What You Need to Know About the New Digital Core REIT (SGX:DCRU)

If all of the world’s data are stored in 1 terabyte (TB) thumb drives today, you’ll need 30 billion pieces of thumb drives. And that massive volume of data is set to grow even bigger. According to Statista, by 2025, the world will consumer 181 zettabytes (that’s 7 zeros) of data.

That also means you need six times more than the number of thumb drives to store all these data today.

What we do online uses and creates more data. And all these digital information needs to be managed and store in a physical place.

Data centres house servers — big computers that process and store these data — then lease out these servers to companies that need data storage. Data centres are home to the future of the 181 zettabytes of data to be stored.

Once a landlord owns a high quality data centre, it’s hard for tenants to switch. And the reason is simple. Tenants who rent data centre spaces are typically big, growing and sophisticated companies. They come from various sectors including technology, finance and healthcare.

And customers all need these: data storage and a high connectivity.

Sometimes, these tenants need to have data centres as close to their own customers as possible. That’s why it makes it hard for tenants to switch out of their data centres once they found a suitable one.

Another thing is, one customer might not want to take up the whole data centre and may share. This is called “colocation”. It’s cheaper and also helps the REIT to diversify their tenant base.

What’s more, it’s easier and way cheaper for companies to make use and share data centres than to build their own servers. As more companies outsource their data storage, Digital Core REIT is a key beneficiary.

Digital Core REIT’s Stable Distribution Yield

Enter Digital Core REIT (SGX:DCRU). 

This is a newly launched IPO. It has started trading since 6 Dec 2021, and has a market cap close to US$1 billion.

What’s interesting is all 10 of Digital Core REIT’s data centres are located in the U.S. And that makes it a “pure-play” U.S. data centre Singapore REIT.

Digital Core REIT’s sponsor is an expert in U.S. data centres.

REIT sponsor is someone who has a stake in the REIT. But I’ll come to that later.

In 2022, Digital Core REIT will produce US$105 million of revenues and distributable income of US$53 million. That’s 4.18 U.S. cents of distributable income per unit. At current shares of US$1.15 per unit, it’s a 3.7% dividend yield.

But what’s interesting about data centres is its high tenant retention rate. This gives the dividend yield a lot of stability.

You see, most of Digital Core REIT’s data centres are already fully occupied. And considering the the REIT’s average leases are about six years. And all of its lease agreements allow Digital Core REIT to increase the yearly rent by 1% to 3%.

What’s more, 36% of Digital Core REIT’s rent comes from Fortune 50 Software Companies.

These are some of the top companies that show the best growth prospects — including some of the top customers like IBM, Facebook (Meta Platforms), Oracle, LinkedIn.

Source: Digital Core REIT’s prospectus

This REIT Still Has More Room to Grow

What’s more important here is: even though distribution yield is low, that’s only because its gearing ratio is only at 27%. It still has massive room to borrow more capital to grow its data centres. It can take only another US$600 million of debt before it hits its gearing ratio limit of 50% set by MAS.

Digital Realty REIT the sponsor of Digital Core REIT.

And Digital Realty REIT is one of the biggest developer and operator of over 290 data centres across 24 countries. It serves over 4,00 customers today and was listed on the NYSE since 2004. This makes it the sixth largest U.S. REIT and part of the S&P 500 companies. Today, this major sponsor has more than US$15 billion worth of data centres to be readily injected into Digital Core REIT.

This allows Digital Core REIT to easily grow over the years and become the next data centre powerhouse listed in Singapore.

And I’m not surprised if the distribution yield continues to grow in a big way over the next five to ten years.

What I Think About Digital Core REIT

I think Digital Core REIT is a decent alternative to Keppel DC REIT and Mapletree Industrial REIT. The yield is higher and there’s a much stronger sponsor, Digital Reality REIT. In fact, Digital Realty REIT takes up about 39% stake in Digital Core REIT. And Digital Core REIT has a first priority to buy more assets from Digital Realty REIT.

What’s more important is Digital Core REIT is a resilient play to the COVID pandemic. With the ongoing COVID pandemic and new Omnicron variant, Digital Core REIT should balance up some of the more COVID prone REITs today.

Sometimes investing can be simple.

Willie Keng, CFA

Founder, Dividend Titan

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2 years ago

Thanks for this piece on DigiCore DCRU. Is there any risks that the U.S. Govt increase the taxation on such companies like Company tax etc. Also, being a U.S. Reit, is the dividends subject to any Withholding Tax to be deducted from us as investors in Singapore?

Would love your thoughts, please comment.x
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