What Kind of Clients are Ideal for Sale-Leasebacks?

SEATTLE, WA – CapRE’s Fourth Annual Greater Seattle & Pacific Northwest Data Center Summit on November 15 was a full day of non-stop market analysis and networking. Chock-full of rousing, in-depth panels, the event welcomed 250+ attendees from all over the region. Data Center Industry M&A Activity: 2018 Year in Review & 2019 Forecast was one of the most revelatory discussion, featuring the expertise of four regional data center insiders. Below, we highlight the introductory remarks by panelist Tim Doherty, Chief Executive Officer at Digital Fortress, in response to a question posed by Moderator Tony Wanger, former CEO of IO.

data center summitWanger: Let’s start with a general question about 2018. The year is coming to a close. We’re up against the holiday season. So we have a pretty good idea how 2018 played out. But it’d be good to hear from an M&A perspective, what you witnessed in the last year. Any observations or takeaway from the past 11-12 months? Tim, would you want to start with that?

Doherty: There was more of an acceleration of activity from 2017. A number of companies have been transacted. And again in my perspective, looking at sale-leasebacks as an operator, there are a number of transactions, sale-leasebacks, private transactions, from operators to companies like John’s for example that have traded hands for revenue or cash-flow.

There are a number of operators that are contracting their needs for the data center, so they are pushing some of their compute to the Cloud, so they don’t need as big of a footprint. And that’s where it falls into the sale-leaseback that we’re engaged in, and we are a data center operator. So accelerated activity from 2016 to 2017 and again from 2017 to 2018. It looks like it’s going in that same direction from 2018 to 2019. It’s a frothy market. Which is good and bad, depends on whether you’re on the buy or sell side. But it’s a very active market today.

Timothy Doherty, Chief Executive Officer, Digital Fortress

Wanger: Did we see more activity in 2018 than 2017 or was 2017 a bigger year?

Doherty: 2017 was a very big year. 2018 hasn’t finished yet. I know there are a number of deals out there that haven’t closed out yet, which I’ve heard of. So I’m not quite sure. But I think 2018 is very much on track to where 2018 was.

Wanger: Tim, you mentioned the sale-leaseback arena. Why don’t you talk to us about that? What kind of clients are you seeking out for sale-leaseback deals?

Doherty: Well the ideal client would be a credit tenant in the tenant’s facility, that would term on the actual contract to the sale-leaseback. So the term would then hopefully take you to a position at the end of the run where you have a basis that is very small. It is much less capital-intensive than to build a new data center. A brownfield deployment of course is a measurement of how much per kilowatt is the standard number. So if you can have a low basis and a good credit-tenant with capacity, and then use your economies of scale, your ability to sell into is ideal. So the trifecta. It’s very important.

Wanger: Are you seeking a specific kind of client such as healthcare or financial?

Doherty: I would love to quantify and qualify clients by that basis. But I think it’s, we are in a specific market, so we seek clients that complement our current infrastructure, our current capabilities and our current ability to finance and acquire. Not necessarily in a vertical but more of a broad cast.

Stay tuned to future CapRE Insider Reports for more from Doherty and his co-panelists.