MIT just announce a deal to build to suit a data center for us listed Equinix. This to me is a splendid deal for MIT. Factsheet here
It also shows us how much lock in certain data center has.
Equinix Economic Moat
Equinix Data center are rather different from perhaps the local data center in that the folks that make use of their infrastructure are Google and Facebook, the big boys in the infrastructure consumption space.
For the telecom operators to connect to them they have to try to minimize the latency. Equinix have a proprietary switching channel that allows very fast switching between Equinix neighbours.
The cost of moving away is that you gave to incur migration and these residual business losses due to not competitive services.
Thus Equinix somehow enjoys an economic moat that allows them to charge a premium.
Moreover, application server systems may be easier to redeploy and migrate to another data center, telecommunications equipment is not so straight forward.
The business risks are so much that they are likely to such thumb and pay for these costs.
MIT’s Good Deal
MIT’s deal isn’t shabby as well.
- The land lease is 30 years
- Equinix will lease from mit for 20 years with the option to extend for 5 + 5 years
- Equinix have the option to increase two more levels which means more rents possible
- Yearly 2% rent escalation
- Total Aei will bump up leverage to 42%
What amaze me is that why the hell would Equinix lease from mit when its like they can build on their own.
The lease term is crazy long and certainly will help bring stability to the cash flow.
MIT may develop a reputation to implement something like this.
This will bode well for the reit in the future
Raymond Thor says
March 31, 2013 at 9:28 amMaybe I can comment a bit on this based on one of my read-ups.
1. One of the Gartner report mention that Datacentre space will be hitting surplus by 2014. Meaning that if Equinix were to build the datacentre, it will have to bear costs for
2. Equinix may not want to own the building. It is asset after all and has maintenance costs etc. Owning a DC may mean that it has to manage all the costs of land – in particular, DC sites in singapore have additional considerations. (Perhaps security is outsourced to MIT, I’m not sure. Some DC need 2 layers of security – again additional costs)
3. In the arrangement, Equinix can pull out within 20 years. Bearing in mind that Equinix already has existing space in SG. Google may stay for a very long time, I can’t say the same for Facebook (I do not think it is easy to analyse Facebook business at this point).
4. This is an arrangement where Equinix can really focus on being a DC infra provider. This may allow them to reduce operational costs by just having DC related employees rather than have in addition, building management experts.
5. 2% yearly escalation rental is low compared to say, commercial space escalation percentage.
All in all, I do agree it is a win-win situation.
Do reply if I have made contentious point above.
Raymond
Kyith says
March 31, 2013 at 9:34 amhi Raymond,
Thanks for your inputs, that makes sense. It will also cede the project management of the construction part to a third party that takes care of the piping.
Thanks for highlighting the 2% as being low. I guess this may be how Equinix locks in a low rental escalation rate considering how much they can maximise their earnings after this.
Is the Gartner report talking about world wide DC? I wonder have singapore DC peaked. Keppel T&T moving agressive into it.
Raymond Thor says
April 2, 2013 at 12:04 amI found the report, it’s on AP region.
http://www.gartner.com/technology/media-products/reprints/ntt_communications/NTT_Communications_1_17M7GMN.html
Unfortunately, I think Keppel is being overshadowed by traditional telco players who are cash rich and like loss-leader strategies. Without the edge like Equinix, Keppel could easily struggle.
Disclosure: I am working in one of the telcos mentioned. 😉 But not doing the actual DC directly.
Kyith says
April 3, 2013 at 12:16 amHi thanks for the report I will read when I have the time to feedback
Dufy says
April 3, 2013 at 11:13 pmThe business looks similar to Sunvision (8008.HK) which is listed in HKex. I myself prefer much to this kind of business as it can generate a stable while strong cash flow.
Kyith says
April 4, 2013 at 9:15 amWhy is this business similar to a REIT???
Ed says
May 14, 2013 at 10:25 amCurrent price of MIT still attractive?
Kyith says
May 15, 2013 at 6:09 amhi Ed, not so sure the price have ran up yield is still around 5.7%. alot depend on whether you believe inthsi new paradigm
Ed says
May 31, 2013 at 12:35 pmHi Kyith, I am more concerned if the interest rates goes up and will hurt its profitability. And yes, you made the right point saying that companies are relocating out of SG because of all sort of reasons. That is why I am still pondering if this REITS will be a good investment or not.
Kyith says
June 2, 2013 at 8:53 amHi Ed, are you refering to this REIt. I think financial wise they should do ok. I am still more concern about the move to overseas. perhaps i overestimate it.
Looks like its back to the level when this article was published.