DIGITAL Core Reit said on Wednesday (Nov 1) that it has reached a definitive agreement to sell several Silicon Valley facilities for US$160 million to Brookfield Infrastructure Partners, under a series of agreements to resolve the bankruptcy of its second-largest customer.

The Reit manager did not name the customer, but it was previously reported to be Cyxtera Technologies, a global colocation and interconnection provider, which filed for bankruptcy protection in June.

Cyxtera said separately on Monday that it had entered into an asset-purchase agreement with Brookfield and its institutional partners, which will acquire substantially all of Cyxtera’s assets for US$775 million.

Digital Core Reit noted that the second-largest customer occupied three facilities in Silicon Valley, two in Los Angeles, and 4 per cent of a fully-fitted facility in Frankfurt. The customer accounted for around US$16 million or 22 per cent of its annualised revenue.

The Reit has entered into an agreement to sell two of the three Silicon Valley facilities to Brookfield and its institutional partners for US$178 million. Digital Core Reit’s 90 per cent stake is valued at US$160 million, in line with the current book value. The transaction represents a 4.4 per cent cap rate.

Meanwhile, the customer has also agreed to assume and assign to Brookfield its existing lease agreement for the third Silicon Valley facility, with no change to the terms, conditions or rental rate of the existing lease agreement.

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The Reit manager said it has reached an agreement to amend the lease agreements for the two Los Angeles facilities, to bring forward the expiry of these leases to Sep 30, 2024, from February 2033 and January 2035 previously.

When these leases expire, Digital Core expects to enter into direct agreements with end-user colocation customers now occupying the facilities.

The manager said it “expects to enhance the return on these facilities over time” by leveraging on sponsor Digital Realty’s global platform “to gain efficiencies, lease up existing vacancy, and invest prudently to enhance marketability and build out additional capacity”.

Over at the Frankfurt facility, where the customer leases 4 per cent of the space, Digital Core Reit said it will pay US$2.5 million to terminate the customer’s lease agreement as part of the broader transaction under which Brookfield is acquiring the customer’s business out of bankruptcy.

“Digital Core Reit and Digital Realty expect to create long-term value by re-leasing this capacity on more favourable terms,” the manager said.

The completion of the sale of the customer’s business to Brookfield is subject to approval by the United States Bankruptcy Court, as well as customary closing conditions, and is expected to close in January 2024.

Digital Core said it has separately signed a letter of intent to acquire an additional 20 per cent interest in a fully-fitted freehold facility in Frankfurt, from Digital Realty for 94 million euros (S$136 million), or US$99 million.

It expects to fund the transaction with a portion of the proceeds from the sale of the two Silicon Valley facilities. The acquisition is subject to unitholder approval, and is expected to close in the first quarter of next year.

In another separate transaction, Digital Core has acquired a 10 per cent interest in a freehold data-centre facility in Osaka from Mitsubishi Corporation for 7.7 billion yen (S$69.7 million), or around US$51.5 million.

“The transaction will establish Digital Core Reit’s presence in Japan, improve geographic diversification and achieve international expansion,” the manager said, noting that the transaction will be funded with Japanese yen-denominated borrowings.

Assuming the transactions were completed on Jan 1, 2022, Digital Core’s pro forma distribution per unit for FY2022 would be US$0.035, compared to the actual distribution of US$0.0398. Pro-forma net asset value (NAV) would be US$0.82, compared to the reported NAV or US$0.83 as at December 2022.

John Stewart, chief executive of the manager, said: “These transactions will significantly enhance credit quality while providing financial flexibility to fund opportunistic investments and advancing our mission of delivering sustainable value for unitholders.”

The counter closed at US$0.50 on Wednesday, down 1 per cent, before the announcement.