Digital Core REIT: Organic growth to bridge the gap at Linton Hall
Steady DPU, in line with our projections. DCREIT reported 1HFY25 DPU of 1.80 UScts, in line with consensus and our estimates. While flat y/y, DPU was underpinned by revenue growth from its expanded stake in its Frankfurt facility and the recent acquisition of a stake in a second Osaka data centre, partially offset by higher property and trust expenses.
Revenues grew by 84.2% y/y to USD 88.9mn, lifted by the expanded stake in Frankfurt (now 65%) and new income stream from Osaka KIX12 (20% stake), acquired in March 2025. However, property expenses surged over 100% y/y, with utilities, maintenance and repairs, and other expenses up markedly across the portfolio. This compressed margins, even as NPI grew 52.2% y/y to USD 46.3mn. We understand that there were some one-off property expenses for integration costs and loss allowances that amounted to c.USD1.5mn.
Portfolio occupancy driven by healthy demand in LA. Portfolio occupancy improved 0.3ppt q/q to 98.0%. This was entirely driven by the leasing at 3015 Winona Avenue (LA) which brought its occupancy up from 79.3% to 84.0% q/q.
All assets across Northern Virginia, Silicon Valley, and Toronto maintained full occupancy. The Osaka portfolio remained resilient at 97.6%, with the only vacancies at Digital Osaka 2. The overall WALE remained healthy at 4.5 years, offering income stability.
That said, the lease at Linton Hall (Northern Virginia) expired on 30 June 2025 and the tenant vacated in July. This has already been previously highlighted, and DCREIT will commence AEIs at the property estimated to cost between USD30mn – 40mn.
Apart from the vacating at Linton Hall, there will be minimal lease expiries for the rest of FY25, with only c.3% of leases (on an annualised rent basis) due in 2H25.
Improvement works at Linton Hall DC expected to take up to 15 months. DCREIT shared that the improvement works at Linton Hall is now expected to take between 12-15 months, slightly longer than previous guidance of a downtime of up to 12 months. We understand that delays in supply chain and the procurement of equipment have led to the slight extension in AEI period. In addition, the fit-out period required for a 10MW facility could take a further three months upon the completion of the improvement works.
Despite the persistently tight supply of DCs in the Northern Virginia market (vacancy rates of only c.0.4%), we also understand that prospective tenants will likely only commit to a lease when the asset is closer to its “Ready For Occupancy” status. This is typically around six months before all renovation and improvement works are completed.
Average cost of debt continues to improve. DCREIT’s gearing inched up marginally by 3bps q/q to 38.3% in 2Q25, but borrowing costs continue to improve. Average cost of debt in 2Q25 improved 20bps q/q to 3.4%, on the back of a similar 20bps improvement in the prior quarter. Around 85% of borrowings remain on fixed rates, while the remaining 15% are floating rate loans benefitting for lower interest rates.
There are no refinancing requirement until FY27, and ongoing savings in financing costs could provide upside to our estimates.
Our views
Despite vacating the Linton Hall DC, the overall portfolio continues to demonstrate resilience. Strong performance at several other assets, namely the Frankfurt, Toronto, and Los Angeles DCs, along with the acquisition of a 20% stake in Digital Osaka 3, and savings in financing costs, are expected to offset most of the income loss stemming from the Linton Hall vacancy.
The downtime at Linton Hall for AEI works has now been extended to 12–15 months, compared to the previously anticipated 12 months. While this delay represents a slight setback, the backfilling of other vacancies across the portfolio, coupled with lower debt costs, came as a positive surprise relative to our earlier projections. Previously, we had factored in six months of income contribution from the Linton Hall DC in FY26. In light of the revised timeline, we adjusted our estimates to reflect a further six months of downtime, with income contribution now expected to resume only in FY27. We also revised our assumptions to incorporate stronger-than-anticipated occupancy across the rest of the portfolio, as well as additional financing cost savings.
Management has indicated that share buybacks will be paused in the interim to preserve debt headroom for the ongoing asset enhancement initiatives at Linton Hall. Share buybacks conducted in 1H25 resulted in a modest c.0.1% accretion to DPU. Nonetheless, we now expect that organic growth from the rest of the portfolio will be sufficient to sustain earnings, even as Linton Hall remains offline for the next 18 months. If income contribution resumes before the end of FY26, there will be upside to our revised estimates.
We maintain our BUY recommendation, supported by the attractive forward yields on offer. Our TP is lowered slightly to USD 0.68, down from USD 0.70 previously, reflecting the modest downward revision in our FY26F earnings.
Interim Income Statement (USDmn)
FY Dec | 1H2024 | 2H2024 | 1H2025 | % chg y/y | % chg h/h |
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Gross revenue | 48.3 | 54.0 | 88.9 | 84.2 | 64.6 |
Property expenses | (17.8) | (22.6) | (42.6) | 138.8 | 88.4 |
Net Property Income | 30.4 | 31.4 | 46.3 | 52.2 | 47.4 |
Other Operating expenses | (3.2) | 1.75 | (7.9) | 146.1 | (553.3) |
Other Non Opg (Exp)/Inc | 0.0 | 0.0 | 0.0 | - | - |
Associates & JV Inc | 3.96 | 12.6 | 2.85 | (27.9) | (77.4) |
Net Interest (Exp)/Inc | (5.9) | (8.2) | (14.4) | (145.2) | (76.6) |
Exceptional Gain/(Loss) | 2.00 | (11.1) | (0.4) | nm | nm |
Net Income | 27.3 | 26.6 | 26.4 | (3.2) | (0.5) |
Tax | (6.0) | (34.1) | (7.6) | 26.8 | (77.8) |
Minority Interest | (2.7) | (57.4) | (6.8) | (150.8) | (88.1) |
Net Income after Tax | 18.6 | (64.9) | 12.1 | (35.2) | nm |
Total Return | 18.6 | 187 | 12.1 | (35.2) | (93.5) |
Non-tax deductible Items | 3.96 | (163) | 11.3 | 185.6 | nm |
Net Inc available for Dist. | 22.6 | 23.4 | 23.4 | 3.5 | (0.1) |
Ratio (%) |
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Net Prop Inc Margin | 63.0 | 58.1 | 52.1 |
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Dist. Payout Ratio | 103.9 | 103.1 | 102.2 |
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Source of all data: Company, DBS
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