Digital Core REIT and Mapletree Industrial Trust: Top Tenants Go Bust

June 6, 2023

Singapore REITs bankrupt

In Singapore, REITs are usually considered as an asset class that provide stable and consistent dividends.

However, like any investment out there, nothing is risk free. The same applies to Singapore REITs.

In this higher interest rate environment, one of the key risks (besides financing costs) is actually whether tenants can pay rent.

That’s crucial because a REIT’s profits – and dividends – ultimately come from the rental fees that its tenants pay them.

Earlier this week in Singapore, two large data centre REITs – Digital Core REIT (SGX: DCRU) and Mapletree Industrial Trust (SGX: ME8U) – both announced that key tenants of theirs had filed for bankruptcy.

Here’s what Singapore REIT and dividend investors need to know about these data centre REITs’ announcements.

Digital Core REIT sees second-largest tenant declare bankruptcy

For Digital Core REIT, its second-largest tenant (by rental revenue) filed for bankruptcy on Sunday (4 June).

As a result, the absence of the tenant’s annual rental revenue, which totals US$16.3 million and makes up over 20% of the REIT’s total (see below), will likely impact Digital Core REIT’s dividend.

Digital Core REIT top tenants

Source: Digital Core REIT Q1 2023 earnings presentation

The tenant, which is a global co-location and interconnection provider, occupied space at six of Digital Core REIT’s locations.

Digital Core REIT did say that the tenant has remained current on its rental obligations through May 2023 but has yet to pay rent for June.

Digital Core REIT warns on potential dividend impact

Furthermore, the tenant had managed to obtain a commitment for up to US$200 million of debtor-in-possession financing – stating that it intends to pay vendors and suppliers for goods or services provided after the filing date.

In the event that revenue from the tenant is completely eliminated, Digital Core REIT did warn that its distribution per unit (DPU), or dividend, could be cut by 2 US cents from the DPU of 3.98 US cents for FY2022.

That would represent a DPU cut of over 50% in a worst-case scenario.

Yet management remains confident it can find a tenant to backfill the space and says it is “well-positioned” to draw up agreements with existing end-user co-location customers.

In addition, rental conditions in the three cities where its tenant had space – Silicon Valley, Los Angeles, and Frankfurt – remain tight as demand continues to be strong.

After initially seeing its share price fall by 10% on Monday, Digital Core REIT shares are now trading above where they were before its tenant’s bankruptcy announcement.

Mapletree Industrial Trust sees third-largest tenant go bust

Meanwhile, for Mapletree Industrial Trust, its third-largest tenant (by gross rental income) also filed for bankruptcy on Sunday (4 June).

In an announcement on Tuesday (6 June), Mapletree Industrial Trust commented that the tenant in question made up 3.2% of its total gross rental income (GRI).

The tenant, which is also a named as a “global colocation provider” in the REIT’s latest earnings presentation, occupies space in eight data centres in North America – seven of which are held the Mapletree Rosewood Data Centre Trust, a 50:50 joint venture with Mapletree Investments Pte Ltd.

The REIT did state that after the completion of its newly-built data centre in Osaka, Japan, the tenant would end up being its fourth-largest tenant.

Similar to Digital Core REIT’s bankrupt tenant, Mapletree Industrial Trust’s tenant stated that it had received a commitment for US$200 million in debtor-in-possession financing, in order to pay vendors and suppliers.

Mapletree Industrial Trust said the tenant had met its full rental obligations for April 2023 and partially fulfilled its May 2023 ones. The REIT said it would be pursuing the balance of the outstanding rental payments for May 2023.

Thinking about tenant risk for Singapore’s REITs

The recent announcements by Digital Core REIT and Mapletree Industrial Trust are a good reminder that investors should remain aware of tenant concentration and the risk it poses to REITs.

In this higher interest rate environment, most of us have been concerned about REITs and their ability to finance themselves.

However, at the end of the day, a REIT’s tenants and their ability to pay rent is what drives profits and revenues, both of which are key to paying out dividends.

Thankfully for both Digital Core REIT and Mapletree Industrial Trust shareholders, these tenant bankruptcies look like they can be effectively contained.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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