REITs have plenty of levers to pull to access capital, and one that is growing in popularity these days is joint ventures—with deals that are growing in frequency and size.
JV activity is being driven in part by tighter capital markets, market volatility, and REITs that are looking to fortify their balance sheets and expand their geographic footprint. In particular, where the industry is seeing some of these JV announcements tends to be around big platforms, such as data centers, single-family rentals (SFR), and health care.
“I think the increased activity is just the desire to use JVs as an effective tool to build out their platforms and find alternative capital sources,” says Scott Maguire, global head of real estate securities solutions at CenterSquare Investment Management.
The rise in JV formations started in earnest a few years ago when interest rates started to increase and the traditional equity and capital markets environment became more challenging for public REITs, adds Daniel LeBey, a partner in the law firm of Vinson & Elkins.
“We’ve seen JV formations across a variety of property types ranging from multifamily and self-storage on one end of the spectrum to office to data centers and large industrial properties on the other end, particularly when an asset is being developed or re-developed,” LeBey says.
JVs Help Scale Platforms
In March, Digital Realty (NYSE: DLR) and Bersama Digital Infrastructure Asia (BDIA), a leading Southeast Asian digital infrastructure platform, announced the formation of Digital Realty Bersama, a 50-50 JV to develop and operate data centers across Indonesia.
Among other recent deals, Equinix Inc. (EQIX) inked an agreement last fall with Singaporean investment firm GIC and Canada Pension Plan Investment Board (CPP Investments). When including both equity commitments and debt, the JV is expected to invest more than $15 billion in total capital to accelerate the expansion of Equinix’s xScale data center portfolio.
JVs have been critical for Equinix’s ability to scale its platform. As context, on its most recent earnings call in February, the company guided for non-recurring capex investment of approximately $3.0 billion to $3.2 billion for 2025. In addition to that on-balance sheet spend, the company has 16 xScale projects in progress, representing an additional $1.8 billion of investment off-balance sheet.
“Even though we’re the largest in this space, we recognized that the size of our balance sheet and the amount of debt capacity you can put on it was limited,” says Equinix CFO Keith Taylor. The solution was to find JV partners that wanted to put their equity to work in digital infrastructure real estate.
This is the latest major JV for Equinix. Earlier JV deals, with partners GIC and PGIM Real Estate, are expected to total more than $8 billion of investment and create more than 725 megawatts of capacity at full buildout. With the capital raised through its latest JV, Equinix expects to purchase land to build new state-of-the-art xScale facilities on multiple campuses in the United States, eventually adding more than 1.5 gigawatts of new capacity for hyperscale customers.
Equinix is one of a growing number of REITs across sectors that are leveraging their operating expertise to attract JV equity partners to finance growth, improve their balance sheets, and generate new income streams. And, importantly, REITs are utilizing some of the advantages of JV capital, while still maintaining control over operations and key decisions.
Under the terms of the recent Equinix JV agreement, for example, the REIT will own a 25% equity interest and serve as the general partner, while CPP Investments and GIC will each control a 37.5% equity interest. For its JV in Indonesia, Digital Realty contributed approximately $100 million for a 50% interest in the data centers and adjacent land, which will support further expansion. In addition to its equity interest, Digital Realty will receive property management and development fees from the JV.
Growing Momentum
A JV offers a REIT several benefits, including immediate access to a large chunk of capital and the ability to partially monetize assets while retaining operating control and increasing scale. REITs also can take on higher leverage at the JV without driving up the company’s overall leverage and generate additional fee income.
So when is a JV a good fit? One clear case for a JV is for development, especially for larger assets like data centers and industrial properties, LeBey says. “Because of the dealer property rules, and the fact that REITs need to deploy their capital primarily in assets that generate operating cash flow, there’s a limit on how much true development REITs can do on balance sheet, and a JV creates more capacity for development,” he says.
Prologis, Inc. (NYSE: PLD) has an established track record of engaging in JVs to develop logistics facilities globally. In another recent example, BXP (NYSE: BXP) announced in March that it was forming a JV to develop a new $400 million apartment project at 290 Coles Street in Jersey City. BXP has said that it will own a 19% common equity interest in the venture, the Albanese Organization will own a 14% common equity interest, and CrossHarbor Capital will own the remaining 67% common equity interest.
The motivation behind JVs varies depending on the company and the situation. Whereas some REITs are tapping JV partners to help finance growth, others are using the capital to monetize assets, pay down debt, and improve balance sheets.
In the office sector, JVs are a way for some REITs to raise capital in what remains a challenging transaction market. REITs such as SL Green Realty Corp. (NYSE: SLG), Cousins Properties (NYSE: CUZ), and Paramount Group, Inc. (NYSE: PGRE) are among those companies engaging in JV partnerships.
