Digital Core REIT DCRU has announced today that its second-largest customer Cyxtera Technologies has filed for bankruptcy.
Cyxtera, a global colocation and interconnection provider, represents approximately US$16.3 million ($22.0 million) or 22.4% of Digital Core REIT’s annualised rental revenue; it is deployed across six data centres, representing 26.6% of the pure-play data centre REIT’s portfolio value.
The facilities it currently occupies comprise 100% of three shell and core facilities in Silicon Valley; 100% of two shell and core facilities in Los Angeles and 1.5 megawatts, or 4%, of a fully-fitted facility in Frankfurt.
Cyxtera filed for chapter 11 bankruptcy protection in the US Bankruptcy Court for the District of New Jersey on June 4.
In an announcement on SGX, Digital Core REIT says that the customer has remained current on its rental obligations to Digital Core REIT through the month of May but has not yet paid rent for the month of June.
In conjunction with its bankruptcy filing, Cyxtera announced in a separate media statement that it has obtained a commitment for up to US$200 million of debtor-in-possession financing “to support ongoing operations and continue meeting customer demand for global data centre platforms”.
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The new financing is convertible into an exit facility upon the company's emergence from its bankruptcy filing and is expected to provide sufficient liquidity to support Cyxtera during this process and beyond.
The company says it is continuing to operate its data centres “normally and without interruption”. Its customers also continue to have access to their Cyxtera data centre sites and equipment as usual.
According to Digital Core REIT, Cyxtera intends to pay vendors and suppliers in full for goods and services provided on or after the filing date.
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Were all of Cyxtera’s annual revenue contribution to be eliminated, Digital Core REIT estimates that its distribution per unit (DPU) would be reduced by approximately 2.0 US cents.
The REIT’s total asset value would be reduced by approximately $85 million or an estimated 6%, while net asset value (NAV) per unit would be reduced by some 9% from 81 US cents to 74 US cents.
Meanwhile, aggregate leverage would increase by around 200 basis points, from 34.4% to 36.5%.
However, Digital Core REIT says it expects to be able to minimise any potential DPU impact and maintain or enhance long-term value and returns for unitholders given below-market rents in top-tier markets with favourable fundamentals.
“The customer’s in-place or passing rents are below market in each of the metros where the customer leases capacity from Digital Core REIT. Current market conditions are tight, with vacancy rates in the low- to mid-single-digits across all three metros,” explains the REIT.
The REIT notes that Silicon Valley is a global technology hub, with three of the five largest companies in the world by market capitalisation headquartered within 15 miles of all three Silicon Valley facilities, while Los Angeles serves as the “connectivity gateway” from the Americas to Asia as well as a global media, entertainment and gaming capital.
In Europe, Frankfurt is a preferred data centre destination for leading global service providers as well as local and international enterprises due to its central European location, excellent connectivity and leading role as a major financial centre.
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Also providing mitigation, according to Digital Core REIT, is the fact that Cyxtera’s facilities are 70% occupied in Frankfurt, 57% occupied in Los Angeles and 95% occupied in Silicon Valley.
The REIT explains that given Cyxtera’s operating expertise as the largest global provider of data centre, colocation and interconnection solutions, the REIT manager is “well-positioned” to step into agreements with the existing end-user colocation customers currently relying upon these facilities to support their digital infrastructure requirements, if Cyxtera were to reject any of its lease agreements with Digital Core REIT.
John Stewart, CEO of Digital Core REIT's manager, says: “We are disappointed by this recent development, but we wish our customer well as they navigate the bankruptcy process, and we stand prepared to guard against any potential near-term disruption while capturing long-term upside potential as the opportunity presents itself.”
“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,” he adds.
As at 12.49pm, units in Digital Core REIT were trading flat at 41 US cents.
