Digital Core REIT - UOB Kay Hian 2023-11-03: Rising From The Ashes

• Digital Core REIT (SGX:DCRU)’s second-largest tenant Cyxtera is on the cusp of emerging from chapter 11 bankruptcy restructuring. The series of six agreements reduces exposure to Cyxtera/Brookfield from 22% to 5% while enhancing exposure to investment-grade tenants from 77% to 85%.
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• Digital Core REIT provides a distribution yield of 6.4% for 2024. Maintain BUY. Target price: US$0.69.

Cyxtera on the cusp of emerging from chapter 11 bankruptcy.

• Brookfield Infrastructure Partners has entered an agreement with Cyxtera to acquire all of Cyxtera’s assets for US$775m. Brookfield will also purchase seven data centres from Cyxtera’s landlords.
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Resolving bankruptcy of Cyxtera.

• Digital Core REIT has entered into a series of six agreements to resolve the bankruptcy of its second-largest tenant Cyxtera, which accounted for 22% of its total annualised rent:
  1. Digital Core REIT will divest its 90% stake in two Silicon Valley data centres, 2401 Walsh Avenue and 2403 Walsh Avenue, to Brookfield for US$160m, which is in line with current book value. The transaction represents a cap rate of 4.4%.
  2. The existing lease agreement for 1500 Space Park, the third Silicon Valley data centre, is assigned to Brookfield with no change to terms, conditions and rental rate.
  3. The lease expiration for two Los Angeles data centres, 200 North Nash Street in El Segundo and 3015 Winona Avenue in Burbank, is accelerated by about 10 years from Feb 33 and Jan 35 respectively to Sep 24.
  4. Digital Core REIT has signed a letter of Intent to acquire an additional 20% interest in Wilhelm-Fay Straße 15 and 24, a fully-fitted freehold data centre in Frankfurt, from Digital Realty for €94m or US$99, thereby increasing its stake to 45%. The transaction is funded by proceeds from the sale of two Silicon Valley data centres.
  5. Digital Core REIT will pay US$2.5m to terminate Cyxtera’s lease agreement at Wilhelm-Fay Straße 24, which is 1.5MW or 4% of capacity for the Frankfurt data centre.
  6. Digital Core REIT has completed the acquisition of a 10% interest in a freehold data centre located in Osaka from Mitsubishi Corporation for ¥7.725b or US$51.5m on 1 Nov 23. The transaction is funded by 3-year JPY term loan at all-in cost of 1.3%.
• The acquisiton of a 20% stake in a Frankfurt data centre is subject to unitholders’ approval during EGM and is expected to close in 1Q24.

Major overhang and risk factor removed.

• Read more at SGinvestors.io.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2023-11-03 SGinvestors.io

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