Digital Realty and Prudential have been named in press reports from The Mercury News noting that they have sold a portfolio of 9 powered shell data centers in the United States, comprising facilities in Silicon Valley, Northern Virginia, and Dallas-Fort Worth, to Menlo Equities, a commercial real estate investment firm, for an estimated $400m+. The data centers sold by Digital Realty were part of its joint venture with Prudential Real Estate Investors (PREI), now known as PGIM Real Estate, through which Digital Realty owns a minority 20% equity interest.

As a result of Prudential’s majority 80% equity interest in the joint venture, the financial impact to Digital Realty will be muted. However, thematically, much of the same rationale to selling these data centers (discussed below) aligns with prior Digital Realty divestments to Ascendas Reit and Mapletree.

Overall, the Digital Realty and Prudential joint venture has 10 data centers, including one in New Jersey, which does not appear to be part of the transaction with Menlo Equities. In aggregate, the joint venture’s 10 data centers comprise 100+ megawatts of power capacity and 1.2 million sqft.

Finally, Dgtl Infra understands that Digital Realty and Prudential are selling this data center portfolio to Menlo Equities at a valuation of ~19.5x EBITDA.

Transaction Background – Digital Realty, Prudential

In October 2013, Digital Realty announced the formation of a $369m joint venture with Prudential Real Estate Investors (PREI), seeding an initial 9 powered shell data centers into the vehicle. Subsequently, in March 2014, Digital Realty contributed a New Jersey data center to the joint venture, bringing the total portfolio to 10 facilities.

Digital Realty contributed this New Jersey property, in Somerset, to the joint venture at a price of $40.4m. Therefore, the Digital Realty joint venture with Prudential comprises a total of 10 data centers originally valued at ~$409m.

As a reference point, as of June 30, 2021, Digital Realty marked the asset value for 100% of the Prudential joint venture at $403.8m.

Thematic Assessment

Digital Realty is divesting a number of older facilities (more than half were built 20+ years ago), with a significant concentration of non-investment grade tenants, on leases that have short remaining terms, and above market rents.

Interestingly, for Digital Realty’s California data centers, where pricing by facility is available, each sale price was lower than the value at which Digital Realty contributed the facility to the Prudential joint venture, in September 2013.

Older Facilities

Older facilities in this portfolio no longer have modern power supply, back-up generators, and cooling systems. Therefore, they require a combination of higher maintenance capital expenditures and/or complete refurbishment.

Non-Investment Grade Tenants

Digital Realty and Prudential’s portfolio comprises primarily single-let data centers with the three largest tenants being Cyxtera, Equinix, and Amazon Web Services. However, nearly 50% of the annual rent is paid by Cyxtera, an operator which was recently rated B3 by Moody’s and B- from S&P. Indeed, these ratings are well-below the investment grade threshold.

Lease Duration

As detailed below, over half of the Digital Realty and Prudential portfolio leases have a remaining term of less than 2.5 years. Moreover, Amazon Web Services’ original lease at 43790 Devin Shafron Drive expired in May 2021 – and it is unclear whether the company extended its occupancy at the facility.

Above Market Rents

At least 8 of the total 10 facilities have 3.0% weighted average contractual annual rent increases. Over lease terms of 10+ years, the compounding of this contractual rent, in many cases, has brought in-place rent above that of market rents, within a facility’s respective sub-market. Indeed, this notion is highlighted in Digital Realty’s disclosures for the joint venture portfolio’s net operating income (NOI) – particularly, the difference between GAAP NOI and Cash NOI.

For Q2 2021, the Prudential joint venture generated $8.5m of GAAP NOI but only $7.7m of cash NOI. This is due to an $822k adjustment for above market rent embedded in the portfolio. Therefore, on an annualized basis, the Prudential joint venture produces GAAP NOI of $34.1m versus cash NOI of $30.7m.

Portfolio Overview – Digital Realty, Prudential

Below we provide a breakdown of all 10 powered shell data centers in Digital Realty’s joint venture with Prudential. For clarity, purchase prices for the California portion of the data center portfolio are from The Mercury News via the Santa Clara County Recorder’s Office.

Additionally, lease expiration dates noted below represent the latest public information available. Thus, certain tenants may have extended their lease terms beyond their original expiration date.

Silicon Valley, California

Digital Realty and Prudential have sold the following 4 data centers in the Silicon Valley, California market for a combined $108.8m:

Santa Clara – 4650 Old Ironsides Drive

Digital Realty and Prudential’s 4650 Old Ironsides Drive site, built in 1977, was acquired by Menlo Equities for $35.8m. Specifically, this data center has 6.0 megawatts of UPS capacity across 124.4k sqft of building interior. Also, Cyxtera leases this facility, until April 2027, as its SFO2-B Santa Clara data center.

In comparison, Digital Realty contributed this facility to the Prudential joint venture, in September 2013, at a valuation of $56.3m.

