Analysts from Citi Research, DBS Group Research and UOB Kay Hian have kept their “buy” calls on Digital Core REIT after the REIT’s results for the 2HFY2024 and FY2024 ended Dec 31, 2024, met or exceeded their expectations.
Digital Core REIT declared a distribution per unit (DPU) of 1.80 US cents (2.4 cents) for the 2HFY2024 and an FY2024 DPU of 3.60 cents, but the highlight was the REIT’s good set of operating metrics.
During the year, the REIT signed new and renewal leases representing US$74 million of annualised rental revenue, which brought their year-end occupancy to 97%, unchanged y-o-y. Digital Core REIT’s weighted average lease expiry (WALE) increased by two years y-o-y to 4.8 years as at Dec 31, 2024.
Digital Core REIT’s 2HFY2024 results, which surpassed Citi analyst Brandon Lee’s expectations, showcased the portfolio’s “under-rentedness” amid continued strength in supply-demand/rental growth dynamics of the markets it is operating in.
“[This is] evidenced by [a] 7% expansion in AUM (on spot rental growth of 20% despite discount rate expansion) and solid portfolio occupancy,” Lee notes. Digital Core REIT’s AUM, or assets under management, stood at US$1.6 billion based on its portfolio valuation at share at Dec 31, 2024.
In his Feb 12 flash note, Lee estimates that FY2024 valuations rose by 7% y-o-y on a same-store basis in US dollar (USD) terms, while the expansion was led by Frankfurt (15%), North America (12%) and Osaka (8%) in local currency terms. Within North America, the analyst believes the growth is led by North Virginia, Los Angeles and Silicon Valley, offset by a dip in its Toronto portfolio.
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“The valuation gain was largely driven by improved market rents (+20%), which more than offset 20 basis points (bps) expansion in discount rate. As a result, revaluation gain of US$251.6 million was recognized, which led to [a] net asset value (NAV) per share expansion of 18% y-o-y to 79 US cents,” Lee writes.
While the REIT did not provide any updates on the Linton Hall Road vacancy, Lee sees that the DPU gap from the property has been “significantly filled” by improved occupancies at three assets and by the 15.1% stake acquisition of the Frankfurt facility and debt re-cast.
Year-to-date (ytd), Digital Core REIT has underperformed the Singapore REITs (S-REITs) sector with the REIT down by 11% compared to the sector’s 1% dip due to uncertainty over Linton Hall Road. However, Lee believes that the leasing risk is more than priced in at the REIT’s current valuations of 0.7 times P/B and FY2025 yield of 7.3%. The analyst likes the REIT for its DPU-accretive acquisitions, sustained share buybacks and clarity provided on the potential redevelopment of a new data centre on Linton Hall’s excess land.
On DeepSeek, Lee sees limited impact, with Digital Core REIT citing that artificial intelligence (AI) contributes less than 10% of its total data centre demand landscape currently. The rest of the demand is mainly from enterprise and cloud.
“Technological advancement will keep happening, but given Digital Core REIT’s and its sponsor’s large customer base, they can ascertain where and how AI development will happen, which puts them in a good position to capitalize on it using their ecosystem. Since the onset of DeepSeek, they have not seen any breaks in customer demands,” Lee notes in a separate flash note on Feb 13.
The analyst has kept his target price at 76 US cents.
DBS analysts Dale Lai and Derek Tan also like Digital Core REIT after its FY2024 DPU stood in line with their full-year estimates. They also note that the REIT filled most of its portfolio vacancies at “significantly higher” rents and that its portfolio revaluation was up by 13% driven by a 20% growth in market rents.
They add that the REIT’s recent data centre acquisitions in Frankfurt and Osaka are likely to drive earnings.
“Digital Core REIT also has other pipeline assets from its sponsor, which will further drive earnings. The large pipeline of assets from its sponsor will enable Digital Core REIT to continue acquiring accretive data centre assets,” Lai and Tan write in their Feb 13 report.
The REIT’s yield of around 6.5% is deemed to be attractive for a pure-play data centre REIT, they add.
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Lai and Tan have kept their target price unchanged at 72 US cents.
Finally, UOB Kay Hian analyst Jonathan Koh has lowered his target price to 88 US cents, which is still the highest among the analysts here. Koh’s previous target price was at 93 US cents.
In his Feb 14 report, the analyst lauded Digital Core REIT’s 2HFY2024 results, calling it “good works that withstood the test of time”.
“With many embedded renewal options already exercised, management expects the positive rental reversion to improve to the double digits in FY2025. It recognised a sizeable revaluation gain of US$251.6 million,” Koh writes.
The analyst has also trimmed his FY2026 and FY2027 DPU forecasts by 3% after factoring in an additional capital expenditure (capex) of US$30 million to upgrade the electrical system of the data centre at Linton Hall.
Based on his estimates, Digital Core REIT has an FY2025 distribution yield of 6.7%.
Units in Digital Core REIT closed 2 US cents higher or 3.74% up at 55.5 US cents on Feb 14.
