Why you should avoid Digital Core REIT IPO

To start off, this is just an alternative view amidst the recent hype and optimism seen from some financial bloggers.

As such, it will be mainly talking about why you should not apply for the IPO

1) Poor Rental Revision Rates

(Most expiry coming from FY 2025 onwards)

From this image, we can tell that the rental revisions are at an average of 2% each year. Which assumes that revenue would increase at around 2% each year assuming occupancy rates are the same.

With less than 1% of rental expiring in FY 2022 and FY 2023 combined, a new revenue increase by rental revision if any will have to come in 2024 and that would be 14.1% in FY 2024.

While this figure is an increase, it is just not attractive enough given that things will be stale again next year. 

In fact, they forecasted a roughly 2.5% increase in revenue in 2022 and less than 1% increase in 2023.

(Assuming 100 million in 2021. Growth is low at 2.5% in 2022 and <1% in 2023)

In terms of revenue, Digital Core has recorded an increase of revenue of 1% from 1H 2020 to 1H 2021.

(Increase of 1% from 49 million to 50 million)

In contrast, when looking at Keppel DC Reit, it has recorded a 9% growth in revenue from 1H 2020 to 1H 2021. 

2) Poor Return of Assets of Data Centre

The appraised value of the data centres are at $1.4 billion. 

Whereas, net property income came in at $32.1 million in 1H 2021. This equates to $64.2 million on a full year basis and translates to a return of asset of 4.58%

Drawing out a table of comparisons against other companies, lets see how well they did

Company	Return on Asset
Keppel DC Reit	8%
Sunevision	6.2%
MIT US Data Centre Purchase	2.4%

While it has a better return of asset against the MIT purchase, it has to be said that it loses out to other peers in the industry. 

Although 1 might argue that we are comparing US with DC Reits with other countries, i would like to point out that a higher ROA would be better in giving a better blended yield when mixed with leverage.

3) Expensive Fees

For 1H 2021, Digital Core Reit incurred Manager Fees of $4.729 million. 

This is roughly 14.6% of net property income and 9.36% of revenue.

In contrast, Keppel DC Reit incurred Manager Fees of $11.827 million in 1H 2021.

This is roughly 9.55% of net property income and 8.75% of revenue.

As such, we are paying higher fees for lesser growth and flat revenue. Totally perfectly bad.

4) Poor record of US Properties related listing on SGX

In my mind, these names come to mind when it comes to US related properties listing in SGX. 

(a) Eagle Hospitality Trust - IPO Price 0.78 , now its bust

(b) Manulife US Reit - IPO Price 0.83 , now its 0.71

(c) Prime US Reit - IPO Price 0.88 , now its 0.82

(d) Keppel Pacific Oak US Reit - IPO Price 0.88, now its 0.75

(e) United Hampshire US Reit - IPO Price 0.80 , now its 0.67

As such, i do not have high hopes for such US Reits/Trusts listing in sgx.

Conclusion

The listing of a US Reit has taken the Singapore by storm being the talk of a town as it is a data centre listing.

However, some simple analysis shows that the reit comes up very poor in numbers. In fact i think that the seller is getting a good deal.

Keppel DC Reit trades at a PE of 22.36 while Digital Core Reit trades at an implied PE of 28 upon IPO.

In light of certain positives that has been pointed out by others, this to me looks like a really bad deal. 

I was really hyped for this IPO but i guess i will be avoiding it after all.