Santa Clara – 4700 Old Ironsides Drive

Digital Realty and Prudential’s 4700 Old Ironsides Drive site, built in 1993, was acquired by Menlo Equities for $28.0m. Particularly, this data center has 6.0 megawatts of UPS capacity across 90.1k sqft of building interior. Additionally, Cyxtera leases this facility, until April 2027, as its SFO2-A Santa Clara data center.

In comparison, Digital Realty contributed this facility to the Prudential joint venture, in September 2013, at a valuation of $29.1m.

Sunnyvale – 444 Toyama Drive

Digital Realty and Prudential’s 444 Toyama Drive site, built in 1999, was acquired by Menlo Equities for $25.6m. Specifically, this data center has 6.2 megawatts of gross power capacity across 42.1k sqft. Also, Equinix leases this facility, until July 2022, as its SV6 Silicon Valley IBX data center, through which it offers 14.4k sqft of colocation space.

In comparison, Digital Realty contributed this facility to the Prudential joint venture, in September 2013, at a valuation of $28.3m.

San Jose – 2950 Zanker Road

Digital Realty and Prudential’s 2950 Zanker Road site, built in 1984, was acquired by Menlo Equities for $19.4m. Particularly, this data center spans 69.7k sqft. Additionally, Verizon leases this facility.

In comparison, Digital Realty contributed this facility to the Prudential joint venture, in September 2013, at a valuation of $45.7m.

Northern Virginia

Digital Realty and Prudential may have sold the following 3 data centers in the Northern Virginia markets of Ashburn (Loudoun County) and Manassas (Prince William County):

Ashburn – 43790 Devin Shafron Drive (Building E)

Digital Realty’s 43790 Devin Shafron Drive (Building E) facility, built in 2011, has 10 megawatts of gross power capacity across 152k sqft. Also, this facility was leased by VADATA, Inc. (i.e., Amazon Web Services) as its IAD-13 data center, until May 2021.

As of 2021, this building and its land had a value for tax purposes of $50.9m. Separately, the building’s appraised value, in July 2018, for debt financing was $55.3m. In comparison, Digital Realty contributed this facility to the Prudential joint venture, in September 2013, at a valuation of $45.5m.

Ashburn – 21551 Beaumeade Circle

Digital Realty’s 21551 Beaumeade Circle facility, built in 2012, has 7 megawatts of gross power capacity across 153k sqft. Additionally, Equinix leases this facility, until December 2023, as its DC10 Washington DC IBX data center, through which it offers 84.8k sqft of colocation space.

As of 2021, this building and its land had a value for tax purposes of $43.4m. Separately, the building’s appraised value, in July 2018, for debt financing was $41.3m. In comparison, Digital Realty contributed this facility to the Prudential joint venture, in September 2013, at a valuation of $30.7m.

Manassas – 7505 Mason King Court

Digital Realty’s 7505 Mason King Court facility, built in 2003, has 20 megawatts of gross power capacity across 110k sqft. Also, VADATA, Inc. (i.e., Amazon Web Services) leases this facility, until December 2023, as its IAD-7 data center.

The building’s appraised value, in July 2018, for debt financing was $35.9m. In comparison, Digital Realty contributed this facility to the Prudential joint venture, in September 2013, at a valuation of $25.5m.

Dallas-Fort Worth, Texas

Digital Realty and Prudential may have sold the following 2 data centers in the Dallas-Fort Worth market:

Fort Worth – 14901 FAA Boulevard

Digital Realty’s 14901 FAA Boulevard facility, built in 2000, has 264k sqft of building interior and 189k sqft of raised floor. Particularly, this data center has 25.3 megawatts of UPS capacity across three pods. Additionally, Cyxtera leases this facility, until February 2022, as its DFW1 Fort Worth data center campus.

The building’s appraised value, in July 2018, for debt financing was $78.3m. In comparison, Digital Realty contributed this facility to the Prudential joint venture, in September 2013, at a valuation of $80.1m.

Richardson – 900 Dorothy Drive

Digital Realty’s 900 Dorothy Drive facility, built in 1976, comprises 56.2k sqft. Also, AT&T leases this facility.

For reference, Digital Realty contributed this facility to the Prudential joint venture, in September 2013, at a valuation of $25.4m.

New Jersey

Digital Realty and Prudential may have sold the following data center in the New Jersey market:

Somerset – 636 Pierce Street

Digital Realty’s 636 Pierce Street facility, built in 2001, has 8 megawatts of gross power capacity across 108k sqft. Additionally, The Bank of New York Mellon leases this facility, until April 2023, utilizing the building as data center space for its own use.

The building’s appraised value, in July 2018, for debt financing was $45.8m. In comparison, Digital Realty contributed this facility to the Prudential joint venture, in March 2014, at a valuation of $40.4m.

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