At the end of 2023, cloud and carrier neutral data centre provider Digital Realty announced a joint venture with investment firm Blackstone that caught the attention of the industry.
While the deal is the latest and by far the biggest in a spree of transactions aimed to raise capital outside of capital markets, Sadler revealed that it will not be the last.
The two companies are teaming up to spend a total of $7 billion on four campuses in Northern Virginia, Frankfurt and Paris, and initially provide 500 MW of capacity when fully operational.
“This could potentially be 750 megawatts of total capacity and even bigger than the $7 billion,” Sadler says, taking to Capacity.
It’s the scale of these investments that have driven Digital Realty to form partnerships with the likes of Blackstone.
Hyperscaler deployments are only getting larger. Combine this with the growth in demand generated by advances in AI and Digital Realty has a big opportunity for growth in front of it, but needs the capital to take advantage.
What happened in 2023?
“We were seeing the opportunity to grow and we wanted to reduce our reliance on the capital markets for that growth,” Sadler explains.
Rather than relying on issuing equity, Digital Realty wanted big money fast and decided it was time to bring in a private capital partner.
The strategy to diversify and bolster the company’s capital sources was put into place at the start of 2023 and fell into three distinct buckets.
Firstly, it planned to sell $500 million of non-core assets, or data centres they deemed to be non-strategic. Digital Realty also planned $750 million of stabilised asset joint ventures of hyperscale data centres and a further $750 million of development hyperscale joint ventures.
“We put those markers out there because we thought we could hit them, but we launched a greater volume of potential transaction value relative to the markers,” Sadler explains.
Around July, Digital Realty began accelerating the pace of these transactions. Two stabilised asset joint ventures with GI Partners in Chicago and Texas Pacific Group in North Virginia blew the $750 million target out the water, raising over $2 billion.
Preceding the development joint venture with Blackstone, Digital Realty closed a transaction with a smaller real estate investment trust (REIT), Realty Income, which was initially worth around $400 million.
Similar to the Blackstone deal though, this has the potential to increase to $800 million of development at Digital Realty’s tenant’s discretion.
Why Blackstone?
“There are a number of players who wanted to participate, and we are still engaged with others,” Sadler says. “The returns are attractive, but the number of players who could sign a $7 billion check is limited”.
That number shrinks further when you consider the pace at which Digital Realty wanted the cash.
“Blackstone are already in this business, they’re familiar with data centres and could move swiftly given their experience and history”.
For example, Blackstone’s REIT acquired QTS Realty trust for $10 billion in 2021. Over the summer it was reported to be planning on spending a further $8 billion on data assets through QTS. So no stranger to Digital Realty's ambition then.
Digital Realty’s CEO, Andy Power, and CIO, Greg Wright, have had extensive careers on Wall Street, and Sadler says that personal familiarity with faces on the other side of the table from Blackstone helped get the ball rolling and speed the transaction along. Even still, Sadler revealed that the two firms had been in discussions for around 9 months prior to the announcement.
More details on the joint venture
Blackstone is primarily a capital partner on the project, but will be consulted on certain decisions, Sadler says.
But development, operations and property management responsibility primarily sit with Digital Realty.
“The biggest market by megawatt is North Virginia,” Sadler says. In fact, two facilities will be deployed in the US, with the rest of the capacity split evenly between Paris and Frankfurt.
Sadler reveals that one of the Virginian campuses will be in Manassas, and will hold the lion’s share of the capacity. Blackstone will also support additional capacity in Dulles, which includes a building at the 1GW Digital Dulles campus.
More details on the specifics of the deal structure can be found in Capacity’s initial coverage of the story.
More joint venture’s are to come
“We’ve made some good progress in terms of expanding our funding, but there’s more to do,” Sadler says.
“We've got a lot of the heavy lifting out of the way around these joint ventures, but you'll see additional joint ventures for sure.”
What those joint ventures look like though, is likely to evolve. “Rather than one large partner, we may look for an expanded group of partners to work with this year,” he says.
“We’ve spoken to a lot of people this year and the number potential investors who want to have access to investing in data centres is sizable”.
Sadler said Digital Realty would be willing to entertain facilitating incremental investments from these partners, but with nuances to the fund structure to accommodate a wider pool of capital partners.