“It’s a way for some of these REITs to be able to dispose of certain properties to investors that don't necessarily want to write a huge check to the office sector today because it is still fairly risky from the viewpoint of certain investors,” says Dylan Burzinski, a senior analyst and head of the office team at Green Street.
In addition, high-quality office buildings are not trading as often as they did pre-COVID. So in certain instances, the only way to get exposure to best-in-class office assets that institutional investors want might be through a partial interest.
From the REIT perspective, it's a way for companies to realize some of the value that they've created, while also tapping into a new income stream from various fees the JV partner will pay them throughout the life of that JV.
For some REITs, the overall JV fees as a percentage of NOI or earnings are relatively low. However, some companies derive a sizable amount of income as a result of entering JVs.
For example, Equinix generates recurring and non-recurring fee income streams related to development, asset management, and sales & marketing. The company said at their analyst day in 2023 that typical yields on development are between 12% and 17% when applying leverage of approximately 50%. When adding fees on top of that, Equinix can push its levered equity return above 20%.
“Our partners understand that, and they negotiated it because we’re the general partner and, effectively, we do all the work, while they bring the capital,” says Taylor, the CFO. “It's very important capital, but it was really important for us to make sure that we set it up in a way that made sense for us economically.”
Although individual JVs are structured differently, a key element is that REITs are maintaining an ownership stake and operational control. “They’re effectively managing the day-to-day leasing and blocking and tackling of owning and operating the asset, and they'll get fees either in the form of direct leasing fees or some other sort of management fee,” Burzinski says.
REITs also have the potential to collect carried interest following some type of liquidity event, such as the refinancing or sale of the asset at some point in the future.
Healthy Appetite
REITs are finding a healthy appetite from a pool of potential partners that include private equity groups, insurance companies, pension funds, and sovereign wealth funds.
“There is a vast amount of private capital looking to partner with strong operators to invest in real estate, and REITs fit the bill,” LeBey says. For REITs, the ideal partner is an institution that has patience and is comfortable allowing its operating partner to retain substantial control over the assets.
“There is a vast amount of private capital looking to partner with strong operators to invest in real estate, and REITs fit the bill”
One notable shift in JV structures is that REITs are taking smaller equity positions. Historically, REITs preferred to own a majority stake at 51% or greater. These days, it’s more common to see REITs taking lower ownership positions between 20% and 35%, while still maintaining the general partner position in the deal.
Investors are motivated to engage in JV partnerships for a variety of reasons. For some, they’re looking to partner with strong operators and deploy capital at scale into sector-specific strategies. “JV partners also like the safeguards and transparency that accompany partnering with a quality public REIT, such as strong internal controls over financial reporting,” LeBey notes.
“We know they have to monetize at some point, but we like the ideological symmetry in that long and patient capital”
REITs, meanwhile, like to work with partners that have long-term investing timelines. “We know they have to monetize at some point, but we like the ideological symmetry in that long and patient capital,” Equinix’s Taylor says. There also is some value in partnering with big names such as GIC and CPP Investments and PGIM Real Estate that everyone recognizes. From a competitive standpoint, it puts Equinix in a good position to be able to still access capital in a world where capital is becoming more constrained, he adds.
Digging into the Details
How the market views such partnerships depends on the economics. On a disposition, what’s the sale price and sale valuation, and how does that compare to how the market might have been valuing it? On an acquisition basis, what’s the going-in yield, or stabilized yield on cost, and how does that compare to overall cost of capital?
One potential challenge is how JVs are presented in the financial statements or the supplementals that are provided to investors, Burzinski says. “You do have to make certain adjustments to account for their correct share of income derived from these partnerships, and in some instances, the disclosure is just not there to get comfortable with truly being able to value the entirety of the REITs’ portfolio at their direct ownership,” he says.
Especially in cases where JV assets are a larger percentage or concentration of the overall portfolio, analysts would like to see information into the deal that helps to appropriately ascribe the correct amount of revenue and NOI generated for those assets.
More disclosure is generally always better when valuing companies, Maguire adds. “The more that you're able to synthesize the information that's out there just helps you with your underwriting and anything that's opaque makes it more difficult to value the company,” he says. For example, some REITs disclose only the headline numbers and don’t disclose details of the financials or even the name of their partner.
As REITs continue to lean into partnerships to access capital, JV agreements are likely to get more attention in the future. “I think we'll continue to see an increase in the structure going forward,” Maguire says. “There's a lot of capital that is looking to be deployed, and partnering with a REIT with a lot of scale helps them to deploy capital and also partner with the best in the business.”
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