Digital Realty (NYSE: DLR) released its Preliminary Prospectus, announcing its intention to raise gross proceeds of $977m USD through the initial public offering (IPO), on the Singapore Exchange (SGX), of a newly created Singapore REIT (S-REIT) focused on data centers, called Digital Core REIT. Incorporating drawn debt, Digital Core REIT will have an enterprise value of $1.34bn USD upon completion of its IPO.
Digital Core REIT will own and operate a portfolio of stabilized income-producing data centers located in the United States and Canada. Specifically, the REIT’s initial portfolio will comprise 10 freehold data centers, which are 100% leased, within the markets of Northern Virginia, Silicon Valley, Los Angeles, and Toronto (Canada). Overall, Digital Core REIT’s portfolio will comprise 60+ megawatts of critical IT load across 1.2 million net rentable square feet (NRSF).
In terms of customers, Digital Core REIT’s portfolio is primarily leased to Microsoft, Cyxtera, Facebook, IBM, Sungard Availability Services, and Amazon Web Services (AWS). Notably, through Digital Core REIT, Digital Realty is again divesting itself of exposure to Cyxtera (a non-investment grade tenant), which it recently reduced exposure to via the sale of its Prudential data center joint venture.
Capital Raise and Unitholders – Digital Core REIT
Digital Core REIT expects to raise gross proceeds of $977m USD, through the issuance of 1.11 billion units at a price of $0.88 per unit. As shown below, Digital Realty will be the largest unitholder of Digital Core REIT with a $390m USD or 39.4% ownership stake, assuming the overallotment option is not exercised. In turn, the remaining $600m USD of gross proceeds, representing a 60.6% ownership interest, will be raised from a combination of cornerstone investors and public & institutional investors.
| Investors | Units | Ownership | Units (Over) | Ownership (Over) |
| Digital Realty | 428.8 | 38.1% | 375.4 | 33.3% |
| Manager (Digital Realty) | 14.7 | 1.3% | 14.7 | 1.3% |
| Cornerstone | 414.8 | 36.9% | 414.8 | 36.9% |
| Public and Institutional | 267.0 | 23.7% | 320.4 | 28.5% |
| Total | 1,125.4 | 100% | 1,125.4 | 100% |
| Digital Realty – Total | 443.5 | 39.4% | 390.1 | 34.6% |
Digital Realty
In Digital Core REIT, Digital Realty will own 428.8 million units, equivalent to 38.1% ownership, assuming the overallotment option is not exercised. Alternatively, Digital Realty will own 375.4 million units, equivalent to 33.3% ownership, assuming the overallotment option is exercised. Notably, the IPO’s joint bookrunners (see below) are able to sell 53.4 million units through an overallotment option from Digital Realty to public and institutional investors (i.e., not new units).
Additionally, Digital Realty will own a further 14.7 million units, equivalent to 1.3% ownership, via the entity Digital Core REIT Management Pte. Ltd., which is the manager of Digital Core REIT. Particularly, this ownership derives from Digital Realty’s acquisition fee, on the initial portfolio, being paid in units. Therefore, Digital Realty’s total economic interest rises to 39.4% ownership (excluding overallotment) or 34.6% (including overallotment).
Cornerstone Investors
In Digital Core REIT, cornerstone investors will own 414.8 million units, equivalent to 36.9% ownership. Specifically, these firms include 25+ institutional investors such as APG, Blackrock, Cohen & Steers, DWS, and Fidelity, amongst others – see below for the full list.
Public and Institutional Investors
In Digital Core REIT, public and institutional investors will own 267.0 million units, equivalent to 23.7% ownership, assuming the overallotment option is not exercised. Alternatively, public and institutional investors will own 320.4 million units, equivalent to 28.5% ownership, assuming the overallotment option is exercised.
Bookrunners and Underwriters
Bank of America, Citigroup, and DBS Bank are acting as the joint issue managers, global coordinators, bookrunners, and underwriters to Digital Core REIT.
Portfolio Summary – Digital Realty Forms Digital Core REIT
Digital Core REIT will own a 90% interest in each of the 10 data centers within its portfolio, while Digital Realty will retain the remaining 10% stake. These data centers include 3 facilities in Northern Virginia, 4 facilities in Silicon Valley, 2 facilities in Los Angeles, and 1 facility in Toronto.
Geography
In relation to annual base rent, Digital Core REIT’s portfolio is geographically positioned 38.4% in Northern Virginia, 35.2% in the Silicon Valley submarket of Northern California, 7.3% in Los Angeles (including Burbank), and 19.2% in Toronto (Markham), Canada.
