Haiya…..why so many people bashing DigiCore REIT (“DCREIT”) on blogosphere for this week? The news on Cyxtera (2nd largest tenant making up 22.4% of DCREIT’s gross revenue) filing for bankruptcy protection on 5th June 2023 lead to many folks demonising it. But in a surprising twist, DCREIT (its price dropped to an all time low of US$0.37 per unit at one point in time after the announcment) rebounded sharply to USS$0.48 per unit as at 9th June 2023, which is an amazing +29% increase in just 3 days.
1. Latest information release by DCREIT management better than expected
Apparently, the bad news of a total loss of 22.4% of gross rental income had already been fully priced in. The better than expected updates actually lead to huge rally in price of DCREIT by 29%.
(i) Management has clarified that US$200Mil of “debtor in possession” financing has been obtained by Cyxtera which intends to fulfill all its financial obligation to its vendors. Debtor in possession refers to a special loan that is unique to companies undergoing chapter 11 in the US which is used to keep the company in operations during the re-organisation.
(ii) In addition, if Cyxtera really end up being liquidated, given Digital Realty's operating expertise as the largest global provider of data center, colocation and interconnection solutions, the 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.
(iii) Market conditions are tight in terms of supply of data centres in the properties that were leased to Cyxtera- vacancy rates in the low- to mid-single-digits for these areas.
2. Strange myth/thoughts by some bloggers that anybody can just build a data centre and lease it out hence there is no special "moat"
I find it weird that some folks are thinking that retail malls or Grade A office are better properties than data centres which are just "building with electrical and cooling systems". We need to understand that not everyone can build data centre technically.
Also, data centres form the foundation of our new age economies of digitalised and networked world. The exponential growth of data-driven technologies-such as cloud computing, Artificial Intelligence (AI), and the Internet of Things (IoT) – has led to huge demand for data centres to store, process, and manage this information. In Singapore, many proponents of data centres ("DC") lament at our local government restriction that has not been fully lifted for building more DCs to take advantage of Singapore location which is free from natural disaster and political stability.
In addition, once you have tenants in, they will most likely be in for a very long duration. It is not easy feat to just move all equipment to other data centres once the lease expires. Lots of planning and efforts need to be made by the tenant's IT team to prevent disruption to their services to their own clientele.
Saying that, investing and holding Data Centre REITs are not risk free investment akin to holding government fixed income as the usual tenant default risk due to financial duress are all present as evident in the Cyxtera bankruptcy case that surfaced. One needs to be wary of the quality of assets and tenant being crafted out into a Data Centre REIT at IPO- this is the 2nd tenant default after IPO for DCREIT.
Parting thoughts
It is quite funny that even Mapletree Industrial Trust (another REIT with data centres) got bashed by folks on top of DCREIT as it also counts Cyxtera as its tenant (albeit lesser concentration of only 3%). Anyway, I am happy to see the price of DCREIT rallying to US$0.48 per unit which means that I am sitting on on some paper profits for my recent purchases earlier this year in March and April.
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