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
Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
Readers also follow Kyith to learn how to plan well for Financial Security and Financial Independence.
Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Fee-only Wealth Advisory firm Providend.
You can view Kyith's current portfolio here, which uses his Free Google Stock Portfolio Tracker.
His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.
You can read more about Kyith here.
Ed
Tuesday 14th of May 2013
Current price of MIT still attractive?
Kyith
Wednesday 15th of May 2013
hi Ed, not so sure the price have ran up yield is still around 5.7%. alot depend on whether you believe inthsi new paradigm
Dufy
Wednesday 3rd of April 2013
The 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
Thursday 4th of April 2013
Why is this business similar to a REIT???
Raymond Thor
Sunday 31st of March 2013
Maybe 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
Sunday 31st of March 2013
hi 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.