REIT - 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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