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Can REITs Turn a Commodity Into a High-Return Asset?

By Motley Fool Staff - Oct 1, 2017 at 6:45AM

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Are data-center REITs different from any other types of REITs?

Ultimately, the single biggest advantage any REIT can have is in its ability to raise capital for investing. The REIT with the lowest cost of capital can win deals on accretive terms, resulting in dividend growth as they deploy more capital to buy and lease out property on behalf of investors. But is there more to the story? Can data-center REITs drive incremental value for their customers and investors alike from their operational abilities, rather than their financing power?

In this episode of Industry Focus: Financials, join Michael Douglass and Jordan Wathen as they discuss at least one way data-center REITs purport to create value by curating a list of clientele within the same data center, and charging outsize fees to link clients' servers to one another.

A full transcript follows the video.

This video was recorded on Sept. 25, 2017.

Michael Douglass: Jordan and I both spent some time looking at the various REITs. I really struggled to find key things that distinguish them outside of the general things with REITs. So in terms of balance sheet, in terms of credit rating, in terms of dividend yield. Outside of that, it seemed that their cost of electricity production and the sort of things that they were touting they could do were broadly similar. Sure, there were some geographic differences. But it was hard for me to really identify a company that I felt was reasonably moated.

Jordan Wathen: Yeah, I think that's fair. One of the things that a lot of companies are talking about now, and let's get in briefly, the things that companies are really talking about now in this space is the ability to interconnect. So basically, this is really bad, especially for REITs, but think of a data center as a shopping mall. You have your anchor tenants like a Macy's or J.C. Penney or something, and those bring the people in. In a mall, in a small geographic area, one mall will survive because it'll have the best anchor tenants and everyone will want to go shop at that mall. So data-center REITs' pitch now is basically, "Look, we bring together all the awesome clients, and we can connect them directly to one another through one cable right here on site, so that'll bring everyone else to us, too, and we have some pricing power because of that." And that may be true right now, but I don't know how that changes in the future, or how companies end up putting their data in hundreds of different data centers, and whether that edge remains. But it's kind of an interesting argument that the interconnection part of the business is the good part of the business. I think that's something to look at if you're following this industry and have more interest in it.

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