On March 20, Digital Core REIT DCRU ’s manager announced that the REIT’s second largest customer was downgraded by Moody’s Investors Service on Feb 17 to Caa2 from B3. The customer is believed to be Cyxtera Technologies,a publicly traded global colocation and interconnection provider. The manager has announced that the customer occupies three buildings in Silicon Valley, two in Los Angeles and less than 5% of a facility in Frankfurt, and “represents approximately US$16 million of annualised rent or 22.6% of Digital Core REIT’s total annualised rent”.
“On March 16 2023, the customer announced that it entered into an agreement with its lenders to extend the maturity date of its 2023 debt maturity to April 2024. The customer remains current on its rental obligations and has not requested any rent deferments, rental reductions, or contraction of the space it occupies,” DC REIT’s manager says.
Cyxtera reported its 2022 results on March 16, and announced that on March 14 it extended the debt maturity of a US$120.1 million revolving credit facility to April 2024. “The company is actively attempting to address its revolving credit facility and long-term debt that mature in April 2024 and May 2024, respectively. Due to these ongoing efforts, Cyxtera will not hold a fourth quarter 2022 conference call and is not providing 2023 guidance at this time,” the Cyxtera announcement said.
The results announcement shows that the company has US$96 million of short term debt which expires this year, and is likely to be covered by the revolving credit facility. Additionally, Cyxtera has US$853 million in long term debt and its 10-k form shows that all this matures in 2024.
In FY2022, Cyxtera’s Ebitda was US$238.9 million versus its net interest expense of US$163.3 million,
Cyxtera’s share price is down 32% this year and more than 80% over a one-year period, giving an indication of how challenging it could be to raise equity.
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In 2022, Sungard, which was a tenant at DC REIT’s Toronto facility filed for Chapter 11. During a results’ briefing in Feb this year, John Stewart, CEO of DC REIT’s manager had said that the REIT has an agreement with the sponsor for a cashflow support agreement till end-2023.
“In December 2022, we also executed a short-term lease agreement with one of the end-user customers and investment grade cloud service provider to release half the bankrupt customers footprint at the same rental rate. We are proactively working with the sponsor’s salesforce and portfolio management teams to backfill the remaining vacancy,” Stewart had said.
Analysts believe that the sponsor could provide a similar backstop should that be needed for the Cyxtera tenanted properties. At any rate, DC REIT has time to look for new tenants as Cyxtera’s woes may surface towards the end of 2023. Analysts have suggested that DC REIT would have the opportunity to rebalance its tenant base toward investment grade tenants in the event that Cyxtera files for chapter 11.
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“Sponsor Digital Realty could provide support through a cash flow guarantee in the event that Cyxtera files for chapter 11 bankruptcy protection,” says UOB Kay Hian in a March 20 update. Based on UOBKH’s sensitivity analysis on progress of backfilling vacant space, FY2025 DPU could drop by up to 29% if Cyxtera files for chapter 11 bankruptcy protection.
“Our base case scenario, which assumes DC REIT backfills half of the vacant data centre space, provides FY2025 DPU forecast of 3.5 US cents. Our worst-case scenario, whereby none of the vacant space is backfilled, provides FY2025 DPU forecast of 2.9 US cents and target price of US$0.57,” UOBKH says.
DC REIT reported a DPU of 3.98 US cents for FY2022, translating into a historic yield of 8.6%.
