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Why REITs (Even Data-Center REITs) Are Financial Stocks — The Motley Fool

If you look at Digital Realty Trust (NYSE:DLR), it’s not all that surprising that you might think of it as being a tech company first and foremost. But the economics of its business is perhaps more like a bank or leasing company, given that it buys and builds data centers to lease capacity to fast-growing tech companies such as Uber.

In this episode of Industry Focus: Financials, join Michael Douglass and Jordan Wathen as they discuss why data-center REITs have a confusing place as part tech, part financial stocks.

A full transcript follows the video.

This video was recorded on Sept. 25, 2017.

Michael Douglass: Longtime listeners will know we divide Industry Focus into five different sectors each week — Financials, Consumer Goods, Tech, Healthcare, and Energy/Industrials. But the fact of the matter is, there’s a lot of crossover between these different groups, and data-center REITs are one of those areas where you could argue that it’s tech, or it’s financials. But the thing is, these REITs, or real estate investment trusts, are, at their core, balance-sheet-driven financials companies. So that’s why we’re covering this in Financials. These guys basically buy out this real estate, and then lease out the computing power to the Googles and the Facebooks of the world.

Jordan Wathen: Right. It’s kind of complicated, but if you think about what a REIT really does, they basically buy real estate and hard, long-lived assets —

Douglass: Expensive.

Wathen: Very expensive stuff. And they turn it into an easy monthly payment. Which, if you think about it, it’s basically what banks do. You buy a house with a mortgage; they turn it into an easy monthly payment. Or a company wants to buy a new location for a pharmacy, a Walgreens wants to buy a new location, they don’t want to hold the real estate, so they pass it off to a REIT. And the REIT owns the real estate, and Walgreens just pays them a monthly payment. So for data centers, think an Uber, they don’t want to build the data centers and hold on to them. They would rather just lease the capacity from a data-center REIT like Digital Realty Trust.

Douglass: Yeah. Particularly if that REIT already has unused capacity that the tech company could use when it’s scaling — because when you think about an Uber or a Facebook, or really any of these companies that have rocketed in terms of their volume and their transactions, and as a result, their data capacity that they need, they can’t easily build new capacity. What they really need is someone who already has that capacity that they can lease so they can scale up very quickly.

Wathen: Right. A lot of data centers talk about how bringing a new one online is basically a two- or three-year project. And Uber, since we already brought it up, just last year, it basically doubled in size and the number of trips and the amount of revenue it was doing, the amount of bookings it was doing. So a company like Uber really can’t build out as fast as it can build its underlying core business.

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