Establishes programmatic framework with leading infrastructure investor for future potential capital contributions aggregating up to $500 million at an attractive cap rate valuation
OVERLAND PARK, Kan., Feb. 25, 2019 /PRNewswire/ -- QTS Realty Trust (QTS), a leading provider of software-defined and mega scale data center solutions, announced today the formation of a joint venture with Alinda Capital Partners ("Alinda"), a leading infrastructure investment firm with approximately $7 billion of assets under management. QTS contributed a 118,000 square foot hyperscale data center under development in Manassas, VA to the venture. The facility was contributed at a stabilized value of approximately $240 million, excluding associated closing costs, representing a 6.75% cap rate. QTS and Alinda will each take a 50% interest in the venture, which will be reflected as an unconsolidated joint venture on QTS' reported financial statements beginning in the first quarter 2019.
Through this expected initial joint venture, QTS is able to:
- Raise upfront net capital proceeds of approximately $53 million at closing, which will grow to approximately $87 million as the asset stabilizes, including QTS' share of joint venture debt
- Reduce its capital funding requirement by an aggregate of approximately $120 million over the course of the full development of the stabilized Manassas facility while retaining a 50% proportionate stake in the NOI generated by the facility
- Increase the expected stabilized ROIC on QTS' capital contribution in Manassas from approximately 9% to approximately 12% including incremental management and development fees.
In addition, through the programmatic nature of its broader strategic partnership with Alinda, QTS has the opportunity to structure additional joint venture agreements, enabling future equity capital contributions from Alinda at a valuation that is comparable to the initial joint venture in support of QTS' hyperscale growth strategy.
The Manassas data center is currently leased to a global cloud-based software company subject to a 10-year lease agreement. The customer has currently signed commitments to lease the entire powered shell as well as nine megawatts of turn-key data center capacity. The customer is expected to sign future commitments, scaling to the full 24 megawatts of gross turn-key power capacity available at the data center over approximately a two year period. The first phase, representing the powered shell and five gross megawatts of turn-key data center capacity, commenced in the first quarter of 2019 and the second phase, representing four gross megawatts of additional turn-key capacity is expected to commence in the second quarter of 2019.
The joint venture has arranged a credit facility of up to approximately $165 million secured by the Manassas facility at LIBOR plus 225 bps. At closing, QTS received net proceeds from the joint venture of approximately $53 million, comprised of equity contributions from Alinda and joint venture debt. QTS' proportionate share of the upfront joint venture debt is approximately $27 million. As incremental development at the Manassas facility takes place and future phases are delivered to the customer, QTS will draw additional proceeds from the venture based on the pre-set stabilized 6.75% cap rate for all phases delivered within the first three years of development, thereby not sacrificing future value from the joint venture's growth. Upon full stabilization, QTS expects to receive net proceeds aggregating to approximately $87 million associated with the Manassas data center, including the joint venture debt, while materially reducing QTS' capital requirements in the facility. QTS expects to use the net proceeds from the joint venture to pay down outstanding borrowings on its revolving credit facility and for general corporate purposes, including ongoing data center development.
The joint venture agreement announced today represents potentially the first closed transaction as part of a broader strategic partnership with Alinda. The strategic partnership outlines a programmatic framework under which Alinda will be given the opportunity to partner with QTS and contribute equity capital for specific data center development projects in support of QTS' go-forward hyperscale growth strategy at a cap rate that is comparable to the initial joint venture agreement. Including equity capital associated with the initial joint venture, the strategic partnership outlines Alinda's initial capacity to potentially contribute up to $500 million of equity capital in aggregate over a five year period. In addition to joint venture debt proceeds, this would represent in excess of $1 billion of potential JV funding to support QTS' future hyperscale data center development strategy.
"We are pleased to partner with Alinda, a premier infrastructure investor, to enhance QTS' access to capital in support of its accelerating and capital efficient growth initiatives," said Chad Williams, Chairman and CEO – QTS. "This strategic partnership gives QTS a unique ability to optimize capital, materially enhances the overall return on capital profile within our portfolio and expands our available sources of capital funding with an experienced infrastructure investor. In addition, the implied valuation encompassed in the joint venture agreement demonstrates the strong underlying value of data center assets within QTS' broader platform."
"The quality and long-term cash flow visibility of QTS' world-class data center facilities aligns well with our investment strategy focused on essential infrastructure assets," said Jim Metcalfe, Partner and Head of Global Investments – Alinda Capital Partners. "This joint venture represents the first transaction of our broader strategic partnership and we are excited to deepen our relationship with an appetite to initially deploy as much as $500 million of equity capital alongside QTS over the next five years."
The joint venture, which closed on February 22, will be reflected as an unconsolidated joint venture on QTS' reported financial statements beginning in the first quarter 2019. Consistent with GAAP accounting standards, revenue from the unconsolidated joint venture will be removed from QTS' reported GAAP financial statements. Also consistent with GAAP accounting and NAREIT-defined standards, QTS anticipates including its proportionate ownership of EBITDAre and Funds from Operations from the joint venture in its reported EBITDAre and Funds from Operations results, respectively.
QTS expects the closing of the joint venture will result in a reduction in its full-year 2019 reported revenue of approximately $12M, representing 100% of the expected revenue from the Manassas facility. In addition, QTS expects the consummation of the initial joint venture will result in an approximately $3M reduction in its reported 2019 adjusted EBITDA to reflect the impact from its 50% reduced proportionate ownership in the Manassas hyperscale development project contributed to the unconsolidated joint venture.
As the joint venture provides the opportunity for QTS to balance a higher return on capital, against reduced capital spending, QTS does not anticipate the closing of the joint venture will have a material impact on its 2019 reported Operating FFO per share. As leasing in the facility ramps to full stabilization over the next several years, QTS expects the Manassas joint venture to ultimately result in approximately $0.02 - $0.03 of reported annual OFFO per share accretion.
The impact of the initial joint venture has been fully incorporated into the Company's 2019 financial guidance provided in conjunction with its fourth quarter 2018 earnings release. QTS will provide additional details on its joint venture agreement with Alinda during its fourth quarter 2018 earnings conference call.
Deutsche Bank Securities Inc. and Jefferies LLC served as financial advisors to QTS, and Hogan Lovells US LLP served as legal advisor to QTS.
Greenberg Traurig, LLP served as legal advisor to Alinda.
About Alinda Capital Partners
Alinda Capital Partners is one of the world's largest and most experienced infrastructure investment firms. Alinda is a long-term investor in infrastructure assets that provide essential services to communities. Alinda's infrastructure businesses serve over 100 million customers annually in more than 550 cities globally, and are run by a workforce of over 80,000 people. To learn more https://www.alinda.com/ [alinda.com]
QTS Realty Trust, Inc. (QTS) is a leading provider of data center solutions across a diverse footprint spanning more than 6 million square feet of owned mega scale data center space throughout North America. Through its software-defined technology platform, QTS is able to deliver secure, compliant infrastructure solutions, robust connectivity and premium customer service to leading hyperscale technology companies, enterprises, and government entities. Visit QTS at www.qtsdatacenters.com, call toll-free 877.QTS.DATA or follow on Twitter @DataCenters_QTS.
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