Latest / Investor Exchange / Inside Digital Core REIT’s US$1.8 Billion Global Pivot – FY2025

Transcript

Inside Digital Core REIT’s US$1.8 Billion Global Pivot – FY2025 · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
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  When we talk about the cloud, I think most of us still have this very airy,
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  lightweight image in our heads.
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  It's invisible. It's floating somewhere above us, holding our photos and our emails.
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  But if you actually trace that cloud back to Earth, it is heavy. Oh, it's very heavy.
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  It is massive, concrete buildings, tons of steel, cooling systems the size of
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  houses, and just a staggering amount of electricity.
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  It's the physical backbone of our entire digital world. And today,
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  we are not looking at the software floating around up there.
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  We're looking at the landlord.
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  This is the Deep Dive. And today, we are unpacking Digital Core REIT.
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  For those new to the term, a REIT is a real estate investment trust.
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  Right. It's a way for regular people to invest in commercial real estate,
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  sort of like you would a stock. Yeah.
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  And digital core is a pure play on data centers. And pure play just means they
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  don't dabble in shopping malls or office towers.
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  They strictly own the server farms where the Internet lives.
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  They're listed in Singapore, but they are sponsored by and really they act as
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  a proxy for digital realty, which is the largest global data center owner and operator on the planet.
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  So we have their financial results in front of us for the full year ended December 31st, 2025.
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  And our mission today is really to figure out if this is a growth story or,
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  well, a stagnation story. I could see why you'd say that.
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  Because depending on which line you look at in the financials,
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  you could, you know, argue for both. It's a fascinating time to look at them.
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  You've got the AI revolution providing these massive tailwinds on one side.
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  Right. And then you have some complex accounting and vacancy issues on the other, acting as an anchor.
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  It's a classic tug of war. OK, let's start with the headline numbers.
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  If I'm an investor just scanning the press release, my eyes pop out of my head.
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  Gross revenue for FY 2025 hit 176.2 million U.S. dollars.
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  That is a jump of 72.2 percent compared to last year. A huge number.
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  And net property income or NPI is up 43.5 percent. I mean, in almost any other
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  business, if you tell me revenue is up over 70%, I'm popping champagne.
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  It looks explosive on the surface.
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  But this is why we do the deep dive. We have to look at what actually ends up
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  in the investor's pocket.
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  The DPU. The metric that matters for a REIT investor.
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  The DPU distribution per unit. That's your dividend.
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  And despite that massive revenue jump...
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  It was flat. Completely flat. It stayed at 3.60 U.S. cents, exactly the same as FY 2024.
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  Okay, wait. Help me bridge this gap. How do you grow revenue by nearly three
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  quarters, bring in all this extra
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  cash, and yet the payout to shareholders doesn't grow by a single cent?
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  Where did the money go? It didn't disappear.
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  It's largely a matter of accounting optics versus operational reality.
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  That massive revenue jump is primarily due to something called consolidation.
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  Consolidation. Specifically regarding their facility in Frankfurt,
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  Germany. Okay, that's one of those accounting terms that kind of glosses over
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  a lot. Can you break that down for us? Sure.
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  Imagine you own, say, 20% of a pizza shop.
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  On your personal books, you only record your share of the profit.
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  You don't list the shop's total sales as your revenue. Right, that makes sense.
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  But if you buy more of the shop and suddenly you own a controlling stake,
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  the accounting rules change.
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  You now have to list 100% of the pizza shop's sales as your revenue.
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  Even if you don't actually keep 100% of the profit.
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  Correct. You show the whole pie on the top line.
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  In late 2024, Digital Core REIT acquired an additional stake in the Frankfurt facility.
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  So they moved from treating it as an associate to consolidating it.
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  So boom revenue looks like it exploded.
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  Because they're counting the whole building's revenue, not just their slice
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  of the profits. Exactly. But that implies they're also counting the whole building's bills.
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  Ah, there's the catch. That is the mechanic. When you consolidate revenue,
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  you also consolidate expenses.
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  If you look at the property expenses line, it didn't just go up a little. It more than doubled.
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  It increased by over 100% to $87.4 million.
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  So the expenses just ate up a huge chunk of that top line growth because of the accounting shift.
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  It wasn't that they suddenly got inefficient. It's just that the ledger changed.
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  That's the biggest factor. Yeah.
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  But there was a second anchor dragging on performance. Finance expenses,
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  the cost of borrowing money. Interest rates. Yep.
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  Interest expenses on their borrowings increased by 5.8%.
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  So you filter that revenue explosion through higher property expenses and higher
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  interest payments, and you end up with a distributable income that essentially
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  just kept the status quo.
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  So the payout remains steady at 3.60 U.S. cents, which, based on the share price
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  at the end of the year, about 51 cents, gives an annualized distribution yield of roughly 7.06%.
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  Which is a respectable yield, to be fair. Sure. But investors want growth.
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  And the reason the DPU didn't grow wasn't just accounting. There was a genuine
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  operational hole in the bucket in 2025.
