Digital Core Reit aims to raise almost US$1b in Singapore IPO

PURE play data centre real estate investment trust (Reit) Digital Core Reit intends to raise total gross proceeds of US$977 million from its initial public offering (IPO) on the Singapore Exchange, including the issuance of the sponsor units, cornerstone units and parent US Reit preference shares.

According to the prospectus lodged with the Monetary Authority of Singapore on Monday (Nov 29), Digital Core Reit's manager will offer more than 267 million units at US$0.88 per unit for subscription as part of an offering which will include a placement tranche and a public offer.

Nearly 253.7 million units will be offered in the placement tranche to international investors outside of the US, while close to 13.4 million units will be offered to retail investors in Singapore.

The public offer will close at noon on Thursday (Dec 2).

In addition, cornerstone investors have each entered into separate subscription agreements at the offering price for a total of nearly 414.8 million units. Among the 26 cornerstone investors are AEW Asia, Affin Hwang Asset Management, AIA Investment Management, AMP Capital Investors, Blackrock, Cohen & Steers Asia, DBS, DWS Investments Australia, FIL Investment Management Hong Kong, Fullerton Fund Management Company, Lion Global Investors, Nikko Asset Management Asia and Value Partners Hong Kong.

Separately, sponsor Digital Realty Trust has agreed to subscribe for over 428.8 million units at the offering price of US$0.88 apiece through a wholly-owned subsidiary. New York Stock Exchange-listed Digital Realty is one of the top 10 largest US-listed Reits and the largest owner and operator of data centre providers in the world.

According to John Stewart, chief executive officer of the manager of Digital Core Reit, the sponsor sees the new Reit as a "perpetual capital source".

"Singapore is certainly forward thinking in terms of not only attracting capital to the market for real estate listings but also in terms of focusing on the digital economy. I believe that the Singapore market has demonstrated a very healthy appetite for and respect for data centres," he said.

"We think this market will be well suited to and has a proven appetite for stabilised core data centres like we're contributing here," he added. "From the perspective of investors in the Reit, we see an opportunity to invest in a stable cash flow stream from a blue chip customer base."

After the completion of the offering, the total number of outstanding units will be nearly 1.13 billion, giving the Reit a theoretical market capitalisation of US$990 million based on the IPO price.

Assuming that the over-allotment option is not exercised, the sponsor will hold 38.1 per cent of units in Digital Core Reit, while the cornerstone investors will hold a combined 36.9 per cent interest.

The Digital Core Reit manager will also draw down on US$350 million of loan facilities on the listing date.

The majority of the funds will go towards paying for the acquisition cost of US$1.3 billion for Digital Core Reit's 90 per cent stake in the initial portfolio of 10 freehold data centres in the US and Canada from its sponsor while the remaining will be used for transaction costs.

The 10 assets in the initial portfolio have a total appraised valuation of US$1.4 billion. Similar to the initial portfolio, the sponsor intends to co-invest in 10 per cent of each of Digital Core Reit's future acquisitions.

The initial portfolio has a total net lettable area (NLA) of 1.2 million square feet, with 4 of the data centres located in the Silicon Valley, another 3 in Northern Virginia, 2 in Los Angeles and 1 in Toronto.

Portfolio occupancy is at 100 per cent, with weighted average lease expiry of the portfolio at 6.2 years based on base rental income for the month of June or 7.7 years by NLA as at end-June.

"We've had a very, very strong track record with these assets of retaining existing customers," said Stewart. "It's very expensive to, what we call in the data centre industry, 'lift and shift' a data centre requirement or to pick up and move. It's prohibitively expensive... (and) also introduces a lot of risk to the (tenant's) business."

"As a result, the (data centre Reit) business tends to have a very strong retention track record," he added.

Nearly all the existing leases by base rental income have built-in annual rental escalations generally ranging from 1 to 3 per cent, with a weighted average of 2 per cent.

While there are "some potential areas for conflicts" with the sponsor, which is also a Reit, the manager of Digital Core Reit said the investment proposition for both Reits are "actually quite different".

The Reit manager explained that the sponsor is looking more at capital appreciation though its material development pipeline and entry into emerging markets, while Digital Core Reit will be focusing on more stabilised assets.

"We're offering different investment merits to investors out there," said Daniel Tith, chief financial officer of the Reit manager. "We appreciate the fact that the investor base here is looking for a stable and growing dividend yield. And that means minimal interruption (with) little to no development at all. Obviously, we're looking to grow the pipeline through accretive acquisitions."

Based on the offer price, Digital Core Reit is expected to have an aggregate leverage of 27 per cent as at the listing date - significantly lower than its peers. The Reit manager said it sees a leverage of 35 to 40 per cent post-IPO as a comfortable level.

"Looking at 35 per cent gearing, we can actually grow our portfolio to acquire an asset of US$160 million in size, which obviously would grow the existing portfolio more than 10 per cent," Tith said. Meanwhile, gearing at 45 per cent would imply debt headroom of US$424 million.

Post-IPO, Digital Core Reit will have right of first refusal to a potential pipeline of over US$15 billion of data centres - both existing and under construction.

The Reit manager has forecast a distribution yield of 4.75 per cent for 2022 and projected a distribution yield of 5 per cent for 2023.

Trading in units of Digital Core Reit will commence at 2 pm on Dec 6.

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