Should You Invest In Digital Core REIT [Fundamental Analysis]

Updated: May 18

In this article, we'll be conducting 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 a high degree of capital preservation ability.

Information Is Accurate Up To May 24

Business Description

Digital Core REIT is an industrial REIT listed in 2021 and owns 12 data centres mainly located in the western hemisphere.

What I Like About Digital Core REIT:

Despite being new and unproven, their reporting and communication are quite detailed.
The tenant contract is designed in a way that enables 100% of utilities to pass through which reduces the volatility of energy prices in the REIT’s operating performances (Figure 11)

What I Do Not Like About Digital Core REIT:

I’ve my suspicion on the intention of the REIT’s sponsor – Digital Realty – one of the 10 largest US-listed REITs. It puzzles me why is there 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 suspect that there may be a conflict of interest between the sponsor and 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)
A high percentage of the DPU is formed by management fees paid in units. This inflates the reported DPU when compared to the DPU from operations (Figure 7)

Updates From Recent Performance (FY23 & 1Q24)

General Comments:

In January 2024, the management closed a series of agreements to put the bankruptcy of the second largest customer and also sold off two Silicon Valley properties at book value.

In February 2024, the management raised another $120mil through private placement (@ $0.625 per share) of which the proceeds, together with the proceeds from the divestments, are used to acquire an incremental 24.9% of Frankfurt facility and an increment of 10% interest in Osaka data centre as well as to pare down floating debt.

Over the quarter, the management had also bought back nearly eight million units at an average price of just under $0.58 ·
Aggregate leverage stands at 35.1% and the weighted average cost of debt stands at 3.9% as of 1Q 2024.

Positive Headwinds:

The cost of borrowing is going to remain stable across FY 2024 and 2025 as there are minimal to no refinancing requirements within the coming 24 months. (Figure 6)

Negative Headwinds:

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Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).

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