Digital Realty Trust, Inc. DLR recently announced two definitive agreements with affiliates of Mapletree Industrial Trust and Mapletree Investments Pte Ltd for creating a joint venture (JV) on three existing data centers and the sale of a 10-data center portfolio. These transactions are expected to result in aggregate consideration of roughly $1.4 billion.
Specifically, per the terms of the agreements, Digital Realty will sell its 10 Powered Base Building® data centers to Mapletree Investments and Mapletree Industrial Trust for a total consideration of around $557 million. Nonetheless, Digital Realty will aid the portfolio’s transition by offering property management services for a year from the closing date at a customary market rate. The high-quality data centers in key markets are 100% leased and this portfolio is estimated to generate cash net operating income (NOI) of nearly $37 million in 2020. This indicates a cap rate of 6.6%.
Digital Realty has also announced plans to form a JV with an entity jointly owned by Mapletree Investments and Mapletree Industrial Trust for three Turn-Key Flex® hyper-scale facilities. Digital Realty will retain 20% interest in the JV, while the entity will purchase 80% stake in the properties located in Ashburn, VA for around $811 million. This values the three assets at approximately $1 billion. The company will keep operating and managing these fully-leased and stabilized facilities. The facilities are anticipated to generate aggregate cash NOI of around $61 million next year. This indicates a 6% cap rate.
The above-mentioned transactions are subject to customary closing norms and will likely close in late 2019 or early 2020. Transaction proceeds will be used to repay outstanding debt and fund future accretive investments as well. Additionally, management will update its 2019 guidance during the third-quarter earnings call, to reflect the impact of these transactions.
In fact, management noted that the transactions will back its aim to self-fund growth and diversify sources of equity capital. Furthermore, by disposing 10 data centers, the company has condensed its asset base. Also, as sale proceeds will be redeployed in accretive investment opportunities, it will likely witness growth.
Additionally, Digital Realty currently carries a Zacks Rank #3 (Hold). In the past six months, shares of the company have outperformed the industry. While the stock has rallied 9.3%, the industry has gained 7.5% during this period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Notably, with growth in cloud computing, Internet of Things (IoT) and big data, and an increasing number of companies opting for third-party IT infrastructure, data-center REITs are likely to keep witnessing a boom market. In addition, the estimated growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five to eight years. These factors are anticipated to give significant impetus for growth to data-center REITs, including Digital Realty, Equinix, Inc. EQIX, CyrusOne Inc. CONE and CoreSite Realty Corporation COR.
Amid these, Digital Realty’s effort to enhance its data-center platform through such strategic transactions is a strategic fit.
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