Customers
Digital Core REIT’s customers consist of cloud service providers, colocation & interconnection providers, social media companies, and IT service providers. Particularly, as measured by base rental income, sector contributions are cloud (50.0%), colocation providers (23.9%), social media (18.5%), IT services (7.4%), and connectivity (0.3%).
Overall, Digital Core REIT’s portfolio comprises of 12 unique customers. However, the REIT’s top 6 customers contribute 99.9% of the portfolio’s base rental income. These customers are Microsoft, Cyxtera, Facebook, IBM, Sungard Availability Services, and Amazon Web Services (AWS).
Digital Core REIT – Top 6 Customers by Base Rental Income
Lease Term
Digital Core REIT’s facilities are 100% leased on a weighted average remaining lease expiry (WALE) of 6.2 years, when using base rental income. Interestingly, as shown in the table below, Cyxtera (a non-investment grade tenant) has a long WALE of 11.7 to 13.6 years. Whereas investment grade tenants including Microsoft, Facebook, and Amazon Web Services (AWS) all have a short WALE of 3.7 to 4.8 years. Therefore, the portfolio’s blended WALE of 6.2 years may not be an informative metric for assessing the portfolio’s cash flow quality and durability.
Beyond WALE, Digital Core REIT’s portfolio has weighted average contractual annual cash rental rate escalations of ~2%. Additionally, in 2022 and 2023, the portfolio has no meaningful lease expirations. While in the following years, the portfolio has a lease expiry profile, centered on base rental income, of 14.1% in 2024, 61.9% during 2025 through 2029, and 23.9% in 2030+.
Financials
For the six-months ended June 30, 2021, Digital Core REIT’s portfolio produced $50.5m USD of revenue and $32.2m USD of net property income (63.7% margin). Therefore, on an annualized basis, the portfolio generates $101.0m USD of revenue and $64.4m USD of net property income.
Additionally, Digital Core REIT projects that its portfolio will earn $105.9m USD of revenue and $66.9m USD of net property income for FY2022E.
Management and Board of Directors
Below is Digital Core REIT’s management team and board of directors which will lead the new data center business. The REIT’s leadership includes John Stewart as Chief Executive Officer and Daniel Tith as Chief Financial Officer.
Data Centers – Digital Core REIT
Below are key metrics for Digital Core REIT’s IPO portfolio, which comprises 60+ megawatts of critical IT load across 1.2 million net rentable square feet (NRSF). In terms of occupancy, these 10 data centers are all 100% leased. Additionally, these 10 data centers have an appraised valuation, for 100% ownership, of $1.44bn based on a blended 4.25% cap rate.
| Data Center | Market | IT Load | NRSF | Tenant | Income | WALE |
| 44520 Hastings Dr | NoVa | 13.9 | 147k | Microsoft | $15.9m | 3.9 |
| 8217 Linton Hall Rd | NoVa | 9.6 | 230k | Microsoft | $11.3m | 4.0 |
| 43831 Devin Shafron | NoVa | ~7 | 117k | AWS | $1.8m | 4.8 |
| 3011 Lafayette St | SV | 6.0 | 91k | $7.7m | 3.7 | |
| 1500 Space Park Dr | SV | 4.9 | 52k | Cyxtera | $5.9m | 13.2 |
| 2401 Walsh Av | SV | 4.8 | 168k | Cyxtera | $4.9m | 11.7 |
| 2403 Walsh Av | SV | 4.8 | 104k | Cyxtera | $3.1m | 11.7 |
| 200 North Nash St | LA | 2.7 | 114k | Cyxtera | $3.2m | 11.7 |
| 3015 Winona Av | LA | 1.7 | 83k | Cyxtera | $2.6m | 13.6 |
| 371 Gough Rd | Toronto | 6.8 | 104k | Sungard, IBM | $10.6m | 5.5 |
| Total / Average | — | 62 | 1.2m | — | $66.9m | 6.2 |
Northern Virginia
44520 Hastings Drive (ACC3) – Ashburn, Virginia
Digital Core REIT’s 44520 Hastings Drive facility comprises 13.9 megawatts of critical IT load across 147k net rentable sqft. The data center is fully-leased to Microsoft with a WALE of 3.9 years and is projected to produce $15.9m USD of net property income in 2022.
Additionally, below are further details on the data center:
- Location: within Digital Realty’s 740k+ sqft Ashburn Corporate Campus in Ashburn, Virginia
- Building: one-story data center, constructed as a shell in 2001 with building systems installed in 2006
- Lease: staggered lease expirations from August 2024 to August 2026. Presently, Microsoft has one, 8-year renewal option remaining and is currently within its first renewal period
- Rent: $180.89 per sqft or $92.30 per kW per month
- Valuation: $318m assuming a 4.89% cap rate
8217 Linton Hall Road (VA4) – Bristow, Virginia
Digital Core REIT’s 8217 Linton Hall Road facility comprises 9.6 megawatts of critical IT load across 230k net rentable sqft. The data center is fully-leased to Microsoft with a WALE of 4.0 years and is projected to produce $11.3m USD of net property income in 2022.
