Digital Core REIT (DCREIT) has been quick to buy back some of its units following a series of proposed deals to help the REIT deal with the longdrawn bankruptcy of its second-largest tenant, Cyxtera Technologies.

 

On Nov 2, the day after DCREIT announced the plans, it bought back 175,000 units on the open market at 51.6 US cents (70 cents). On Nov 6 and 7, it acquired 106,300 units at 55 US cents each and 20,000 units at 55.75 US cents each respectively. This brings the total number of units bought back under the current mandate to just over 4.54 million, equivalent to 0.4045% of the total unit base.

 

On Nov 1, DCREIT announced it was selling certain assets and amending lease terms to a shorter end date. It will also take parts of the proceeds from the divestments to invest in Japan, a new market, and also increase its presence in Frankfurt. Most notably, an investor, Brookfield Investment Partners, also signed a deal to acquire a substantial portion of Cyxtera&rsquo s portfolio which includes assets leased from DCREIT.

 

Analysts say that the net effect of the transactions is that DCREIT will now have a more diversified portfolio of assets and be less susceptible to tenant risks. While short-term distribution per unit will be reduced, the long-term resiliency of the portfolio has been boosted as a result of lower tenant risk.

 

Dale Lai and Derek Tan of DBS estimate that DCREIT will see a 3% dilution in its FY2024 DPU of 3.72 US cents upon completion of the transactions. &ldquo However, we view this as a net positive for DCREIT as it actively investors&rsquo concern of over-concentration risks of its tenant profile towards selected large tenancies,&rdquo the DBS analysts note, adding that DCREIT&rsquo s exposure to so-called investment-grade customers will increase to 87% from 77%.

 

Citi Research&rsquo s Brandon Lee is similarly positive about the developments. He calls this a &ldquo new chapter&rdquo for DCREIT as it can now trade closer to its normalised book value of 1.1 to 1.4x P/B, versus just 0.6x previously. Further positives are in the form of an ongoing buyback programme, says Lee, who has kept his &ldquo buy&rdquo call and 67 US cents target price.

 

$14 billion plan

 

Sembcorp Industries has been buying back its shares recently as it announces ambitious plans to grow its renewable energy sector in the coming years. The most recent buyback was on Nov 3 when the company acquired 357,000 shares at $4.85 each on the open market. This brings the total number of shares bought back under the current mandate to nearly 6.55 million shares, equivalent to 0.367% of the total.

 

Before Nov 3, Sembcorp also bought 357,000 shares each on Nov 1 and 2 for $4.74 each and $4.76 each respectively. On Nov 6, Sembcorp announced a new target of increasing the installed capacity of its renewable energy assets to 26GW come FY2028, up from 8.7GW now. If projects under development are included, the company has around 12GW of capacity now, with 6.3GW from wind, 4.7GW from solar and 8% or 909MWh from energy storage

 

Given Sembcorp&rsquo s target mix of 50-50 mix between solar and wind, this means the company is expected to add about 7.8GW of capacity through solar projects by 2028, figures Lim Siew Khee of CGS-CIMB.

 

To grow its energy business, Sembcorp plans to invest some $14 billion over FY2024 and FY208, out of which $10.5 billion will be meant for boosting renewable energy capacity, $1.4 billion to be allocated to imports, and $0.7 billion for integrated urban solutions.

 

According to Lim, Sembcorp should be able to achieve an overall return on equity target of 12% by FY2028. In her Nov 7 note, Lim reiterates her &ldquo add&rdquo rating along with an unchanged target price of $6.85, which is pegged to 14x earnings. &ldquo Our current estimates have not included any potential accretion from the planned new investments,&rdquo she adds. 

 

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&rsquo 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&rsquo 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.

 

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 &ldquo expects to enhance the return on these facilities over time&rdquo by leveraging on sponsor Digital Realty&rsquo s global platform &ldquo to gain efficiencies, lease up existing vacancy, and invest prudently to enhance marketability and build out additional capacity&rdquo .

 

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&rsquo s lease agreement as part of the broader transaction under which Brookfield is acquiring the customer&rsquo s business out of bankruptcy.

