Hype vs Reality in Data Centers: +0.03% in September, +6.1% YTD

“Man is the most intelligent of the animals – and the most silly” – Diogenes

• PERFORMANCE: Serenity Alternative Investments Fund I returned +0.03% net of fees in September vs the REIT index at +1.15%. Year to date (YTD), the fund has returned +6.1% vs +4.72% for the REIT index.

• DATA CENTER SILLINESS? Why the new wave of “Data Center” companies are long on hype, but low on...uhh…Data Centers.

• MEANWHILE IN SENIORS HOUSING – The most ignored bull market in commercial real estate rolls on apace.

• INTEREST RATES – A quick note on REIT costs of capital.

The AI hype train in commercial real estate is real.

Data Center spending is exploding, as investors of all stripes look to grab a piece of this game-changing new technology.

And while the implications of AI are fascinating to ponder, some questionable investor behavior has begun to emerge.

When a new “Data Center” company IPO hits $20 billion in market cap within its first week of trading, it’s worth taking notice.

When that company doesn’t own a single completed Data Center, however, it might be time to ask some hard questions about hype vs substance.

Luckily for REIT investors, Data Centers are not a new property type. There are multiple high quality Data Center REITs that have large, diversified portfolios and valuations based on actual cash flows. And frankly, a few of them are relatively cheap.

Simultaneously, one of the most incredible bull markets in commercial real estate history continues to unfold with basically no media fanfare. Seniors Housing REITs are growing their portfolios by over +10% on an organic basis and achieving similar development yields as the hyper-scale Data Centers. While Seniors Housing is clearly not as exciting as AI, it generates much more cash flow and is much less capital intensive.   

The point here is that we can still be bullish on AI and its implications for the Data Center industry, without making silly decisions with investor capital. Serenity’s portfolio remains well diversified, disciplined, and focused on real, sustainable, cash flow growth.

Buy the hype in Senior Housing…avoid the silliness in Data Centers.

PERFORMANCE: +0.03% in September, +6.1% YTD

Serenity Alternative Investments Fund I returned +0.03% in September net of fees and expenses with +96% net exposure versus the MSCI US REIT Index which returned +1.15%. Year to date the fund has returned +6.1% versus +4.72% for the REIT index. Over the past 5 years Serenity Alternatives Fund I has returned +13.1% annually, net of fees and expenses versus +9.3% for the REIT index.

The most profitable position in the fund in September was Iron Mountain (IRM), a long position which returned +11.3% for the month. IRM is one of the fund’s largest holdings, as the company occupies a unique niche within the modern digital economy. IRM’s Data Center business is growing at ~30% per year, and they have transformed their paper storage business from a sleepy enterprise into a business that has very steady rent growth of about +6% per year. As more large enterprises digitize their (once paper) records, IRM is positioned as the go-to solution. The company is also set to unlock a significant amount of free cash flow in 2026, as a long-standing restructuring program winds down at the end of 2025. The company trades at a very average REIT valuation, despite top decile growth which we expect to persist well into the future. Serenity remains long.

The worst performing position in the fund in August was American Tower (AMT), a long position which returned -4.82% for the month. The cell-tower REITs have struggled over the last few years as wireless carrier spending (the towers’ largest tenants) has disappointed. Investors are still adjusting to the reality of growth rates that are lower (~3-5%) than they were from 2000-2025 (+7-10%). We still like AMT’s position as the company generates a prodigious amount of free cash flow and is investing this cash in a rapidly growing Data Center portfolio (formerly CoreSite). Serenity remains long with a long-term horizon for AMT’s ability to compound cash-flow.

HYPE VS REALITY: Investigating new Data Center players…

In 2010 I was fortunate enough to find myself working for the Data Center analyst at a $7 billion REIT fund. It was early days in the Data Center industry, and at the time, there was debate as to whether “Data Centers” were even real estate companies…

Fast forward 15 years that that debate is effectively settled. Data Centers are one of the largest commercial real estate exposures of many of the top institutional commercial real estate investors (Blackstone, KKR, GIC to name a few).

With the recent AI boom, their prominence within investing has only increased, with investors of all stripes now racing to build Data Centers as fast as humanly possible.

As someone who has been bullish on the sector for well over a decade, this is a welcome realization of something Serenity has pounded the table on multiple times in the past (here and here to name a few). That is, that the digital economy requires a physical footprint, and Data Center developers are a crucial part of the infrastructure of the future.

Now for the part of the newsletter in which we ask our readers to hold two slightly conflicting thoughts at the same time.

Serenity is bullish and long the bull market in Data Centers, and at the same time, extremely skeptical (and potentially short) some of the new players in the Data Center industry.

