Carter Validus Mission Critical REIT has purchased a data center in Northlake, Illinois, for $211.7 million from developer Ascent. The building, called CH2, is a 250,000 square foot multi-tenant facility next to Microsoft's data center in the suburban Chicago market.
The deal is partially a development play, while the real estate investment trust's traditional strategy has been to buy fully-leased data center properties."It definitely has an aspect of development for them, because there’s some vacancy," Ascent CEO Phil Horstmann said."They have a lot of capital at their disposal."
Until now, Carter Validus has done sale-leaseback data center deals only. A typical sale-leaseback option involves a property owner selling their building to a second party, while agreeing to continue to lease space in the building. The transaction generates cash for the former owner (now the tenant), and provides the new owner steady rent from the lease. These deals are particularly attractive when the initial owner is a blue-chip company with a strong credit rating.
In Northlake, the REIT gains a well-managed facility with an existing customer base, as well as an opportunity to develop the property further. This is Carter Validus’ largest single portfolio acquisition to date, pushing its asset value over the $1 billion mark.
Ascent to continue managing CH2
The deal works out well in Ascent's overall strategy too. "Our main private equity partners out of New York have a higher risk profile," Horstmann said. "We’re recycling some capital with them and we’re moving on to some more higher-risk projects. It allows us to continue to do speculative developments."
As part of the agreement, Carter Validus will provide new capital for continued expansion of the facility, and Ascent will continue to manage operations, engineering and construction at the site.
The new capital structure for CH2 frees Ascent up to build more with its other private equity partners, Horstmann said. "We have a site in downtown Chicago, in the South Loop, we’re working on. We’re getting started in St. Louis, Phoenix and Denver."
A wholesale-retail mix
Ascent launched the data center in March, offering both wholesale and retail space. The mix is representative of a trend in the industry of wholesale providers getting closer to retail colocation (DuPont Fabros and Digital Realty), and retail getting closer to wholesale (Fortrust and Equinix with its Business Suites).
"We’re hearing from users that they want more options than wholesale kW," Horstmann said. "They want to turn dials around customization, wholesale colo with or without operational services."
Carter Validus is focused on two sectors, data center and healthcare, citing trends in society it believes will boost demand for data storage and outpatient healthcare. The company acquired acquired $593.2 million in real estate assets in 2013, bringing its total portfolio to $988 million. Of that 2013 total, $589 million was data center assets, compared to $399 million of healthcare facilities.