EAST WINDSOR - As it enters the facility management business, QTS Realty sees its new Princeton campus as an ideal showcase for its approach to data center services. The 200-acre property provides QTS with a lease from an existing tenant, revenue from its facility management services, room to expand its infrastructure, and a partner to help fill that new space with customers.
The $75 million deal reflects the way QTS approaches the data center business. It likes buying large facilities at an affordable price, building out space at a thrifty $7 million per megawatt, and offering a range of service options to its 850 customers.
The Princeton site is the first implementation of the new Critical Facilities Management (CFM) program, in which QTS manages data centers for corporate users. QTS will provide its wholesale data center offering (known as C1) to Atos, which will then package these services for McGraw Hill Financial, the end user and previous owner of the facility.
QTS expects the 10-year lease to provide a return on capital of better than 10 percent.
"What was interesting for us is the ability to go into a transaction with great visibility and long-term double digit return, and then still have the capacity of almost 180,000 square feet of fully improved shell," said Chad Williams, CEO of QTS Realty, in the company's recent earnings call.
The building was initially used as a book warehouse by McGraw Hill, which has had a campus in East Windsor since the early 1960s. The current data center, built in 2008, spans about 180,000 square feet. It also features more than 180,000 feet of expansion space.
"The long-term plan is to build that out for multi-tenant use," said Danny Crocker, the Vice President of Operations and Global Critical Facility Management for QTS. Crocker estimated that construction would probably start in six to 12 months, with an initial buildout of 30,000 to 60,000 square feet of space.
It may get some help marketing the space from its new tenant. "Atos has ambitious plans for that facility beyond McGraw Hill Financial, and (wants) to bring other clients in," said Williams.
Williams said the data center management service provides enterprise customers a way to monetize underused data center assets.
"We can utilize our CFM services in enterprise-owned facilities or in connection with QTS taking ownership of the data center in a sale/leaseback structure where QTS can increase the value by using our services to broaden the customer base in a multi-tenant environment," he said.
The QTS product portfolio is built atop the "three Cs" approach. The C1 offering is wholesale data center space, while C2 is colocation and C3 is a managed cloud offering. The CFM offering adds the option to outsource not just services, but facilities management.
A key benefit is unleashing the power of the sale-leaseback model, which has been a popular growth strategy in recent years for real estate investment trusts like QTS Realty. A sale-leaseback option typically 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.
Leveraging the Sale-Leaseback Model
The sale-leaseback model has provided a popular way for companies to reduce their focus on real estate and data center management. The model has been widely used by Digital Realty Trust and Carter Validus as they have built large portfolios of data centers and technology buildings.
"We’re excited about the new customer relationships with both McGraw Hill and the broader partnership with Atos," said Williams. "The opportunity to be 50 miles from Philly and 50 miles from New York really kind of makes this location near Princeton a very optimal location for us. We feel like we have a cost advantage mega scale campus with unique infrastructure and a great client roster to start."
Continue to see photos of the East Windsor facility:
Here's a look at some of the infrastructure supporting the QTS Princeton facility in East Windsor, N.J. For photos of the adjacent 14 megawatt solar array, see Super-sizing Solar Power for Data Centers.