Digital Realty and Realty Income form build-to-suit data centre development JV

Digital Realty, the largest global provider of cloud- and carrier-neutral data centre, colocation and interconnection solutions, and Realty Income Corporation have established a joint venture to support the development of two build-to-suit data centres in Northern Virginia. Realty Income invested approximately $200 million to acquire an 80% equity interest in the venture, while Digital Realty maintains a 20% interest.

Each partner will fund its pro rata share of the remaining $150 million estimated development cost for the first phase of the project, which is slated for completion in mid-2024. The build-to-suit facilities were 100% pre-leased to an S&P 100 investment grade client prior to construction and are expected to generate a 6.9% initial cash lease yield upon lease commencement in mid-2024. The facilities are subject to a 10-year initial lease term with extension options and 2.0% annual rent escalators.

The two build-to-suit data centres commenced construction in the fourth quarter of 2022 and are slated to deliver 16 megawatts (MW) of initial data centre capacity, which is expandable up to 48MW at the client’s option. The budget for the first phase of these yield-on-cost developments is approximately $400 million. The client maintains the option to expand the projects up to 48MW of total capacity during the initial lease term, which could increase the budget up to $800 million, based on current development cost estimates.

“We are delighted to partner with Realty Income, a blue-chip net-lease REIT, in their first investment in the data centre sector,” said Digital Realty President and Chief Executive Officer Andy Power. “The formation of this development joint venture supports our customer’s build-to-suit requirements with a like-minded, long-term investor as our partner. The transaction also further bolsters and diversifies Digital Realty’s capital sources, while enhancing our flexibility so that we can prudently support our stakeholders’ longer term capacity requirements.”

“One of Realty Income’s core strategies is to partner with companies that are leaders in their respective industries. To that end, for our initial investment in the net lease data centre vertical, we are pleased to partner with Digital Realty, the largest provider of cloud- and carrier-neutral data centres whose global platform is well respected in the industry,” said Sumit Roy, Realty Income’s President and Chief Executive Officer. “This transaction offers our stockholders attractive risk-adjusted returns and will support the development of two state-of-the-art facilities located in Northern Virginia, the largest data centre market in the world.”

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