Digital Realty Nets $1.5B Through Sale Of Properties, Shares Amid Leadership Shake-Up
It has been an eventful week for Digital Realty.
The data center real estate investment trust has raised more than $1.5B through the sale of new shares and the disposition of properties in Texas and Illinois.
The transactions, which follow growing investor concerns about the company’s rising debt levels and ability to fund new development, come during a week the colocation giant terminated its chief revenue officer and saw the resignation of a longtime board member amid allegations of improper governance.
The Austin, Texas-based firm announced this week that it raised $1.1B of gross proceeds through the sale of close to 11 million new shares issued under the company’s at-the-market program. ATM programs are a tool that has been increasingly used by public REITs to access cash in recent months, with 34 different REITs utilizing similar programs in the last quarter of 2022 alone, according to S&P Global.
Meanwhile, Digital Realty raised $150M in net proceeds through the sale of what it is calling a noncore data center in Texas. The company indicated it sold its 100% interest in the facility at a 4.4% cap rate, generating a capital gain of approximately $88M.
While Digital Realty didn't name the Texas property specifically, the company indicated that the property was acquired in 2012 and leased as a powered shell, meaning that its interior is provided as raw space for the tenant to outfit as needed. Digital Realty purchased three Texas data centers in 2012: 400 South Akard St. and the Convergence Business Park in Dallas and 8025 North Interstate 35 in Austin, according to Data Center Dynamics.
In addition to the Texas facility, Crain's Chicago Business reported this week that Digital Realty sold its majority stake in a pair of Chicago-area data centers to investment firm GI Partners. The two adjacent properties, located on Busse Road and East Devon Avenue in the data center hot spot of Elk Grove Village, offer a combined 110 megawatts of capacity over almost 800K SF.
Both properties are part of a three-building campus acquired through Digital Realty’s merger with Dupont Fabros in 2017. It is unclear how large a stake in the properties GI Partners is acquiring in the deal, which is being financed through a $450M loan, according to Data Center Dynamics.
This significant wave of liquidity comes as Digital Realty is eager to ease investor concerns about its ability to pay down debt and fund new development through asset sales after a lackluster first quarter.
After three years of unprecedented growth, Digital Realty’s new booking numbers declined precipitously last quarter to their lowest level since the start of the pandemic. As new bookings dropped, the company’s debt load skyrocketed beyond the firm’s own targets and north of what many investors are comfortable with.
Digital Realty has also faced skepticism about its plan to sell fully leased assets to pay down its debt and fund future development. As Bisnow has reported, macroeconomic volatility has made executing these deals far more difficult, with overall data center deal volume declining significantly late last year.
With investor doubts in mind, Digital Realty officials have been explicit about their intention to use the combined proceeds from asset sales and ATM issuances to pay down debt and eventually fund future development.
"Consistent with our goals for this year, this transaction enables us to recycle capital from a non-core asset at an attractive valuation," Digital Realty Chief Investment Officer Greg Wright said in a statement. "We are consistently enhancing our portfolio by redeploying proceeds into strategic investments with premium growth prospects. Institutional demand for data centers remains robust and we look forward to continued execution on our capital plan."
Amid this flurry of transactions, Digital Realty also experienced a significant shake-up in its boardroom and executive suite this week.
Laurence Chapman, Digital Realty’s former chairman and a longtime member of the board of directors, resigned from his board position Tuesday following disagreements over the company’s governance practices, according to Dow Jones. Chapman was already scheduled to step down from the board this week but resigned prematurely, writing a letter to Chair Mary Hogan Preusse in which he objected to the behavior of Director Mark Patterson and raised concerns about the board not following established governance procedures in a number of instances.
Chapman wrote that he was also troubled by what he called a lack of transparency around the CEO selection plan the company established late last year, a process that culminated in Andy Power taking the helm from longtime CEO Bill Stein in December.
“My concern is with the process, which was far from the transparent, participative and consensual process I associate with good governance," Chapman wrote.
"The company believes its governance policies and practices are compliant and robust, including numerous improvements in recent years," Digital Realty Trust responded in a securities filing Wednesday. "The board believes in the importance of good governance and remains focused on governance matters, including periodic board refreshment to provide diversity, fresh thinking and new perspectives."
Meanwhile, Digital Realty filed notice with the Securities and Exchange Commission Monday that it terminated Chief Revenue Officer Corey Dyer, who had been in the role since 2021. The company named Colin McLean, its Americas sales lead, as Dyer's replacement.
