Two real estate investment trusts are positioned to benefit as demand for data centers continues to soar, according to Moody’s Ratings. Moody’s senior credit officer Ranjini Venkatesan said in a note last week that the demand is being driven by the massive computing needs of artificial intelligence and cryptocurrencies, as well as large tenants such as cloud service providers and social media companies. “While data center capacity has grown rapidly in recent years, it has not been able to keep up with surging demand,” she wrote. “We estimate that data center capacity will need to more than double by 2028 to meet our unconstrained forecast for data center power consumption.” Diversified data center owners Digital Realty Trust and Equinix are investing in projects around the world to meet this demand, Venkatesan said. Digital Realty Trust is up more than 9% year to date and has a dividend yield of 3.32%. But Equinix, which became a target of short seller Hindenburg Research in March, is down nearly 4% so far this year.It yields 2.19%. Hindenburg accused the company’s management of manipulating key profitability metrics. But Equinix said in May that an independent investigation concluded its financial reporting was accurate. EQIX 1Y Mountain Equinix’s 1-Year Results “These landlords’ increased use of joint venture agreements, pre-leasing of capacity under construction, and favorable returns on new investments should help maintain current credit ratios and strong liquidity,” Venkatesan wrote. “Rapid technological innovation will pose significant obsolescence risk over time, but the two REITs are better equipped than most other REITs to respond to the changing environment,” she added. She believes that the real estate pipelines and diverse portfolios of both Digital Realty Trust and Equinix should attract data center tenants. Together, the two REITs own about 71 million square feet of data center space, she said. DLR 1Y Mountain Digital Realty Trust Full Year Results 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. Meanwhile, she said, Equinix derives 44% of its revenue from properties in the Americas, 34% from EMEA and 22% from APAC. Both companies have longstanding relationships with hyperscalers and diverse tenant rosters, she noted. And because both companies have longstanding and proven global track records, she sees the REIT winning business from large hyperscaler clients expanding into new markets. “Especially in countries with data privacy and sovereignty rules that require data to be processed and stored within the country, not in one remote centralized location,” Venkatesan said. “So hyperscalers will be maintaining data center capacity in more locations than ever before.”
Surge in demand for AI data centers will benefit dividend-paying real estate stocks: Moody’s
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