Digital Core Reit: When the tenant goes bankrupt

This post is a continuation of the journey down the rabbit hole from my previous post. Again in this post, I strive to present the data as it is. I leave it for you, to form your own judgment.

A brief recap of the unfortunate events that occurred to the Reit post-IPO.

Digital Core Reit, the only pure-play data centre Singapore Reit sponsored by a global pure-play listed data centre owner and operator, Digital Realty was listed on SGX on 6 Dec 2021.

As stated prior to the IPO (read here), Digital Core Reit’s customers consist of cloud service providers, colocation & interconnection providers, social media companies, and IT service providers. Particularly, as measured by base rental income, sector contributions are cloud (50.0%), colocation providers (23.9%), social media (18.5%), IT services (7.4%), and connectivity (0.3%).

Overall, Digital Core Reit’s portfolio comprises of 12 unique customers. However, the REIT’s top 6 customers contribute 99.9% of the portfolio’s base rental income. The prospectus disclosed the top six customers without identifying the customers (see chart below). We now know that these customers are Microsoft, Cyxtera, Facebook (or Meta), IBM, Sungard Availability Services, and Amazon Web Services (AWS).


On 11 April 2022, it was announced that DCR’s fifth-largest tenant – Sungard Availability Services – has filed for bankruptcy protection in the US, Canada and the UK. Sunguard occupies about 40% of the power capacity at DCR’s data centre in Toronto and contributes slightly more than 7% of DCR’s rental income.

DBS lowers Digital Core REIT’s TP to $1.30 amid tenant bankruptcy, UOB KH downgrades to ‘hold’ (read here)

Shortly after, Digital Core Reit’s sponsor, Digital Realty, announced that it is committed to guaranteeing the cash flow to Digital Core Reit in the event of any near-term shortfall arising from tenant bankruptcy.

On 16 March 2023, The Edge highlighted that last month, Bloomberg reported that Cyxtera is attempting to refinance a revolving credit facility that matures in November this year. “Fresh concerns on Cyxtera’s ability to service their debt obligations have surfaced, and most recently, Moody’s downgraded the company’s corporate family rating from B3 to Caa2. Moody’s cited that although they believed in Cyxtera’s underlying business fundamentals, they are concerned with the firm’s ability to service debt obligations in the medium term,” 

Cyxtera Technologies is one of DC REIT’s top 10 tenants accounting for 22.6% of gross rental income. It is Digital Core Reit’s second largest tenant to be exact. Cyxtera Technologies is a data centre owner and operator in the US, and Asia-Pacific.

Is this why Digital Core REIT’s unit price has been weak? (read here)

On 16 March 2023, Digital Core Reit highlighted that Cyxtera Technologies announced that it entered into an agreement with its lenders to extend the maturity date of its 2023 debt maturity to April 2024. Cyxtera Technologies remains current on its rental obligations and has not requested any rent deferments, rental reductions, or contraction of the space it occupies.

Cyxtera’s long term debt of US$853 million matures in 2024 (read here)

Shortly after the 16 March 2023 “The Edge” article about Cyxtera Technologies was out, there were a number of analysts’ articles.

One by DBS dated 16 March 2023, titled: “Digital Core REIT: News Analysis: Key tenant’s operations remain healthy, but financial health has been called into question” (read here)

To quote the above article by DBS:

“DCREIT has demonstrated their ability to navigate similar risks previously.

We understand from management that Cyxtera continues to be current on all their rentals, and have not received any new updates from the tenant. Based on our estimates, Cyxtera is DCREIT’s second largest tenant, accounting for c.22.6% of DCREIT’s revenues. Although this may seem like a concern for DCREIT, we take comfort from its Sponsor’s commitment to the REIT. Similar to what we saw with SunGard previously, DCREIT’s Sponsor was quick to step in and provide support for the REIT. Moreover, DCREIT has already successfully backfilled almost half of the space that was vacated by SunGard as demand for DC space remains robust.”

One by UOB Kay Hian dated 20 March 2023: “Digital Core REIT – UOB Kay Hian 2023-03-20: Rebalancing Towards Investment Grade Tenants” (read here)

To quote the above article by UOB Kay Hian:
“Cyxtera is Digital Core REIT’s second largest-tenant, accounting for 22.6% of annualised rent as of Dec 22. The exposure to Cyxtera is straddled across six data centres. Cyxtera remains current in rents and has not defaulted. Sponsor Digital Realty could provide support through a cash flow guarantee in the event that Cyxtera files for chapter 11 bankruptcy protection.”

