Brokers’ take: Analysts cut Digital Core Reit targets after Cyxtera files for bankruptcy protection
Chong Xin Wei
ANALYSTS have lowered their target prices for Digital Core Reit after its manager on Monday (Jun 5) warned that the real estate investment trust’s (Reit) distribution per unit (DPU) could fall by US$0.02.
This is assuming the elimination of annual revenue from its second-largest tenant, Cyxtera, which filed for bankruptcy protection over the weekend.
UOB Kay Hian slashed its target price for Digital Core to US$0.67, from US$0.78 previously. Citi Research also reduced its target price by 18 per cent to US$0.67 from US$0.82.
Cyxtera currently occupies 100 per cent of five shell and core facilities in Silicon Valley and Los Angeles, and 4 per cent of a fully-fitted facility in Frankfurt.
The tenant, which represents about US$16.3 million or 22.4 per cent of the Reit’s annual rental revenue, has 120 days to decide which leases to resume and reject.
On Tuesday, UOBKH analyst Jonathan Koh said he expects Cyxtera to reject the two leases for data centres in Los Angeles as occupancy there is low, at 57 per cent.
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Similarly, Citi analyst Brandon Lee said that the data centres in Los Angeles and Frankfurt are “poised for a downtime” due to lower customer occupancy.
Both research teams reduced their FY2023 to FY2025 DPU estimates for Digital Core.
Koh from UOBKH reduced his DPU forecast for FY2024 by 15 per cent to US$0.035. Citi’s Lee cut his DPU estimates by 5.7 per cent to US$0.0374 for FY2023, by 12.8 per cent to US$0.0357 for FY2024, and by 0.9 per cent to US$0.0422 for FY2025.
Meanwhile, DBS Group Research said that “all negatives have already been priced in”.
“We believe that the worst-case scenario – fully vacating all properties and impacting about 35 per cent of DPU – are unlikely to happen,” it said.
This is because the market occupancies at the Silicon Valley and Frankfurt properties are “relatively healthy” at 95 per cent and 70 per cent, respectively, it added. But it noted that risks are “probably concentrated” on the two assets in Los Angeles.
DBS Group Research said it is maintaining its target price of US$0.90 and its “buy” call on the counter until there is “more clarity” on the leases with Cyxtera.
Both Citi Research and UOBKH are keeping their “buy” calls on the counter as well.
Lee said that Digital Core Reit can continue to receive rents until Sep 23 as the tenant has secured debtor-in-possession financing with a 120-day ceiling.
The Reit said on Monday that its tenant obtained a commitment for up to US$200 million of debtor-in-possession financing, and it intends to pay vendors and suppliers in full for goods and services provided on, or after, the filing date.
“It has up to 120 days to determine which leases to assume and reject, and post-petition rent must be paid until lease rejection occurs,” Lee said.
He also said that Silicon Valley occupancy is “likely to hold” given the “solid supply and demand dynamics and limited power until 2028”.
Supply constraints can drive higher rents, noted UOBKH’s Koh. “Rising rents and tightening vacancies augur well for Digital Core Reit’s efforts to backfill the vacant data centre space.”
He added that the Reit’s estimated in-place passing rents are 15 per cent to 40 per cent below market at Northern California and 5 per cent to 15 per cent below market at Los Angeles.
Koh also said that the Reit is well-positioned to deal directly with Cyxtera’s existing end-user co-location customers.
Units of Digital Core Reit resumed trading on Tuesday and were trading down 1.2 per cent or US$0.005 at US$0.405 as at 11.56 am.
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