Also, below are further details on the data center:
- Location: in the Gainesville / Manassas area of Prince William County, Virginia. Specifically, the facility is in a transition area between heavy industrial uses to the east and residential development to the west
- Building: one-story data center, constructed in 2000
- Lease: Microsoft has been a tenant since 2005 and has its lease expiration in June 2025. Additionally, Microsoft is currently within its 8-year renewal period
- Rent: $116.98 per sqft or $91.39 per kW per month
- Valuation: $261m assuming a 4.26% cap rate
43831 Devin Shafron Drive (Bldg. C) – Ashburn, Virginia
Digital Core REIT’s 43831 Devin Shafron Drive (Bldg. C) facility comprises ~7 megawatts of critical IT load across 117k net rentable sqft. The data center is fully-leased to Amazon Web Services (AWS) with a WALE of 4.8 years and is projected to produce $1.8m USD of net property income in 2022.
Additionally, below are further details on the data center:
- Location: within Digital Realty’s Digital Loudoun Campus, an eight-data center complex in Ashburn, Virginia
- Building: one-story data center, constructed in 2001
- Lease: Amazon Web Services (AWS) has been a tenant since May 2006 and has its lease expiration in April 2026. Also, AWS has three, 5-year renewal options and is currently in the first renewal period
- Rent: $15.00 per sqft on a net basis, which is well-below market levels
- Valuation: $50m assuming a 3.42% cap rate
Northern California (Silicon Valley)
3011 Lafayette Street – Santa Clara, California
Digital Core REIT’s 3011 Lafayette Street facility comprises 6.0 megawatts of critical IT load across 91k net rentable sqft. The data center is fully-leased to Facebook with a WALE of 3.7 years and is projected to produce $7.7m USD of net property income in 2022.
Also, below are further details on the data center:
- Location: proximate to Highway 101
- Building: two-story data center, constructed in 2000 but underwent renovation in 2007
- Lease: Facebook’s lease commenced in March 2018 and has its lease expiration in February 2025
- Rent: $145.69 per sqft or $179.69 per kW per month
- Valuation: $185m assuming a 3.37% cap rate
1500 Space Park Drive – Santa Clara, California
Digital Core REIT’s 1500 Space Park Drive facility comprises 4.9 megawatts of critical IT load across 52k net rentable sqft. The data center is fully-leased to Cyxtera with a WALE of 13.2 years and is projected to produce $5.9m USD of net property income in 2022.
Additionally, below are further details on the data center:
- Location: near Highway 101 and close to three sub-stations on the cost-effective grid of Silicon Valley Power
- Building: two-story data center, constructed in 1977 but underwent renovation in 2008
- Lease: Cyxtera’s lease commenced in September 2019 and has its lease expiration in August 2034. Also, Cyxtera has three, 5-year renewal options
- Rent: $85.68 per sqft or $76.78 per kW per month
- Valuation: $113m assuming a 5.56% cap rate
2401 Walsh Avenue – Santa Clara, California
Digital Core REIT’s 2401 Walsh Avenue facility comprises 4.8 megawatts of critical IT load across 168k net rentable sqft. The data center is fully-leased to Cyxtera with a WALE of 11.7 years and is projected to produce $4.9m USD of net property income in 2022.
Also, below are further details on the data center:
- Location: near major highways (e.g., Highway 101 and Lawrence Expressway) and transportation networks such as the Santa Clara Valley Transportation Authority (VTA) light rail and San Jose International Airport
- Building: two-story data center, constructed in 1973, with subsequent improvements completed in 2001
- Lease: Cyxtera’s lease expires in February 2033. Also, Cyxtera has three, 5-year extension options
- Rent: $26.53 per sqft net
- Valuation: $112m assuming a 3.85% cap rate
2403 Walsh Avenue – Santa Clara, California
Digital Core REIT’s 2403 Walsh Avenue facility comprises 4.8 megawatts of critical IT load across 104k net rentable sqft. The data center is fully-leased to Cyxtera with a WALE of 11.7 years and is projected to produce $3.1m USD of net property income in 2022.