Quick fact: DBS is the joint issue manager, global coordinator, book-runner and underwriter of Digital Core Reit IPO, with UOB as Co-manager. See below.

To the above articles, I took it with a pinch of salt: Sponsor Digital Realty could provide support through a cash flow guarantee in the event that Cyxtera files for chapter 11 bankruptcy protection.

Well, yes and no. If we can infer from what happened with Sungard.

Shortly after the news of Sungard bankruptcy, Digital Core Reit announced on 21 April 2022, in their Business and Operational Updates for the First Quarter 2022, the below-mentioned. This was also made known via the various analysts’ reports.

Perhaps to reassure investors worried about the impact on the dividend payout.

However, shortly after the above news (about 3 months later), in an article posted on the Reit website under the Newsroom section dated 28 July 2022, titled “CASH FLOW SUPPORT AGREEMENT“, the below was mentioned:

So the cash flow guarantee was meant to be temporary and repaid back to Digital Realty from 1 Jan 2024 to 31 Dec 2028. Wonder why there were no analysts’ reports on the above-mentioned.

So with the impending bankruptcy of Cxytera, and if we are to infer from the example from the Sungard episode (7% of DCR’s rental income), any cash flow guarantee from Digital Realty (if any for Cxytera situation to begin with) would also be temporary. Hence, yes and no to support through a cash flow guarantee.

Another point to note pertaining to DPU (which investors are anxious to know), is that as stated on its website, Digital Core Reit’s distribution policy is to distribute 100% of Digital Core Reit’s Distributable Income from the 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.

So what will be the DPU after FY 2023?

It is anyone’s guess.

What happens when a tenant goes bankrupt?

Now what happens when a tenant goes bankrupt and what can the landlord do? In the case of Digital Core Reit, we do not need to look too far back. We can perhaps track what happened to Sungard. However, in gist, I have yet to find any news of the permanent conclusions/solution. Nevertheless, knowing the sequence of events might perhaps be useful in anticipating the situation with Cxytera.

Actually, it is not the end of the road for landlords. Although, I am sure most landlords would want to avoid the lengthy and cumbersome process.

However, before we begin, here are a few fun facts:

1) The April 2022 bankruptcy is Sungard Availability Services 2nd bankruptcy. Sungard first declared bankrupt in 2019. Sungard emerged from its pre-negotiated Chapter 11 restructuring in less than a day, a US record for a deal of this kind.

In May 2019, Sungard Availability Services completed a pre-packaged Chapter 11 filing. Through this action, Sungard reduced its long-term debt by more than $800m and received $100m of new liquidity from the company’s creditors.

Sungard files second Chapter 11 bankruptcy (read here)

Tech company Sungard files second bankruptcy in three years (read here)

Sungard AS completes bankruptcy restructuring in record time, appoints new CEO (read here)

2) Mapletree Industrial Trust was also impacted by the 2022 Sungard’s bankruptcy, though the extent is not as significant. MINT is more diversified, and it has a larger market capitalization (SGD 6.55 billion), as compared to Digital Core Reit (USD 539.03 mil or SGD 718.26 mil).

To quote the below article: “Sungard is estimated to contribute c.1.1% of revenue and depending on the outcome of the company’s restructuring plan, this could be at risk in the medium term.”

Mapletree Industrial Trust: Looking for growth within the portfolio (read here)

To quote the below article: “Sungard comprised 6.7% of gross rental income (GRI) in the 29-data center Sila Realty Trust portfolio, which Mapletree acquired for $1.3bn

Sungard Availability Services Files for Chapter 11 Bankruptcy (read here)

The sequence of events relating to Sungard Availability Services:

On 11 April 2022, it was announced that Digital Core Reit’s fifth-largest tenant – Sungard Availability Services – has filed for bankruptcy protection in the US, Canada and the UK. (read here)

Overall, Sungard Availability Services expects to complete the Chapter 11 bankruptcy process in four to six months, by mid- to late-summer 2022. Notably, less than one month ago, the company’s UK subsidiary initiated an administration (i.e., insolvency) proceeding for its business in the United Kingdom.

