Equinix vs. Digital Realty: A Fitch Analyst Talks Data-Center REITs

Cool Vector

Data center real estate investment trusts (REITs), like Equinix and Digital Realty Trust, differ from traditional REITs in their higher operational intensity and reliance on artificial-intelligence tailwinds for growth, says Harold Chen, Director of Commercial Real Estate at Fitch Ratings.

Chen, whose team has assigned investment-grade ratings to Equinix and Digital Realty, says the companies benefit from surging demand related to AI. Of the two, Digital Realty has a higher concentration of hyperscaler customers, defined as big-tech, data-center customers like Microsoft, Mega and Amazon. The upside of hyperscaler concentration is longer-term leases, while the downside is customer concentration and the inability to more frequently reprice rent rates, says Chen, adding data center REITs have a history of only single-digit customer churn. Data centers that cater to co-location customers tend to have shorter leases, he says.

Data-center REITs also differ from traditional REITs in their "significantly higher levels of operational intensity," says Chen. Complexities like power, cooling and interconnectivity make data-center REITs "significantly different beasts."

Chen also discusses with Cool Vector the impact that ESG and sustainability initiatives have on Fitch ratings, and the historic challenge for data center companies to access certain forms of financing, like asset backed securities (ABS).

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