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  You're talking about the vacancy. I am. We need to talk about Linton Hall.
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  This is their property in Northern Virginia.
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  And for context, Northern Virginia is basically the Silicon Valley of data centers,
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  the most important market in the world.
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  It is the epicenter, yeah. And DigitalCore REIT owns a facility there called Linton Hall.
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  In July 2025, the tenant in that building left.
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  The lease expired, they moved out, and the building went dark. Ouch.
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  So for the entire second half of 2025, they had a massive asset generating zero revenue. Correct.
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  And in a portfolio this size, losing a whole building, it hurts.
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  That vacancy dragged down the earnings for the entire U.S. and Canadian portfolio.
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  It effectively canceled out rental growth they were seeing elsewhere.
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  So that empty building is the real fundamental reason the DPU flatlined.
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  That's the primary one, yes.
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  It's frustrating because it masks the good performance everywhere else.
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  But this is where the story pivots, because while the 2025 numbers show the
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  pain, we have breaking news from January 2026 that changes the narrative completely.
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  This is the turnaround moment. On January 5th, 2026, just days after the fiscal
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  year ended, they announced they signed a new lease for Linton Hall.
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  And it's a big one. A very big one. It's a 10-year agreement.
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  They leased the entire facility to what they call an investment-grade global
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  cloud service provider. Which usually means one of the big hyperscalers.
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  An Amazon, a Microsoft, a Google. Probably.
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  But the name isn't even the most interesting part. It's the price.
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  The new rent is approximately 35% higher than the previous rent. 35%?
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  That is a massive hike. How do you get away with charging 35% more for the same building?
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  This is what investors call a mark-to-market opportunity.
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  The old tenant was paying rates set years ago. When they leave,
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  the landlord gets to reset their rent to today's market rates.
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  And today's rates are skyrocketing. Incredibly high.
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  So the vacancy was short-term pain, six months of zero revenue,
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  but it resulted in a long-term gain of locking in 35% more revenue for the next decade.
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  It's a great outcome. Precisely. It validates the asset value.
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  However, I do have to curb the enthusiasm slightly with a reality check on the timeline.
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  Oh, there's always a cash. The new lease doesn't actually commence until December 1st, 2026. Oh.
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  So the building's that empty for half of 2025, and it's going to sit empty for
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  almost all of 2026. Essentially, yes.
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  The new tenant likely needs that time to fit out the space for their specific servers and hardware.
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  Okay. So investors need to understand that 2026 will still feel the drag of that vacancy.
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  You aren't going to see that 35% bump fully hit the bank account until 2027.
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  That's a crucial distinction. So 2026 is another transition year.
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  But once that rent kicks in, it brings the portfolio occupancy back up to 98
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  percent and it boosts the whale.
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  The Whaley weighted average lease expiry. It's a measure of stability.
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  By signing a 10-year deal, they've secured that cash flow until the mid-2030s.
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  It really highlights the demand, though. To have a tenant waiting to take the
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  whole building at that premium, it says a lot.
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  Let's talk about their expansion. They also made a strategic move in Japan. Yes.
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  In March 2025, they acquired a 20% stake in a data center in Osaka, Japan.
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  It cost about $87 million U.S. dollars. Why Osaka? I always think of Tokyo as the main hub.
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  Tokyo is the primary hub, but it has a problem. It's full. It's incredibly crowded,
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  and more importantly, it's facing power constraints.
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  It is hard to get enough electricity to build new data centers there.
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  So Osaka is the strategic alternative. It's the second core market, yes.
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  It's like the backup generator for the country's digital infrastructure.
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  It provides geographic diversity.
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  By entering Japan, the REIT isn't solely dependent on the U.S.
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  Market. And I see they mentioned this acquisition is accretive.
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  That's a key word for REIT investors. Accretive means it adds to the DPU.
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  They aren't just buying buildings to make the empire bigger.
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  They're buying them because it increases the dividend for shareholders.
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  It's profitable growth. Speaking of moves that help the shareholder,
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  I noticed they were buying back their own stock. They were.
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  In FY 2025, the manager repurchased 1.8 million units. They bought them at an
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  average price of about 56.5 cents.
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  Why do companies do that? Is it just to prop up the stock price?
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  It signals confidence, but it's also a mathematical play.
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  If management believes their stock is trading for less than it's actually worth,
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  which they clearly do, then buying it back is a good investment.
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  It's like buying a dollar bill for 50 cents.
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  Exactly. And by retiring those units, the remaining pie is split among fewer shares.
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  They calculated this buyback added about 0.1% to the DPU.
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  It's small, but it shows capital discipline. Okay, let's step back.
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  They're fixing the vacancy with a massive rent hike, they're expanding into
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  Japan, and they're buying back stock.
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  It feels like they're positioning themselves for something big.
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  Which brings us to the super cycle. The JLL report referenced in their outlook is extremely bullish.
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  They're calling it an infrastructure investment super cycle.
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  JLL is predicting the sector will expand at a 14% compound annual growth rate
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  through 2030. That's huge.
