Data Center Market Kicks Off 2017 With Flood of Acquisitions
CyrusOne’s Phoenix I data center in Chandler, Arizona (Photo: CyrusOne)

Data Center Market Kicks Off 2017 With Flood of Acquisitions

With deals by three of the six public data center REITs, strategic acquisitions are back in vogue

It hasn't taken long for M&A activity to ramp up in the data center market this year.

QTS Realty, Equinix, and CyrusOne all kicked 2017 off with strategic acquisitions. Equinix and QTS chose to double down on capacity in existing markets, while CyrusOne widened its footprint by acquiring two stabilized data centers with adjacent land for expansions located in North Carolina and Northern New Jersey.

Additionally, privately-held Digital Bridge Holdings continued a fast-paced acquisition program by its DataBank subsidiary (also a recent acquisition), purchasing data centers in Cleveland and Pittsburgh from 365 Data Centers.

These largely tactical moves differ from how the acquisition cadence played out in the data center market at the end of last year, when major portfolio deals dominated.

Read more: 2016 Was a Record Year for Data Center Acquisitions, but 2017 Will Be off the Charts

Notably, large telecom portfolio deals, enterprise data center outsourcing, and private equity exits, including Vantage Data Centers (potentially) and Cologix, all suggest that 2017 activity will set new records.

CyrusOne's Enterprise Focus

During 2016 CyrusOne was highly successful when it came to competing for and winning hyperscale cloud deployments. However, its latest $490 million acquisition from Sentinel Data Centers appears to be back in this REIT's more traditional wheelhouse: providing colocation data center solutions for larger enterprise customers.

Its announcement of Raleigh-Durham, North Carolina, and Somerset, New Jersey, data center acquisitions highlighted gaining over 20 new enterprise logos, including five Fortune 1000 customers among the 30 existing tenants. Additionally, the North Carolina campus represents CyrusOne's closest pin in the map to data center markets in the Southeast.

Here are the details on the two locations:

Raleigh-Durham Data Center

  • Current power capacity: 10 MW (approximately 70 percent leased)
  • Average remaining lease term: ~9 years
  • Lease-up and expansion opportunity: 23 MW

Somerset Data Center

  • Current power capacity: 11 MW (approximately 95 percent leased)
  • Average remaining lease term: ~8 years
  • Lease-up and expansion opportunity: 22 MW

The purchase price was underwritten at 14.4x the pro-form $34 million EBITDA run-rate. This would make the acquisition immediately accretive to existing shareholders. CyrusOne expects to be able to lease up the remaining 34,000 square feet and 8 MW of power with only $15 million in additional investment.

There is land available for expansion at both sites, where the company expects it can build out another 230,000 square feet and 37 MW of power "at a cost expected to be in line with the Company's current build cost per MW." CyrusOne has several "Massively Modular" projects underway, including outside of Chicago and in Northern Virginia. It is still too early to tell how the new normal for hyperscale cloud leasing will evolve during in 2017.

A Post-Brexit Vote of Confidence in London

The recent Equinix announcement of a data center acquisition from IO for an undisclosed price is essentially additional bolt-on colocation capacity for Equinix in the Slough data center market, a financial hub outside of London.

This desire for more capacity can be viewed as a vote of confidence for London remaining a major global financial center despite UK's Brexit vote. The Equinix Slough campus offers low-latency connectivity between London and other key financial markets: 30 milliseconds to New York and 4 milliseconds to Frankfurt, according to the company.

Equinix currently operates LD4, LD5, and LD6 in Slough and plans to rename the IO data center LD10 after it is tethered to the existing campus. IO UK's Slough data center contains Baselayer Modular Data Center units, which Equinix will maintain and expand on an as-needed basis, according to the press release.

LD10 will add about 350 cabinets of sold capacity and total colocation space of 3,340 cabs once the facility is completely built out. The IO data center currently has a customer mix similar to Equinix's existing base, including financial services, enterprises, and networks. IO's anchor tenant in Slough is Goldman Sachs.

QTS Sticks to Its Formula

QTS has once again executed on its core strategy by acquiring another large-scale facility at a low cost basis which can be retrofitted and leased to third parties.

Last week, the company announced that it has acquired a 53-acre data center campus for $50 million from Health Care Service Corporation (HCSC) in the Dallas data center market. The transaction was structured as a sale/partial lease-back, where HCSC will remain as a 1 MW anchor tenant in the existing 8 MW data center. The purchase would represent just over $6 million per megawatt if the entire purchase price was allocated to the existing facility.

Currently there is 40,000 square feet available in a powered shell that can accommodate 80,000 square feet total and is currently served by a dozen carriers. The former HCSC campus at full build-out can support a total of 300,000 square feet and up to 60 MW of power. The new QTS Dallas-Fort Worth campus is located adjacent to the $1 billion Facebook data center campus that's currently and 20 miles away from QTS's existing 700,000 square foot Irving facility.

Big 2016 Deals: a Recap

After a relatively slow start to 2016, Digital Realty and Equinix worked out a mutually beneficial arrangement in Europe to satisfy the EU Commission in conjunction with the TelecityGroup acquisition by Equinix. Equinix ended the year by announcing another blockbuster deal, the $3.6 billion Verizon Americas data center portfolio carve-out.

Read more: Why Equinix is Buying Verizon Data Centers for $3.6B

Additionally, Terremark founder Manny Medina put together a group to purchase the $2.6 billion Century Link data center portfolio. The other acquisitions during 2016 would be considered singles and triples compared with these towering home runs.

Fast-forward to 2017, and thus far it has been a steady flow of granular acquisitions in targeted markets, as the public data center REITs continue to strategically expand their footprint.

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