There are good news and bad news coming out of DigiCore REIT ("DC REIT"). Good news is that DC REIT has rebounded from its low of US$0.710 per unit in the July'22 bloodbath. Taking into account the recent price recovery of DC REIT to US$0.87 per unit as at 31 August 2022, this represented a +22.5% rally in market pricing which is an excellent news for all investors of DC REIT. The major bad news is that the 1st half distribution is only US$0.0206 per unit which means an annualised distribution of US$0.0412 per unit. At the price of US$0.87, this gives a distribution yield of a mere 4.74% per annum. Personally, I thought that with such a low yield at current market price, taking up business risks such as the bankruptcy of one of its major tenant is too much notwithstanding its Sponsor, Digital Realty, coming out to "guarantee" its cashflow.
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| Dividend of 2.06 cents for 6mths of 1H22. |
Sponsor to guarantee cashflow shortfall from future potential default by major tenant's bankruptcy
Initially, I was very excited and happy that the sponsor will make good on any loss of cashflow from the major tenant in bankruptcy. However, substance over form, this turns out to be in the form of a loan which need to be repaid eventually. DC REIT's own term for this loan is nicely crafted as a "cash flow support of shortfall".
Initially, I was very excited and happy that the sponsor will make good on any loss of cashflow from the major tenant in bankruptcy. However, substance over form, this turns out to be in the form of a loan which need to be repaid eventually. DC REIT's own term for this loan is nicely crafted as a "cash flow support of shortfall".
I have a hard time understanding the above arrangement as what is the use of having extra cash upfront but that one still need to return it to the Sponsor by 31 December 2028? Personally to me, this is just a clever financial engineering move to produce a seemingly stable stream of income for distribution at DC REIT level. It does not change the fact that DC REIT which just IPO has a potential default of rental by major tenant coming up. Money borrowed upfront from Sponsor ultimately still needs to be returned. The only consolation here is that the "cashflow support" given is interest free.
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| Extract of Cash Flow Support Agreement from the recent press release |
Summary
During early July'22, when DC REIT's market price clashed due to the havoc caused by Chanos shorting data centres, I have accumulated 20,000 units of DC REIT at various batches averaging US$0.743 per unit (I have planned to acquire more units should it plunged below US$0.70 but this did not materialize). In view of the sudden August 2022 surge in DC REIT market prices which resulted in the extremely low distribution yield of less than 5% for DC REIT as well as the issue of major tenant facing bankruptcy, I have exited all my positions in DC REIT at US$0.865 per unit and took an immediate profit of US$2,440 (S$3,318). 16% realized return within a month is equivalent to waiting on capital deployed for 3 years to get the equivalent income distributions. I will be looking to re-deploy this S$20K plus in capital over the next few weeks.
(Note: Since I am being heckled as well as being trolled online these days whenever my past few posting relating to REITs is put up on a Facebook group, I need to state here that having a liberal mind on discussion of 2 sides of a coin should never be perceived to be "filmsy" or "airy". It is also perfectly ok to disagree with my views but one should not be overly confrontational, in particularly, through harassing or trying to disconcert others with challenges or gibes.)
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