Latest / Investor Exchange / Digital Core REIT: First Half 2025 Performance Review

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Digital Core REIT: First Half 2025 Performance Review · Investor Exchange

• 0:00
  Music.
• 0:17
  Single AI query. It all needs a place to live, right? A data center. Exactly.
• 0:23
  And the demand for that digital real estate, it's just exploding.
• 0:26
  Yeah, I saw a stat somewhere. AI workloads alone, they're projected to grow
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  like, what, 3.5 times between 2023 and 2030.
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  It's honestly incredible. It really is a massive surge.
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  Welcome to The Deep Dive. We're the place that cuts through the noise to get you informed fast.
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  Today, we're diving into a whole stack of reports you share,
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  the interim financials, presentations, press releases, all focused on Digital
• 0:48
  Core REIT's performance for the first half of 2025.
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  We've gone through it all. Our mission today to really unpack what happened
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  financially, you know, understand the key drivers behind those numbers,
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  the good and maybe the not so good, and then try to get a sense of what the
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  future might hold for them. They're a pretty big player in this space.
• 1:05
  Yeah, absolutely. And just for context, for anyone maybe less familiar,
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  Digital Core REIT is what they call a pure plate data center S REIT.
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  That's a Singapore REIT. So So basically, their whole game is investing in income-producing
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  real estate, specifically these absolutely critical data centers, and they do it globally.
• 1:23
  Right. And they've got serious backing too, don't they? Oh, yeah.
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  Sponsored by Digital Realty.
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  I mean, that's one of the largest data center owners and operators on the planet.
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  So they're definitely playing in the big leagues with pretty strong support behind them.
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  Okay, let's get right into it then. The numbers for the first half of 2025.
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  What are the big headlines? What really jumps out from those financials about
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  their overall health? Well, the top-line figures are certainly attention-grabbing.
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  Gross revenue came in at U.S. $88.9 million for the half.
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  But the really striking thing is the comparison to last year.
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  That's an 84.2% jump from the U.S., $48.3 million in 1H 2024.
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  Huge increase. Wow, 84%. Okay. Yeah. And net property income,
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  NPI, also saw a really substantial lift. It hit U.S.
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  $46.3 million, which is up 52.2% from U.S., $30.4 million last year.
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  So, you know, very strong growth metrics right off the bat. Those are seriously
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  impressive growth numbers for revenue and NTI.
• 2:20
  Absolutely. But then you look a bit further down the income statement rate to
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  the distributable income to unit holders. And that tells a slightly different story.
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  It was U.S. 23.4 million dollars, which is only up about 3.5 percent from the
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  U.S. 22.6 million dollars the year before.
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  And the distribution per unit, the DPU, that actually held completely steady.
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  1.80 U.S. cents for both periods.
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  So massive top line growth, but much more modest when it comes to what actually
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  gets paid out, what's going on there.
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  Yeah, that's a really crucial distinction. You're right. It kind of highlights
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  the difference between the raw revenue coming in and what actually makes it to unit holders.
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  Now, while the DPU itself is flat,
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  it is worth noting the annualized distribution yield actually went up.
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  It increased by 50 basis points to 6.85% from 6.35% the year before.
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  How does that work? Well, that's based on their closing unit prices,
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  which were actually lower this year, USIO 53 cents versus USL 57s last year.
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  So same distribution, lower price, higher yield. It reflects the market dynamics too.
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  But your point stands. Flat DPU, despite that huge revenue growth,
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  it definitely means we need to dig into the costs and, you know,
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  the adjustments they made. Definitely.
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  Okay, so strong revenue, strong NPI, but flatter distributable income and DPU.
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  Let's look at the foundation then. How's the balance sheet holding up? Assets, liabilities.
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  So their total assets under management, AUM, that was around US $1.7 billion at the end of June 2025.
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  Their investment properties value actually increased to just over U.S.
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  $1.95 billion from about U.S. $1.85 billion at the end of last year.
