Digital Realty (NYSE: DLR) has sold its data center located at 43915 Devin Shafron Drive in Ashburn, Virginia, comprising 132,280 square feet and 9 megawatts of UPS power capacity, to GI Partners for $150 million.
Digital Realty Sells 43915 Devin Shafron Dr in Ashburn, Virginia
On March 3, 2023, Digital Realty, through the entity Nova DC Fee Owner, L.P., sold its data center at 43915 Devin Shafron Drive in Ashburn, Virginia to GI Partners, a private equity firm, and more precisely, the entity GI TC Devin Shafron LLC. The sale price was $150 million for the data center, which resides on 8.2 acres of land, spans 132,280 square feet, and has 9 megawatts of UPS power capacity. This pricing implies a valuation of $1,134 per square foot and $16.7 million per megawatt for the data center.
Digital Realty constructed 43915 Devin Shafron Drive as a “Turn-Key Flex” data center, meaning it is a hyperscale facility designed to be move-in ready, with power and cooling infrastructure, to support customers with over 1-megawatt deployments.
Historical Context – Joint Venture Formation
Digital Realty sold 43915 Devin Shafron Drive (Building A) out of its “Managed Unconsolidated Joint Ventures” holdings. Previously, in September 2014, this property was contributed by Digital Realty, at a valuation of $185.5 million, to a joint venture, known as Digital-GCEAR 1 (Ashburn), that was formed with Griffin Capital Essential Asset REIT (GCEAR).
At the time, the property was expected to generate cash net operating income (NOI) of $13.1 million in 2014, implying a valuation for the data center of a 7.05% cap rate. The property was 100% leased, with a weighted-average remaining lease term (WALE) of approximately 7 years.
GCEAR contributed cash to the joint venture in exchange for an 80% interest in the joint venture, with Digital Realty retaining the remaining 20% interest in the joint venture. Griffin Capital Essential Asset REIT (GCEAR) is currently known as Peakstone Realty Trust.
Tenant History and Challenges at the Data Center
As of the end of 2019, the data center was fully leased to a social media company and a financial services company with an average remaining lease term of approximately 3 years. However, by this time the joint venture had determined that its investment was impaired based on worsening market rental rates in Northern Virginia, at $80 to $90 per kilowatt-hour (kWh), as well as expectations for terminal cap rates of 6.0%.
Moreover, in 2020, a key tenant of the data center did not execute a long-term extension or sign a new lease with the joint venture. As a result, in September 2020, the lender to the property (Starwood Capital) provided a notice of default for non-payment of the unpaid balance of its loan and exercised its right to draw on a stand-by letter of credit. This default was rectified by GCEAR funding an $8.2 million stand-by letter of credit with cash.
As part of the wind-up of the joint venture, GCEAR received a $4.1 million payment from Digital Realty in April 2021, and GCEAR wrote-off its remaining investment in the venture. In April 2021, the lender to the joint venture sold its loan and concurrently, the joint venture executed a deed in lieu, thereby extinguishing any further obligations.