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SALE/LEASEBACK TRANSACTIONS
From Site Selection magazine, May 2015
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Rewiring

Sale-leasebacks of mission-critical facilities can take a load off the portfolio, the books and the CIO all at once.

SALE/LEASEBACK TRANSACTIONS
Phoenix-based software-defined data center technology, services, and solutions firm IO in August 2014 announced a partnership with Carter Validus Mission Critical REIT, Inc. (CVMC REIT) through which CVMC REIT acquired a 100-percent interest in the real estate containing IO’s Phoenix and Scottsdale data centers (pictured). CVMC REIT immediately leased the data centers back to IO in a sale-leaseback transaction valued at $125 million.
Images courtesy of IO

by ADAM BRUNS
W

hen media giant iHeartCommunications (previously known as Clear Channel), decided to sell and lease back its primary IT and finance shared services center in February, it did what more companies are doing than ever before: Turn the expenses of a mission-critical asset to an operating expense, and escape the specter of depreciation.

Represented by DTZ, iHeart sold the 120,147-sq.-ft. facility in San Antonio to W. P. Carey Inc., the New York–based global REIT specializing in corporate sale-leaseback financing, build-to-suit financing and acquisition of single-tenant net lease properties, acting on behalf of CPA®:17 – Global, one of its managed non-traded REITs. The 13-year-old facility is leased to iHeartCommunications for 20 years, and the total acquisition price was approximately $22 million.

Many of our clients are looking at sale-leaseback or sale-partial leaseback options for their data centers.”
— Jeremy Meyers, business development analyst, CBRE Data Center Solutions Group

“Given the valuable data center space and improvements to the building, we believe that we were able to acquire the facility at below replacement cost,” said W. P. Carey Managing Director and Co-head of Global Investments Jason Fox. “The terms of the triple-net lease provide for an attractive initial cap rate, as well as annual built-in rent increases. iHeartCommunications’ position in the broadcast and outdoor advertising sector and the highly critical real estate make for what we believe will be a long-term, income-generating investment for CPA®:17 – Global’s investors.”

That same month, Carter Validus Mission Critical REIT, Inc. (CVMC REIT) announced that it had acquired the AT&T Data Center property in Waukesha, Wis., just outside Milwaukee along I-94, for approximately $52 million. In this case, the facility, built by Wisconsin Bell in 1989, was leased back for 10 years by AT&T Services, Inc.

The 142,952-sq.-ft. data center include over 40,000 sq. ft. of raised floor space and 60,000 sq. ft. of supporting infrastructure and critical systems, and houses a wide array of enterprise applications for AT&T’s business operations, said a CVMC release.

“The addition of the AT&T Data Center is representative of our commitment to acquire high-quality, mission-critical assets under long-term net leases with credit tenants,” said John Carter, CEO, CVMC REIT. “We look forward to adding more assets of this caliber to our investment portfolio.”

As one of the busiest REITs in this arena, CVMC has already been doing plenty of that. Its acquisitions include a number of medical buildings and portfolios across the country, and the September 2014 purchase for $50 million of the “Alpharetta Data Center” in metro Atlanta, originally constructed by a financial services firm.

“We are delighted with the significant progress we have made recently,” said Michael Seton, president and chief investment officer of Carter Validus Advisors, LLC. “As we approach $2 billion in portfolio assets, we believe we are well positioned to continue to deliver value to our shareholders.”

Analysis Begets Action

But what value accrues to the corporate occupier? If mission-critical is defined as “essential to the successful operation of the tenant,” what are companies doing giving up ownership?

They’re getting focused on core business, for one thing. And they’re making an expensive, high-maintenance real estate category work in their favor — literally and fiscally.

“Many enterprises have spent tens, even hundreds of millions just revamping their data center’s infrastructure, and can spend easily two to four times the amount the data center is worth on the capital improvements.”
— Jeremy Meyers, business development analyst, CBRE Data Center Solutions Group

“Many of our clients are looking at sale-leaseback or sale-partial leaseback options for their data centers,” says Jeremy Meyers, a business development analyst for CBRE’s Data Center Solutions Group. Usually owners are motivated by the opportunity to shift data center costs to an operating expense.

Others are doing it because the data centers are not core assets, and so farming it out to a third-party data center provider makes sense. “They’d rather focus on their core competencies instead of operating a data center,” says Meyers. “They know these data center providers will deliver great service from a facilities perspective, and it’s a bit of a load off the CIO.”

Sometimes, oddly enough, it’s the third-party firm itself that’s offloading. Such was the case in August 2014, when Phoenix-based IO, a software-defined data center technology, services, and solutions firm, announced it was selling and leasing back its Phoenix and Scottsdale data centers in a partnership with CVMC REIT, in a transaction valued at $125 million.

IO said the partnership would allow it to focus on its core competency of delivering colocation and cloud services across its global data center footprint.

Avoiding Major Capex

Many territories have developed incentive programs for mission-critical facilities, usually designed around new capex or a new build. In a number of states, such incentives continue through the usable life of the data center, meaning those savings can be rebated or taken off the top of the rent when a sale-leaseback transaction occurs. While not a typical decision driver, the expiration of incentives can be a tip-the-scale factor.

“The addition of the AT&T Data Center is representative of our commitment to acquire high-quality, mission-critical assets under long-term net leases with credit tenants.”
— John Carter, CEO, CVMC REIT, on the acquisition of a facility in Waukesha, Wis.

Some corporate end-user owners may be looking down the road and not seeing a viable disposition strategy. Another motivator is the need for capital improvements.

“For a lot of clients, their facility might be 10 to 15 years old, and that can necessitate new generators, UPS, or updated infrastructure,” says Meyers. “That’s really capital-intensive, and they don’t want that responsibility. It’s easier for these organizations to budget for a relatively fixed operating expense rather than dealing with the uncertainty of large capital expenditures.”

The cost of staying up to speed can speed up fast.

“On average, it’s not uncommon to see capex in eight- to nine-figure sums,” says Meyers. “Many enterprises have spent tens, even hundreds of millions just revamping their data center’s infrastructure, and can spend easily two to four times the amount the data center is worth on the capital improvements. It can be a huge money pit to maintain and own.”

Hence one of the attractions of sale-leaseback: being able to quantify that expense.

“It’s a pretty transparent expense versus owning,” says Meyers, when, for instance, critical infrastructure might go out and a company faces a large, sudden expenditure.

Trends Worth Tracking

Jeremy Meyers is a business development analyst for CBRE’s Data Center Solutions Group.

CBRE is seeing significant mission-critical facility sale-leaseback activity from the financial services, healthcare and social media sectors. Meyers says sale-leaseback transactions in secondary or tertiary markets are often driven by the concern over asset disposition. A few recent transactions in primary data center markets, however, have been at least partly driven by the big dollars it would take to bring the facility up to date.

Sale-leaseback, among its other attributes, can free up your mind along with some cash.

Complicating the issue is the speed-of-light evolution and growth of data centers and IT as a strategic pillar, rather then a backroom necessity, for many companies. It’s top of mind, but that doesn’t mean it’s easy to make up your mind. Sale-leaseback, among its other attributes, can free up your mind along with some cash.

“A lot of clients don’t have a good idea of what their IT strategy is going to be two to five years out,” Meyers explains. “They’re moving to colocation, or exploring the cloud. Owning that asset really constrains them. And it could leave them with quite a bit of empty space, should they alter their IT strategy.”


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