• Credit rating of Cyxtera Technologies recently downgraded by Moody&rsquo s following concerns of its ability to service debt obligations
• Cyxtera continues to be current on all their rentals, and there are currently no indication that anything has changed
• The tenant&rsquo s operations remains strong, especially as energy prices have came off the highs and have stabilised
• Although we remain cautious in the near term, we remain confident on DCREIT&rsquo s ability to navigate any potential tenant risks together with the support from its Sponsor

What has happened?

Cyxtera technologies is a global colocation data centre operator that operates throughout Asia Pacific, Europe, and the US. They have recently been in the news after they approached lenders to push back maturities on its debt. Fresh concerns on Cyxtera&rsquo s ability to service their debt obligations have surfaced, and most recently, Moody&rsquo s downgraded the company&rsquo s corporate family rating from B3 to Caa2. Moody&rsquo s cited that although they believed in Cyxtera&rsquo s underlying business fundamentals, they are concerned with the firm&rsquo s ability to service debt obligations in the medium term.

Not new news, but fresh concerns are valid.

The concerns surrounding Cyxtera&rsquo s debt obligations are not new, and questions were raised since last year when we saw a spike in operating costs and interest rates. We understand that although energy prices has came off the peak and have stabilised, the high interest rate environment calls into question Cyxtera&rsquo s ability to continue expanding and growing, which has been once of the key drivers of its business strategy.

DCREIT has demonstrated their ability to navigate similar risks previously.

We understand from management that Cyxtera continues to be current on all their rentals, and have not received any new updates from the tenant. Based on our estimates, Cyxtera is DCREIT&rsquo s second largest tenant, accounting for c.22.6% of DCREIT&rsquo s revenues. Although this may seem like a concern for DCREIT, we take comfort from its Sponsor&rsquo s commitment to the REIT. Similar to what we saw with SunGard previously, DCREIT&rsquo s Sponsor was quick to step in and provide support for the REIT. Moreover, DCREIT has already successfully backfilled almost half of the space that was vacated by SunGard as demand for DC space remains robust.

We believe risks have mostly been priced in at current levels as fundamentals still remain strong.

Looking at a valuation perspective, we have seen DCREIT&rsquo s share price correcting by c.18% over the past month. At current prices, this implies a relatively high forward yield of c.7.5%. Although we remain cautious on these developments surrounding Cyxtera in the near term, especially in the wake of credit tightening in the US, we believe that such risks have mostly been priced in at current levels and DCREIT&rsquo s yield of c.7.5% is attractive. Aside from concerns on Cyxtera, DCREIT&rsquo s other tenants are continue to maintain their strong credit ratings. Furthermore, with energy prices having stabilised, we are less concerned with the operating profits of tenants as compared to a year ago.

Cautious in the near term, but remain confident on DCREIT

Although we will take on a more cautious approach on DCREIT in the near term, we are confident on the REIT&rsquo s ability to navigate such hurdles as previously demonstrated. Until there are further developments on Cyxtera, we will be maintaining our  BUY  recommendation with TP of  US$0.90.