Data Center REITs

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Submitted by gzz on June 30, 2022 - 8:02am

I finally found another RE sector to short. Most of RE seems fairly valued or more often very undervalued. But not these data center REITs. I started with EQIX and DLR.

The long thesis for these stocks I guess is Cloud Computing Boom! AWS!

They seem however to have anemic sub-inflation growth while costs are rising faster than inflation. That would be fine if they were cheap or super-profitable, but they aren’t, they have 70-100ish P/Es and negative earnings growth.

The reason these stocks are overvalued is that for a while they did show healthy growth. That seems to be over now, even before the big tech slowdown which could look very ugly for them.

They also are talking about how excited they are to enter the market in Argentina and Chile. Good for them if that works, but American companies with lots of good US/Canada opportunities don’t generally go for big RE investments that far away.

I have also half exited my short of WE. It is still overvalued, but the borrow interest spiked to 11% and it already has dropped in half. It has a tendency to have big irrational rallies so covering under 5 now seems prudent.

Submitted by Coronita on June 30, 2022 - 8:38am.

um...ok...if you say so...
Personally, I think you're making this way more complicated than it is. And your stock picking track record isn't that great. Didn't you say you went long on Intel awhile ago for the dividend when Intel was in the low 50ies?

Submitted by gzz on June 30, 2022 - 6:34pm.

INTC was not a good buy, I am indeed averaged at 50. But it is my 22nd largest long position. My largest is XOM, which I am up on in a down market. And INTC did well for a tech stock.

I have good results shorting tech stocks, but not buying them. I often have good tech stock entry points at bear market lows, but I tend to sell when I am up 50-100%, and never let them ride way up.

The same post I said I was going long INTC I said I was buying puts on Coinbase. One of them I purchased was deeply out of the money and cost like $1.20, but went up to $60 as COIN crashed. I sold for a 5x profit rather than hold for a 50x.

Short RE stocks is something that I find hard to do, but also the better option to hedge a RE downturn than selling any of my appreciated RE and paying a ton of capital gains tax.

My worst tech stock investment was iRobot. The idea is they are the only public company making profitable consumer robots, which will eventually be a big thing, and also they have a bunch of patents. I still believe that thesis, but I rode them from 30 to 100 and now back to the 30s, and unfortunately I averaged up a few times above my low initial entry point.

Submitted by Coronita on June 30, 2022 - 10:38pm.

Dude. You had a lot of not good buys.

Submitted by Myriad on July 1, 2022 - 12:17am.

I was looking at a Data Center investment in Prince William county south of Loudoun county where there are numerous data centers.
Sounded like a good opportunity, but then I looked at the numbers and the exit was based on a 4% cap rate.
My take is that all post 2018 CRE is based on completely unrealistic NOI, cap rates, and low loan rates.
Being super cautious on CRE investments at this stage. A lot of CRE use interest only products, so they expect to refinance every 5-10 years.

Maybe when there's more defaults and some things shake out at a discount

Submitted by gzz on July 1, 2022 - 9:37am.

Thanks Myriad, that’s interesting.

Are you able to provide any more details?

What really led me to pull the trigger on my short sale was seeing how costs went up even more than inflation, but rent was basically flat.

Makes me suspect that these companies have long term leases that don’t provide for substantial rent increases.

Perhaps it has changed because of their loss of market share, but a few years ago I read Netflix was 30% of Internet traffic, and it could spike to more than half. Netflix is now doing poorly lately and cutting back spending and raising prices.

Perhaps the second biggest customer is Amazon. But supposedly AWS growth is slowing and the startup valuations that help fuel it are down 75%+.

Moreover, Amazon is hardly allergic to low margin business lines, or getting into capital intensive RE development. The fact that they often outsource data centers makes me think they are offering Amazon very sweet and unsustainable deals. I assume Amazon is the smart money in these transactions, not the REITs.

The commentator who turned me onto shorting data center REITs, a finance professor at Yale, made the point that if you are a cloud / internet traffic bull, better to just buy amzn and goog, which have declined to the point they have better valuations than the data center reits.

Submitted by Coronita on July 1, 2022 - 2:25pm.

gzz

(facepalm)

Submitted by scaredyclassic on July 2, 2022 - 1:54pm.

No one is as smart as the market.

Submitted by gzz on July 14, 2022 - 11:24am.

Up 6.5% on my short in two weeks! I need to think about exit points. Probably around the -20% mark.

PTON dropped another 80% from when I covered, should have really held on there. They purchased during their high flying days the much bigger company Precor, maker of my lovely AMT elliptical. I hope they aren’t negatively effected.

Submitted by Coronita on July 16, 2022 - 7:40am.

I don't think your individual stock picking, winners and losers, are really going to make a material difference for you financially. I think it's probably an arm's length away from feeding your gambling addiction that others go to Vegas for.

Just my 2 cents. I say this because most folks that go to vegas always talk about the occasional winning hands, but not about the much more frequent losing hands...

ETF index funds, dripped in, and wait. That's about it.

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