On March 17th, Digital Realty announced it had completed the sale of 11 data centers in Europe to Ascendas REIT. In US dollars, the price of $680MM representing an EBITDA multiple of ~17x based on most analysts’ estimates. This divestiture was already factored in Digital’s 2021 guidance – so (putting on my old analyst hat) there should not be a big change to numbers (which optically is always a very good thing for a stock price!).
This ‘capital recycling’ as it is called is NOT a new part of Digital’s playbook. They have done this successfully in the past (including with the recent Mapletree JV deal). While some of this capital will go toward de-leveraging, M&A is an integral part of Digital’s DNA (recall – their CFO was a top banker in the space before joining the company). The big bet is they are able to deploy this capital and realize a higher cap rate than what they were getting from these divested assets (~6%+). So the key question is where do they go? While there are geographies which Digital likely wants to increase their presence (greater exposure to India has always been a point of discussion) – a recent blog post by them may offer some clues.
Specifically, in its Blog post in late January (LINK HERE: https://www.digitalrealty.com/blog/how-data-gravity-digital-transformation-and-hybrid-it-will-define-2021) Digital spoke much about the Edge and the need for “re-evaluation of architectures.” Driving these trends are the shift to “data localization” (think GDPR) and need for “cyber-physical security.” The ‘money quote’ which jumped out to us in the write up was: “Connected devices at the edge are predicted to generate more than 79 zettabytes of data by 2025—5x higher than the amount generated last year.”
We agree with this view and its impact on the industry. One has to wonder if Digital is thinking more formally as to how it will develop this edge play. With almost a third of Digital’s revenue coming from cloud players, Digital will need to have some sort of ‘pitch’ as to why it can further help its customers with this path. Microsoft, a top customer for Digital, just recently introduced “Azure Precept” at its Ignite event. Thus, to say the Edge is top of mind to many of these CSPs is indeed an understatement.
If Edge is becoming more than just a buzzword, Digital needs to find a more formal way be there. The task is not too large for them. Digital has been a company in enormous transition in the past five years. Remember, it used to be known as ”just a space and power” company a few years ago. But it pivoted to connectivity and now has 164,000 cross connects. While much of this was due to the InterXion acquisition, it went to where the proverbial hockey puck continues to be going.
Like other capital recycling moves Digital has made in the past, this one last week in Europe was a concerted effort to rationalize their more mature assets and use the proceeds from that to make forward-looking chess moves in this space! My bet is that next chapter will somehow involve the all-important Edge. To be a fly on the wall of Digital’s business development teams’ Zoom calls (or should I say Microsoft Teams calls!?) would be very interesting right now that is for sure……