Data center play Digital Core REIT plans IPO to raise US$977M

U.S. one-dollar currency notes; taken September 2018.U.S. one dollar bills.

Digital Core REIT, which plans to invest in data center assets and assets used to support the digital economy, is seeking an initial public offering (IPO) to raise gross proceeds of around US$977 million, according to a prospectus filing with the Monetary Authority of Singapore.

Around 267.03 million units priced at US$0.88 will be offered to investors, in addition to the sponsor subscribing for 428.81 million units for US$377 million and cornerstone investors taking up 414.79 million units, the prospectus said.

If the overallotment option isn’t exercised, public and institutional investors will hold 23.7 percent of units, cornerstone investors will hold 36.9 percent, the manager will hold 1.3 percent and the sponsor will hold 38.1 percent, the filing said.

In addition, the REIT will have loan proceeds of US$350 million to partially financed the purchase of the initial portfolio, the prospectus said.

The prospectus forecast total return of 10.1 percent, including a distribution yield of 4.75 percent for 2022 and 5.0 percent for 2023, with distribution per unit (DPU) growth of 5.26 percent over 2022-2023.

Revenue is forecast at US$105.92 million for 2022 and US$106.69 million for 2023, the prospectus said.

The initial portfolio

The initial portfolio will hold 10 institutional quality, freehold data centers in top-tier markets in the U.S. and Canada, with an appraised valuation of US$1.4 billion, the prospectus said. Around 73.5 percent of the portfolio is located in Northern Virginia and Northern California’s Silicon Valley, while 19.2 percent is located in Toronto, Canada, and the remainder in Los Angeles, California, the filing said.

The assets are fully leased to blue-chip customers, the filing said, adding the weighted-average remaining lease term is more than six years and all of the lease agreements have contractual annual rental rate escalations ranging from 1 percent to 3 percent.

Digital Core REIT will indirectly hold a 90 percent interest in the 10 properties in the IPO portfolio, while the sponsor will retain a 10 percent holding, the filing said.

The sponsor is Digital Realty, the largest global provider of cloud- and carrier-neutral data center, co-location and interconnection services, the prospectus said. Digital Realty is one of the 10 largest U.S.-listed REITs, the filing said.

Digital Realty plans to co-invest with Digital Core REIT for all future acquisitions, with the sponsor to hold 10 percent of each asset and the Singapore REIT holding the remainder, the filing said.

“The sponsor is the largest owner, operator, developer and acquirer of data centers globally, providing Digital Core REIT with an industry leading pipeline for growth,” the prospectus said. “The sponsor is providing a global ROFR [right of first refusal] to Digital Core REIT.”

The prospectus pointed to high growth in the data center industry, with the North American market expected to grow at a compound annual growth rate (CAGR) of around 15 percent over 2020 to 2024, driven by demand from digitisation, adoption of new technologies and other trends, such as streaming, social media, cloud computing and artificial intelligence (AI).

Cornerstone investors

The cornerstone investors which will be taking up 414.79 million units include: AEW Asia, Affin Hwang Asset Management Bhd., AIA Investment Management, AMP Capital Investors, B&I Capital AG, Blackrock, Cohen & Steers Asia, DBS Bank, DBS Bank (on behalf of certain wealth management clients), DWS Investments Australia, Eastspring Investments (Singapore), FIL Investment Management (Hong Kong), Fullerton Fund Management, Ghisallo Master Fund LP, Jane Street Financial, JPMorgan Asset Management (UK) (for and on behalf of its clients), Kasikorn Asset Management, Lion Global Investors, Nikko Asset Management Asia, Principal Global Investors (Singapore), Resolution Capital, Schonfeld IR Master Fund and Schonfeld Global Master Fund LP, Stichting Depositary APG Tactical Real Estate Pool as Depositary of APG Tactical Real Estate Pool, The Segantii Asia-Pacific Equity Multi-Strategy Fund, TMB Asset Management and Value Partners Hong Kong.

APG Tactical Real Estate Pool, which invests in listed real estate assets, is a collective investment fund between Dutch pension funds.

The sponsor’s units and units acquired by DBS Bank for its own investments are subject to a lock-up period, while the other cornerstone investors are not subject to lock-up arrangements, the filing said.

The joint issue managers, global coordinators, bookrunners and underwriters of the offering are BofA Securities, Citigroup Global Markets Singapore and DBS Bank, while BNP Paribas, OCBC Bank and UOB are co-managers, the prospectus said.