Digital Realty Tweaks Strategy, Plans Property Sell-off

Digital Realty Trust is planning to divest the least-performing properties in its massive global portfolio and change its mix of product offerings to include solutions that combine its traditional space-and-power offerings with services higher up the stack provided by some of its customers.

The changes come as the company continues its search for a permanent replacement of former CEO Michael Foust, who abruptly resigned in March. The company’s CFO and interim CEO Bill Stein announced what the company’s senior leadership called “a new path forward” on a first-quarter earnings call with analysts Tuesday.

“This is a new path forward that both I and the senior leadership team have created,” Stein said.

Addressing concern expressed by an analyst that whoever becomes the next CEO may have ideas of their own about changing the company’s direction, Stein said the changes were too common-sense for anyone to disagree with. “I can’t see anyone disagreeing with those initiatives,” he said.

The plan includes divesting legacy non-data center assets, as well as data centers in non-core markets and under-performing data centers. The idea is to recycle capital currently sunk into those “non-strategic” assets.

The real estate investment trust is also going to stop building data centers without first securing tenants for them. Since Digital Realty can now deliver a data center pod in 12-16 weeks, it no longer needs to stockpile finished facilities, Stein said, and will take a “just-in-time” approach to inventory.

With the new strategy, the team expects to have more than 90 percent of its portfolio to be occupied by the end of 2014.

First Two Properties Offloaded

Scott Peterson, chief investment officer the company appointed in April, said the leadership team had been evaluating every property in its portfolio and assessing its long-term potential over the past several weeks. The plan is to offload the bottom 5-10 percent of the portfolio over the next several years.

The first property Digital Realty has gotten rid of is a 110,000-square-foot facility in Somerset, N.J., which it contributed to a joint venture with Prudential Real Estate Investors.

The data center is fully leased to a financial-services company with nine years left on the lease. Digital Realty contributed the facility to the joint venture, of which it owns 20 percent, at a valuation of about $40 million.

The second property to go was another single-tenant data center which the company sold to the tenant who currently occupies it for about $42m. It did not name the tenant.

The company’s portfolio currently consists of 131 properties, 13 of which are investments in unconsolidated ventures. Together, the properties comprise about 24.5 million square feet.

Recognizing Market Changes

Digital Realty also has recognized that the data center market is changing and there is now more demand for solutions that include more than its traditional space-and-power offerings. To address this dynamic, the company’s executives said they will partner with some of its customers who provide things like managed services to offer combined solutions customers need.

Digital’s revenue for the first quarter was about $390 million – a 9-percent increase year over year. Its funds from operations (similar to earnings) were $1.22 – up 5 percent from the first quarter of 2013.