 

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

 

The completion of the sale of the customer&rsquo 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.

 

&ldquo The transaction will establish Digital Core Reit&rsquo s presence in Japan, improve geographic diversification and achieve international expansion,&rdquo 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&rsquo 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: &ldquo 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.&rdquo

 

DIGITAL Core real estate investment trust (Reit) : DCRU +1.8% announced on Monday (Sep 4) that it would be included in the FTSE EPRA Nareit Global Developed Index from market close on Sep 15.

 

The FTSE EPRA Nareit Global Real Estate Index Series is an international real estate investment index developed by the FTSE Group along with the European Public Real Estate Association and the National Association of Reits. The index series is designed to track the performance of listed real estate companies and Reits globally.  

 

John Stewart, chief executive of Digital Core Reit Management, said that the inclusion is a &ldquo significant milestone&rdquo that should enhance the Reit&rsquo s trading liquidity on the Singapore Exchange as well as its visibility to global institutional investors, while attracting new capital inflows from global index funds. 

 

Digital Core Reit also announced a slew of leadership changes in a separate announcement on Monday, in a bid to &ldquo provide additional depth to drive the next phase of its growth and build upon its commitment to deliver sustainable value for stakeholders&rdquo . 

 

David Lucey, who is currently a non-independent director, will become the chairman of the board of Digital Core Reit management. Lucey most recently served as interim managing director of Asia-Pacific, with responsibility for the sponsor&rsquo s operations across the region. 

 

He also previously served as senior vice-president of portfolio management for the Reit&rsquo s sponsor Digital Realty, and was responsible for leasing and financial management of the sponsor&rsquo s portfolio in North America. He replaces current chairman Jeff Tapley, who will take on an &ldquo expanded role &ldquo with the sponsor as Digital Realty&rsquo s chief commercial operations officer, and will step down from the board of the Reit&rsquo s manager. 

 

These changes will take effect from Oct 1. The Reit said that these changes are designed to &ldquo balance fresh thinking and new perspectives with experience and continuity&rdquo . 

 

Serene Nah, who joined Digital Realty in January this year as managing director and head of Asia-Pacific, will join the board of the manager as a non-independent director, effective Oct 1. Nah currently serves as an independent, non-executive director and a member of the audit committee and nomination committee for ESR Group. 

 

Her previous stints include roles as executive director and chief financial officer at Kerry Properties, head of Asia portfolio management for global technology private equity firm Silverlake Partners, and various roles spanning over a decade with General Electric. 

 

Dave Craft, who currently serves as vice-president of acquisitions for Digital Realty, will become the chief financial officer of the Reit&rsquo s manager from Oct 1. He will take charge of all financial functions of the manager, including financial reporting, capital markets, tax and investor relations as well as financial planning and analysis.

 

Craft succeeds Daniel Tith, who is returning to the US to lead global finance for Digital Realty. 

 

Stewart said that the new slate of industry veterans brings &ldquo strong leadership and investment experience that will be instrumental to driving the next phase&rdquo of the Reit&rsquo s growth. He added: &ldquo With these refreshments to our leadership, we look forward to continuing to capitalise on the favourable set of data-centre fundamentals along with our industry-leading acquisition pipeline to deliver sustainable value for our stakeholders.&rdquo

 

DIGITAL Core Reit&rsquo s distribution per unit sank 6.8 per cent to US$0.0192 for its first half-year ended June, from US$0.0206 the year before, as a result of lower rental income.

 

Two of its tenants filed for bankruptcy, which caused them to fall behind on rent payments. One of these customers has since vacated the data centre it was occupying in Toronto, Canada, and has been replaced by other tenants, the Reit manager said on Thursday (Jul 27) in a bourse filing. 

 

The other tenant, which The Business Times understands is Cyxtera, a Nasdaq-listed data centre operator, has remained current on rental obligations for July.

 

However, rent for June has not been paid due to administrative claim procedures, but is expected to be collected. 

