Wednesday 22 March 2023

DigiCore REIT Potential 2nd Major Tenant Potential Bankruptcy Crisis Temporary Postponed to April 2024.

I do not want to be a busybody but I thought that it is rather interesting that Professor Mak Yuen Teen from NUS Business School, who specialises in corporate governance and ethics, wrote recently about Digital Core REIT ("DIGITAL CORE REIT: ANOTHER FOREIGN REIT ON A BUMPY RIDE") on 17 March 2023. So I should document it here for my personal future reference as well as to share with folks who are interested to read more about it. Then on 20 March 2023, John Stewart, Chief Executive officer, of Digital Core REIT ("DCR") subsequently responded to the various articles including from Prof Mak relating to the financial crisis of its 2nd largest customer, Cyxtera Technologies.
 
1. Updates on potential default of Cyxtera Technologies, 2nd largest tenant, making up 22.6% of DCR's rental income.
Basically, on 16 March 2023, Cyxtera has announced that it has entered into an agreement with its lender to extend the maturity date of its 2023 debt maturity to April 2024 and has not requested DCR for any rent deferments, rental reductions or contraction of the space it occupies. 

2. Prof Mak raised very good points but read it with a pinch of salt
From my perusal, the 3 main points raised by Prof Mak in his article are as follows:

(i) Conflict of interest between sponsor which is listed in US and DCR which is of a smaller scale listed in Singapore and the interest of US shareholders of sponsor will take precedence; 

(ii) One of the independent director was a former DBS equity market staff with strong ties to DBS which is the issuance manager of the IPO and

(iii) Poor quality tenants dumped into the DCR as evident from default of Sungard and another upcoming delinquency by Cyxtera.

My only comment here is that being in commercial and running a business has all kinds of risk. For example, it does not mean that with good and awesome "Corporate Governance", then this is the magic bullet that will ensure minimum risks to a business. Even long established banking institution like Credit Suisse almost suffered from a complete collapse just recently. If anyone wants minimum risk free investment and tenants that will never go bankrupt or default on rental, then go invest in treasury bills or government bonds and stay far away from equities.

Parting thoughts
Well, the saying goes that "hindsight is always 20/20" and I have not seen Prof Mak daring to make a bolder statement that DCR is destined for business failure due to its poor corporate governance. But I am very sure that if DCR really went under water in future, then Prof Mak and other "experts" will rush in to assert that their previous "warnings" were right on the spot as they spotted the early "warning signs".  

Anyway the key question I guess is whether DCR is on the verge of a complete collapse and that it is in fact worthless or is the current market price at US$0.420 per unit adequately reflecting its fair valuation after taking out the upcoming bankrutpcy of Cyxtera and other weak major tenants? 

5 comments:

  1. I have read the article and it is quite focused on corporate governance. I agree with some of the points which have their own merits. However, as an investor, I am concerned with the bottom line and I think the main question that we have in mind is whether the data center space could be rented out easily after the collapse of the weak customers. It is unavoidable to have weak customers but the business viability makes sense if the product (i.e.data center) is still good. And of course, I agree that there is room for improvement in corporate governance. Hope the management could address these issues appropriately.

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    1. Hi Robert, thanks for dropping by and sharing your thoughts. I think DCR is now facing a crisis of investor lack of confidence. As seen from the run on banks, intangible sentiment can destroy a business overnight.

      I do hope that the sponsor can find good replacement quickly (just like what they did for Sungard's default) and backfilled half the vacated space within a short time frame in the event that Cyxtera goes underwater.

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  2. Thank you the author for this article. Really appreciate it.

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  3. Hi Blade, thank you for detailing the Professor's points in such a concise manner. Personally, I am with you on this one, and believe that sufficient risk has been priced in to DCR!

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    1. Hi Mate, thanks for dropping by and sharing your thoughts. Haha, I am keeping my fingers cross that the worst is over in terms of its pricing and that DCR does not self-implode.

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