<Alert!> US focused datacenter S-REITs rocked by bankruptcy proceedings filed by Sungard AS
- Sungard Availablity Services (“Sungard AS”) files for bankcrupcy protection in US and Canada
- Sungard AS is a meaningful tenant at facilities leased from Digital Core REIT (“DCREIT”) and Mapletree Industrial Trust (“MINT”)
- Sponsor of Digital Core REIT steps in to support the REIT, providing visibility to unitholders distributions.
- MINT exposure to tenant has been diluted through acquisition and is estimated to impact distributions by c.1.3%.
What has happened?
Sungard Availability Services (“Sungard AS”), a data center operator focused on retail colocation, disaster recovery solutions, and managed services announced that it has voluntary Chapter 11 process in the US and for protection under the Companies’ Creditors Arrangement Act (“CCAA”) in the Ontario Superior Court of Justice in Canada (link: Sungard AS files for Chapter 11 in US). To support its ordinary course operations during the process, the Company secured access to $7 million of bridge financing in advance of the chapter 11 cases. In addition, the Company has received a commitment for up to approximately $95.3 million in new money debtor in possession (DIP) financing from certain of its secured lenders. With this funding, Sungard AS intends to meet its financial obligation, including paying suppliers in the normal course of business for the goods and services delivered. The Company also has filed the customary motions to honor its ongoing commitments to employees and customers.
The reason for the Chapter 11 filing is due to the company’s “challenges to capital structure”, delayed customer spending decisions, insourcing and reductions in IT spent, energy price inflation, amongst others.
Amongst other landlords, we understand that Sunguard AS is a tenant of Digital Core REIT (“DCREIT”) at 371 Gough Road facility in Markham, Ontario and a tenant of Mapletree Industrial Trust (“MINT”) in the 29-data center Sila Realty Trust portfolio, contributing c.6.7% of gross rental income (“GRI”) for this portfolio.
Our thoughts and impact:
DCREIT: Sponsor backstop cashflow risks and support with rental guarantees: We understand that the tenant is the REIT’s 5th largest customer, occupying 2.7 MW of capacity in Toronto and has been prompt in payment up to April’22. Market conditions have been strong and over the past twelve months, Digital Realty (“DR”) has leased over 19MW in Toronto and has absorbed substantially all existing available capacity. The manager remains confident that the REIT is able to quickly back-fill this potential vacancy if the customer rejects this lease. Digital Realty, the sponsor for DCREIT, has reached an agreement in principal to guarantee the cash flow to DCREIT in the event of a near term cash flow shortfall due to this customer bankruptcy. We believe that this commitment and support from the sponsor will be well appreciated by investors, given the REIT is one of the “youngest” REIT in Singapore and is still trying to find its feet and build up a track record in Singapore. Because of this rental guarantee provided to DCREIT will mitigated the downside risk in DPUs for the REIT.
MINT: Exposure to Sungard has been diluted through acquisitions. While a meaningful contributor to the Sila Realty Trust portfolio that MINT acquired back in Aug’21 at c.6.7% of GRI , the REIT’s diversified exposure meant that exposure on a portfolio basis is estimated to be at c.1% of net property income (“NPI”), implying that the non-payment of rent from this tenant is likely to see a c.1.3% drop in DPU, which we believe can be compensated from the steady growth in contributions from past acquisitions and stability of its portfolio.