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  And the driver isn't just us saving more photos to the cloud anymore,
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  is it? No. The new driver is artificial intelligence.
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  AI is hungry. It requires exponentially more computing power than traditional cloud services.
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  I heard a simple chat GPT query uses something like 10 times the energy of a Google search.
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  It's in that ballpark, yeah. So if everyone shifts to AI-assisted search,
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  the energy demand explodes.
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  And that computing power needs physical space and, more importantly, electricity.
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  For data centers, it's all about power, power, power.
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  The report mentions that land prices in northern Virginia, where Linton Hall
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  is, have hit $950,000 per acre.
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  Just think about that. Almost a million dollars for an acre of dirt. Why?
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  Is the duke made of gold? It might as well be. But developers aren't paying
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  for the land, they're paying for the plug.
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  They are fighting for sites that have access to the power grid.
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  Because you can build a concrete shell in 18 months, but getting a new substation
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  approved and built by the utility company. That can take five years or longer.
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  Timelines for power delivery are extending everywhere. So if you are Digital
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  Core REIT and you already own these facilities and they are already plugged
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  in. Your moat just got a lot wider.
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  You own the scarcest resource in the AI economy. You've got it.
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  Existing capacity becomes incredibly valuable when new supply is choked off by the power grid.
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  It explains why they could hike the rent at Linton Hall by 35 percent.
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  The tenant didn't have a lot of other options. It's fascinating.
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  The bottleneck isn't the chips, it's the electric utility.
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  So the wind is in their sails. But we have to look for anchors.
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  What about the balance sheet? Can they afford to keep riding this wave?
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  Their balance sheet actually looks quite healthy.
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  As of the end of 2025, their aggregate leverage was 37.1%. Is that high? In the REIT world, no.
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  The regulatory limit is usually 50%. Most try to stay around 40%.
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  So being at 37% means they have plenty of headroom.
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  Meaning they can borrow more money if they need to? Yes.
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  They have over $500 million of debt capacity.
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  So if they see another Osaka-like deal, they have the firepower to go get it.
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  What about rising interest rates?
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  We saw finance costs go up. They've managed that risk well. About 85% of their
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  debt is hedged. So they locked in the rate. Right.
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  It's like getting a fixed rate mortgage instead of a floating one.
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  And their average debt maturity is 3.7 years.
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  So there's no massive refinancing cliff right around the corner.
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  One other risk I saw was currency. They're listed in Singapore.
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  The assets are all over the world. Yeah, this is a common point of confusion.
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  There are U.S. asset heavy REIT listed in Singapore reporting in U.S. dollars.
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  You saw a dip in their net asset value, or NAV, this year. And that wasn't because
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  the buildings lost value?
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  Mostly no. It was largely due to foreign currency translation differences.
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  Basically, if the euro gets weaker against the dollar, the value of that Frankfurt
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  building looks lower when you convert it back to dollars for the report.
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  So the building is the same, the rent is the same, but the calculator just shows a different number.
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  That's the gist of it. It's a standard risk for any global company.
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  Okay, let's bring this all together. We have a company that just posted huge
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  revenue growth, technically, due to accounting changes, but actual cash flow
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  was stable, leading to that flat payout. Correct.
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  2025 was a year of absorbing changes and dealing with the vacancy.
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  The big hole at Linton Hall hurt 2025 and will drag on 2026,
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  but it's essentially solved for the long term with that massive 35 percent rent hike.
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  A clear validation that their assets are in high demand.
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  And looking forward, we had this AI supercycle driving demand against a backdrop
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  of power scarcity, which makes their existing plugged in buildings more valuable.
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  And they have a clean balance sheet to pursue more growth.
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  It feels like 2025 was a cleanup year. The flat DPU might look boring,
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  but the underlying moves securing the lease, entering Osaka,
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  are about long-term stability. So the investor just needs patience.
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  2026 might still look a bit flat, but 2027 is when the new RET really starts
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  to kick in. That's the timeline.
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  If you believe in the AI thesis, you are essentially waiting for the cash flow
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  to catch up with the demand.
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  Before we sign off, I want to go back to that power constraint issue.
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  It feels like the biggest story here, bigger than just one REIT.
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  It raises a very provocative question for the listener.
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  We usually categorize data center stocks as tech plays or real estate plays. But think about it.
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  Land prices are skyrocketing purely based on access to the power grid.
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  Right. It's not about the view. It's about the voltage.
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  Exactly. And with AI demand expected to double capacity needs by 2030,
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  the constraints are only getting tighter.
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  So are these actually becoming utility plays?
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  That is a great question. If you control the power socket, you control the AI economy.
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  If the grid is the bottleneck, the landlord holding the connection holds the cards.
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  Who really holds the power literally and figuratively in the next decade?
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  Something to think about. Thank you for joining us on this deep dive into the
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  physical side of the internet.
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  We'll catch you on the next one. This content is intended to serve strictly
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  and only as an informational, independent, objective summary of recent events
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  and should in no way be interpreted, construed, or relied upon by any party
• 15:22
  as inside information or financial advice.