Digital Realty and Realty Income announced on Monday, November 13, the establishment of a joint venture (JV) for the construction of two build-to-suit data centres in Northern Virginia. Under the agreement, Realty Income invested approximately USD 200 million to acquire an 80 percent stake in the venture, while Digital Realty holds 20 percent. The official release outlined the financial commitments, stating that each partner will fund its pro rata share of the remaining estimated USD 150 million development cost for the first phase. This initial phase is scheduled for completion in mid-2024.
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Pre-leased for 10 Years
The joint statement noted that the built-to-suit facilities were 100 percent pre-leased to an S&P 100 investment-grade client before construction and are expected to generate a 6.9 percent initial cash lease yield. The facilities are initially leased for a period of 10 years with provisions for extending the lease period and an annual rent increase of 2 percent each year.
Digital Realty, Realty Income Form Joint Venture
"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," said Digital Realty.
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Commenting on the development, Realty Income said, "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."
Flexibility in Development
The construction of the two build-to-suit data centres commenced in the fourth quarter of 2022 and will deliver an initial data centre capacity of 16 MW, expandable up to 48 MW at the client's option.
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The joint statement also provided insights into the budget for the first phase of these yield-on-cost developments, approximating USD 400 million. Importantly, the client maintains the option to expand the projects up to 48 MW of total capacity during the initial lease term, potentially increasing the budget up to USD 800 million, based on current development cost estimates.
