed for bankruptcy protection in June 2023. To resolve this, Digital Core Reit entered an agreement with Brookfield Infrastructure Partners to divest some of its Silicon Valley assets for US$160 million.

 

The decrease in rental income from the divestment was offset by higher co-location income from two of the Reit&rsquo s Los Angeles assets &ndash 3015 Winona and 200 North Nash &ndash as well as additional income from its Frankfurt facility, which became a subsidiary in December 2024.

 

Finance income grew 66.2 per cent to US$5 million, from US$3 million in H2 2023, due partly to higher fixed deposits placed with banks.

 

Net fair-value gain in investment properties was US$251.6 million, reversing a loss of US$139.2 in the prior corresponding period. This was attributed to the Reit&rsquo s North American portfolio notching an 11 per cent gain of around US$135.7 million, on the back of positive market fundamentals and a combination of new and extended lease executions.

 

For the full year, Digital Core Reit posted a 2.7 per cent fall in DPU to US$0.036. FY2024 revenue was down 0.3 per cent at US$102.3 million, while NPI declined 1.9 per cent to US$61.8 million.

 

As at Dec 31, the trust had US$1.6 billion in assets under management, mostly in core data centre markets across the US, Canada, Germany and Japan.

 

New and renewal leases represented US$74 million of annualised rental revenue, while the cash rental rate reversion on renewal leases was 4.3 per cent.

 

Portfolio occupancy was 96.7 per cent, with weighted average lease expiration at 4.8 years.

Their maturity dates have been extended by about three years

 

PURE-PLAY data centre real estate investment trust (Reit) Digital Core Reit : DCRU +5.17%has recast US$716 million of loan facilities which will be used to refinance its existing US$703 million term loan and multicurrency revolving credit loan facilities.

 

The recast loan facilities will also be used for working capital and other general corporate purposes, the Reit manager announced on Wednesday (Oct 9).

 

The maturity dates of the loan facilities have been extended by about three years relative to existing maturity dates.

 

The facilities comprise a US$363 million senior unsecured multicurrency term loan facility maturing in 2030, and a 70 million euro (S$100.2 million) senior unsecured term loan facility that matures in 2029.

 

They also include a US$275 million senior unsecured revolving multicurrency loan facility, which matures in 2029 and has two six-month extension options.

 

This was upsized by US$75 million from US$200 million and structured for greater flexibility for the Reit to borrow in currency denominations of US dollars, yen, euros, Canadian dollars, Singapore dollars and sterling.

 

Chief executive officer of the Reit manager John Stewart said: &ldquo The refinancing will provide us increased financial flexibility as we continue to prudently execute accretive data centre investments, expand our asset base, and enhance our geographic and customer diversification.&rdquo

It intends to fund the total acquisition cost with either borrowings or both equity and borrowings on its multi-currency credit facilities

 

DIGITAL Core Reit : DCRU +0.85% has proposed to raise its stake in a data centre in Germany by 0.2 to 40 per cent, said the real estate investment trust&rsquo s (Reit) manager on Monday (Sep 9).

 

It would own between 50.1 and 89.9 per cent if the latest proposed acquisition from a wholly owned subsidiary of the sponsor goes through.

 

Digital Germany Holding, the wholly owned subsidiary of the sponsor, will hold the remaining stakes in the data centre.

 

While the actual amount being acquired has not been disclosed, the manager said it expects to purchase an interest of about 10 per cent.

 

At this acquisition amount, the deal is expected to be about 1.7 per cent accretive to the Reit&rsquo s annual distribution per unit, on a pro forma basis.

 

This is assuming the proposed acquisition and new units were issued on Jan 1, 2023, and the Reit held an interest of between 50.1 and 89.9 per cent in the facility through to end-December.

 

Earlier this year, Digital Core Reit launched a private placement to raise gross proceeds of US$120 million, in part to finance its purchase of an additional stake in the Frankfurt facility.

 

If the latest proposed deal at the expected purchase price was completed and new units were issued on Dec 31, 2023, its net asset value per unit would have risen to US$0.72 from US$0.69.

