Business Context and Reporting Period
Company: Digital Realty Trust, Inc. (Digital Realty)
Filing Type: Form 8-K (Current Report)
Date of Report: September 24, 2018
Primary Event: Announcement of the definitive agreement to acquire Ascenty, a leading data center provider in Brazil, and the formation of a joint venture with Brookfield Infrastructure Group, Inc. to own the acquired entity.
Key Financial Metrics and Transaction Details
Ascenty Acquisition Consideration: Approximately $1,826.8 million (subject to adjustments), comprised of:
- $1,511.1 million in cash
- $290.7 million in common units of limited partnership interest
- $25.0 million in equity interests in an indirect subsidiary
Total Estimated Cost: Approximately $2,251.3 million (including $1,826.8 million purchase price and $424.5 million capital expenditures for development).
Valuation Multiple: Estimated at 15.0 - 15.5 times underwritten forward stabilized EBITDA.
Financing Structure:
- Equity: Approximately $323 million from Digital Realty.
- Joint Venture Partner: Brookfield committed to invest up to $725.0 million (estimated initial investment of $613 million).
- Debt: Approximately $575.0 million in new Brazilian operating company level secured term loan indebtedness.
- Bridge Financing: A $750.0 million short-term senior unsecured term loan facility committed by Bank of America and Citigroup to fund Brookfield's portion if investment occurs post-closing.
Virginia Land Acquisition: Agreement to acquire 424 acres in Loudoun County, Virginia, for $236.5 million.
Ascenty Portfolio Metrics:
- Total Planned Capacity: 106.2 megawatts (39.2 MW in-service, 34.0 MW under construction, 33.0 MW potential additional).
- Leasing Status: 97% leased (in-service), 83% leased (under construction).
- Revenue Currency: Approximately 75% of contractual cash rent denominated in U.S. dollars.
Material Changes and Strategic Developments
Expansion into Latin America: The acquisition establishes Digital Realty as the leading data center provider in Brazil with approximately 31% of the market capacity. The portfolio includes eight in-service data centers and six under construction across São Paulo, Campinas, Rio de Janeiro, and Fortaleza.
Joint Venture Formation: Digital Realty and Brookfield will initially hold approximately 49% equity interest each (with 50% voting power) in the JV Entity owning Ascenty. Ascenty management retains approximately 2% non-voting equity.
Corporate Governance: Execution of the Seventeenth Amended and Restated Partnership Agreement to grant Digital Realty Trust, L.P. the right to redeem units of limited partnership interests under certain circumstances.
Capital Markets Activity: Commencement of an underwritten public offering of 8,500,000 shares of common stock in connection with forward sale agreements.
Outlook, Risks, and Management Commentary
Management Outlook: The transaction is expected to be initially dilutive to financial metrics but accretive over the intermediate term and long-term growth rate. Closing is anticipated in the fourth quarter of 2018.
Key Risks:
- Transaction Completion: No assurance the Ascenty Acquisition or Brookfield investment will close on time or at all.
- Emerging Market Exposure: Risks related to Brazilian political instability, currency fluctuations (Brazilian Real vs. U.S. Dollar), inflation, and regulatory changes.
- Leasehold Structure: Ascenty does not own its facilities; all are held via leasehold interests with a weighted average remaining term of over 30 years. Renewal risks exist.
- Joint Venture Governance: Potential for deadlock on major decisions requiring 75% voting approval; limited ability to exit the JV for five years.
- EBITDA Estimates: Stabilized EBITDA is a non-GAAP measure based on assumptions regarding construction completion and lease-up rates.
Investor Verification Checklist
- Verify the final closing date of the Ascenty Acquisition and the Brookfield joint venture investment.
- Monitor the actual stabilized EBITDA performance of Ascenty against the 15.0 - 15.5x multiple used in underwriting.
- Track the exchange rate volatility between the Brazilian Real and U.S. Dollar and its impact on consolidated revenue.
- Confirm the status of the $750 million bridge loan facility and whether Brookfield's investment occurs pre- or post-closing.
- Review the lease renewal terms for Ascenty's facilities to assess long-term asset security.
- Assess the impact of the 8,500,000 share public offering on existing shareholder dilution.