Digital Core REIT IPO: Should Dividend Investors Buy Shares?

December 1, 2021

Singapore dividend investors have a wealth of options when it comes to buying income-generating assets in the “Little Red Dot”.

That’s mainly down to the fact that Singapore is an extremely stable and prosperous place to do business.

As a result, the stocks that are listed here tend to be reliable dividend payers, albeit slower-growing than companies found in other markets throughout Asia.

Among the popular dividend-paying stocks listed here are real estate investment trusts (REITs). They pay out regular income to shareholders that’s generated from rents on physical property.

One of the newest REITs to propose listing shares on the Singapore Exchange (SGX) is Digital Core REIT, a data centre-focused REIT that is part-owned by US-listed data centre REIT giant Digital Realty Trust Inc (NYSE: DLR).

So, should those of us looking to buy shares for dividend income think about buying this REIT IPO that will soon hit the Singapore market?

Rare US-focused data centre play

One of the first things to note about Digital Core REIT is that it will become only the second pure-play data centre REIT listed in Singapore – after Keppel DC REIT (SGX: AJBU).

Furthermore, it will differentiate itself further from Keppel DC in that Digital Core owns only North American data centres, versus Keppel DC which owns data centres primarily in Europe and Asia.

So, how many data centres will it own? Well, it just makes it into double digits – the REIT owns 10 data centres located in four locations; Silicon Valley, Los Angeles, Northern Virginia and Toronto.

With that, the REIT will be well positioned given its presence in four of the top 10 data centre markets in North America (see below).

Source: Digital Core REIT IPO prospectus filing

Only one – the one in Toronto – is outside of the US so the REIT will be focused on riding the tailwinds of the incredible digital transformation that is taking place in the US economy.

Strong portfolio profile

As with any REIT investment, we want to know about the profile of the portfolio. In Digital Core REIT’s case, it does look robust.

The weighted average lease expiry (WALE) is an enviable 6.2 years – giving investors visibility and predictability of income.

Even better, nearly all its existing leases will have annual rental escalations built in of up to 3%, with a weighted average for the 10 data centres of 2%.

The overall portfolio value has been appraised at US$1.4 billion while the portfolio has a 100% occupancy rate as of 30 June 2021.

With the REIT going to market with a gearing ratio of only 27% (well below the 50% ceiling limit set by the MAS), it will have substantial headroom to grow its portfolio (see below).

Source: Digital Core REIT IPO prospectus filing

The REIT projects a yield of just under 4.8% for its Forecast Year 2022 (FY2022) and expects distribution per unit (DPU) growth of over 5% between FY2022 and the following year.

Heavy institutional interest

One thing I noticed in the news surrounding the IPO is just how many institutional investors are taking part in the cornerstone offering.

A total of 26 to be exact, with the likes of AIA Investment Management, BlackRock Inc (NYSE: BLK), and Fullerton Fund Management Company among the giants subscribing to shares.

This suggests that the income generated is highly sought after and likely to be extremely stable. Digital Core REIT’s portfolio characteristics would suggest that’s the case.

In a world where yields are extremely low, the potent combination of predictability of income and portfolio/dividend growth has clearly piqued institutions’ interest.

Take a wait-and-see approach

Overall, it’s a solid offering but dividend investors in Singapore should be in no rush to subscribe to shares.

In fact, only 5% of the 267 million units – priced at US$0.88 apiece – will be open to retail investors in Singapore, with the other 95% being offered in a placement tranche to international investors outside of the US.

However, if you do want to subscribe, the public offer closes at noon tomorrow (Thursday 2 December).

As with any IPO, though, seeing how it performs on its debut and in the months after will give us an idea of the business.

Additionally, hearing from management after its first earnings call – which I would assume should be in late January/early February – will also provide more colour on the portfolio’s fortunes post-listing.

Having said that, with a solid portfolio and offering a unique data centre opportunity for local investors, Digital Core REIT looks set to be an excellent addition to the thriving Singapore REIT market.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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