Quality Growth From Hyperscale Demand And Sizeable Sponsor Pipeline

With 68.5% of its base rental income derived from hyperscalers, DCREIT benefits from strong demand for hyperscale data centres expanding at a CAGR of 23% in 2020-24. Sponsor Digital Realty has granted DCREIT 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%. DCREIT provides a distribution yield of
4.4% for 2022 (average for US-listed peers: 2.3%) and trades at P/NAV of 1.20x (KDCREIT: 1.96x and MINT: 1.41x). Initiate coverage with BUY. Target price: US$1.18.

• Digital Core REIT (DCREIT) invests in a diversified and stabilised portfolio of mission-critical data centres. Its initial portfolio comprises 10 freehold data centres concentrated within top-tier markets in the US (North Virginia, Silicon Valley and Los Angeles) and Canada (Toronto) with an appraised valuation of US$1.4b and net rentable square feet (NRSF) of 1.2m.

• 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. DCREIT is a beneficiary as
68.5% of its base rental income was derived from the hyperscale segment as of Jun 21.

• Enduring customer relationships. DCREIT had 12 customers, which are Fortune 500 and multinational companies, as of Jun 21. Its top six tenants are sponsor Digital Realty’s long-standing 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 centres, colocation and interconnection solutions. It has a network of 291 data centres with NRSF of 35.8m sf across 47 metropolitans in 24 countries on six continents. DCREIT is the exclusive S-REIT vehicle of Digital Realty. The sponsor has granted DCREIT a global right of first refusal (ROFR) on its growing data centre pipeline worth over US$15b (existing: US$10b; under construction: US$5b). Its ability to scale up through acquisitions is supported by its low aggregate leverage of 27% and its more competitive cost of debt of 1.0%.

• Our target price for DCREIT of US$1.18 is based on DDM (cost of equity: 5.75%, terminal growth: 2.0%). DCREIT provides a distribution yield of 4.4% for 2022 (average for USlisted peers: 2.3%) and trades at P/NAV of 1.20x (KDCREIT: 1.96x and MINT: 1.41x).