A premier global data-centre play

  • Initiate with a BUY, TP of US$1.40, offering a c.18% upside
  • Pure-play data centre, REIT backed by the largest global owner and operator of data centres
  • Full portfolio occupancy to provide stable income and annual rental escalations to provide some organic growth
  • Low initial gearing to pave the way for c.US$250m debt-funded acquisition

Initiate with BUY, TP: US$1.40. We initiate coverage of Digital Core REIT (“DCR”) with a target price of US$1.40. Catalysts baked into our valuations are (i) an assumed US$250m of debt-funded acquisitions in FY22 and (ii) a further assumed US$500m of acquisitions funded by both debt and equity by FY23. These are expected to drive a three-year DPU CAGR of c.7% during FY21-24F and 10-11% above IPO forecasts.

Earnings underpinned by solid fundamentals. With a portfolio of fully occupied data centres with a long WALE of c.6.2 years, this ensures income stability and visibility. In addition to the booming data centre industry, annual rental escalations of c.2% for its portfolio provides for organic growth in earnings.

A pipeline that could make DCR one of the largest S-REITs. With strong commitment from its sponsor, DCR has been granted a Rights of First Refusal (ROFR) to c.US$15bn worth of data centres globally. In addition, the sponsor has a further US$5bn worth of data centre developments that could potentially be made available to DCR when completed.
 

Valuation:

Our target price of US$1.40 is based on DCF with a WACC of 5.3% (risk-free rate of 2.0%). This implies a normalised target yield of 3.6% in the next two years. We have assumed a total of US$750m in acquisitions over the next two years.

Key Risks to Our View:

Key risks to our view would be the slower-than-anticipated acquisition growth and a spike in borrowing costs.