Under the Spotlight AUS: DigiCo Infrastructure REIT (DGT)

Santa has come early for investors wanting more exposure to one of the market’s hottest themes: data centres. 

DigiCo Infrastructure REIT ($DGT) will make its market debut on 16 December in an IPO that will give it a market cap of $2.74b at its offer price of $5 a share. This owner, operator and developer of data centres raised $2b of fresh capital, surpassing other big IPOs this year like Guzman Y Gomez ($GYG) and Cuscal ($CCL). 

It’s canny timing from HMC Capital ($HMC), the external manager of DigiCo. Investor appetite for data centres has been healthy in 2024. Airtrunk was sold for $24b to Blackstone and Canada Pension Plan Investment board; AustralianSuper paid $2.2b for a 20% stake in U.S.-based Databank; and NextDC ($NXT) raised $2b in fresh equity to fund expansion. Just last week we analysed the rally in shares of Wall St data centre giant Equinix ($EQIX). 

Data boom

DigiCo’s has a portfolio of 13 data centres (including three development sites) leveraged to the growing need to store and access data quickly and securely. It has 586 customers and installed capacity of 76 megawatts (MW) across Australia, Chicago, Kansas City and Dallas. Most of its assets are co-location data centres, where multiple tenants rent space in the same centre. It also has hyperscale centres, which are used by large cloud platform providers.

AI is turbocharging the growth in data, adding to demands from the corporate transition to cloud-based computing. Data centre capacity in Australia is forecast to more than double from 1,350 megawatts (MW) in 2024 to 3,100 MW by 2030. Additional investment in Australia’s data centre capacity is forecast to exceed $26b over this period.

If the demand for data centres is well known, the supply challenges are less understood. Access to land and reliable power are big issues, especially in large competitive markets like Sydney. This has led to data centres in tier 2 markets providing spillover capacity. The U.S. industry faces the same constraints, with tier 2 markets there growing their share of leasing activity. There are also pressures on the data centre supply chain as developers wait for critical equipment. 

DigiCo is a REIT, which means it makes money as a landlord leasing space in its data centres. Like the commercial or industrial property markets, investors will focus on the outlook for leasing rates as more supply is built over coming years. The prospectus forecasts Australia’s data centre supply will increase at an average annual rate of 16.3% over 2024 to 2027, compared to 15.9% demand growth. U.S. supply growth is forecast to increase at a 13.8% annual pace vs a demand growth of 12.1%. The prospectus shows DigiCo plans to add 161MW of capacity. 

While DigiCo is leveraged to a hot thematic, it remains to be seen whether it has the scale to compete for clients at a time when billions are flowing into new data centres. The prospectus shows it has a 3% share of the Australian data centre market (based on installed capacity). That’s well behind Airtrunk and CDC – the latter 48% owned by Infratil ($IFT) – with 25% and 24% respectively. NextDC has a 14% share. Last week’s Under the Spotlight highlighted Equinix and its 268 data centres, while rival Digital Realty ($DLR) operates more than 300 data centres either directly or through joint ventures.  

Portfolio strategy

DigiCo plans to have a diversified portfolio of data centre exposures. The target is to have around 40%-50% in stabilised centres – those no longer expanding –  and a similar weighting to existing data centres where they can add value. The remaining 10-20% will be weighted to data centre development. At IPO, it will have 38% stabilised assets, 59% value-add and a 3% weighting to development assets. Its stabilised U.S. assets have net rental yields of around 6%. 

DigiCo reckons it can deliver returns of 12%-15% for value-add assets and 15% to over 30% for development assets. HMC Capital will receive a management fee of 5% for the first $2.5m of project costs and $3% of development costs above that. The manager is also incentivised to bring in new customers, receiving 15% of the gross rent for a new tenant's first year of lease.

Returns on value-add and development assets are potentially higher, but they require more capital. The involvement of multiple parties in some of this year’s biggest data centre deals underscores the scale of investment. Page 59 of the prospectus hints at how DigiCo may free up capital. It says a partial divestment of the SYD1 asset may be considered following ‘stabilisation’, as well as its Los Angeles development sites – LAX1 and LAX2 – once planning approvals have been received.  

HMC Capital will want to ensure DigiCo hits its financial forecasts. These include an annualised FY25 revenue of $137.6m, or $216.8m if the SYD1 acquisition is included. Also an annualised FY25 EBITDA of $31m, or $97.3m if the SYD1 acquisition is included – this inclusion would see DigiCo trading on an enterprise value to EBITDA multiple of 43x. A distribution of $0.109 is forecast for the period to June 30, placing it on an annualised yield of 4%.  

More clients means more revenue, which should translate to a higher valuation of DigiCo’s assets. HMC Capital will earn a fee equal to 0.55% of the annually independently assessed gross asset value up to $4b (and 0.5% above $4b). 

Popular demand

DigiCo Infrastructure REIT’s fully subscribed IPO provides investors another way to invest in data centres at the end of a year when billions have been thrown at the sector. While growing demand is a tailwind, the ASX debutante will need to navigate a wave of new data centre supply over coming years to ensure lease rates continue to rise.   

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.