Digital Realty Trust Expects Q3 Close on Huge New Joint Venture

During their third quarter conference call with analysts, executives with San Francisco, CA-based Digital Realty Trust, Inc. (DLR) disclosed that they expect to close on a new joint venture partnership in the third quarter valued at an estimated $350 million to $400 million.

Digital Realty, which provides data center facilities and technology-related real estate to enterprise customers and IT service providers, would sell a pool of its existing assets with a private market valuation of at least $350 million into the joint venture. The real estate investment trust would own 20 percent of the venture and the as-yet unnamed institutional investor — described only as a “highly regarded institutional investor in the real estate space” — would own 80 percent of the partnership.

Arthur William Stein, the company’s Chief Financial Officer, said Digital Realty would maintain “significant equity ownership and operational control of the assets, access the new source of capital at a cost well below the returns we expect to achieve on new investment opportunities and generate management fees – and thus, a higher return on investment – on our retained investment.”

When asked if the investor had any sensitivity on pricing given the recent move in rates, or if he could shed some light on the cap rate of the deal, Stein was short on details.

“We’ve seen no sensitivity as a result of the changing rates,” Stein said. “You can assume the cap rates are — they’ll be rates that are attractive to us.”

William A. Crow from the research division at Raymond James & Associates, Inc. asked if the REIT had any interest in using proceeds from the joint venture to buy back some of its stock at the current price.

“When we close the venture, we’ll have to look at what our investment opportunities are,” Stein replied. “Depending upon investment opportunities, we would either use all the proceeds to pay down the revolver or the other alternative would be to make the use of proceeds leverage-neutral, which is to say partially retire debt and partially to retire equity in accordance with our pro forma capitalization. And of course, we could do anything along that spectrum.”

Digital Realty’s 122 properties, excluding three properties held as investments in unconsolidated joint ventures, comprised approximately 22.7 million square feet as of April 26, 2013, including 2.6 million square feet of space held for development. Digital Realty’s portfolio is located primarily in the United States, but the company has a presence in 32 markets total, including markets in Europe, Asia and Australia.

Specific properties being considered for the joint venture were not discussed.