371 Gough Road, Suite 110 – Markham, ON

Sungard Availability Services leases 40,000 sqft of gross area / 20,000 sqft of raised floor space from Digital Realty’s entity Digital Toronto Nominee, Inc. at its facility located at 371 Gough Road, Suite 110 in Markham, Ontario (Canada). In terms of layout, this data center has two data halls across one floor.

Digital Core Reit (Digital Realty-sponsored company), owns 90% of Digital Toronto Nominee, Inc., and, in turn, 90% of the underlying operating property at 371 Gough Road. Whereas Digital Realty retains the remaining 10% interest in the underlying operating property at 371 Gough Road. (read here)

So what comes next?

To quote this article: Sungard Availability Services Files for Chapter 11 Bankruptcy (read here)

Sungard’s Next Steps – Sale or Equitization Scenario

Sungard Availability Services’ restructuring support agreement (RSA) contemplates that the company will implement a restructuring either through:

i) a sale of all, substantially all, or one or more subsets of its assets, known as the Sale Scenario, or

ii) the equitization of Sungard’s prepetition-funded debt through a chapter 11 plan, known as the Equitization Scenario.

On 22 June 2022, Digital Realty filed a limited objection, in the United States Bankruptcy Court for the Southern District of Texas, to Sungard Availability Services’ possible assumption and assignment of certain executory contracts and unexpired leases, as part of Sungard’s ongoing Chapter 11 bankruptcy process.

In total, Digital Realty’s various agreements with Sungard require a total cure amount of at least $1.15m to account for outstanding monetary defaults. 

Note: Cure Amounts means all amounts, costs and expenses required by the Bankruptcy Court to cure all defaults and other amounts outstanding under the Assumed Contracts and Additional Assumed Contracts to the extent required so that they may be assumed by the applicable Selling Entities and assigned to Buyer pursuant to Bankruptcy Code Sections 363 and 365 and the Confirmation Order.

Digital Realty Files Objection to Sungard Availability Services in Bankruptcy Court (read here)

However, I was unable to find news of the outcome of this filing.

Subsequently, Sungard opted for the sale scenario.

On 2 Aug 2022, it was reported that 365 Data Centers is to acquire a majority of Sungard’s US colocation and networking business.

365 Data Centers to acquire the majority of Sungard US (read here)

On 3 Nov 2022, the following was reported in the article below: “Sungard Availability Services announced the successful completion of the previously announced Asset Purchase Agreements (APAs) with 11:11 Systems (“11:11”) and 365 Data Centers (“365”). 11:11, a managed infrastructure solutions provider focused on cloud, security, and connectivity solutions, has acquired Sungard AS’ North American Recovery Services (RS) business, as well as its North American Cloud and Managed Services (CMS) business and Consulting business. 11:11 will operate essentially all of Sungard AS’ IT systems and provide services back to 365 and Sungard AS. Also, as part of the transactions, 11:11 will operate four data centers previously part of Sungard AS. 365, a leading provider of network-centric colocation solutions, acquired a majority of Sungard AS’ U.S.-based Colocation and Network Services business. As part of the 365 transaction, eight data centers including network assets, will become part of the 365 portfolio of infrastructure assets.

Sungard AS Successfully Completes Transactions with 11:11 Systems and 365 Data Centers (read here)

11:11 Systems Completes Acquisitions of Sungard Availability Services’ Recovery Business and Cloud Managed Services Business (read here)

It is worth noting that unsecured creditors will recover nothing from Sungard’s $60 Million Asset Sale to 11:11 Systems.

Sungard Wins Approval of $60 Million Asset Sale to 11:11 Systems (read here)

If a tenant goes bankrupt, a tenant can make one of three elections with respect to its unexpired leases, subject to the approval of the bankruptcy court and so long as the tenant satisfies certain applicable requirements under the Bankruptcy Code. The tenant can:

1. assume the lease in accordance with Sections 365(a) and (b) of the Bankruptcy Code;

2. assume and assign the lease to a third party in accordance with Section 365(f) of the Bankruptcy Code; or

3. reject the lease.