 

Net property income fell 0.7 per cent to US$35.1 million on higher property taxes, while lower utilities expenses supported a 1.1 per cent increase in gross revenue for the first half of the year to US$53.4 million.

 

Income available for distribution declined 7.6 per cent to US$21.5 million, down from US$23.2 million previously, as finance and tax expenses for the first half of the year were higher than before due to a rise in interest rates in the United States since April 2022. 

 

The distribution will be paid on or before Sep 28, the manager said. 

 

Preserving the flexibility of its balance sheet, while prudently utilising debt headroom to execute upon accretive investment opportunities will be its key focus, it said. 

 

For the first half of 2023, aggregate leverage stood at 34.2 per cent while the weighted average debt maturity was approximately 3.4 years. 

 

As at Jun 30, Digital Core Reit&rsquo s portfolio is 97 per cent occupied with a weighted average lease expiry of approximately 3.9 years.

 

The manager said it intends to expand its asset base and diversify its customers.

According to a report by the International Data Corporation (IDC), AI is expected to increase data center demand by 66% by 2025. This is because AI-powered applications require a lot of computing power and storage space. For example, AI-powered facial recognition software requires a lot of data to train and operate. This data needs to be stored in data centers, which drives up demand for data center space.

In addition, AI-powered applications are often used in real-time applications, such as self-driving cars. This means that data centers need to be able to process large amounts of data quickly, which also drives up demand for data center space.

Overall, the increasing adoption of AI is expected to have a significant impact on data center demand. By 2025, AI is expected to account for more than 20% of all data center traffic. This will require data centers to be built or expanded to meet the growing demand for computing power and storage space.

Here are some specific examples of how AI is increasing data center demand:

• Virtual assistants: Virtual assistants like Amazon Alexa and Google Assistant require a lot of computing power to process voice commands. This demand is only going to increase as more and more people use virtual assistants.
• Self-driving cars: Self-driving cars require a lot of computing power to process data from sensors and make decisions in real time. This demand is only going to increase as self-driving cars become more widespread.
• Healthcare: AI is being used in healthcare to develop new drugs, diagnose diseases, and provide personalized treatment plans. This demand is only going to increase as AI-powered healthcare applications become more widespread.

As you can see, AI is having a major impact on data center demand. This trend is only going to continue in the years to come, as AI becomes more widespread and sophisticated.

 

The manager of Digital Core REIT has responded to the query by Singapore Exchange Securities Trading Limited (SGX-ST) stating that it was not aware of any information that may have caused the surge in its unit price.

 

The SGX-ST, on July 20, issued a query to the REIT after its unit price spiked to 57 US cents (75.5 cents), which was 14% higher than its last-closed price of 50 US cents apiece.

 

On further possible explanations for the &ldquo unusual price movements&rdquo , the REIT manager pointed out that it is &ldquo aware&rdquo that a brokerage firm has circulated a bulletin noting that the final bids for Cyxtera, the REIT&rsquo s second largest customer, were due to be submitted by July 19.

 

According to the media reports from the US, Cyxtera had received six letters of intent (LOI) to acquire its entire business.

 

DBS Group Research, on July 20, had issued a bulletin stating that Cyxtera is only seeking to reject two of its leases &ndash the one of a Serverfarm-owned data centre in Washington and a CyrusOne-owned facility in Amsterdam &ndash and is likely to affirm all the other leases with its landlords.

 

&ldquo [This is] positive news for the likes of Digital Core REIT, Mapletree Industrial Trust (MINT), and Keppel DC REIT as they had several properties leased to Cyxtera which were at risk of being vacated,&rdquo says DBS.

 

&ldquo Following the news that Cyxtera has filed for a Chapter 11 filing on June 6, Digital Core REIT which has [about] 23% of its revenue exposed, saw a steady increase in its trading unit price. Compared to the lows prior to that, Digital Core REIT&rsquo s share price is currently trading [some] 35% higher. Despite this, we believe the rally in Digital Core REIT&rsquo s share price is far from over as the continuation of all of Cyxtera&rsquo s leases in Digital Core REIT&rsquo s portfolio will reaffirm our earnings projections going forward,&rdquo it adds.

