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SINGAPORE – Digital Core Reit, a pure-play data centre real estate investment trust (Reit) listed in Singapore, on Monday said it expects minimal impact on its earnings following news that its second-largest tenant, Cyxtera, had filed for bankruptcy in the United States on Sunday.
Cyxtera is the Reit’s second customer to file for bankruptcy, after Sungard, its fifth-largest tenant, did so in 2022.
Cyxtera, a data centre operator based in Miami, Florida, accounts for about US$16.3 million (S$22 million), or 22.4 per cent, of Digital Core Reit’s annualised rental revenue. It leases six data centres in Silicon Valley, Los Angeles and Frankfurt, Germany, from Digital Core Reit, and provides co-location and interconnection services, which allow other companies to rent out rack space for their own servers and networking equipment.
This represents 26.6 per cent of the Reit’s total portfolio value, which comprises 11 data centres in Silicon Valley, Los Angeles, Northern Virginia, Toronto in Canada and Frankfurt.
Digital Core Reit said Cyxtera met its rental obligations for May but has not yet paid rent for June.
Cyxtera said in a statement on Sunday that it has obtained US$200 million of debt financing to keep its business going, including paying its vendors and suppliers for goods and services provided.
For now, Digital Core Reit said, Cyxtera has not yet determined which leases it may accept or reject.
In the worst-case scenario that Cyxtera rejects all its leases with Digital Core Reit and vacates the premises, the Reit’s manager estimates that its distribution per unit (DPU) will drop by about two US cents and aggregate leverage will increase to 36.5 per cent, up 2.1 percentage points from 34.4 per cent currently.
It added that any potential impact on earnings will be minimised because current market conditions remain tight, with vacancy rates in the low to mid-single digits across all three cities – Silicon Valley, Los Angeles and Frankfurt.
“Silicon Valley is a global technology hub… Los Angeles serves as the connectivity gateway from the Americas to Asia, and is a global media, entertainment and gaming capital. Frankfurt is a preferred data centre destination… due to its central European location, excellent connectivity and leading role as a major financial centre,” Digital Core Reit’s manager said in a statement.
Cyxtera’s facilities are currently 70 per cent occupied in Frankfurt, 57 per cent occupied in Los Angeles and 95 per cent occupied in Silicon Valley. It is also paying below-market rents in each of the metros, where it leases capacity from the Reit, the manager added.
The Reit manager expects to be able to lease out capacity directly to Cyxtera’s customers or find new tenants at higher rents than what Cyxtera was paying.
“Should any of our leases be rejected during the court process, we would either be able to step into agreements with the existing end-user co-location customers currently relying upon these facilities to support their digital infrastructure requirements or re-lease the assets,” said Mr Dan Tith, the chief financial officer of Digital Core Reit’s manager.
Mr Vijay Natarajan, a real estate and Reits analyst at RHB Singapore, said new technologies like artificial intelligence will drive the “next generation of demand for data centres” so the outlook is still positive.
Mr John Stewart, chief executive of Digital Core Reit’s manager, said the Reit has the support of its sponsor, Digital Realty, a global data centre owner and operator listed on the New York Stock Exchange.
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