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  That's a decent 5.3% rise.
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  However, and this is important, total liabilities also jumped quite a bit, up 23.4%, hitting U.S.
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  $907.1 million compared to U.S.
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  $735.3 million previously. Right. That's a pretty significant increase in the
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  debt side, something to watch as they grow. Definitely.
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  And with liabilities going up like that, what happened to the net asset value
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  per unit? Did that take a hit?
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  Well, interestingly, the NAV per unit at the group level actually saw a small
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  increase up to U.S. C dollars and 80 cents from U.S. 79 cents.
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  But there's a nuance here. At the trust level, it actually went down slightly.
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  That decrease was basically offset at the group level by gains from foreign
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  currency translation reserves.
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  Ah, currency effects again. Exactly. It really shows how things like the euro
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  and yen moving against the U.S.
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  Dollar can impact the reported NAV, especially with their global loans,
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  is just a reminder of the international nature of their portfolio.
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  Fascinating how that works on the balance sheet.
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  Okay, beyond the pure financials, what about the operational side?
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  Are the buildings full? Who are their tenants? The real sort of nuts and bolts?
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  Yeah, the operating metrics actually tell a pretty positive story,
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  especially about demand.
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  Occupancy improved quite nicely, jumping to 98.0%. Oh, wow. Yeah,
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  up from 96.7% at the end of 2024.
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  So that's a great sign. Less empty space. Their weighted average lease expiry,
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  or Whaley, is about 4.5 years.
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  That gives them decent stability in their rental income.
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  And the portfolio itself, it's all 100% freehold assets.
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  11 data centers across key markets, U.S., Canada, Germany, and Japan.
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  And the customer profile is really strong.
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  81% of their tenants are investment grade or equivalent so, highly creditworthy.
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  That's good. And a huge chunk, 64 percent, are hyperscale cloud service providers.
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  You know, the Googles, Amazons, Microsofts of the world.
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  That provides incredibly stable, high volume demand. It's a very solid customer
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  base. Okay, got the headlines, got the operational health check.
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  Now, let's really dig into the why. Why did these numbers move like they did?
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  What were the big growth drivers, the good news that fueled that impressive
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  revenue and NPI jump? Well, the number one force behind that big increase in
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  gross revenue and NPI was, without a doubt, strategic acquisitions.
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  The most significant one was buying that extra 15.1% interest in their Frankfurt
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  facility back in December 2024.
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  Right. I remember that. That was a real game changer because it shifted how they accounted for it.
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  It went from being an associate, where they just booked a share of the profit,
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  to being fully consolidated.
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  That meant all this revenue started flowing directly onto their top line.
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  Huge impact. And they didn't just stop there, did they? Weren't there other deals? Exactly.
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  They also completed buying a 20% equity interest in Digital Osaka 3 in March 2025.
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  That was about U.S. $86.7 million.
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  And that investment is actually expected to be accretive to DPU,
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  about 1.8%. So it should help future payouts.
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  Plus, it boosts their geographic diversity, especially into that really fast-growing Asia-Pacific market.
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  So yeah, two pretty significant acquisitions really drove that top-line growth this period.
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  So acquisitions were key, but were there any sort of organic gains,
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  growth from the assets they already had?
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  Because that shows underlying health. Absolutely, yes.
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  They did see higher rental and co-location income coming from their Los Angeles assets.
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  That's a positive sign. Shows good demand in that specific market.
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  Plus, you have to remember, the portfolio generally benefits from built-in rent
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  increases, usually around 1-3% across many of their leases. Ah,
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  the escalators. Exactly.
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  Those are automatic bumps, providing a steady upward nudge to revenue without
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  needing to sign brand new deals.
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  And I noticed they also did a unit buyback. It seems small, but that's usually
• 7:31
  seen as a positive signal, right?
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  Yeah, they repurchased 1.8 million units, averaging about US sweep 565 per unit.