 

Acquiring an additional 10 per cent interest in the facility, which is valued at 470 million euros (S$678. 3 million), will cost the Reit some 47 million euros or S$67.8 million, excluding acquisition fee and professional expenses.

 

The manager of the pure-play data centre Reit intends to fund the total acquisition cost with either borrowings or both equity and borrowings on its multi-currency credit facilities.

 

Assuming the purchase and new units were issued at end-December, the Reit&rsquo s aggregate leverage would have increased to 35.8 per cent from 34.5 per cent.

 

The acquisition will improve overall portfolio credit quality, maintaining the total annualised rent contribution from investment-grade customers from 84.1 per cent as at end-June, to between 84.1 and 84.3 per cent pro forma, said the manager.

 

It will reduce the total annualised rent contribution from North America from 65.8 per cent as at end-June to between 54.3 and 65.8 per cent pro forma, thus enhancing geographical diversification for the Reit, it added.

 

The data centre has 449,546 rentable square feet of space with an occupancy ratio of 98.5 per cent and features tenants who are a &ldquo roster of blue-chip customers, each with numerous deployments across the sponsor&rsquo s global platform&rdquo , said the Reit manager.

 

Digital Realty Trust is the Reit&rsquo s sponsor.

 

The weighted average remaining lease expiry is about 5.8 years based on annualised rent as at Jun 30. Meanwhile, the lease agreements allow for the pass-through of utilities expenses, providing additional insulation against rising energy costs.

 

Currently, Digital Core Reit holds a 49.9 per cent interest in the Frankfurt facility. It had bought a 25 per cent interest in the data centre in December 2022, and acquired another 24.9 per cent interest in April this year.

As at Aug 29, Digital Realty&rsquo s share price is up 11.1% this year, and 14.7% over a one-year period. In contrast, Digital Core REIT (DC REIT) is down 7.0% this year, but up 12.2% over a one-year period. 

 

The divergence in share price between DC REIT and its sponsor, Digital Realty, this year suggests that DC REIT&rsquo s strengths have yet to be fully reflected in its price performance as both REITs are experiencing rising demand outpacing supply, according to John Stewart, CEO of DC REIT&rsquo s manager. 

 

&ldquo I don&rsquo t believe the strength of the underlying business has been reflected in the Singapore REIT&rsquo s valuations,&rdquo says Stewart. &ldquo Our portfolio is a subset of Digital Realty&rsquo s. We are pretty similar in geography, in the US, in Europe and Asia Pacific (APAC). They are globally diverse. We are smaller and less diversified. But still, there shouldn&rsquo t be a 250 basis-point divergence in the performance.&rdquo  

 

The difference between sponsor Digital Realty and DC REIT is Digital Realty&rsquo s ability to build, operate and own data centres, enabling it to reap higher returns, but for higher risk. As an internalised US REIT, Digital Realty can have a more flexible strategy than an S-REIT. Under Singapore&rsquo s external manager structure, DC REIT owns a diversified portfolio of stabilised properties and collects rent income, which, after costs, is distributed to unitholders. While Singapore-listed REITs can take on some development risk, this is usually limited to around 10% of the REIT&rsquo s deposited properties. 

 

Strengthening portfolio with strategic positioning

 

DC REIT owns 10 data centres, of which eight are in North America, carved out of Digital Realty&rsquo s portfolio at the outset of DC REIT&rsquo s IPO in 2021. The data centres are stabilised assets in top-tier core markets, providing quality and stable cash flows. Notably, Northern Virginia &mdash the world&rsquo s largest and most densely utilised data centre market&mdash hosts three of these facilities, contributing 39% of the portfolio&rsquo s value and 30% of its rental income. 

 

Since its IPO, DC REIT has expanded its footprint with two key acquisitions in Frankfurt and Osaka, further diversifying its portfolio. 

 

DC REIT acquired an initial 25% of the Frankfurt data centre from Digital Realty in December 2022, and a further 24.9% in April this year, taking its stake to 49.9%. Similarly, in Osaka, the REIT&rsquo s stake doubled from 10% in November 2023 to 20% in April this year. 

