So much promise at the start, only to start seeing worms post-IPO. That was my initial thought when news of Cyxtera’s refinancing woes surfaced in March 2023.
Cyxtera Technologies is one of DC Reit top 10 tenants accounting for 22.6% of gross rental income. Cyxtera Technologies is a data centre owner and operator in the US, and Asia-Pacific.
Although I am currently vested in Digital Core Reits, I am fully aware that one has to be impartial when it comes to catching a falling knife and admitting it, disposing of it, and moving on. Overall, the DC Reit holding occupies approximately 2% of my overall stock and bond portfolio.
I typically do not read too much into the details of my investments if things are going smoothly. However, when stock price starts crashing and negative news hit the headlines, I tend to put them under a ‘microscope’ to try to find out what I have missed. There could be lessons to be learned and to avoid in the future.
In most cases, it is like going down a rabbit hole. There are tonnes of information.
However, in this post, I would like to refrain from stating my opinions and strive to present the data as it is. I leave it for you, to form your own judgment.
Revenue and Dividend
For the FY 2022, DC Reit’s gross revenue at US$107.7 mil exceeded the forecast gross revenue of US$105.9mil.
At its recent stock price, DC Reit has a current yield of 9.43%.
In its full-year 2022 presentation dated 2 Feb 2023, the Full Year 2022 Distribution is at 3.98 US Cents per share. As stated on its website, DC Reit’s distribution policy is to distribute 100% of Digital Core REIT’s Distributable Income from listing date to the end of the projection year 2023, and at least 90% thereafter. The distributions will be made on a semi-annual basis.
The FY 2022 distribution at 3.98 US cents fell short of what was stated in the IPO prospectus (eg. 4.18 US cents) – See below. Given the evolving situation, it is also doubtful if they can meet the target of 4.4 US cents for FY 2023.
There are many glaring questions.
For this post, let’s just look at the management (or rather the changes in management).
Management playing the game of musical chairs
Typically I do not read too much into change of management. However, when there appear to be sudden and increasing numbers of changes… It could signal troubles ahead.
1) Cyxtera Technologies: Digital Core Reit’s 2nd largest tenant
Is this why Digital Core REIT’s unit price has been weak? (read here)
There has been some weakness in the price of Digital Core REIT in early to mid March 2023. According to DBS Group Research, Cyxtera Technologies is one of DC REIT’s top 10 tenants accounting for 22.6% of gross rental income. Cyxtera Technologies is a data centre owner and operator in the US, and Asia-Pacific.
It was reported that Cyxtera posted a $355m net loss for 2022, and canceled its earnings call.
Cyxtera Technologies announced that it has entered into an agreement with all of its revolving lenders to modify certain terms of its $120.1 million revolving credit facility, including an extension of the maturity date from November 1, 2023, to April 2, 2024; and it is actively attempting to extend the maturity on, or refinance or repay, its revolving credit facility and long-term debt that mature in April 2024 and May 2024, respectively.
However, its business is fundamentally unsustainable (as stated in the post below) and its end appears to be imminent.
Cyxtera Technologies: Unsustainable Business Model (read here)
Cyxtera Technologies was already downgraded by Moody’s Investors Service from B3 to Caa2 on 17 Feb 23. Its outlook was also changed from stable to negative. Moody’s cited governance weakness and difficulty in refinancing revolving credit facilities of US$120m as basis for their downgrade. Moody’s believes Cyxtera is at high risk for default without an equity capital infusion and full refinancing over the next few months.
The recent exodus of key members of the Company’s board of directors and audit committee in late March could be a sign of imminent troubles.
– On March 28, 2023: Resignations of Melissa Hathaway and Michelle Felman from the Company’s board of directors and audit committee, effective on March 28, 2023.
– On March 27, 2023, Jeffrey C. Smith resigned as a member of the Board of Directors (the “Board”) of Cyxtera Technologies, Inc. (the “Company”), effective immediately.
– On March 22, 2023, Cyxtera Technologies, Inc. announced that Mr. Randy Rowland will step down as the Company’s Chief Operating Officer, effective March 31, 2023.
– On November 10, 2022, Raymond Svider resigned from the Board of Directors Company. Mr. Svider’s resignation was not due to any disagreement with the Company. In addition, on November 10, 2022, the Board elected Benjamin Phillips to serve as a member of the Board to fill the vacancy created by Mr. Svider’s resignation.
