Included in the three-building portfolio is Prometric’s Global Operations Center of Excellence, a 57,782 SF Class A office building which Prometric has invested over $8.5 million to improve. The other two facilities are occupied by Comcast. The first is a 25,000 SF office and call center, as well as a training facility. The second is a 66,000 SF data center and switch site. The buildings are fully leased with Comcast and Prometric, both credit-worthy tenants, representing relatively stable cash flows. Because of the unique nature of the purchase, there are three key takeaways from Lincoln Rackhouse buying these buildings.
Part of the strength in any acquisition lies in the tenant base of the asset and the lease, and both tenants in the Lincoln Rackhouse acquisition were strong drivers. Comcast, one of the tenants, has an A3 credit rating from Moody’s, and Prometric is a branch of Educational Testing Services, one of the largest private non-profit educational testing organizations. And with all buildings fully leased, Lincoln can immediately begin operating the facilities without having to search for tenants to fill the space. This acquisition is one of several made by Lincoln over the last year and a half, including the purchase of Coca-Cola’s Atlanta data center in 2Q 2017. Additionally, the stable cash flows and critical nature of the facilities provides Lincoln Rackhouse with a secure and longevous source of revenue.
Lincoln’s purchase of the portfolio is a bit unique for the traditional data center investor, but their relationships and real estate experience allowed them to get comfortable with the opportunity. Because the portfolio included office buildings along with the data center, the buyer needed both an operational and leasing background in both the office and data center industry. While Lincoln Rackhouse’s expertise lies in the data center industry, their parent company, Lincoln Property Company, is a partner and very familiar with operating and leasing office space. This expertise allowed Lincoln Rackhouse to execute the purchase with a focus on data center infrastructure operation, while Lincoln Property Company focuses on the office space. This unique blend of experience should allow Lincoln Property Company and Lincoln Rackhouse to continue to grow their portfolio through acquisition of mixed portfolios of office and data center product, where traditional single-sector buyers may have difficulty.
This acquisition is another example of how data center real estate developers are growing their opportunities with reliable capital partners. Bailard, with over 40 years of experience in real estate investment, also participated in Lincoln Rackhouse’s purchase of Coca-Cola’s Atlanta data center earlier this year. “This kind of opportunity fits well with Bailard’s strategy of investing in good quality real estate that can generate a consistent high-quality income stream along with providing the potential for attractive capital appreciation,” said Preston Sargent, Bailard’s Head of RE Investments. The data center industry is becoming an increasingly attractive investment sector, and a growing number of equity firms are entering the market. As an emerging market, equity firms will partner with data center providers to gain from the provider’s expertise and knowledge of the data center industry to ensure success from their investments.
According to Ryan Sullivan, Managing Director at Lincoln Rackhouse in Dallas, “Lincoln is looking for quality, well-maintained second generation facilities, with existing cash flows, that present the ability to grow returns.” Like the Coca-Cola data center purchase, Lincoln can invest the time, resources and capital into the space that the existing tenant or owner may not have been willing to, adding value to the purchase by increasing the probability for current tenants to stay in place, and for new tenants to consider moving in.
While Lincoln Rackhouse’s purchase of three buildings in Baltimore may be out of the ordinary, the purchase fits the company’s goals very well. The existing leases make the transition much smoother and creates instant cash flow. Lincoln’s relationship with their partners can help to overcome some of the obstacles associated with the different tenants and building types. These benefits create opportunities with equity firms looking to enter the data center industry, and strengthens the company’s relationship with their capital partner Bailard. Lincoln will likely continue purchases like this as their relationship with Bailard strengthens and further opportunities arise.