As demand for data centers continues to surge, two real estate investment trusts are well-positioned to benefit, according to Moody’s Ratings. Ranjini Venkatesan, Moody’s senior credit officer, said in a note last week that demand is being driven by massive computing needs for artificial intelligence and cryptocurrencies, as well as large tenants such as cloud providers and social media companies. “While data center capacity has grown rapidly in recent years, it has not been able to keep up with rising demand,” she wrote. “We expect data center capacity to more than double by 2028 to meet our unconstrained forecast for data center power consumption.” Venkatesan said that Digital Realty Trust and Equinix, diversified data center owners, are investing in projects around the world to meet that demand. Digital Realty Trust is up more than 9% year to date and has a dividend yield of 3.32%. However, Equinix, which became a target of short seller Hindenburg Research in March, has lost nearly 4% so far this year. It yields 2.19%. Hindenburg accused the company’s management of manipulating a key measure of profitability. However, Equinix said in May that an independent investigation concluded that its financial reporting was accurate. EQIX 1Y mountain Equinix’s one-year performance “These owners’ increased use of joint venture arrangements, pre-leasing of under-construction capacity, and healthy returns on new investments will help maintain current credit ratios and strong liquidity,” Venkatesan wrote. “While rapid technological innovations will pose significant obsolescence risks over time, the two REITs are better equipped than most of their peers to respond to the changing environment,” she added. She believes the real estate pipelines and diversified portfolios of both Digital Realty Trust and Equinix should attract data center tenants. The two REITs own a combined total of about 71 million square feet of data center space, she said. Venkatesan noted that about 59% of Digital Realty’s revenue base is generated in the Americas, 31% in Europe, the Middle East and Africa (EMEA), and the rest in the Asia-Pacific (APAC) region. Equinix, meanwhile, generates 44% of its revenue from its properties in the Americas, 34% in EMEA, and 22% in APAC. She noted that both names have longstanding relationships with mega-scalers and diverse tenant rosters. She also sees REITs winning business from large mega-scale clients expanding into new markets because both have a long and proven global track record. “In particular, countries with data privacy and sovereignty rules will require data to be processed and stored within their borders rather than in a single, remote, central location. As a result, mega-scalers will maintain data center capacity in more locations than in the past,” Venkatesan said.
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Growing Demand for AI Data Centers Will Benefit Dividend-Paying Real Estate Stocks: Moody’s
