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Net Data Centers Selling New Jersey, Virginia Data Centers to Exit Bankruptcy

Successful sale likely to be good news for bankrupt firm's wholesale data center landlords

Data center services provider Net Data Centers is selling its New Jersey and Northern Virginia data centers as part of a global plan to exit bankruptcy.

The company retained investment banking firm Three Twenty-One Capital Partners to help with the sale of its East Coast operations and is now actively seeking potential buyers.

The East Coast business includes one data center in Piscataway, New Jersey, and three Northern Virginia data centers: two in Ashburn and one in Reston. The facilities generated close to $15 million in revenue in 2014.

The company also has data centers in Los Angeles, which are not being marketed for sale, but the ownership is "open" to selling all of its assets at once.

Founded in 2002, Net Data Centers provides retail colocation, managed hosting, and private Infrastructure-as-a-Service solutions out of leased wholesale data center space.

The company changed its name from Net2EZ in March after filing for Chapter 11 bankruptcy protection in February. According to a Three Twenty-One promotional email, the company's problems were caused by above-market rental rates at its data centers. The company leased its wholesale data center space at a higher price than the current going rates.

The bankruptcy allows a potential buyer the means to buy the operations with renegotiated market-based rents.

The company disclosed some of its financials in the marketing materials. Revenue for the entire operation exceeded $40 million in 2014, with revenue growth of 15 percent from 2012 through 2014. East Coast operations revenue grew 26 percent between 2012 and 2014. The revenue numbers show decent growth, but it's possible that Net grew overly ambitious and leased too much wholesale space too quickly.

Wholesale providers often have colocation and data center services providers as customers. It often makes sense to take wholesale space rather than build your own data center, because it means a premium facility without the premium capital expenditures of building.

However, the lessee needs to provide additional value and still make a healthy enough margin above what it has to pay itself, making it particularly sensitive to pricing fluctuations. It's a careful balance.

"Retail colocation providers have been squeezed over the past few years as wholesale providers started to lease smaller amounts of capacity and compete on price with some retail firms," said Kelly Morgan, research director, North American Data Centers, 451 Research. "To survive, retail providers such as Net2EZ (Net Data Centers) have had to be able to differentiate, typically with added services (everything from remote hands to IaaS). However, providing services can put pressure on margins, which are thinner in many cases for firms that do not own their underlying facilities."

Morgan said that Net Data Centers was potentially hit by a combination of lackluster cost control and not being able to differentiate in the highly competitive New York and Northern Virginia markets.

The bankruptcy was felt beyond Net Data Centers, as it’s a sizable wholesale data center customer. Two of its landlords are DuPont Fabros and Digital Realty.

"For wholesale providers, of course, the nightmare is to have a tenant that cannot pay the bills," said Morgan. "This is one reason why investors have worried about DuPont Fabros’ concentration of tenants: if one does not pay, such as Net Data Centers, that has a much larger effect on DuPont than it would on a larger, more diverse provider such as Digital Realty."

However, wholesale providers were prepared to navigate through the issue. Both DuPont Fabros and Digital Realty discussed the Net Data Centers bankruptcy situation on earnings calls and set aside reserves to account for non-payment.

Net Data Centers' Los Angeles market footprint is significant. In 2007 it signed a lease with Digital Realty and continued to expand before making its way east.

“While we are not actively marketing the business as an entirety (East and West Coast operations) ownership remains open to the possibility of an entirety sale and will evaluate all offers,” Three Twenty-One Capital Partners said in a statement.

The provider's East Coast data center operations might make for an attractive asset, given the quality of the data centers and the ability to renegotiate the rents. Both Ashburn and New Jersey are hot markets.

In Ashburn, Yahoo recently subleased 13 MW still under contract in a DuPont Fabros facility to another DuPont Fabros customer. The wholesaler also recently signed Facebook for 7.5 MW. Facebook leases over 40 MW from DuPont Fabros in Ashburn.

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