 

The Frankfurt and Osaka date centres were developed by Digital Realty within the last five years. &ldquo They&rsquo re absolutely state of the art. They&rsquo re almost brand new they&rsquo re very certainly first generation and very recently completed,&rdquo Stewart says. 

 

Proactive lease management boosts accretion

 

When acquiring the Frankfurt data centre, in 2022, the accretion to distributions per unit (DPU) was 2%. That has since improved. &ldquo In Frankfurt, we signed several new leases during the second quarter, generating 630 basis points of positive net absorption, and leasing up substantially all the remaining vacancy on the Frankfurt campus,&rdquo Stewart says in prepared remarks during the REIT&rsquo s 1HFY2024 results briefing. 

 

In DC REIT&rsquo s 1HFY2024 results, Stewart also said that two anchor customers in Frankfurt had renewed lease agreements for five years of additional term at a positive 2% cash rental reversion. A third customer terminated its lease due to bankruptcy proceedings. 

 

However, Stewart says the REIT has managed to retain all the end-user customers, &ldquo significantly outperforming our underwriting&rdquo .   As a result of the REIT manager&rsquo s pro-active lease management, both the Osaka and Frankfurt facilities have higher occupancies than when DC REIT took initial stakes in them. &ldquo I think the level of accretion that we&rsquo re able to deliver was pretty attractive,&rdquo Stewart says of the facilities&rsquo performance. 

 

Building on the achievements in Frankfurt, Stewart is optimistic about replicating this success in Los Angeles, where the REIT is &ldquo in the process of taking over operations from the former co-location provider&rdquo to direct agreements with the end-user customers.

 

&ldquo In Los Angeles, we won&rsquo t take over operations until Oct 1. We are actively signing direct agreements with the end-user customers in both LA properties and enjoying solid momentum to date,&rdquo he says, adding: &ldquo We still have some wood to chop.&rdquo  

 

Data centre hotspots: Northern Virginia and Singapore 

 

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Northern Virginia, DC REIT&rsquo s largest market, holds the title of the world&rsquo s largest data centre market, and one of the tightest in terms of capacity utilisation. Vacant capacity is around 0.6%, placing its utilisation rate at more than 99%.   DC REIT&rsquo s facilities are fully occupied in Northern Virginia. 

 

Interestingly, Singapore, despite being an expensive market to build and own data centres, has a vacancy rate of around 1%, indicating almost no spare capacity. Digital Realty owns three data centres here.  

 

Notably, connectivity stands out as a magnet for data centre users in both places. 

 

Singapore is strategically important due to its status as Asia&rsquo s premier financial hub and its geographical location as a connectivity hub linking Southeast Asia to the global network through 26 subsea cables and three landing sites. 

 

In Northern Virginia, the proximity to Washington, DC, is significant as the latter is home to the US government, the Federal Reserve, the US Treasury, the FBI and the US Navy where the internet started.

 

&ldquo The legacy infrastructure for the internet is in Northern Virginia, and that&rsquo s important in terms of customer demand. Customers like to be close to each other so that they can exchange traffic securely. The closer you are, the less you need to go to a public internet,&rdquo Stewart explains. 

 

Factors that make a location attractive to data centre providers include ease of doing business, reasonable entitlement approval processes, respect for property rights and the rule of law, accommodative local utility providers, low natural disaster prone areas, and a well-regulated tax regime. 

 

Other important factors are access to fibre, broadband penetration, proximity to airports and a location for subsea cable landings. These attributes make DC REIT&rsquo s newest market, Osaka, attractive as it is situated at the opposite end of the Pacific Ocean to the US West Coast. 

 

&ldquo A data centre user wants to get data to the end-user, so [the data centre] needs to be fast, and secure, in a geopolitically stable location, where the redundancy of the network is minimal,&rdquo Stewart says. He adds that cost is also a major consideration. Taxes including sales tax are also important considerations. 

 

&ldquo In data centres, those [graphics processing units] cost tens of millions of dollars. If you have a sales tax, it&rsquo s a significant cost to the user. Some of the most attractive markets have a business-friendly environment with a low risk of natural disasters and a stable utility grid,&rdquo Stewart says. 

