DIGITAL CORE REIT (SGX:DCRU)
Digital Core REIT - Quality Growth From Hyperscale Demand & Sizeable Sponsor Pipeline
- With 68.5% of its base rental income derived from hyperscalers, Digital Core REIT (SGX:DCRU) benefits from strong demand for hyperscale data centres expanding at a CAGR of 23% in 2020-24.
- Sponsor Digital Realty has granted Digital Core REIT a global ROFR on its pipeline worth over US$15b. Its ability to scale up is supported by its low aggregate leverage of 27% and competitive cost of debt at 1.0%.
- Digital Core REIT provides a distribution yield of 4.4% for 2022 and trades at P/NAV of 1.20x. Initiate coverage with BUY.
Hyperscale provides hypergrowth.
- Hyperscalers are technology giants, such as Amazon, Facebook, Google, IBM and Microsoft, dominating the cloud services industry. They utilise hyperscale data centres built on a massive scale with sizeable commissioned power of 20- 100MW to support hundreds of millions of users. Demand for hyperscale data centres is projected to grow at a CAGR of 23% in 2020-24, outpacing a CAGR of 15% for the broader North America data centre market. Digital Core REIT is a beneficiary as 68.5% of its base rental income was derived from the hyperscale segment as of Jun 21.
- Enduring customer relationships due to emphasis on reliability. Digital Core REIT had 12 customers, which are Fortune 500 and multinational companies, as of Jun 21. Its top six tenants are sponsor Digital Realty’s longstanding customers of more than 15 years. It benefits from sticky customer relationships with a high tenant retention rate of 95.8%. Tenants are entrenched due to capex incurred and high switching costs.
Able to scale up rapidly due to sizeable sponsor pipeline.
- Digital Realty is the largest global provider of cloud-and carrier-neutral data verticals. They develop infrastructure to support hundreds of millions and even billions of users. According to Synergy Research, there are 24 hyperscalers globally and they account for more than 50% of the cloud service market.
Initiate coverage on Digital Core REIT with BUY.
- Our relative to other S-REITs due to its status as a pure play on data centres and acquisition-led growth with support from Digital Realty. Refer to the attached 15-page report for complete analysis on Digital Core REIT.
- P/NAV at huge discount relative to peers. Digital Core REIT trades at P/NAV of 1.20x, which is a discount compared with other data centre REITs that are trading at an average P/NAV of 1.69x (Keppel DC REIT (SGX:AJBU): 1.96x and Mapletree Industrial Trust (SGX:ME8U): 1.41x).
- See
- Catalysts:
- Organic growth from cash rental escalation of 1-3% (weighted average: 2%).
- Yield-accretive acquisitions tapping on sponsor’s large and growing data centre pipeline.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-12-06
SGX Stock
Analyst Report
1.18
SAME
1.18