CYXTERA TECHNOLOGIES, INC. : Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing (form 8-K) (read here)
2) Digital Realty
Talking about the musical chairs game played by the management, recently there were changes in the key roles of Digital Realty Management.
Digital Realty, the largest owner, operator, developer, and acquirer of data centres globally (and Digital Core Reit’s Sponsor), recently issued mixed 2023 guidance after Q4 earning miss in Feb 2023.
Digital Realty issues mixed 2023 guidance, after Q4 earning miss (read here)
a) In Dec 2022, it was announced that Digital Realty CEO Bill Stein was terminated from his role as CEO, effective immediately. The current president and chief financial officer, Andrew P. Power was appointed as its CEO.
Digital Realty CEO Bill Stein leaving company, CFO Andy Power takes helm (read here)
b) In Jan 2023, Digital Realty appointed Matt Mercier as Chief Financial Officer. He succeeded Andrew Power, who was recently named Chief Executive Officer.
Digital Realty Appoints Matt Mercier as Chief Financial Officer (read here)
c) In Jan 2023, Serene Nah was appointed as Managing Director, Head of Asia Pacific. Serene graduated from The Nanyang Technological University Singapore with a Bachelor’s degree in Business and has an executive MBA from Kellogg-HKUST. She will be based in Singapore.
Digital Realty Appoints Serene Nah as Managing Director, Head of Asia Pacific (read here)
New regional leader takes charge at Digital Realty (read here)
3) Digital Core Reit
DIGITAL CORE REIT: ANOTHER FOREIGN REIT ON A BUMPY RIDE (read here)
Mr Mak, in his post (above), highlighted the following points:
“Unlike its sponsor REIT, which is internally managed as is the common practice in the US, DCREIT is externally managed. We have in various editions of GIFT mentioned our strong preference for the internally managed model as it is better mitigates conflicts of interest between the manager and unitholders….
Another issue we raised is that the five-member all-male board of the manager includes an independent director who “spent 30 years with DBS Bank until his retirement in 2019 and was responsible for the bank’s equity markets business in Singapore”. While he may meet the technical requirements for independence, it is surprising that an independent director who has such a close relationship with DBS Bank – one of the three issue managers, global coordinators, bookrunners and underwriters – was appointed. This does not reflect well on the search and nomination process and raises questions as to whether those involved in assembling the board had adequately considered whether this particular director would be perceived to be independent.”
While going through the biodata of the management team, I just can’t help finding this interesting information.
Daniel Tith (Chief Financial Officer) – Read here. An impressive set of appointments. Prior to joining Digital Realty Trust in July 2015 (and last served as Vice President), he served as Vice President, Product at Peloton Document Solutions LLC (for 2yrs and 7 months as per his Linkedin Profile), and prior to that, he was an Investment Banking Associate at Bank of America Merrill Lynch (for 5yrs 10 mths).
Mr Tith holds a Bachelor of Arts from the University of California, Los Angeles.
Digital Core Reit has a market cap of US$510.96 million. And in FY2022, generated gross revenue of US$107.7mil.
Peloton Document Solutions LLC (from data online), is an enterprise-level web application for the finance industry that allows investment banks and other financial institutions to market deal opportunities in a dynamic new way.
Peloton Document Solutions LLC has a revenue of US$5.4M (read here) and has less than 25 employees (read here).
In another article, it states: “Based in Los Angeles, CA, Peloton Document Solutions is a small technology company with only 50 employees and an annual revenue of $580,000.” (read here)
In Dec 2022, Digital Core Reit announced the resignation of Ms Yvonne Ang Ruey Shya as Joint Company Secretary of the Company and in her place, the appointment of Ms Maureen Low Meimei and Ms Sheena Han RuiYun as Joint Company Secretaries of the Company with immediate effect. (read here)
As mentioned earlier, this post is to present the data as it is and share what I have read.
Management is one aspect I looked to when evaluating a stock/company. However, it is highly subjective and not at the top of my list. Basically, I view the fundamentals and business moat as more important. How the system is structured.
However, if the fundamentals are flawed and there is no strong moat, good management that is capable, experienced, and ready to listen, enforce pro-business actions, and steer the company (away from being a bad business) is critical. If the business remains as fundamentally flawed (bad), it is the manager that eventually loses (terminated/resigned).
“Choose a business any idiot can run because sooner or later one will.” Warren Buffett
“Whenever a bad business comes up against an excellent manager, the business invariably wins.” Warren Buffett
Thank you for reading.
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