 

Further to its note, the brokerage noted that another catalyst in the REIT&rsquo s unit price could be the potential of an index inclusion to the FTSE NAREIT Developed Asia Index.

 

&ldquo Based on our estimates, Digital Core REIT will have to trade at a market cap of US$400 million to be considered for an inclusion by the cut-off date on Aug 21 (for the September review),&rdquo says DBS. &ldquo Digital Core REIT will have to trade at a price range of between 57 US cents to 58 US cents per unit to stand a good chance for the index inclusion. Following the price rally in the past few days, and the 10% increase [on July 20], we believe Digital Core REIT is on track for the index inclusion by the September review.&rdquo

 

&ldquo As we await for more news on the restructuring of Cyxtera and the affirmation/rejection of its leases, this is a case of &lsquo no news is good news&rsquo . Given that Cyxtera has not indicated their intentions to reject any other leases (other than the two already announced), we believe that there is a good chance they will affirm their leases at its other facilities. With this, it reaffirms our earnings projections for Digital Core REIT, implying a still very attractive forward dividend yield of more than 6.7% currently,&rdquo adds the brokerage.

 

The manager has also confirmed that it is in compliance with the SGX-ST listing rules.

Digital Core Real Estate Investment Trust (DigiCore Reit) : DCRU -1.03% bought back 520,000 units for a total consideration of US$213,002.75 over the period.

 

The units were repurchased to be cancelled.

 

On Jun 6, the Reit manager bought back 500,000 units at US$0.4081 each for a total consideration of US$204,292.42.

 

On Jun 7, it repurchased another 20,000 units at US$0.435 each for a total consideration of US$8,710.33.

 

The buybacks came after the manager warned on Jun 5 that the Reit&rsquo s annual distribution per unit (DPU) could be reduced by about US$0.02 if the annual revenue from its second-largest tenant is completely eliminated.

 

The tenant, a global co-location and interconnection provider, filed for Chapter 11 bankruptcy protection on Jun 4.

 

The Reit manager did not name the tenant, but The Business Times understands it to be Cyxtera. The Nasdaq-listed data centre operator had been struggling under a significant debt load for months.

 

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

 

Units of DigiCore Reit closed at US$0.48 on Friday (Jun 9), up 17 per cent over the course of the week. The counter is down 12.7 per cent this year.

 

ANALYSTS have lowered their target prices for Digital Core Reit : DCRU +4.88% after its manager on Monday (Jun 5) warned that the real estate investment trust&rsquo 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&rsquo 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.

 

Similarly, Citi analyst Brandon Lee said that the data centres in Los Angeles and Frankfurt are &ldquo poised for a downtime&rdquo 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&rsquo 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 &ldquo all negatives have already been priced in&rdquo .

 

&ldquo We believe that the worst-case scenario &ndash fully vacating all properties and impacting about 35 per cent of DPU &ndash are unlikely to happen,&rdquo it said.

 

This is because the market occupancies at the Silicon Valley and Frankfurt properties are &ldquo relatively healthy&rdquo at 95 per cent and 70 per cent, respectively, it added. But it noted that risks are &ldquo probably concentrated&rdquo on the two assets in Los Angeles.

 

DBS Group Research said it is maintaining its target price of US$0.90 and its &ldquo buy&rdquo call on the counter until there is &ldquo more clarity&rdquo on the leases with Cyxtera.

 

Both Citi Research and UOBKH are keeping their &ldquo buy&rdquo 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.

 

&ldquo 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,&rdquo Lee said.

 

He also said that Silicon Valley occupancy is &ldquo likely to hold&rdquo given the &ldquo solid supply and demand dynamics and limited power until 2028&rdquo .

 

Supply constraints can drive higher rents, noted UOBKH&rsquo s Koh. &ldquo Rising rents and tightening vacancies augur well for Digital Core Reit&rsquo s efforts to backfill the vacant data centre space.&rdquo

 

He added that the Reit&rsquo 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&rsquo s existing end-user co-location customers.