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  Like you said, relatively small in the grand scheme. But it did generate a small
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  positive DPU accretion, about 0.1%. It shows they're actively managing their
• 7:48
  capital, especially if they think their units are undervalued. Makes sense.
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  And another thing, showing alignment with unit holders, the manager actually
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  chose to take 100% of his base fees in units for this half instead of cash.
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  Oh, interesting. Yeah. And the management fees for the Frankfurt facility,
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  which had been paused during the transition, also resumed, adding a bit more to their income stream.
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  Okay, so lots of positive moves, acquisitions, organic growth,
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  buybacks, manager alignment.
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  That definitely explains the big revenue and NPI jumps.
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  But let's flip the coin. Let's talk costs. What were the factors that kind of
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  dragged on profitability or caused some of those shifts lower down the income statement?
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  Where were the challenges or maybe just the necessary costs of growth? Right.
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  Well, one really notable area was property expenses. They jumped significantly.
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  While NPI went up, the actual property expenses more than doubled over a 100
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  percent increase year over year.
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  Wow, double. Why so much? A big chunk of that was simply due to consolidating
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  the Frankfurt facility's expenses.
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  You bring the revenue on, you bring the costs on, too. That's just part of the
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  deal with that kind of acquisition.
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  OK, that makes sense. There were also some one-off costs like repair and maintenance
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  related to integrating the L.A.
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  Assets they bought previously. And unfortunately, they also had to book a loss
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  allowance for a receivable from an older tenant at their 1500 Space Park project.
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  So, yeah, the revenue came in, but so did the associated costs for those new
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  assets, plus a couple of specific operational hits.
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  Right. So growth came with higher running costs, essentially.
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  Did other income streams shift or did borrowing costs change much? They did. Yeah.
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  Finance income actually saw a really dramatic decrease down 93.5 percent. Ninety three percent.
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  Why? Mostly because, again, the Frankfurt facility is now consolidated.
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  Before, it might have contributed some interest income when it was treated as
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  an associate. That's gone now.
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  Also, they just had lower cash balances sitting in fixed deposits compared to
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  last year, likely because cash raised earlier was put to work. Okay.
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  And other income went to zero. But that was mainly an accounting change related
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  to dividend income from another asset, Digital Osaka, too.
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  It's more of a reclassification than income disappearing entirely.
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  Got it. And finance costs, I assume they went up with more debt.
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  Yes. Finance expenses rose by 23.3%. Part of that includes legal and professional
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  fees for setting up their big U.S.
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  $750 million euro medium term note program, the EMTN. Right.
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  The funding tool. Exactly.
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  That program gives them access to public debt markets for future deals.
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  So setting it up has upfront costs. It's strategic spending.
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  There was also interest expense kicking in from a shareholder loan related to
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  that Frankfurt acquisition.
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  So, yeah, necessary costs for funding growth and acquisitions,
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  even if they temporarily hit profitability. OK, that paints a clear picture of the cost side.
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  But let's talk about that potential wildcard for any international portfolio.
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  Currency swings, you mentioned it briefly with NAV.
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  How did Forex play out for them overall in the first half? Yeah,
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  Forex definitely made its presence fell.
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  They faced unrealized foreign exchange losses.
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  This was mainly because the euro and the Japanese yen appreciated against the
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  U.S. dollar during that period.
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  OK, so stronger euro and yen hurt their USD reported profits. Exactly.
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  It negatively impacted their profit before tax and their profit after tax attributable
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  to unit holders. You could see the numbers go down because of it.
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  However, and this goes back to your earlier point about the DPU,
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  despite these forex losses hitting the profit line, the DPU itself remained
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  flat. How did they manage that?
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  Through significant distribution adjustments.
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  These totaled U.S. $11.3 million in the first half of 2025 compared to just U.S.
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  $3.9 million in the same period last year.
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  So what are those adjustments typically? They often involve non-cash items,
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  accounting adjustments, or revaluations.