 

Following customers to drive accretive growth

 

&ldquo Japan is a large developed economy, with a stable government. Our philosophy is basically that we follow our customers, why they find a particular data centre market attractive, and once there&rsquo s a critical mass of customer demand in a given market, we are a fast follower,&rdquo Stewart says. 

 

Stewart notes that Japan&rsquo s low interest rates and lower local cost of debt compared to the US, Europe, and Singapore have enabled DC REIT to generate attractive accretion there. 

 

Similarly, the European Central Bank has started an easing cycle for its interest rates. &ldquo Our initial investments post-IPO had been outside the US, where we were able to generate attractive DPU accretion, in addition to the utilisation rate in Frankfurt of 91% initially,&rdquo Stewart says. The Frankfurt facility&rsquo s utilisation rate is 98.5% as at June 30. &ldquo It&rsquo s done much better than when we acquired it because we have been able to lease out that vacant capacity,&rdquo Stewart says. 

 

The main trigger for investment interest in DC REIT to revive is in the hands of the Federal Reserve, which economists believe is on the cusp of a rate-easing cycle. Interest rates impact REITs in the three main ways: the trading price because of the yield spread relative to the risk-free rate and cost of capital interest expense which affects DPU directly and capital values which are indirectly affected by policy rates. 

 

&ldquo When interest rates begin to come down, I&rsquo m hopeful that the Singapore REIT will become more attractive. Lower interest rates lower cost of capital and make investments more accretive,&rdquo Stewart says, referring to tighter DPU yields and lower cost of debt. 

 

DC REIT would also be well-positioned to capitalise on inorganic growth opportunities once its unit price rises and DPU yield narrows.

 

&ldquo The market hasn&rsquo t really afforded us an opportunity to capitalise on our sponsor&rsquo s US$15 billion [$19.5 billion] pipeline. We are optimistic that once the tightening cycle is over, and we see more of a rotation into REITs, we would land in a virtuous cycle where we are able to issue equity for an acquisition that would fund external growth,&rdquo Stewart says.   

On Aug 5, Cohen & Steers Capital Management purchased 3,640,500 units in Digital Core Reit : DCRU -1.74%, which increased its deemed interest in the Reit from 7.87 per cent to 8.14 per cent. The average price paid was US$0.58 per unit.

 

This follows Cohen & Steers Capital Management&rsquo s increase in its deemed interest in Digital Core Reit to above the 5 per cent substantial shareholder threshold back on Feb 1, then above the 6 per cent threshold on Feb 14. Based on the filings, that interest then oscillated around 7 per cent between late February and early July.

 

For its H1 FY24 (ended Jun 30), Digital Core Reit reported that its gross revenue on a same-store basis saw a slight decline of 0.6 per cent from H1 FY23, to US$48.2 million.

 

Note the same-store basis excludes the contributions from the 2401 Walsh Avenue and 2403 Walsh Avenue properties that were divested in January 2024.

 

Property expenses rose marginally by 0.3 per cent to US$17.5 million, primarily because of higher property taxes and other expenses, mitigated by reduced utilities costs.

 

Consequently, net property income on a same store basis fell by 1.1 per cent to US$30.6 million. Excluding straight-line rent effects, H1 FY24 cash net property income was up by 1.3 per cent from H1 FY23 to US$30.3 million.

 

In March 2024, Digital Core Reit completed the purchase of an additional 10 per cent stake in an Osaka data centre from Mitsubishi Corporation for about 7.7 billion yen (S$69.6 million), securing a 1 per cent discount on the appraised value.

 

The following month, Digital Core Reit acquired a further 24.9 per cent share in its Frankfurt facility from Digital Realty for 117 million euros (S$169.1 million), at a 6 per cent discount to the appraised value.

 

The manager noted that both transactions enhanced Digital Core Reit&rsquo s portfolio quality and improved geographic diversification as well as customer credit quality.

 

The manager also noted that Digital Core Reit repurchased a total of 14.6 million units at an average price of US$0.57 in the first half of the year that were held as treasury units and were subsequently cancelled.

