The Bedokian’s (Very Late And Very Short) Review Of Digital Core REIT IPO

By the time you are reading this, you would have left about a few hours to decide on whether to subscribe to the Digital Core REIT IPO, whose application closes at 12:00 PM today (2 Dec 2021).

Several financial bloggers had covered this IPO and their views ranged from good to not-so-good. Summarizing some of the selected good and not-so-good points (which includes mine), here it goes:

 

Why Good?	Why Not-So-Good?
Low gearing (27%)	Subject to withholding taxation risk
All freehold properties	Not-so-new buildings (built between 1972 and 2001, though 5 of the 10 properties had undergone at least one renovation)
100% occupancy	Rental escalation does not keep up with prevailing and projected U.S. inflation rate
Strong sponsor (of data centres)	Top 3 customers provide 78.3% of base rental income (for June 2021)
Data centre a current in-thing

 

The Bedokian’s Take

 

Both sides of the argument seemed reasonable and relevant. My answer on whether to apply for this IPO, as always, is “it depends”. The numbers looked relatively alright to me (low gearing, relatively good WALE, reasonable yield), but the REIT is not well diversified to my preference (78.3% of rental income comes from 3 customers as of the month of June 2021, and 76.2% and 76.9% of forecast year 2022 and projection year 2023 revenues, respectively, are from 4 of the total 10 properties). However, I would say the concentrated risk is mitigated by the fact that the data centres are in the Western Hemisphere (read: tech region), and 7 of them are at the coveted tech locations (4 in Silicon Valley and 3 in Northern Virginia). There is growth potential for this REIT, given that its sponsor is having a lot of data centres in their inventory, the main concern would be the type and quality of data centres to be injected.

 

I may not apply for this, but I would keep this REIT under my watchlist.

 

Reference

 

Digital Core REIT prospectus (29 Nov 2021). https://links.sgx.com/FileOpen/Digital_Core_REIT_Prospectus_(29_Nov_2021).ashx?App=IPO&FileID=6328 (accessed 1 Dec 2021)