Investors were surprised when Digital Core REIT (SGX: DCRU), or DCR, called for a trading halt on the first day of November.

The data centre REIT, which has a portfolio of 11 data centres worth US$1.6 billion as of 30 September 2023, was not having an easy time.

Back in June, its second-largest customer which took up 22.4% of the REIT’s annualised rental revenue filed for bankruptcy.

Since then, the REIT’s unit price has tumbled to US$0.50 before the trading halt, down nearly 9.1% year-to-date.

The REIT manager has unveiled a slew of announcements that address this customer bankruptcy and improve DCR’s portfolio metrics.

After the halt was lifted, the data centre REIT’s share price proceeded to shoot up 14% in two days.

Could this represent a potential buying opportunity, or is the REIT a value trap?

Resolving its customer bankruptcy issue

Source: Digital Core REIT Presentation Slides

The slide above summarises the series of transactions that DCR’s manager has undertaken.

These actions are divided into three parts to make them easier to understand.

The first batch of transactions involves the sale of two data centres in Silicon Valley to Brookfield Infrastructure Partners for US$160 million.

A third data centre in the same region had its lease assigned to Brookfield with no change to the existing lease agreement.

DCR also amended the leases on two Los Angeles data centres with the bankrupt customer as a tenant with an accelerated expiration date of 30 September 2024.

Over in Frankfurt where the customer leases 4% of a fully-fitted facility, the lease will be terminated and both DCR and its sponsor Digital Realty Trust (NYSE: DLR), or DRT, will re-lease the space at more favourable terms.

This set of transactions helps to resolve DCR’s customer bankruptcy issue.

With the sales proceeds from the divestment of its Silicon Valley data centres, DCR will procure an additional 20% stake in its Frankfurt data centre to recycle the capital into better-quality assets.

The REIT will also acquire a 10% interest in a Japanese data centre located in Osaka from Mitsubishi Corporation (TYO: 8058).

Improving overall portfolio metrics

With this series of transactions, DCR’s manager has not only resolved the lingering customer bankruptcy issue but also improved the REIT’s overall portfolio metrics.

This is an important move as it injects more confidence in investors with increased tenant diversification along with a slate of higher-quality customers.

The number of customers in DCR’s portfolio increased from 26 as of the third quarter of 2023 (3Q 2023) to more than 40.