 

The manager added that the average repurchase price was nearly a 15 per cent discount to net asset value, resulting in a 100 basis points increase in distribution per unit accretion, while adding less than 60 basis points to leverage.

 

DIGITAL Core Reit : DCRU +2.52% (real estate investment trust) has agreed to raise its stake in a data centre in Germany by 24.9 per cent to 49.9 per cent.

 

However, the proposed 117 million euro (S$170.7 million) interested-person transaction requires unitholders&rsquo approval.

 

Digital Core Reit Management, the manager of the pure-play data centre real estate investment trust, said in a regulatory filing on Wednesday (Mar 6) that raising the stake in the freehold data centre in Frankfurt is expected to be approximately 3.2 per cent accretive to the annual distribution per unit.

 

The manager intends to fund the total acquisition cost with proceeds from the sale of the Silicon Valley properties and a portion of the proceeds from the private placement in February. At the time, the manager launched a private placement of new units at US$0.625 apiece to institutional, accredited and other investors, raising US$117 million in net proceeds.

 

The acquisition will improve overall portfolio credit quality, increasing the total annualised rent contribution from investment-grade customers from 78 per cent as at 2023 to 87 per cent pro forma for the transaction, said the Reit manager.

 

It will reduce the total annualised rent contribution from North America from 82 per cent as at 2023 to 71 per cent pro forma for the transaction, thus enhancing geographical diversification for the Reit, it added.

 

The data centre has 449,546 rentable square feet of space with an occupancy ratio of 92 per cent and features tenants who are &ldquo a roster of blue-chip customers, each with numerous deployments across the sponsor&rsquo s global platform&rdquo , said the Reit manager.

 

Digital Realty Trust is the Reit&rsquo s sponsor.

 

The lease agreements allow for the pass-through of utilities expenses &ndash providing additional insulation against rising energy costs &ndash while the weighted average remaining lease expiry is approximately 2.7 years based on annualised rent as at Dec 31, 2023.

 

Digital Core Reit bought a 25 per cent interest in the facility in December 2022, and would own 49.9 per cent if the proposed acquisition of the 24.9 per cent stake from a wholly owned subsidiary of the sponsor is approved at an extraordinary general meeting to be convened.

 

Digital Germany Holding, the wholly owned subsidiary of the sponsor, will hold the remaining 50.1 per cent of stakes in the data centre.

On Feb 1, Cohen & Steers Capital Management also increased its deemed interest in (DCReit) to above the 5 per cent substantial shareholder threshold. The 825,000 units in DCReit were acquired at an average price of US$0.646 per unit. The filing noted that neither Cohen & Steers nor any of its affiliates is the registered holder of any shares of DCReit.

 

Also on Feb 1, DCReit Management reported that DCReit turned a pivotal corner in late 2023, reaching agreements to resolve a large customer bankruptcy and preserving the flexibility of its balance sheet with proceeds from asset sales at attractive valuations. Its distributable income to unitholders for FY23 (ended Dec 31) declined 7.3 per cent to US$41.5 million.

 

The US$3.70 distribution per unit in FY23 was also down 7 per cent from FY22 and represented an annualised distribution yield of 5.7 per cent, based on the closing price of US$0.645. DCReit has also repurchased 6,485,700 units in the current buyback mandate after buying back 11,009,100 units on the mandate.

 

The manager has noted that this demonstrates its prioritisation of value creation over AUM (assets under management) growth, with the close to seven million units repurchased in 2023, at an average price of just under US$0.50 and a 26 per cent discount to net asset value.

 

Looking forward, DCReit Management CEO John Stewart highlighted that the interest rate tightening cycle appears to be levelling off, while data centre transaction cap rates have begun to edge up, significantly narrowing the gap between public and private market valuations and putting DCReit in an &ldquo excellent position to capitalise on favourable fundamentals and its industry-leading acquisition pipeline in 2024&rdquo .

 

On Feb 7, DCReit Management also proposed a private placement to raise gross proceeds of no less than US$100 million, at an issue price of between US$0.60 and US$0.6250 per new unit.