Which Data Center Business Model is the Riskiest?
by Josh Anderson
LEESBURG, VA – CapRE’s Sixth Annual Washington, D.C. & Mid-Atlantic Data Center Summit, the largest and most influential of the year, kicked off with a rousing morning panel discussion, REIT Analysts’ Outlook: Hyperscale, Traditional and Edge Data Centers Against the Backdrop of Evolving Services Landscape, which featured the input of Robert Gutman, Director, Communications Infrastructure and Telecom Services Equity Research Guggenheim Securities, LLC, on M&A, on the changing face of risk in the data center industry. Below is the first part of his comments, in response to a comment by Moderator Kanan Joshi, Executive Director and Head of Telecom Infrastructure for Upper Bay Infrastructure Partners.
“Just switching topics a little bit, on both the public and private side, as well as in this market particular, there are a lot of large private players,” began Joshi, giving the microphone to Gutman. “There are different business models. You have hyperscale on one hand, you have enterprise colo, you have the Cloud and now you have Edge data centers. What do you think about the risks of each model? Who is going to succeed and what are the trends are you seeing? A lot of the public companies used to be “pure play” more or less five years ago. But now they all seem to be doing a lot of different things. So what are your thoughts on that?”
“It is pretty interesting. Looking from a public company perspective, the big ones we’ve seen, for example Digital Realty several years ago bought Telex and wanted to go retail. And then the hyperscale trend emerged, and they pivoted,” Gutman recalled. “They’ve now gone in that direction. And then you’ve got Equinix, which is the leading mobile interconnection platform of the world, and it’s now looking at hyperscale. So I think that with all of the different business models that you’ve mentioned, there’s a lot going on there.”
According to Gutman, there’s a lot of different avenues. “And if we focus on the big public companies, the risk profile and how they’re getting to each other’s businesses, that’s sort of the question,” he explained.
“I think that overall, for those companies, the risk profile is somewhat declining. I’d say that, when it comes to the hyperscale demand and satisfying that aspect of the demand, you’re seeing large contracts with long, 10 to 15-year lives, up-front commitments, capital is largely de-risked.”
“So I think that the hyperscale for a lot of them is very attractive and viewed by a lot of investors as a lower risk,” he ventured. “On the back end, where a lot of people are sensitive to the risk in that model, they think that ten to fifteen years from now, when that contract comes up for renewal, is that asset going to require new development or is the customer going to leave? Well, no one knows the answer to that because we haven’t hit that period of time yet. So that’s the risk on that side.”
“In terms of the more interconnection-driven business and the risk there, there are various aspects of risk that people consider in that business model,” concluded Gutman. “We like to think that the NAPs are sort of sacred. Those are just irreplaceable assets, dense network connectivity in the right places — the “Beachfront” property of the data center world.
For more from this panel, check out earlier CapRE Insider Reports:
- REIT Analyst Outlook: Defensive Postures, Scarcity of Quality Assets Driving Multiples Higher
- Robert Gutman, Guggenheim Securites: Stocks Have Broadly Recovered, Optimism Has Returned, But Firms Trading in Line with Each Other
- Sami Badri Tells the 2017 Narrative at Leesburg Summit, Brings 2020 Into Focus
- What Do Valuation Trends Portend for M&A?