The scale of changes T5 Data Centers has undergone this year makes the management’s choice to retain the original company name a little confusing, especially if you haven’t followed the transformation closely. So, for the sake of clarity, let’s refer to the current version of the company as “T5 2.0,” at least until you’re done reading this article.
T5 2.0 – Addition by Subtraction
It all began with a transformative deal closed back in January, when a large part of the original T5 portfolio was carved out to create Stack Infrastructure, combining those assets with the former Infomart assets located in the Portland, Silicon Valley, and Northern Virginia markets. T5 1.0 was funded primarily by Iron Point Partners in conjunction with high-powered Silicon Valley wealth management firm Iconiq Capital
IPI Data Center Partners was formed and made its first data center play – an investment in T5 – in 2016. It has now moved on with a new team at Stack, taking with it former T5 1.0 data centers Atlanta, Dallas, Chicago, and Portland.
T5 2.0 has retained facilities in Los Angeles, Charlotte, Colorado Springs, New York State (Westchester County), and a campus in Ireland, outside of Cork City.
Of course, with the exit of IPI, T5 2.0 needed to find another source of funding. The solution was to arrange for a $2.5 billion commitment from Vancouver-based QuadReal Property Group, a global real estate investment, operating, and development company which manages the real estate portfolio for the pension fund called British Columbia Investment Management Company, an institutional investor with over $145 billion of assets under management.
The arrangement with QuadReal and T5 is exclusive, signed initially for a 10-year period. The goal is to create a technology real estate operating and development platform to serve the needs of both hyperscale (think Facebook or Microsoft) and enterprise (think FedEx or Goldman Sachs) customers. The stability of pension fund backing should make T5 2.0 more attractive for big customers looking for long-term development partners.
T5 2.0 Secret Sauce
In a recent interview, T5 chief operating officer Aaron Wangenheim told Data Center Knowledge that the company looks at services that can deliver reliable, recurring revenues as a way to help cover corporate overhead. Those include a variety of design-build construction services and T5FM, a facilities-management outsourcing practice T5 1.0 established in 2014. In addition to facility operations and remote hands, T5FM can provide campus-wide services including power procurement, environmental health, and safety.
During 2018, T5FM signed up 11 new facilities, according to Wangenheim. "We sleep well at night with multiple revenue streams," he said.
Value-Add Focus and Flexible Approach
In addition to ground-up developments, T5 2.0 will be looking for M&A opportunities – especially value-add situations "which might come with a bit of hair."
It becomes more complicated for many buyers to look at data center assets that are not triple-net leased, Wangenheim clarified. T5FM allows the company to operate assets, while the construction team looks at how best to divide a legacy facility for multiple tenants to drive a faster lease-up.
Additionally, T5 construction services would be willing to entertain a build-to-suit for corporate clients (without requiring a sale-leaseback transaction). This type of flexibility is unlikely to be found in a publicly traded company, Wangenheim added, referring apparently to his biggest competitors, such as Digital Realty Trust, QTS, or CyrusOne.
Its recent arrangement with QuadReal is a game-changer for T5 2.0 when it comes to competing for the increasingly large hyperscale deals with 10-year and longer initial lease terms.
T5 is not just another well-funded private startup throwing a cowboy hat into the ring. During the past 10 years, T5 1.0 has developed 22 data centers across 12 US markets. This experience, along with an operational track record, touted in T5 1.0’s "Forever On" motto, are differentiators for T5 2.0.
QuadReal’s backing also allows the company to enter "must-have markets" like Northern Virginia. T5 will build speculatively in markets they "believe in." NoVA is a must-have, Wangenheim said, but land prices there have increased dramatically, creating a challenge T5 will need to overcome. Additionally, "yields have compressed across the board, so the ability to build for less is crucial to compete."
T5's access to patient pension-fund cash will meaningfully reduce the cost of capital – a crucial variable when it comes to successfully underwriting massive data center campuses. Meanwhile, big development wins are notoriously lumpy, which hasn’t made life easy for T5’s publicly traded rivals, who have to deal with the stock market’s knee-jerk groupthink on a weekly basis. The T5 services revenue allows management to be patient and wait for the right opportunity to deploy these large sums of capital.