Lease Defaults and Restructuring: The Impact of Bankruptcy on Commercial Landlords and Tenants (read here)

Top 10 Questions For Landlords to Ask When a Tenant Files for Bankruptcy (read here)

Typically in a sale scenario (sale of the business to a third party), option 2 (assume and assign the lease to a third party) will be chosen. If the third party, assumes the lease, all rents owed – pre-petition and post-petition – must be paid. But the Landlord should not count his chickens quite yet – there is often a negotiation. The tenant or proposed assignee typically will agree to assume the lease only if there is a renegotiation of its terms. (read here)

To quote this article:

However, on 2 Feb 2023: Digital Core Reit issued the article: “Digital Core REIT Reports Results for the Full Year 2022” (read here). See the below extract:

On 6 Feb 2023: As per UOB Kay Hian article it is also stated that Sungard vacated the Toronto data centre on 1 Jan 2023.

It appears that Sungard has opted to reject the lease and vacated the premise. Digital Core Reit was able to temporarily lease out half the area. See below.

Note: Rejection of lease -The bankrupt tenant has the right to reject the lease within the same 60-day period. If the tenant does not assume the lease, it automatically rejects, or cancels, the lease. A tenant can reject a lease before the 60-day period expires. The landlord cannot do anything to stop a tenant from exercising the absolute right to cancel a lease. The landlord and the tenant, however, can negotiate a new lease that will be valid and binding if approved by the Bankruptcy Court. When the debtor rejects the lease, the landlord can obtain an immediate order from the bankruptcy court to force the tenant to vacate the premises. This can be far more expedient than the conventional unlawful detainer. Additionally, in this situation the bankruptcy court is the tenant’s last resort, whereas in the usual unlawful detainer, the tenant has a variety of tactics that can delay eviction (including filing bankruptcy). (read here)

The question remains if the rental rate of Sungard lease at 371 Gough Road is above the market rate.

It was also previously reported by DBS Research & UOB Kay Hian that Digital Core managed to backfill almost half the space vacated by Sungard. Who is the new tenant?

What happened to the limited objection filed by Digital Realty in June 2022?

To quote this article:
“In some circumstances, it will make sense for the tenant to file bankruptcy if it cannot reach a workout agreement with the landlord, particularly if the tenant has substantial other debts that it is unable to pay, if it wishes to sell its assets to a third party that wants to purchase the assets “free and clear” of liens and claims, or where the lease is at a below-market rental rate. If the tenant files bankruptcy, in addition to the right to reject the lease described above, the tenant will typically have the right to assume, or assume and assign, its lease. To the extent that the tenant wishes to sell its assets to a third party, the tenant will be able to assign its lease to that party.

The threshold question for the tenant to answer is whether it can make a credible threat to the landlord that it will actually file bankruptcy. This will depend on the tenant’s particular facts and circumstances. Even financially solvent tenants can file bankruptcy, because insolvency is not a requirement for a bankruptcy filing.”

With the issues surrounding Cxytera, many investors would probably be anxious to know what happened to the Sungard vs Digital Realty/Digital Core situation.

Cyxtera Technologies has 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.

“As the Chinese like to say, if you borrow 100,000 yuan from the bank, you are a bit scared; if you borrow a million yuan, both you and the bank are a little nervous; but if you take a 1 billion yuan loan, you are not scared at all, the bank is,” Jack Ma (read here)

In addition, as stated in my previous post, there was a notable exodus of key members of Cxytera’s board of directors and audit committee in late March 2023, and fundamentally the business of Cxytera is unsustainable.

What comes after April 2024 is anyone’s guess.

In the event that Cxytera Technologies goes bankrupt and if we are to infer from Sungard’s episode, a possible scenario is that Digital Core Reit and the analysts will let it be known (and blast it online / via presentations to investors) that it will not impact DPU to allay investors’ fear. Shortly after (perhaps 3 months later), an article will pop up on DC Reit’s website (Newsroom section) stating that the cash flow guarantee was meant to be temporary and repaid back to Digital Realty.
Subsequently, Cxytera may proceed to sell off its assets and business (unsecured creditors recover nothing), and Digital Realty/Digital Core and third party will renegotiate the lease (depending on the market rate and circumstances).

UOB even has a scenario on the DPU impact (read here):

However, I am scratching my head as to the below statement from UOB Kay Hian. Would DC Reit have much say in who the third party would be? Eg. To whom Cxytera sells its business? Unless Cxytera rejects the lease and Digital Core Reit takes over the premise, and a new tenant lease the space.

Thank you for reading.


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