Let’s look at the newest example, Fermi Inc (FRMI). Fermi conducted an IPO on September 30^th, raised ~$650 million, and within a week traded to a market cap as high as $19 billion.

What stands out while reading the company’s IPO prospectus, is that FRMI does not own a single Data Center. In fact, they have not even begun meaningful construction of their first asset. In their phased plans to deliver 11 Gigawatts of Data Center power by 2038, their first phase to be completed by year end 2025 is site work; i.e. getting their land ready for construction.

They then plan to deliver 1.1 gigawatts of Data Center capacity by year end 2026. To say this is an aggressive timetable is a massive understatement. Applied Digital (APLD), a competitor in the new Data Center construction ecosystem, which has leases in hand from some of the largest AI companies in the world, is targeting a 2027 delivery of 280 megawatts of additional space in their new North Dakota campus. That would be plans do deliver ¼ of the space of FRMI in twice the time frame.

Digital Realty and Equinix (DLR and EQIX), who have been building Data Centers for over 20 years, consistently deliver megawatt scale deployments in 18 months. And that typically occurs in campus environments with a large amount of physical infrastructure already present.

So a company with no physical assets and no track record of Data Center development is suddenly worth almost $20 billion? Interesting. Let’s contextualize that number.

Iron Mountain (IRM), a Serenity long position in large part due to its lucrative Data Center business, has a market cap of $31 billion. Iron Mountain has been building Data Centers for years, and currently has a 450-megawatt portfolio, with 200 megawatts currently under construction. This portfolio generates about $400 million in EBITDA per year and makes up about 10% of IRM’s revenue. Let’s be generous and assume it makes up 20% of IRM’s implied $50 billion asset value ($30 billion in market cap + ~$20 billion in liabilities). That would suggest a $10 billion valuation for IRM’s fully stabilized 650 megawatt Data Center portfolio.

Again, the idea of a $20 billion valuation for a company with no assets, no track record of building them seems like a stretch. Add to it the fact that you can buy a fully cash flowing Data Center portfolio inside of IRM for ½ the valuation, and it makes the Serenity investment decision making process straightforward.

We can buy high-quality, diversified, fully funded and cash-flowing Data Center space at reasonable valuations, or theoretical, non-leased, not funded Data Center space for an extremely aggressive valuation.

The Bottom Line: The hype within the AI ecosystem is real and has begun to manifest within the REIT market. We encourage investors to do their homework when investing in “new” Data Center players, as valuations in many situations are extremely aggressive. Meanwhile, there are much more affordable, fully cash flowing Data Center portfolios available in IRM, DLR, and EQIX.

MEANWHILE IN SENIORS HOUSING…

It’s also important to remember that AI is not, in fact, the only game in town. While Data Centers attract the majority of investor eyeballs, Seniors Housing is quietly experiencing an incredible bull market, and delivering returns based on rapidly growing cash flows as opposed to pure speculation.

Let’s dig into a Serenity favorite and explore the Seniors Housing bull market in more depth.

Serenity first went bullish on American Healthcare Realty (AHR) in May of 2024 at $14.39.

Since then, the company has returned +205%, or 124.8% on an annualized basis, and closed at $42.01 on 9/30/2025.

The company’s performance has been based on extremely strong same-store NOI and earnings growth over its first 18 months as a public company. In Q2 of 2025, AHR reported full portfolio same-store NOI growth of +14.5%, and FFO (REIT earnings) growth of +28.1%. This is a continuation of trends from 2024, a year in which the company grew full portfolio same-store NOI by +17.7%, and earnings by +27%.

As a quick reminder, same-store NOI growth is a powerful driver of Net Asset Value (NAV) growth, which is the key to long-term outperformance as a REIT. You can think of NAV as the Warren Buffet idea of intrinsic value, or the value of the underlying real estate portfolio based on prevailing private market prices. All things equal, for a company with an applied cap rate of +6% (our estimate for AHR is 5.99%), and 20% debt to asset value (AHR’s exact debt level), a +15% increase in same-store NOI translates to a +19% increase in the companies NAV.

Said another way, AHR is growing the value of its real estate portfolio by almost +20% a year ORGANICALLY. That is before they spend a penny on either acquisitions or development, both of which have contributed to additional NAV growth in both 2024 and 2025.

It’s difficult to sufficiently emphasize how incredible this kind of growth is in commercial real estate. Apartment REITs, some of the most stalwart growth companies in the commercial real estate industry, have averaged +4.6% same-store NOI growth over the last 20 years. Sustained double-digit NOI growth is almost unheard of, and a large part of the reason we continue to emphasize that Seniors housing is one of the most powerful commercial real estate bull markets of all time. The chart below displays the SS NOI growth of Welltower (WELL), an AHR peer.

