Digital Core REIT (DCR) is raising around US$600 million with cornerstone investors taking up 414.78 million units, or US$365 million, a placement of 253.68 million units and 13.35 million units available for retail investors.
The IPO price is 88 US cents and the forecast distribution per unit (DPU) in FY2022 is 4.18 US cents giving a DPU yield of 4.75%. DPU in FY2023 is projected at 4.4 US cents, translating into a projected DPU yield of 5%.
According to John Stewart, CEO of DCR’s manager, some of the cornerstones are investors in DCR’s sponsor, Digital Realty Trust (DLR). DCR is tax efficient with minimum tax leakage through either corporate or witholding tax.
DLR will retain a 10% stake in the IPO portfolio through holdings in a US REIT. DLR will also hold 39% of DCR, the S-REIT. To obtain tax efficiency, the REIT is structured so that tests such as the widely held rule, and the portfolio interest exemption rule are complied with. As DLR is itself a US REIT, there is see-through treatment to the shareholders of DLR. Hence the widely held rule is complied with.
The IPO portfolio comprises 10 data centres, with nine based in the US and one in Canada. The appraised valuation of the portfolio is US$1.44 billion, with forecast net property income for 100% of the portfolio in FY2022 at US$68.86 million, translating into an NPI yield of 4.8%.
Since the REIT is going to own a 90% stake in these assets, the purchase consideration is US$1.296 billion. The market capitalisation at IPO is likely to be US$990 million, making DCR the largest IPO this year.
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All the properties are 100% leased with weighted average lease expiry of 6.2 years. Most lease agreements have built-in rental escalations, and 85% of the leases are triple net leases where customers/ tenants bear the expense of running the data centre.
The aggregate leverage at IPO is 27% and the average cost of debt is 1.1%. All the properties are unencumbered at IPO. Assuming gearing going up to 35%, DCR’s debt headroom is US$160 million, and at 45% gearing debt headroom is around US$424 million.
From January 2022, the regulatory limit on gearing is 45% for REITs with interest coverage ratios (ICR) of below 2.5 times and gearing can be as high 50% if ICR is above 2.5 times.
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“We're starting from a relatively small base. But particularly with the support of our sponsor, we see significant runway for growth,” Stewart says.
“The sponsor has granted us a global right of first refusal (ROFR). The mandate [for DCR] is investing in stabilised income-producing assets, which is defined as data centres that are north of 90% leased, and do not require any material capital expenditures within the next two years. And so when we apply that filter to the sponsor’s total portfolio, we have disclosed in the prospectus an acquisition pipeline north of US$15 billion.”
