Digital Core Reit manager warns DPU could be halved as second-largest tenant goes bust

THE manager of Digital Core real estate investment trust : DCRU 0% (Reit) on Monday (Jun 5) warned that the Reit’s distribution per unit (DPU) could be reduced by about US$0.02 if the annual revenue from its second-largest tenant were to be completely eliminated.

This comes after the tenant, a “global co-location and interconnection provider”, filed for Chapter 11 bankruptcy protection on Sunday.

Digital Core’s FY2022 DPU stood at US$0.0398, 4.8 per cent lower than the US$0.0418 forecast.

The Reit manager did not name the tenant, but The Business Times understands it to be Cyxtera, a Nasdaq-listed data centre operator.

Dan Tith, chief financial officer of Digital Core Reit’s manager, said: “We want to reassure investors that we have several lines of defence prepared for this scenario and feel very good about the contingency plans we have in place.”

According to the Reit manager, the tenant in question represents about US$16.3 million or 22.4 per cent of the Reit’s annual rental revenue.

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It 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’s facilities are spread across six of the Reit’s data centres, representing 26.6 per cent of the Reit’s total portfolio value as at end-2022.

Digital Core’s manager noted that the data centre operator has remained current on its rental obligations through May 2023 but has yet to pay rent for June.

It added that its tenant obtained a commitment for up to US$200 million of debtor-in-possession financing, stating it intends to pay vendors and suppliers in full for goods and services provided on, or after, the filing date.

Assuming that 100 per cent of annual revenue from the Reit’s second-largest customer will be eliminated, the manager expects aggregate leverage to increase by approximately 200 basis points, to 36.5 per cent from 34.4 per cent.

Its total asset value would also be reduced by about US$85 million or 6 per cent, and net asset value per unit would fall about 9 per cent to US$0.74, from US$0.81.

Digital Core Reit’s manager nonetheless said it expects to be able to minimise any potential DPU impact on the Reit, in view of mitigating factors such as below-market rents and favourable fundamentals of the locations where the Reit’s assets are located.

The manager also said it is “well-positioned” to step into agreements with existing end-user co-location customers.

Tith said: “Should any of our leases be rejected during the court process, we would either be able to step into agreements with the existing end-user co-location customers currently relying upon these facilities to support their digital infrastructure requirements, or re-lease the assets, which are all in top-tier markets with favourable demand-supply dynamics.”

John Stewart, chief executive officer of Digital Core Reit Management, said he is “disappointed” by news of the tenant’s bankruptcy filing.

“We stand prepared to guard against any potential near-term disruption while capturing long-term upside potential as the opportunity presents itself,” he said.

“We remain committed to our strategy of investing in a diversified portfolio of mission-critical data centre facilities in top-tier global markets and remain focused on preserving and creating long-term value for Digital Core Reit unitholders.”

Units of Digital Core Reit closed at US$0.41 on Thursday, before it called for a trading halt on Monday prior to the market open.