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  Essentially, it's a tool management uses to smooth out the reported income figure
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  to arrive at the actual cash they can distribute.
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  It allows them to maintain that stable, predictable DPU that REIT investors really value.
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  It's a key mechanism for providing stability amidst underlying volatility like forex swings.
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  That's a really crucial point, managing the payout stability,
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  even when underlying profits fluctuate. Okay, so we've broken down the numbers,
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  the why behind them. Let's zoom out a bit now.
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  How does digital core REIT fit into the bigger picture?
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  The macroeconomic climate versus the specific data center industry trends?
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  What's this outlook looking like? Well, it's kind of an interesting push and pull situation.
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  On one hand, you've got the broader global economy.
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  The World Bank, for instance, projects global GDP growth might slow down to
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  around 2.3 percent in 2025.
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  That'd be the slowest growth since 2008, excluding recessions,
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  partly due to trade tensions, policy uncertainty, typical macro headwinds. Right.
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  Not exactly roaring growth globally.
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  No. But on the other hand, you have the data center industry itself,
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  which is just experiencing incredibly strong demand, just relentless.
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  This is driven by massive tailwinds.
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  Cloud adoption is still huge. Digital transformation across every sector.
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  And especially, as we mentioned, the explosion in artificial intelligence and
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  the needs of hyperscale companies.
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  Yeah, that AI demand seems unstoppable. It really does.
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  It might be the smallest slice right now, but it's definitely the fastest growing
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  and the most power hungry, driving a lot of new builds.
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  So macro headwinds, but massive industry tailwinds, a fascinating dynamic.
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  What are you seeing in the specific regions where digital core re-operates?
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  Let's start with North America.
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  North America is seeing record low vacancies.
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  Particularly in places like Northern Virginia. That's even with a huge amount
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  of new supply coming online in this, was up something like 43% year over year in Q1 2025.
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  Wow, demand is just soaking it all up. Pretty much. Pricing is rising.
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  Northern Virginia leads the pack globally there.
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  But this growth brings challenges, right? Significant strain on infrastructure
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  power, water plus noise concerns, and more regulatory pushback,
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  making zoning tougher for new projects.
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  It's becoming a real balancing act. High demand, high strain.
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  Makes sense. What about Northern California?
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  Still a tech hotspot. Yeah, Northern California, Silicon Valley,
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  Bay Area demand is surging there too.
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  Projections for electricity needed for new data centers have jumped significantly,
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  but they face their own hurdles.
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  Super high land costs, really complex permitting, strict environmental rules,
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  and grid capacity issues.
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  Still, developers are pushing forward with big proposals, which tells you how
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  critical the need for capacity is. And their LA assets. You mentioned organic growth there earlier.
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  Similar dynamics. In L.A., the interesting thing is seeing expansion push into
• 14:21
  suburban areas like Vernon and Monterey Park.
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  Why there? It's basically a direct response to the constraints,
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  downtown lack of power, not much land left, long permit times.
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  These suburban spots have benefited from recent power substation upgrades,
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  so they actually have the capacity needed for these large data centers.
• 14:41
  It's a smart strategy to follow the power.
• 14:43
  Makes sense. Okay, shifting north to Canada, what's the picture in Toronto?
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  Canada's got a big focus on data sovereignty and really developing its AI capabilities.
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  So you're seeing new large-scale data center projects popping up increasingly
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  in Toronto suburbs as well.
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  It reflects a national push to build out their own digital infrastructure,
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  and it's attracting major investment, particularly from telecom carriers.
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  Toronto's definitely becoming a key hub. Okay, let's hop across the Atlantic.
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  Europe, specifically Frankfurt, where they made that big acquisition.
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  How are things there? Frankfurt is still showing really strong demand.
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  It's such a critical hub for finance and connectivity for Central and Eastern Europe.
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  But like other mature markets, it's grappling with challenges.
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  Regulatory complexity, especially around energy efficiency and environmental rules, is a big one.
