Realty Income, a net-lease real estate investment trust with a market capitalization of $40B, has made its first push into data centers with a $200M investment into a new joint venture with data center giant Digital Realty.

Realty Income and Digital Realty have formed a development joint venture to complete the build-out of a pair of data centers in Northern Virginia, the companies announced Monday morning.

The deal involves Realty Income investing $200M to acquire an 80% equity interest in two pre-leased data centers Digital Realty is building in the industry’s largest market. Digital Realty will maintain a 20% stake in the project, which could eventually deliver as much as 48 megawatts of data center capacity.

The deal marks the first entry into the data center sector for Realty Income, an S&P 500 REIT invested in more than 13,000 properties, most owned under long-term net-lease agreements with commercial clients.

“For our initial investment in the net lease data center vertical, we are pleased to partner with Digital Realty, the largest provider of cloud- and carrier-neutral data centers whose global platform is well respected in the industry,” Realty Income CEO Sumit Roy said in a statement. “This transaction offers our stockholders attractive risk-adjusted returns and will support the development of two state-of-the-art facilities located in Northern Virginia, the largest data center market in the world.”

As is now typical across the data center industry, both build-to-suit facilities supported by the joint venture were 100% pre-leased by a single tenant before construction commenced in the fourth quarter of 2022. While the identity of that company is unknown, the news release announcing the joint venture described the tenant as “an S&P 100 investment grade client.”

That company has agreed to a 10-year lease with extension options and 2% annual rent escalators, the REITs said. The data centers are expected to generate a 6.9% initial cash lease yield when the lease commences.

Approximately $150M in development costs remain for the first phase of the project, which consists of 16 MW of capacity scheduled for completion by midyear 2024. Capacity can be increased to 48 MW at the client’s behest, an expansion that could double the project’s total budget from $400M to $800M, according to the JV.

Realty Income and Digital Realty have agreed to fund their pro rata share of the remaining expenses.

Speaking with Wall Street analysts in late October, Digital Realty’s leadership hinted that this kind of development joint venture was on the horizon. Although the firm is one of the largest global operators and developers in the booming data center sector, Digital Realty has faced skepticism from investors over its ability to fund growth while simultaneously increasing liquidity and lowering its debt load from levels that had Wall Street nervous.

In a written statement, CEO Andy Power framed the JV as part of the same capital recycling efforts that have seen it unload a number of stabilized assets over the past year.

“The transaction also further bolsters and diversifies Digital Realty's capital sources, while enhancing our flexibility so that we can prudently support our stakeholders' longer term capacity requirements," Power said.