Digital Core REIT (DCRU), a Singapore-based pure-play data centre REIT sponsored by Digital Realty, has unveiled a series of agreements intended to bolster its business activity and shore up the firm's overall asset performance. The series of agreements reached includes resolving the bankruptcy of a significant customer, selling two Silicon Valley centres to Brookfield for US$160 million, and increasing its interest in a Frankfurt facility by 20% for approximately US$99 million. Remarkably, DCRU has also marked its entry into the Japanese market.
The company's second-largest customer, a global colocation and interconnection provider, had filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of New Jersey on 4 June 2023. This provider represented approximately US$16 million or 22% of annualised rental revenue. The bankruptcy had potential implications for DCRU as the customer was the sole occupant of several Richter's facilities, including two in Los Angeles and three in Silicon Valley.
DCRU has brokered a key agreement with Brookfield Infrastructure Partners L.P., and its institutional partners, to sell two Silicon Valley facilities for US$178 million, valuing DCRU's 90% interest at US$160 million. This cost aligns with the current book value, and based on 2024 contractual cash net operating income of approximately US$7.7 million, represents a 4.4% cap rate.
As part of the same bankruptcy resolution, the problematic customer has agreed to assume and assign to Brookfield their existing lease agreement with DCRU in Silicon Valley, keeping the terms, conditions, and rental rate unchanged. The customer also agreed to adopt the existing lease agreements for two facilities in Los Angeles with earlier lease expiration dates, assigning them to Brookfield.
Under a separate agreement, DCRU and Digital Realty will pay US$10 million, with DCRU contributing 25%, to terminate the customer's lease agreement at a Frankfurt-based facility which was part of the broader transaction. Both DCRU and Digital Realty expect to re-lease this capacity to gain more favourable terms. In another separate agreement, DCRU has expressed an intent to purchase an additional 20% stake in the fully-fitted freehold facility in Frankfurt for approximately US$99 million from Digital Realty, expected to be financed via proceeds derived from the Silicon Valley property sale.
DCRU's entry into the Japanese market is marked by its agreement to acquire a 10% stake in a freehold facility located in Osaka from Mitsubishi Corporation for approximately US$51.5 million. This agreement is anticipated to enhance the geographical diversification of DCRU's portfolio, marking a significant step in its international expansion.
The transactions are expected to influence DCRU's financial performance, assuming completion by 1 January 2022. Pro forma distribution per unit could be reduced to 3.50 U.S. cents from 3.98 U.S. cents, while pro forma net asset value would fall slightly to $0.82. The percentage of annualised rental revenue generated outside North America would double to 28%.
Closing conditions include obtaining approval from the United States Bankruptcy Court for the District of New Jersey, among others. Most transactions are expected to close or take place in December 2023 or January 2024. DCRU's 10% interest in the Osaka data centre was completed on 1 November 2023. The additional 20% stake acquisition in the Frankfurt facility is subject to unitholder approval and is expected to close in the first quarter of 2024.
"We are pleased to have reached this series of agreements to resolve our customer bankruptcy exposure and expand our portfolio with strategic investments in Japan and Germany," announced John J. Stewart, CEO of Digital Core REIT Management Pte. Ltd. "These transactions will significantly enhance credit quality while providing financial flexibility to fund opportunistic investments and advancing our mission of delivering sustainable value for unitholders."