Data-center and warehouse landlords: How industrial and digital REITs work

When people think of commercial real estate, they usually picture downtown office towers or suburban shopping malls. Yet two of the largest publicly traded landlords in the world own neither. Prologis (PLD) owns a global network of logistics warehouses that keep online shopping moving, while Equinix (EQIX) operates specialized data centers where the internet’s physical cables and servers meet.

Both companies are structured as Real Estate Investment Trusts, or REITs. Created by Congress in 1960 to let everyday savers invest in large-scale commercial property, a REIT operates under a special tax rule: as long as the company derives most of its revenue from real estate and pays out at least 90% of its taxable income to shareholders as dividends each year, it generally pays no federal corporate income tax.

Two very different types of modern landlords

While both Prologis and Equinix collect rent from corporate tenants, the economics of their buildings are distinct.

• Logistics warehouses (Prologis): E-commerce requires roughly three times as much warehouse space as traditional brick-and-mortar retail because goods are stored in individual parcels rather than stacked pallets on a store floor. Prologis focuses on massive fulfillment centers located near ports, highways, and densely populated cities—allowing tenants like Amazon (AMZN) and major shipping companies to deliver packages within hours. Leases typically run for five to ten years, with built-in annual rent escalators.
• Retail colocation data centers (Equinix): Rather than just renting out empty shells, Equinix provides heavily secured, climate-controlled facilities with backup generators and cooling systems. Customers—including cloud giants like Microsoft (MSFT) and Alphabet (GOOGL), financial exchanges, and telecom carriers—place their server racks inside Equinix buildings so they can physically plug their networks directly into one another. Because unplugging thousands of fiber-optic cross-connects would disrupt a company’s digital operations, tenant turnover at Equinix tends to be remarkably low.

Why standard earnings per share misleads REIT investors

If you look up a REIT on a standard financial website, its price-to-earnings (P/E) ratio will often look alarmingly high. That is because standard accounting rules (GAAP) require companies to subtract depreciation—a non-cash accounting charge that assumes physical assets wear out and lose value every year—from their revenue to calculate net income.

While factory machinery and delivery trucks certainly lose value as they age, well-maintained commercial real estate in prime locations often appreciates over time. Deducting massive depreciation charges makes a REIT’s net income look artificially small on paper, even when its bank account is filling up with rent checks.

To get an accurate picture, real estate analysts use a metric called Funds From Operations (FFO), or Adjusted Funds From Operations (AFFO). FFO starts with net income and adds back real estate depreciation and amortization, while stripping out one-time gains or losses from selling properties. When judging whether a REIT’s dividend is safe or how expensive its shares are, always compare the stock price to its FFO per share rather than its GAAP earnings per share.

Key metrics to watch: Occupancy and leasing spreads

Beyond FFO, two operational numbers show how much pricing power a landlord possesses. The first is the occupancy rate, which measures the percentage of rentable square footage or server cabinet capacity currently leased to paying tenants. The second is the cash leasing spread (or mark-to-market rent growth), which tracks how much rent increases when an old multi-year lease expires and a new lease is signed on the exact same space.

Because REITs must distribute almost all of their taxable profits as dividends, they rely on issuing new debt and new shares of stock to fund the construction of additional warehouses or data centers. That makes watching their balance sheet debt and the cost of capital just as important as tracking the demand for cloud computing and online shopping.