Data Centers & The AI Singularity (Probably)

by

So, everyone’s chasing the shimmering, slightly terrifying promise of Artificial Intelligence, are they? Naturally. The usual suspects are getting all the attention: chip manufacturers (because, you know, intelligence requires silicon… mostly) and software companies (which, let’s face it, are just very sophisticated ways of telling machines what to do). But have you considered the buildings? The actual, physical locations where all this digital brainpower resides? Probably not. Which, statistically speaking, makes you perfectly normal. But also, potentially missing out on a rather interesting opportunity.

We’re talking about Real Estate Investment Trusts, or REITs, specifically those currently engaged in the business of erecting and maintaining enormous, climate-controlled boxes filled with blinking lights – data centers. And one of the largest players in this increasingly vital, and frankly rather improbable, sector is Digital Realty (DLR 1.13%). They operate over 300 of these digital fortresses across more than 50 metropolitan areas. They serve over half of the Fortune 500, which is a lot of corporations trusting their data to someone else. Their clients include IBM, Oracle, and Meta – companies that, between them, are probably responsible for a significant percentage of the world’s digital cat pictures. Let’s examine why this might be a reasonably sensible, if slightly dull, long-term investment.

What Does Digital Realty Actually Do?

Digital Realty operates on a “triple-net-lease” model, which sounds terribly complicated but basically means the tenants are responsible for pretty much everything except, presumably, preventing the building from floating off into space. They handle maintenance, insurance, property taxes – all the tedious bits. Like other REITs, they’re legally obliged to distribute at least 90% of their taxable income as dividends. This is a regulatory quirk designed to encourage investment, and it means you, the investor, get a nice, regular stream of income. (It also means they have less money to spend on, say, building a giant laser to defend against rogue AI. A distinct oversight, if you ask me.)

From 2020 to 2024, their “core funds from operations” (FFO) per share – a key metric for REITs, and one that sounds suspiciously like something made up by accountants – rose at a modest 2% CAGR, from $6.22 to $6.72. For 2025, they’re anticipating a more robust 9-10% increase, to $7.32-$7.38. This should comfortably cover their forward dividend of $4.88 per share, yielding a respectable 2.9%. (A yield that, while not exactly going to fund a private moon colony, is certainly better than keeping your money under the mattress. Unless your mattress is made of solid gold, in which case, carry on.)

They’ve maintained a fairly consistent occupancy rate in the mid-80s over the past five years, and expect that to creep up a bit in 2025. They’re also streamlining their portfolio, shedding older, less profitable data centers to focus on the “hyperscale” variety. (Which, as far as I can tell, just means bigger. Everything is relative, of course. A dust mite would consider a hamster to be hyperscale.)

Loading widget...

Why Bother with Data Centers?

At $165, Digital Realty appears reasonably valued at 22 times its trailing core FFO per share. For investors of a conservative bent – those who prefer a steady income stream to the rollercoaster of high-growth AI stocks – this could be an appealing alternative. Many of those AI stocks are trading at premium valuations, fueled by hype and the vague promise of future world domination. (Which, let’s be honest, is a bit of a gamble.) Its dividend could become even more attractive if interest rates continue their downward trajectory. (Though, naturally, predicting interest rates is a bit like predicting the weather on Mars. Good luck with that.)

Demand for their “AI-ready” data centers is expected to surge in the coming years as companies scramble to upgrade their infrastructure. It might not be as glamorous as investing in Nvidia or Palantir, but it’s a fundamentally solid business. Their growing backlog, budding network of partnerships and joint ventures, and overseas expansion all support their long-term growth. And, crucially, someone has to provide the physical space for all this artificial intelligence to exist. It’s not going to materialize out of thin air, you know. (Although, given the current state of things, I wouldn’t entirely rule it out.)

Read More

2026-02-06 00:12