SAN FRANCISCO-Yesterday, GlobeSt.com reported that Digital Realty Trust Inc. had formed a $369-million joint venture with an investment fund managed by Prudential Real Estate Investors, the real estate investment management and advisory business of Prudential Financial. Digital Realty seeded the joint venture with nine Powered Base Building data centers totaling 1.06 million square feet and valued at approximately $366.4 million (excluding $2.8 million of closing costs), or $346 per square foot.
“The long lease terms and contractual rental rate increases on these Powered Base Building data centers provide a stable rental income stream that represents a good fit with our investment objectives,” notes Cathy Marcus, managing director at PREI and senior portfolio manager of the firm's core US real estate strategy. “These institutional quality properties are fully leased to a diversified roster of credit tenants, and we look forward to realizing a stable return on this portfolio over the course of a long-term relationship with Digital Realty.”
The properties are expected to generate cash net operating income of approximately $24.5 million in 2013, representing a 6.7% cap rate. According to Digital Realty Trust, the properties are 100% leased, with an average remaining lease term of approximately nine years, GlobeSt.com previously reported.
Drilling down to further details of the deal, the JV arranged a $185-million five-year unsecured bank loan at LIBOR plus 180 basis points, representing a loan-to-value ratio of approximately 50%. The transaction generated approximately $328.6 million of net proceeds to Digital Realty, comprised of Digital Realty's share of the initial draw-down on the bank loan in addition to the PREI fund's equity contribution, less Digital Realty's share of closing costs.
Digital Realty will recognize a gain on depreciated book value of approximately $115 million on the sale of the 80% interest in the nine properties during the third quarter of 2013.
A. William Stein, Digital Realty's CFO and chief investment officer adds, “This joint venture is a significant milestone for Digital Realty, as it furthers our objective of maximizing the menu of available capital options, while minimizing the related cost. The transaction also has the ancillary benefits of lowering leverage while reducing our tenant concentration and establishing an attractive private market valuation benchmark for our Powered Base Building product.”
Proceeds from the transaction will initially be used to pay down debt, and will eventually be used to fund future investment activity. Digital Realty plans to revise 2013 guidance to reflect closing of the joint venture on the third quarter conference call at the end of October.
As GlobeSt.com previously reported, the PREI-managed fund will take an 80% interest in the joint venture and Digital Realty will retain a 20% interest. The joint venture is structured to provide a current annual preferred return from cash flow to the PREI-managed interest, while Digital Realty will receive fees and a promote participation for managing the properties.
As GlobeSt.com previously reported in August, Digital Realty revealed that it had completed the refinancing of its global revolving credit facility and term loan. The refinancing allowed the company to reduce pricing, extend loan maturities and increase its aggregate commitments by $450 million. The combined facilities totaled $3 billion, representing the 5th largest unsecured credit facilities among US REITs. The refinancing provided funds for acquisitions, development, redevelopment, debt repayment, working capital and global expansion. The $2 billion Global Revolving Credit Facility matures in November 2017, has two six-month extension options, and can be increased up to a total of approximately $2.55 billion US dollar equivalent. Pricing for the facility, based on the company's senior unsecured debt rating of BBB/Baa2, was reduced from 125 to 110 basis points over the applicable index for floating rate advances and the annual facility fee was reduced from 25 to 20 basis points.
As GlobeSt.com also recently reported, Prudential Real Estate Investors has also been buying properties here in the Bay Area region. Just yesterday, we posted that Harvest Properties along with partner Prudential Real Estate Investors had purchased the 555 City Center office building from CBRE Investors.
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
