Digital Core REIT, a data center-focused real estate investment trust, IPO-ed in December 2021. Its debut was nothing short of spectacular, as the stock surged 14.8% on its first day of trading, reflecting the surging demand for data center assets back then.
However, the REIT’s journey since then has been marked by challenges. It faced headwinds from the widespread impact of rising interest rates and received a significant blow in February 2023 when one of its key tenants, Cyxtera, suffered a downgrade by Moody’s from B3 to Caa2. These setbacks culminated in Cyxtera filing for bankruptcy protection in June 2023. Check out our previous article to get the full picture.
In brief, the fallout was substantial, considering that Cyxtera accounted for approximately 22.4% of Digital Core REIT’s rental income and represented 26.6% of its total portfolio value.
Consequently, Digital Core REIT’s share price tumbled, its credit rating took a hit due to increased uncertainty, and the potential loomed for reduced distribution per unit and asset value write-downs.
Light at the end of the tunnel?
Several months have passed since then, and Digital Core REIT appears to be on a path to recovery. In the broader market context, we are witnessing a shift in the interest rate landscape.
It appears that the bulk of interest rate hikes are now behind us, signaling a positive outlook for REITs in general, including Digital Core REIT.
Digging deeper into Digital Core REIT’s own progress, there are notable positive developments:
Tenant Recovery
Firstly, investors’ anxieties are easing as more information becomes available about Digital Core REIT’s second-largest tenant, Cyxtera.
Recent reports indicate that Cyxtera has resumed rent payments since July and is progressing toward emerging from the court-supervised chapter 11 bankruptcy restructuring by the fourth quarter of this year.
The fact that Cyxtera reported a substantial 10.7% year-on-year growth in EBITDA for 2023 bodes well for Digital Core REIT’s financial stability and outlook.
Inclusion in FTSE EPRA Nareit Global Developed Index
Apart from that, Digital Core REIT’s recent inclusion into the FTSE EPRA Nareit Global Developed Index, is another positive development for the REIT.
This news is expected to enhance the REIT’s trading liquidity on the Singapore Exchange and increase its visibility among global institutional investors. Other benefits include attracting additional capital and support future growth initiatives.
New Leadership Team
One last positive development is the announcement of a new leadership team, with David Lucey as chairman, Serene Nah as a non-independent director, and Dave Craft as chief financial officer and more.
This slew of leadership changes would ultimately provide the management fresh perspective, which could help drive the next growth phase if executed well.
Collectively, these factors suggest that Digital Core REIT is not only on the path to recovery but also positioning itself for a brighter future.
The natural next question is whether it’s a prudent investment choice.
Comparative Analysis of Data Center REITs
Well, let’s delve into the fundamentals and do a comparative analysis of the Data Center REITs in Singapore:
| Digital Core REIT | Keppel DC REIT | Mapletree Industrial Trust | |
| YTD Performance | +5.45% | +21.23% | +2.21% |
| Top 3 tenants’ share of rental income | 74.8% | 50.8% | 14.5% |
| Portfolio Occupancy | 97% | 98.5% | 93.2% |
| Average lease expiry | 3.9 years | 8.0 years | 3.9 years |
| Aggregate Leverage | 34.2% | 36.3% | 38.2% |
| Weighted Average Debt Tenor | 3.4 years | 3.9 years | 3.7 years |
Among the three Data Center REITs, Keppel DC REIT has demonstrated the most robust recovery after being heavily punished post-pandemic. Undeniably, this could be attributed to its exceptional portfolio occupancy and longer lease expiry, which provide investors with higher stability and confidence.
Digital Core REIT doesn’t seem to be doing that bad either. Its impressive 97% portfolio occupancy rate even surpasses that of Mapletree Industrial Trust, and its low aggregate leverage positions it favorably for future acquisitions when the market conditions align.
However, a significant concern still revolves around Digital Core REIT’s tenant profile. The fact that its top three tenants contribute a substantial 74.8% of its total income raises questions about its stability.
This vulnerability became evident during the recent bankruptcy of Cyxtera where Digital Core REIT was impacted the most due to its high-concentration portfolio.
Valuation of Data Center REITs
| Digital Core REIT | Keppel DC REIT | Mapletree Industrial Trust | |
| TTM Dividend yield | 5.53% | 4.70% | 5.82% |
| Price/Book | 0.70 | 1.57 | 1.19 |
From a valuation perspective, Digital Core REIT stands out as an attractive option due to its appealing dividend yield relative to the other two data center REITs. Additionally, it boasts the advantage of being the most cost-effective option in terms of its price-to-book ratio.
However, it’s important to note that a direct comparison with Keppel DC REIT and Mapletree Industrial Trust may not be entirely fair, given that these two have historically traded at higher P/B ratios, averaging 1.86 and 1.44, respectively, over the past three years.
When we consider these REITs in a comparative context against their respective three-year averages (approximately two years for Digital Core), it becomes evident that all of them are currently trading at a decent valuation (slightly undervalued).
Therefore, the decision on which one to choose should be influenced by other factors such as portfolio diversification and other fundamentals we have talked about above.
Conclusion
Overall, Digital Core REIT appears to be in a recovery phase, buoyed by positive developments in the broader market as well as its own fundamentals. The increasing prominence of artificial intelligence underscores the growing demand for data centers, which aligns favorably with Digital Core REIT’s focus.
When assessing Digital Core REIT against its peers in the Data Center sector, considering factors like fundamentals and valuation, it becomes evident that Digital Core REIT does offer certain value.
That said, the decision to invest in this REIT ultimately hinges on your risk tolerance and willingness to accept a higher concentration risk within your portfolio.