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  And just getting enough power, particularly green power, remains a constant struggle.
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  Right. The power constraint seems universal.
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  And finally, Asia-Pacific Osaka, their other recent acquisition target.
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  Yeah, Osaka is really emerging as a key strategic alternative to Tokyo,
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  partly because Tokyo itself is facing infrastructure and grid limitations.
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  Osaka seems really well positioned to capture future demand,
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  especially AI related demand.
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  You're seeing new developments and big investments from major players there.
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  So DigitalCore REIT getting that 20 percent stake in Digital Osaka 3 looks like
• 16:01
  a very timely strategic move to tap into that growth. Okay, so putting it all
• 16:05
  together, the market dynamics, the opportunities, the challenges,
• 16:08
  how is Digital Core Read actually positioning itself?
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  What's their strategy to navigate all this and hopefully capitalize on those
• 16:14
  tailwinds? Their strategy seems pretty clear and multifaceted.
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  First, they're focused on maximizing organic growth. That means really proactive
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  leasing to fill up the space they already have, which we saw reflected in that
• 16:26
  improved occupancy rate.
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  Get more rent from existing buildings. Makes sense. Fill her up.
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  Second, they're being careful about maintaining financial flexibility.
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  They've kept their aggregate leverage pretty prudent at 38.3%.
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  That gives them about U.S.
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  $444 million in debt headroom before hitting a 50% limit, which is quite a lot of room.
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  And critically, they don't have any debt maturing until December 2027.
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  That gives them a really stable runway to plan and execute without immediate refinancing pressure.
• 16:57
  That's huge. That kind of balance sheet flexibility must give them real options
• 17:01
  for growth, right? Absolutely. And that ties into the third point.
• 17:05
  Leveraging their debt capacity for growth. Setting up that U.S.
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  $750 million EMTN program, which they already tapped for the Osaka deal,
• 17:12
  is a massive step. It gives them access to the public debt markets.
• 17:16
  Potentially allowing them to fund more acquisitions that are accretive,
• 17:18
  meaning they boost the DPU right away. So more firepower for deals.
• 17:22
  Exactly. It lets them really lean into capitalizing on those industry tailwinds,
• 17:26
  expanding the asset base, diversifying geographically, and capturing that massive
• 17:30
  demand from hyperscalers, AI, and just general digital transformation.
• 17:35
  And having Digital Realty as their sponsor must help enormously with finding
• 17:38
  those deals. Oh, it's a huge advantage.
• 17:40
  Digital Realty has this massive pipeline, over 300 existing data centers globally.
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  That potentially gives digital core REITs a path to grow its portfolio,
• 17:49
  maybe even up to $15 billion someday.
• 17:52
  Plus, they have a specific right of first offer, ROFR, on a pipeline of about U.S.
• 17:57
  $540 million worth of assets deemed suitable for the REIT. It's like having
• 18:01
  a pre-vetted shopping list of potential growth opportunities handed to you by an industry giant.
• 18:05
  That kind of built-in deal flow is incredibly valuable. What a deep dive.
• 18:10
  So we've really seen how digital core REIT is navigating what's clearly a complex
• 18:15
  global economic picture.
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  They're strategically expanding where it counts, growing through these calculated
• 18:20
  acquisitions, managing costs, maybe smoothing distributions a bit,
• 18:23
  but fundamentally capitalizing on just immense demand for digital infrastructure.
• 18:28
  It really leaves you thinking, considering that push and pull, right?
• 18:31
  Global economic pressures versus this undeniable surge in demand, especially from AI.
• 18:36
  What do you think is the biggest single opportunity for data center REITs,
• 18:40
  like Digital Core REIT, to really stand out and create sustainable value over the next few years?
• 18:45
  Is it just securing power before anyone else? Is it developing specialized AI-ready facilities?
• 18:49
  Or maybe something else entirely we haven't touched on, something for you, our listeners, to.
• 18:53
  Music.