The asset return framework behind high valuations for data center REITs

Overview

This report is aimed at investors unfamiliar with the REIT framework and explains how to evaluate the long-term returns of data center REITs. Bernstein points out that data center assets require large capital expenditures, have long development cycles, and can have useful lives lasting decades, so traditional metrics such as ROA and profit multiples are easily distorted by depreciation, asset classification, and construction-period investment, and therefore do not fully reflect the cash flow capacity of stabilized assets.

Core views

The core view is that although DLR and EQIX's public market valuations appear expensive, they can be supported by high cost yields on stabilized assets, sustainable AFFO growth, and management's ability to continuously allocate capital to high-return development projects. EQIX delivers significantly better returns on stabilized assets than DLR because of its higher mix of retail colocation, interconnection, and managed infrastructure services; DLR's strengths lie in capital recycling, JV structures, and long-term wholesale colocation demand.

Analysis framework

The report uses both stabilized asset ROA and cost yield to assess project economics, and cross-checks the results against EV/EBITDA, P/AFFO, and AFFO growth. The authors believe cost yield is more suitable than accounting ROA for measuring data center projects because it is closer to asset-level cash returns and is less affected by depreciation policies and book value differences.

Methodology notes

• REIT cash flow valuationAFFO

  Adjusted funds from operations

  AFFO is viewed as a more relevant metric for distributable cash flow of REITs, and the report uses P/AFFO multiples to set target prices for DLR and EQIX.

• Project return analysisCost yield

  Cost yield on stabilized assets

  This metric divides stabilized net income or cash earnings by development investment or average net PP&E, helping evaluate the asset-level economics of data center projects after they mature.

• Accounting metric analysisStabilized asset ROA

  Stabilized NOI divided by total PP&E

  ROA provides directional reference, but it is affected by depreciation lives, capitalization policies, asset definitions, and stabilization assumptions, so the report treats it as a secondary metric.

• Public market valuationEV/EBITDA and P/AFFO

  Matching high multiples with long-term returns

  The report converts current and target multiples into forward yields and combines them with AFFO growth and reinvestment returns to judge whether high valuations can support low-double-digit equity IRRs.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Digital Realty Trust, Inc. (DLR.US)

  Key covered U.S. data center REIT

  Strengths

  It owns long-duration data center assets and has a base of wholesale colocation demand, while advancing asset monetization and capital recycling through JVs, closed-end funds, open-ended strategies, and Columbia Capital-related transactions.

  Weaknesses

  Cost yield on stabilized assets is about 11%, below EQIX; interconnection revenue mix is about 8%, and unit margins in wholesale colocation and powered shell businesses are lower.

  Comparison

  Compared with EQIX, DLR has lower returns but stronger contract duration and revenue stability, and its valuation multiple is also relatively lower.

  Risks

  Lower-than-expected growth in the <1MW segment, slowing enterprise data center demand, and pricing pressure from declining market share in data center supply.

• Equinix, Inc. (EQIX.US)

  Key covered U.S. data center REIT

  Strengths

  A higher mix of retail colocation, interconnection, and managed infrastructure services drives higher unit pricing and higher gross margin; 2025 cost yield on stabilized assets is about 26%.

  Weaknesses

  Its valuation multiple is significantly higher than DLR's, and part of the return gap may also be influenced by differences in depreciation policies and definitions of stabilized assets.

  Comparison

  Compared with DLR, EQIX has stronger asset-level returns, interconnection ecosystem, and growth quality, so the report believes its higher EV/EBITDA multiple is justified.

  Risks

  Slowing enterprise data center demand, intensifying competition in the interconnection business, and pricing pressure from declining market share in data center supply.

Key data

• DLR rating and target priceOutperform; target price USD 232The target price is based on 27x 2027E AFFO per share of USD 8.52.
• EQIX rating and target priceOutperform; target price USD 1,222The target price is based on 25x 2027E AFFO per share of USD 48.63.
• 2025 stabilized asset cost yieldDLR about 11%; EQIX about 26%The report believes this metric better reflects the economics of data center projects than traditional ROA.
• Current EV/NTM EBITDADLR 22.3x; EQIX 23.1xEquivalent to roughly 4% to 5% pre-capex EBITDA yields on the stabilized portfolio.
• Target price implied EV/NTM EBITDADLR 23.9x; EQIX 29.2xThe report believes EQIX's higher multiple reflects higher asset returns, scale, and growth quality.
• 2025 AFFO per share growthDLR 7.1%; EQIX 9.3%Consistent with the long-term return framework described in the report.
• FY26-28 forecast AFFO growth CAGRDLR 11.3%; EQIX 12.1%Future growth forecasts are above the growth rate already achieved in 2025.
• High gross margin revenue mixEQIX about 24%; DLR about 8%EQIX has a higher mix of interconnection and managed infrastructure services, which the report believes helps explain the return gap.
• Share of stabilized assets and revenue contributionDLR stabilized PP&E accounts for 81%, revenue accounts for 72%; EQIX stabilized PP&E accounts for 68%, revenue contribution exceeds 80%Differences in stabilization definitions may affect comparability of returns.
• 350 Cermak case1.1M square feet; 330+ network providers; valued at more than USD 2BDLR acquired the facility in 2005 for USD 140M, and the report uses it to illustrate that data center assets can have very long economic lives.

Impact & implications

The implication for investors is that data center REITs should not be evaluated solely on short-term profit multiples or post-depreciation book returns. If DLR and EQIX can continue to develop, stabilize, and reinvest assets at returns above their cost of capital, then lower starting EBITDA/AFFO yields can still translate into total returns of about 11% to 13% or higher through high-single-digit to low-double-digit earnings growth.

Risks

• If enterprise demand for data center capacity slows, it would weaken the growth and reinvestment thesis for DLR and EQIX.
• If DLR's growth in the <1MW segment is below expectations, it could affect its target price and Outperform rating.
• If EQIX's interconnection business faces more intense competition, its advantage in high-margin services could be compressed.
• A continued decline in market share of data center supply could intensify pricing pressure.
• If the cost of capital rises or stabilized asset returns decline, the support that high EV/EBITDA and P/AFFO multiples provide to equity returns will weaken.

What to watch

• Whether DLR and EQIX can deliver the forecast FY26-28 AFFO per share CAGR of 11.3% and 12.1%, respectively.
• Whether cost yields on stabilized assets remain around 11% for DLR and around 26% for EQIX.
• The execution effectiveness of DLR's capital recycling through JVs, closed-end funds, open-ended strategies, and asset monetization.
• The pace of EQIX's USD 15B JV development fund supported by GIC and CPP and its more than 1.5GW of xScale capacity.
• The share of interconnection and managed infrastructure services in EQIX's revenue, and whether DLR can increase related high-margin revenue.
• AI and enterprise customer demand, wholesale and retail colocation pricing, supply competition, and changes in the cost of capital.