Are Data Center REITS Trading at Profitable Multiples? Dallas Insiders Weigh In
by Josh Anderson
DALLAS, TX — Last year during this quarter, the U.S. stocks posted their longest losing streak in 36 years over the presidential election. In addition, REIT share prices tended to fall in a rising interest rate environment. So are there head winds heading into 2018 or is it smooth sailing? After all, prices for data center REITS are less dependent upon GDP, job growth, and other broad economic indicators than other investment classes. So we asked some data center insiders at a recent CapRE summit, are data center REITs trading at profitable multiples?
We first heard from Rashad Kwamy, Director for Leveraged Finance, CapitalSource. “One comment I will make is that to some extent, publicly traded data center REIT values are sensitive to things like interest rates and other things that just mathematically impact the trading value of all REITS,” he commented. “So look at the flattening of the yields curve – no one has fear of forward interest rates anymore. That is one of the reasons – it’s not all because people are drunk on the future exponential value of data centers, it’s also just simply the math and economics of how much cash flow these guys are generating, relative to the distribution of the potential and then relatively speaking, what else is out there in the market. So I think that sometimes on the investment side, often you might even think about it too much. You might just do the math of relative value.”
Next up we checked in with Anubhav Raj, CFO, Aligned Energy. “I think it goes that relative value’s on a growth adjusted basis,” he said. “And the question on whether there are frothy multiples? If all of the underlying trends of the data, the expectations that we have – rightfully or wrongfully – in terms of the future growth over the next 2, 3, or 5 years are true, then I don’t think it’s a frothy multiple. However, if we’re wrong on that, then clearly the multiples aren’t justified in the future growth.”
We then went back to Rashad Kawmy for some counterpoint. “Well if we’re just talking about REIT stocks and not the industry in general, then a challenge that digital is going to have is that the growth trajectory that they’ve proven historically will not be able to be substantiated,” he said. “We’ve seen that basically flip into substantial acquisitions that have been increasing in scale. For some of these guys like Equinix, it makes sense to buy when stock is so valuable but often they need to peel it back on an organic basis.”
Kwamy thinks that they’re probably actually growing on a somewhat reasonable, organic 0–5% growth rate. “So one of the challenges that publicly traded REITS will have is to keep up that growth rate irrespective of what is happening – more M&A, more deployment of substantial capital,” he said. “It could lead to discounted prices because they can’t afford to not win a hyperscale account or move into a certain market. And it may be that chasing the requirements of growth yields potential challenges.”