Digital Core REIT: Sustained leasing momentum in the US
- 1Q25 DI of USD11.7mn driven by robust leasing momentum, in line with our projections
- Acquisition of 20% stake in KIX12 to drive DPU accretion of more than 1% on an annualised basis
- Portfolio occupancy improved 100bps q/q, +183% increase in rents for leases signed in 1Q25
- Maintain BUY with a slightly lower TP of USD0.70 to account for refurbishment works
Revenues and NPI increased by 46% and 35% q/q. The improvement in portfolio performance has been largely driven by strong backfilling activity at two properties in LA and one in Toronto. At 200 North Nash Street, occupancy increased to 90.4%, while 3015 Winona Avenue has reached an occupancy level of 79.3%. The leasing progress at both properties has been tracking in line with our expectations.
1Q25 DI of USD11.7mn is in line with our FY25 projections. DCREIT’s 1Q25 distributable income (DI) of USD11.7mn represents an increase of c.2.1% q/q and c.9.9% y/y. This performance is in line with our projections and accounts for c.26% of our full-year FY25 estimates. In addition, DCREIT has continued with its unit buyback programme, which will contribute to a DPU accretion of c.0.1% year-to-date (YTD). A total of 1.8mn units were repurchased at an average price of USD0.565 per unit.
Portfolio occupancy improved 100bps q/q to 97.7% in 1Q25. Portfolio occupancy improved by 100bps q/q to 97.7% in 1Q25. This was primarily driven by higher occupancy rates at the two LA properties, as well as improved occupancy at Digital Osaka 2 (KIX11).
During the quarter, new and renewal leases amounting to USD3.0mn in annualised rent were signed. This represents a significant +183% increase over the expiring rents. The majority of leases were secured at the LA assets, highlighting continued demand in that market.
Looking ahead, only c.13% of leases by revenue are due to expire in FY25. Of this, c.9% relates to the lease expiry at the Linton Hall DC. The remaining c.4% stems from properties in Frankfurt and LA. Management remains confident in achieving double-digit positive rental reversions, particularly supported by renewals at the Frankfurt DC.
Gearing remains healthy at 38.0%, with borrowing costs trending down to 3.8%. Gearing increased by 400bps q/q, primarily due to the debt-funded acquisition of a 20% stake in Digital Osaka 3 (KIX12). This acquisition alone increased gearing by c.330 basis points. Despite the higher leverage, the average cost of debt improved by 10bps to 3.8% over the quarter. This was largely attributed to the additional JPY-denominated loans used to finance the KIX12 acquisition, which carries an all-in cost of 1.97%.
Expansion into Osaka to drive >1% accretion to DPU. DCREIT completed the acquisition of a 20% stake in KIX12 from Mitsubishi Corporation on 26 March 2025. The purchase consideration was USD86.7mn (JPY13bn), representing a slight discount of c.0.6% to the property’s valuation. The initial NPI yield is estimated at around 4.6%.
KIX12 is a fully fitted, freehold data centre with an IT load of 19.9MW. Constructed in 2021, the facility is fully occupied and primarily leased to leading global cloud service providers with an average WALE of 7.7 years. Strategically located, KIX12 is part of the same campus and directly connected to KIX11 – another data centre in which DCREIT also holds a 20% stake.
The acquisition was fully funded through new JPY-denominated loans at a fixed interest rate of 1.97%. This acquisition enhances DCREIT’s geographical diversification by increasing its exposure to high-growth markets outside of the US. Notably, Japan's contribution to overall revenue is expected to rise from 7% to 11%. Based on our projections, this acquisition is expected to deliver an accretion of more than 1% to DPU on an annualised basis.
Refurbishment of Linton Hall DC to commence once tenant vacates property on 30 June 2025. DCREIT is set to undertake a major refurbishment of the Linton Hall DC, with the estimated cost ranging between USD30-40mn. The refurbishment is expected to take between six to twelve months to complete, and management remains confident in backfilling the space, supported by strong demand fundamentals in the Northern Virginia market. Upon re-leasing, rents are projected to be 20%-30% higher than current rates, which would significantly enhance income contribution from the asset.
In parallel, management is also progressing with plans to construct an annex building on-site, aiming to capitalise on the additional available IT load. However, the immediate priority remains to backfill the existing facility and restore revenue generation from the main building.
Our views
We have revised our estimates to incorporate the recent acquisition of a 20% stake of KIX12 and have also taken the opportunity to reassess our assumptions for the refurbishment of the Linton Hall DC.
Previously, we had assumed a six-month downtime for the Linton Hall DC during its refurbishment. However, given the scale of the planned works and the need for subsequent tenant fit-outs, we believe it is more prudent to assume a longer downtime. As such, our updated projections now factor in a total of 12 months of downtime – six months in FY25 (July to December) and a further six months in FY26 (January to June). The lack of a pre-commitment for the property would probably be a disappointment currently, but should any leasing be announced prior to June 2026, we believe this would present upside to our revised estimates.
With the additional six-month downtime in FY26, we now expect DCREIT to deliver earnings growth of c.2.0% in that year, a downward revision from our earlier forecast of 10% growth. The earnings impact from the Linton Hall DC vacancy will, however, be partially mitigated by the income contribution from KIX12, as well as the strong backfilling progress at the LA properties. Additionally, we have factored in a modest 10bps improvement in borrowing costs, as interest rates are expected to decline further, providing some relief to financing expenses.
The stronger rebound in earnings is now expected to materialise in FY27, once the Linton Hall DC is fully backfilled and contributes a full year of revenue. We project earnings to rise by a further 8% in that year.
Despite the temporary earnings drag from the Linton Hall refurbishment, we maintain a positive outlook on DCREIT. The portfolio continues to demonstrate strong leasing momentum and healthy rental reversions. Accordingly, we maintain our BUY recommendation. However, we revise down our target price slightly to USD0.70, to reflect the extended downtime at Linton Hall.
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