An early exit in data centres

With data centres blurring the lines between infra and real estate, sister publication PERE writes how one Bethesda, Maryland-based private equity real estate firm's 2005 data centre investment evolved from a pure real estate play into something more akin to an operating company.

The graceful walls of the Infomart Dallas tell the story of innovation, both for real estate and technology.

Built in 1985, developer Trammell Crow envisioned the building as a showcase for computers and other emerging technologies. Drawing on architectural inspiration from a former London building, the property’s soaring ceilings and large floorplates allowed space for computers that, at the time, took up entire rooms. The 1.5 million-square-foot building functioned as a permanent trade show for technology companies, with multiple electrical feeds to serve as back-ups – and back-ups for the back-ups – in case of major power outages.

As technology evolved, so too did Infomart Dallas’s tenants: after computers no longer took up entire rooms, the building began leasing space to offices and, in the early 1990s, to telecoms companies. Some of those businesses, however, went out of business in the dotcom crash, leading the previous Dallas Infomart owner to default on its mortgage.

In 2005, ASB Real Estate Investments, the Bethesda, Maryland-based private equity real estate firm, purchased the property out of foreclosure for $102 million, according to data provider Real Capital Analytics. The firm bought the defaulted first mortgage loan debt from owner GMAC, then negotiated a deed in lieu of foreclosure to transfer the equity to ASB.

ASB executed the deal, its first in the data center space, through its $7.4 billion core real estate fund, Allegiance. At the time, the property was 73 percent leased with high-quality, long-term tenants including Verizon and IBM, and about 10 percent of its square footage was devoted to data centers.

Can run on batteries

ASB’s plan centered on converting that office space to data centers, and the firm found a major tenant in Bank of America, which used Infomart Dallas to house its main transactions processing facility. Today, the building is about 60 percent data center space, 30 percent office and 10 percent vacant. Tenants, still including Bank of America, rely on the building’s multiple layers of back-up, including battery power if all four electrical feeds go down, and 10 emergency generators to further power the building that can last several weeks without new fuel. The building likewise has a backup HVAC system and other precautions in place to keep operations running.

The firm acquired three other data centers after its Dallas purchase, but as the industry grew, ASB saw the properties functioning more akin to an operating company than a real estate play. Tenants and providers were each consolidating, and tenants began seeking data center firms with significant domestic and international presence – too tall an order for a US-focused core property fund.

To exit Infomart Dallas, the firm considered either partnering with an operator to capture the growing market or exiting entirely. When ASB sourced bids from private and public players, it found pricing high enough to make an outright sale attractive, with the goal to redeploy capital.

Earlier this month, the firm sold Infomart Dallas to Equinix, a public internet services company, for $800 million. The transaction consisted of cash and debt securities, which will be paid out to ASB over a 36-month period following closing. Because ASB sought to redeploy funds from the sale, the firm opted for the note issuance, with a staggered maturity schedule of up to three years, to avoid diluting returns.

Some of the proceeds from the sale may go to ASB investments in data centers again, but few of those properties are likely to be as eye-catching as Infomart Dallas.

To read more about the sector, check out our analysis on the consolidating US data centre market here.