Data Center REITs: Tech Trouble
Data Center REITs - in synchrony with the broader technology sector - have woefully underperformed their more cyclical and value-oriented counterparts since late 2020 amid an ongoing "Reopening Rotation."
Fundamentals were remarkably unaffected by the pandemic, but that's precisely the issue. The worst-performing major REIT sector this year, these REITs are 10-20% below their recent highs set last summer.
Earnings reports came with few surprises in Q1. Leasing activity - the most closely-watched earnings metric - was better than expected, but "same-store" renewal pricing remains weak amid stiff "hyperscale" competition.
While cloud spending continues to boom, it is increasingly concentrated in a smaller number of providers - Amazon, Microsoft, and Google. With muted pricing power, REITs must rely on development and M&A to fuel growth.
While still trading at premium multiples, pullbacks in these REITs have historically been a buying opportunity. We see M&A as a potential catalyst this year and expect DLR and EQIX - which have plentiful access to capital - to make major moves.
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Additional Disclosure: It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy.