A highly competitive data center market is fueling record asset valuations, and the dynamic has pushed Digital Realty Trust Inc. to explore additional sales of noncore properties.
"There is an awful lot of capital coming in market, and clearly we're seeing some pretty big valuations out there." Scott Peterson, chief investment officer, said Feb. 15 on the company's 2017 year-end earnings call, according to a transcript. "We're going to take a deep dive in our portfolio a little later this year and we're going to look at noncore assets, noncore markets, underperforming assets, assets which may become at risk for underperforming."
Peterson left open the prospect of "a more aggressive" approach to portfolio pruning. The company may explore potential sales of powered base buildings — shell facilities with in-place power and fiber infrastructure — that have significant upside, to in-place tenants. All options are on the table, he said.
"Our basis is relatively low and they're extremely good investments for what they are," Peterson said of PBBs. "But in some cases, we could actually generate some pretty impressive returns if we got those back. So wouldn't want to forgo future upside for the sake of a good cap rate today, but we'll keep that all in mind as we evaluate these opportunities."
Digital Realty sold during the fourth quarter two noncore assets at a combined 7.1% cap rate for net proceeds of $70 million and has sold two other properties year-to-date for net proceeds of "a little less than $90 million," CEO Bill Stein said on the call. He did not disclose the cap rate of the 2018 trades.
The company expects to generate up to an additional $100 million of proceeds from asset sales in 2018, Stein said.
Since the company commenced its capital recycling program roughly three years ago, it has sold 14 assets, generating $500 million of net proceeds.