Bill Stein, CFO and interim CEO, Digital Realty. Understanding the financial structure of your data centre supplier and how it is viewed by the capital markets. Ambrose McNevin asks the questions.
CBR Q: Describe Digital Realty’s relationship with the capital markets
Bill Stein – Interim Chief Executive Officer and Chief Financial Officer Digital Realty, A: We’re the only data centre REIT that has investment grade debt, and that has implications both for the cost of debt and for the availability of debt. The high grade debt capital markets are open far more frequently than the junk market. There is a difference in lending spreads as well.
And if you look at our multiples, we have among the best multiples among our data centre peers. This affects the price of our equity. Overall, we have the lowest cost of capital, which is a strong advantage.
CBR Q: What scale are you operating at?
BS A: Our enterprise value is around $15bn. And with the exception of Equinix our other competitors are probably around 25% of our size. And we have a global footprint
CBR Q: What’s the scale in terms of capital raised?
BS A: In 2014 we have raised roughly $900m. But this is a light year. There have been years when we’ve done a couple of billion ($US).
CBR Q: How will that trend?
BS A: We’re currently in asset rationalisation mode. We’re trimming the portfolio – we’re divesting non core markets, non core products and some underperformers. So that will generate at least $500 or $600 million of incremental capital over time – probably over the next nine months.
We just closed on a joint venture on one of our turnkey assets in Ashburn, Virginia, that raised about $160m.
We’ve basically pre-funded on our development program for next year.
We have no need to access external capital. We have money out on a revolver and based on the current interest rate outlooks it may make sense for us to go into the bond market and term some of that money out. But that’s a balance sheet management exercise.
CBR Q: What about the financial landscape for competitors?
BS A: I think their circumstances vary. Dupont Fabros has non-investment grade ratings They have not issued equity for a long time. CyrusOne, I dont’ believe have issued equity and Cincinnati Bell owns roughly 50% of their stock so that’s an overhang. When CyrusOne needs equity to grow they would be competing with their owner in the equity market because the owner would also want to monetise. Coresite – I think would be in the same situation – it is more than 50% owned by Carlyle.
They’ve had it for a long time and you would assume that at some time they would want to monetise that.
They have revolvers but much smaller. Our revolver is $2bn. I don’t think I’ve seen a DC revolver of bigger than $400m. Interxion did one for $150m.
We’ve done two Sterling revolvers in the last 18mths. First for £400m and second £300m so £700m in total.
Our philosophy for investing outside the US in a different currency is we like to match funds to the greatest extent possible in the local currency.
For our major acquisition – we bought the Sentrum portfolio in London – we financed it on our revolver in sterling and then immediately issued equity to match fund the acquisition.
CBR Q: How do you see Equinix’s plans to become a REIT? Will that impact your position or relationship with the markets?
BS A: It remains to be seen. They have a different business. Much smaller footprint and shorter contract durations. So we don’t see them in large footprint business, certainly not in the UK market – somewhat in Asia but not in the US either.
And, we have just recently entered the smaller footprint and we’ll go down to 50kw – a ten rack deal and they would certainly go much smaller – so not that much smaller in terms of the customer.
And I don’t think their business is acquiring assets with in-place cash flow. We might find ourselves competing for sites if they want to own and develop cash-generating assets. And in fact they are one of our top five customers.
CBR Q: How does the split breakdown in your business?
BS A: In colo, we haven’t done much acquisition of stabilised properties because the prices have gone up and the yields have come down. Maybe that correlates with what has happened in the bond market in the US and greater acceptability for the asset class.
There is a strong bid for long term net lease properties regardless of asset type. And so you find – firms like our former owner – GI Partners in Menlo Park – buys long-term net-lease data centres long-term net-lease office buildings, and long-term net-lease bio tech buildings which they are running in separate accounts. Carter Validus is a non-traded REIT and they but the same type of assets.
So there is a different buyer for the stabilised asset today and we can achieve higher returns by investing in development and leasing our development sites such as significant new developments such as Profile Park, in Dublin.
We have developments such as those ongoing. We have 10 developments. We love to buy income but then have a development opportunity on it to top it up. The problem is they don’t come around that often. We may look at forward income producing or we may look at green field
When we’re looking at Singapore or HK there isn’t much in income – you have to start from the ground up or convert a building.
CBR Q: What’s the demand like?
BS A: It is market specific. Demand drivers are cyclical. While economic recovery will certainly improve demand – you have some unusual factors that continue to push demand, big data, mobility, internet of things.
And that’s been great for the business – but because of the demand, this drives a fair bitg of new supply.
You’ve had private companies that have gone public so they have access to capital. You’ve had private capital come into the space . So what’s there will now need to find an exit. But the good thing is I dont’ see a lot of new private money coming in.
CBR Q: Is speculation gone? Has the fashion gone out of data centres with only the serious players left?
BS A: I think that is right. In addition to having a field, or a building within sight of a sub-station or even a finished data center what we think is very important is connectivity. That is, to have fibre. What we offer is an interconnected platform with sites around the world and that’s a very compelling value proposition.
CBR Q: Describe the character of the company.
BS A: We’re a money raising business [in addition to being an engineering and investment firm] the money is our raw material. We use the engineering to fashion a return that is higher than you would get in the normal course.
CBR Q: What’s the return on capital deployed?
BS A: We are 100% owned by institutions and I would say the majority of those are dedicated real estate investment firms. They are raising their money – some institutionally, pensions, college endowments and some are mutual funds where the retail investor is investing and relying on the portfolio manager, say at a firm like Fidelity to invest across real estate opportunities.
CBR Q: What does the yield look like for the investor?
BS A: The yields we are getting are in the stabilised 10-12% unlevered range. So add leverage and those are very attractive. Our debt funding costs on a 10-year basis right now are in the low 4s. Even on the low end on an unlevered basis – 16% – your levered returns are close to 20. It has improved quite a bit. How we perform influences the access and cost of capital to other players.