Digital Core Reit pivots to ‘offensive’ strategy, targets doubling asset base in 3 years

[SINGAPORE] After spending close to a year in defensive mode to plug a gaping vacancy in its portfolio, Digital Core Real Estate Investment Trust (Reit) is shifting gears by pivoting to an “offensive” growth strategy.

The pure-play data centre Reit is setting out on one of its most ambitious targets to date – it plans to double its US$1.8 billion asset base and market capitalisation within the next three years.

“We’re not big enough. We’re not diversified enough,” said John Stewart, chief executive officer of the manager. Digital Core Reit holds 11 data centres across the US, Canada, Germany and Japan.

He told The Business Times that greater scale and diversification will boost liquidity and optimise the business. But with the Reit’s units trading at a discount to net asset value, he has ruled out raising fresh equity in the near term.

Instead, the manager intends to tap capital reallocation and the balance sheet of the Reit’s sponsor, Digital Realty.

“If we were to recycle capital, we would probably sell an asset in North America and redeploy into (the Asia-Pacific),” he said, identifying the three assets the sponsor owns in Singapore as “potential acquisition candidates”.

He also cited Japan as a possible region for expansion, as the Reit already has a presence in Osaka, which can serve as a direct acquisition pipeline.

Eight of its data centres are in North America, and two are in the Asia-Pacific.

“You look at markets where you’re going to have very strong rent growth and preserve value over time – those are the types of markets where we want to have a presence,” he added.

That said, divestments are not the preferred route. He described the process of acquiring a property and divesting another as “two steps forward, one step back”.

“I would rather generate growth,” he said.

Large-scale data centre acquisitions also remain a challenge, as such a deal would likely strain the balance sheet. Digital Core Reit has an estimated market cap of US$700 million as at Friday (Feb 20).

To bridge the funding gap, Stewart said the manager intends to lean on the sponsor’s flexibility.

He explained that typical third-party transactions require a 100 per cent cash buyout, but Digital Realty has allowed the manager to acquire partial stakes in various data centres.

“The sponsor has been incredibly supportive,” he added, noting that this arrangement has allowed Digital Core Reit to maintain its 37.1 per cent gearing ratio.

The Linton Hall gap

The pivot to a more offensive approach comes after a challenging year for the Reit, as its 10.8-megawatt Linton Hall facility in Northern Virginia has been vacant since June.

But despite the lack of revenue from the asset, the manager posted a 61.6 per cent rise in revenue to US$87.3 million for the second half of the 2025 financial year.

That increase followed its acquisition of an additional 15.1 per cent stake in a data centre in Frankfurt in December 2024. H2 net property income also grew, by 35.1 per cent to US$42.4 million.

Although a new 10-year lease for Linton Hall was signed in December 2025, it commences only in December 2026. This means the facility’s total downtime will be 17 months.

Market observers noted that despite being fitted with artificial intelligence (AI)-ready components, Linton Hall was not leased to an AI tenant. Instead, the facility went to an investment-grade global cloud-service provider.

Stewart revealed that while there was “significant interest” in the data centre from AI companies, the manager chose the tenant for its superior credit quality and lease terms.

BT previously reported that the new tenant will bear all the fit-out costs. The agreement also includes a 3 per cent annual rental escalation clause with a no-break option for the tenant over the 10-year term.

One of the manager’s immediate priorities is bridging the Linton Hall revenue gap.

“We do face headwinds from additional downtime,” Stewart admitted.

Yet, he remains optimistic that the Reit can “hold the line” on its distribution per unit (DPU) – which stood at US$0.036 for FY2025.

He said the DPU will be supported by full-year contributions from a recently acquired Japan data centre facility, alongside some positive rental reversions that will increase cash flows.

“We are in a very good position today… I am more focused on going on the offence, on capitalising on opportunities, than playing defence,” he added.