Welltower has accumulated 14 straight quarters of double-digit NOI growth and is one of the few REITs that has kept pace with AHR from a performance perspective. This sustained level of extremely above average growth is the reason Serenity continues to own both AHR and WELL. Companies that consistently grow the value of their underlying portfolios at close to a +20% clip are a great destination for our client’s capital, and we are confident that these companies will continue to compound our investor’s cash flow at an impressive pace over time.

The Bottom Line: Seniors Housing REITs are in the midst of a bull market arguably more powerful and much less discussed than the bull market in Data Centers. Some of Serenity’s largest portfolio holdings are positioned to continue to benefit from the Seniors Housing bull market and have the most impressive cash-flow growth in the entire REIT market.

INTEREST RATES: Why cost of capital is KEY for REITs

A last quick note on interest rates is in order here as the 10-year yield has dropped to +4.1% and BAA bond yields have dropped to +5.8% from almost +6.4% in May of 2025.

Lower interest rates in a vacuum are good for REITs and commercial real estate of all stripes. While that is not a profound statement, it’s important to remember as the effect can be powerful.

Let’s go back to the Data Centers as an example, since Data Center construction is a very capital-intensive business.

Assume hypothetically you are building a new hyperscale AI Data Center for $500 million and financing the construction with a 50/50 mix of equity and debt. We know the NOI yield for hyperscale deals is right around +12%, so we can assume that on completion and stabilization, that Data Center will deliver $60 million in NOI. This is a great yield for a real estate investment.

But remember, anyone that does not have $500 million in the couch cushions needs to finance this new construction. Again, let’s assume a 50/50 mix of equity and debt, with debt costs of +8%, and an equity cost of +12% (reasonable assumptions for new players in the space as evidenced by recent financing deals). That would represent a cost of capital of ~+10%. This represents a +20% margin on construction, which is very solid for a real estate development, and in-line with construction margins for Warehouses and Apartments. So still a solid deal, with a +20% margin or “value-add.”

From a cash flow perspective, however, this does not deliver an incredibly attractive yield. With $60 million in NOI and debt/equity costs of $50 million, the $10 million remaining cash flow is only a +2% yield on your invested cost. If a third party is valuing your portfolio based on cash-flow, this is a low base on which they will place a multiple.

Now let’s think of the same example with a lower cost of capital. The publicly traded REITs have a cost of capital closer to +6% (even lower in some cases). Using the exact same math from above, the cash flow of your portfolio is now $30 million, as opposed to $10 million. That is 3x the cash return from the same investment, making it significantly more lucrative and much less risky.

I’m not going to win a Nobel Prize for telling our readers that lower cost of capital = higher cash flow, but I want to remind everyone that it is a KEY piece of the puzzle when evaluating investments, particularly in an industry as capital intensive as Data Centers. This is yet another reason we prefer to invest in the large, publicly traded Data Center REITs, because they can finance construction of new Data Centers at significantly lower cost than most newly formed Data Center companies.

The Bottom Line: Interest rates are extremely important to REITs because they dictate cost of capital. For developers and acquirers of commercial real estate, this is a key consideration that needs to be contemplated by equity investors. Publicly traded REITs with strong balance sheets have a significant cost of capital advantage relative to private developers, which we would argue is not reflected in current valuations.

THE MINISTRY OF SILLY INVESTMENTS

A large part of my job at Serenity is to try and avoid silly investments. This means not going leveraged long Apartment REITs in late 2021 at all-time high growth levels and valuation multiples. It means not fishing for value in Office REITs in 2022 when NAV’s were falling by 10-20% per year. And right now, it means not chasing the hype in newly formed Data Center developers that have extremely high costs of capital and little or no track record in Data Center construction.

Instead, we can focus on investing in companies with proven track records and demonstrated cash flow growth. We can buy Iron Mountain, company with a large Data Center portfolio, top decile cash flow growth, and a middle of the pack valuation. We can put capital to work in AHR, which is harnessing the aging baby boomer wave to deliver double digit organic growth to investors. We can even buy EQIX, the world’s premier interconnected Data Center portfolio, at a +19.5x AFFO multiple, a significant discount to similar portfolios that have transacted for closer to +30x.

At the end of the day there are plenty of opportunities to be intelligent in REITs as opposed to silly. At Serenity, this is our day to day, to make sure our client capital is invested in the former, as opposed to the latter.

Short hype, long cash-flow,

Martin D Kollmorgen, CFA

CEO and Chief Investment Officer

Serenity Alternative Investments

MdKollmorgen@SerenityAlts.com

*All charts generated using data from Bloomberg LP, S&P Global, and Serenity Alternative Investments

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