Additionally, below are further details on the data center:
- Location: similar to 2401 Walsh Avenue (see above)
- Building: two-story data center, constructed in 1996, with subsequent improvements done in 2000
- Lease: Cyxtera’s lease commenced in January 2019 and has its lease expiration in February 2033. Also, Cyxtera has three, 5-year extension options
- Rent: $26.53 per sqft net
- Valuation: $69m assuming a 3.92% cap rate
Los Angeles
200 North Nash Street – El Segundo, California
Digital Core REIT’s 200 North Nash Street facility comprises 2.7 megawatts of critical IT load across 114k net rentable sqft. The data center is fully-leased to Cyxtera with a WALE of 11.7 years and is projected to produce $3.2m USD of net property income in 2022.
Also, below are further details on the data center:
- Location: within the El Segundo data center cluster and in close proximity to Los Angeles International Airport
- Building: two-story data center, constructed in 1976, with refurbishments in 2000
- Lease: Cyxtera’s lease commenced in January 2019 and has its lease expiration in February 2033
- Rent: $24.69 per sqft net
- Valuation: $71m assuming a 3.93% cap rate
3015 Winona Avenue – Burbank, California
Digital Core REIT’s 3015 Winona Avenue facility comprises 1.7 megawatts of critical IT load across 83k net rentable sqft. The data center is fully-leased to Cyxtera with a WALE of 13.6 years and is projected to produce $2.6m USD of net property income in 2022.
Additionally, below are further details on the data center:
- Location: within the media and entertainment hub of Burbank, California
- Building: two-story data center, constructed in 1991, with refurbishments in 1999
- Lease: Cyxtera’s lease commenced in January 2019 and has its lease expiration in January 2035. Also, Cyxtera has two, 5-year renewal options
- Rent: $27.57 per sqft net
- Valuation: $58m assuming a 3.92% cap rate
Toronto
371 Gough Road – Markham, Ontario
Digital Core REIT’s 371 Gough Road facility comprises 6.8 megawatts of critical IT load across 104k net rentable sqft. The data center is fully-leased to multiple tenants including IBM and Sungard Availability Services with a WALE of 5.5 years and is projected to produce $10.6m USD of net property income in 2022.
Also, below are further details on the data center:
- Location: within the largest data center hub outside of Downtown Toronto, along established fiber routes
- Building: partial two-story data center, constructed in 1980 which went through a major renovation over 2014/2015 for its conversion into a data center
- Lease: multi-tenant data center currently leased to 6 tenants, of which 2 are data hall tenants and 4 are point-of-presence (PoP) tenants. The vast majority of the facility’s net property income is derived from IBM and Sungard Availability Services. Finally, IBM and Sungard’s leases are scheduled to expire in March 2029 and June 2025
- Valuation: $203m assuming a 4.03% cap rate
Capitalization and Return Targets – Digital Core REIT
Post-IPO, Digital Core REIT will have a total capitalization of $1.34bn USD. Of this total, $990m USD will be in the form of equity, with gross proceeds of $977m USD through the IPO and a further $13m USD via the issuance of additional units as consideration for Digital Realty’s acquisition fee on the initial portfolio.
Additionally, Digital Core REIT will draw on a 5-year senior unsecured term loan of $350m USD at IPO, which represents aggregate leverage of ~27%. Overall, Digital Core REIT has $550m USD of available debt facilities, as it will have access to a $200m USD undrawn revolving credit facility.
Finally, Digital Core REIT will have $160m USD to $596m USD of debt headroom to 35% and 50% leverage, respectively. In turn, this headroom enables Digital Core REIT to fund future data center investments or acquisition opportunities following its IPO.
Cornerstone Investors
Digital Realty has subscription agreements in-place with 25+ institutional cornerstone investors which will purchase, in aggregate, 414.8 million units in Digital Core REIT at the $0.88 per unit IPO price.
Overall, these cornerstone investors include AEW Capital Management, Affin Hwang AM, AIA Group, AMP Capital Investors, APG (manager for Dutch pension fund ABP), B&I Capital, Blackrock, Cohen & Steers, DBS Bank (Wealth Management), DWS Group, Eastspring Investments (Prudential), Fidelity Investments, Fullerton, Ghisallo Capital Management, J.P. Morgan Asset Management, Jane Street, Kasikorn Asset Management, Lion Global Investors, Nikko Asset Management, Principal Financial, Resolution Capital, Schonfeld Strategic Advisors, Segantii Capital Management, TMB Asset Management (TMBAM), and Value Partners Group.
Total Return Profile
Following its IPO, Digital Core REIT anticipates generating an annual total return profile for unitholders of 10.01%. Specifically, this total return is comprised of a distribution yield of 4.75% for 2022 and Distribution per Unit (DPU) growth, a proxy for the appreciation of the REIT’s unit price, of 5.26% from 2022 to 2023. As such, for 2023, Digital Core REIT projects paying a distribution yield of 5.00%.
