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THE DATA CENTER JOURNAL | 17 A n alternative approach is the real-estate invest- ment trust (REIT), which gives investors an easier and more granular option—much like buying stock in a company. In particular, a data center REIT targets the IT market, seeking to take advantage of its growth potential and, perhaps, its relative stability despite macro- economic ups and downs. Should a data center REIT have a place in your portfolio? e following information about this type of investment may help you better discuss that question with your financial adviser or answer it for yourself. WHAT'S A DATA CENTER REIT? REITs are a way to get in on the data center market without actually buying data center space, which would be impractical for most investors. CyrusOne Chief Financial Officer Diane Morefield describes REITs as follows: "e REIT model enables investors (both institutional and indi- vidual) to own shares in high-quality real-estate portfolios, something they cannot achieve through buying commercial real estate directly." is model is therefore like that of buy- ing stock in a company. Investors can supply capital and reap the rewards, but they need not deal with large-scale financial transactions or even the day- to-day business operations. Morefield added, "It's a tax- efficient model, since a REIT is not re- quired to pay corporate-level income tax. And it's definitely a stock, since REITs trade on the major exchanges; the shares are highly liquid and pay an attractive dividend, especially since the REITs are required to distribute taxable income to shareholders in the form of dividends, in lieu of paying corporate income taxes." Because REIT shares are easily bought and sold (i.e., they're liquid) and because they are available on major exchanges (like an investment supermarket), they are easily accessible, particularly to small and independent investors. And the higher the dividends, the more attrac- tive the asset in an economy starved for yield. In the specific case of a data center REIT, the shares represent a stake in the facilities that provide IT resources to customers. For example, "An investor who buys shares in CyrusOne is purchasing shares in the high-quality data center portfolio owned and operated by the company," said Morefield. e investor's choice of REITs would then depend in part on the content of the portfolio. Although the fundamental operation of data centers is fairly uniform, making data center REITs alike in many regards, the facilities in a given portfolio may differ in their target markets or in- dustries, customer space or power de- mands, geographical distribution, and so on. Morefield noted, "Each REIT may have variations in their strategies including more wholesale versus retail colocation models, managed services, expansion goals, and geographic footprint or focus. A REIT typically articulates its particular strategy. e quality and location of the real estate is also important, consistent with any other type of real estate." WHY A DATA CENTER REIT? REITs are a way for investors to purchase a share in something rela- tively tangible, but not all REITs offer the same levels of risk, return and growth potential. "Data center REITs are one of the few high-growth prod- uct types in the REIT industry," said Morefield. "e category is a relatively new type of REIT, and the growth outlook is highly attractive given the growing trend toward outsourcing of data centers and IT infrastructure by enterprises." is observation is criti- cal; as companies try to become more profitable, one strategy is to divest operations that are peripheral to the main business. Retailers, for instance, don't manufacture trucks for trans- porting their goods, so why build and operate data centers when someone else can do so by bringing to bear greater experience and resources? In addition, Morefield said, "e explosion of data and the growth of large cloud providers (who are start- ing to outsource more of their data center locations) will create demand for more data center space for years to come." Of course, cloud provid- ers need data centers to deliver their services, but even that IT-focused industry is in many cases outsourcing data center operations by colocating. e steady demand for space thus creates fundamental support for the value of a data center REIT. "e value and return should broadly track the demand for data center space/loca- tions. ere are periods in time when stock-market valuations disconnect from private valuations for a variety of reasons, but the public market over the long term recognizes the inherent value of the business model." ese characteristics thus help data center REITs stand out from those of other segments. Morefield noted that "most other real-estate cat- egories (such as office, retail centers, apartments, etc.) are in much more mature parts of their life cycle, and they typically realize more-muted growth. e combination of high growth, stability in existing revenue from quality customers and the dividend stream from the predict- BY JEFFREY R CLARK PhD

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