On July 29, I wrote about giant asset manager Blackstone (BX) in fairly glowing terms. The firm is investing in artificial intelligence infrastructure in aggressively intelligent ways that I can’t help but endorse.
One of these projects was the launch of Blackstone Digital Infrastructure Trust (BXDC) in May.
This new data center real estate investment trust (REIT) raised approximately $1.75 billion at its IPO, with proceeds potentially reaching $2 billion.
Now, admittedly, as I wrote on May 23, this is a “blind pool” operation that “hasn’t acquired any assets yet.” So we’re not investing in it until it’s working with something substantial.
With that said, I still think Blackstone Digital Infrastructure is worth understanding.
My regular readers might remember how I wrote about another data center REIT, Fermi Inc. (FRMI), right after its IPO last October. And, yes, I was intrigued by that asset-less company, too, noting how:
Fermi’s portfolio will consist of a single, massive, 6,000-acre energy and data-center campus within 12 years. It’s currently being built within the Texas Tech University system outside Amarillo, Texas, on a ground lease.
When completely finished, the facility should be able to house 18 million square feet of AI-specific data centers, powered by nuclear energy, natural gas, wind, and solar power.
Now, I also said that I don’t buy into IPOs. And Fermi has since proven exactly why that is.
Within mere months, it started suffering severe financial distress thanks to lost contracts… management shakeups as its CEO and CFO both stepped down… and legal troubles from angry investors who lost money from those problems.
I’m not going to say that Blackstone Digital is absolutely different. What I do believe, however, is that it’s handling its launch much more intelligently.
So it’s much more likely to have much better results.
A large and profitable market to choose from
As Fermi showed last year with its $682.5 million IPO, there’s intense demand for data centers. So much so that just the promise of such can generate hype.
I've said repeatedly that data centers represent one of the most attractive real estate sectors in the world today. And I’ll say it again. AI isn't slowing down, and neither is the demand for infrastructure to support it.
This showed clearly on Blackstone Digital Infrastructure Trust’s recent earnings call, where it highlighted remarkable statistics such as how:
U.S. data center vacancy rates remain around 1%.
Target vacancy markets are closer to 0.4%.
Rent growth has more than doubled since 2021.
About $30 billion of comparable transactions have occurred recently at cap rates in the low- to mid-6% range.
Between power constraints and permitting delays, labor shortages and zoning challenges, it’s becoming increasingly difficult to develop new facilities. And that’s creating substantial pricing power for existing assets.
Also supporting Blackstone Digital’s mission is how much money hyperscalers are spending on AI – enough to make their investors very nervous. They could use extra money to pacify their shareholders, and extra money is precisely what Blackstone Digital is proposing.
It’s basically looking to be the sale-leaseback source for data centers, where it buys already existing properties and then rents them back to their previous Big Tech owners. That way, hyperscalers get quick, large infusions of cash.
Blackstone Digital, meanwhile, gets steady monthly rental checks for decades to come… and all without taking on construction costs, entitlement risks, or power development problems.
CEO Nicholas Pell believes this strategy could work so well for everyone involved that it will bring repeat business. He summed up the REIT’s mission as wanting to become the “easy button” for developers to recycle capital into future projects.
This new data center REIT has no debt
Pell’s goal might sound overhyped considering how much data centers are going for these days. But keep in mind that Blackstone Digital Infrastructure Trust is backed by Blackstone Inc. (BX) with its massive cash flow, connections, and capabilities.
That not only gives the REIT credibility but actual financial resources as well to make things happen.
And speaking of money, here’s another distinction from Fermi: While the latter was over $100 million in debt shortly after its IPO, Blackstone Digital is debt free at this time.
It even made some money in its last quarter. Despite holding no actual physical data center assets yet, the REIT still generated:
Funds from operations (FFO) of $0.07 per share
Adjusted FFO (AFFO) of $0.08 per share
Net income of $0.14 per share.
So when management says it’s targeting approximately 40% long-term leverage once acquisitions begin… it seems reasonable to believe the REIT can do exactly that.
It also seems reasonable to believe Pell when he says he’s confident in the company’s acquisition pipeline, which he and his team continue to evaluate. Though there is one important catch there…
On the one hand, it’s good to hear words like “evaluating.” We want to see wise purchases, not growth for growth’s sake. I can’t emphasize that enough.
Yet we also have to recognize that every month spent weighing options is another month where earnings growth isn’t happening. That’s just the reality of a blind-pool REIT.
Especially one as new as this one is.
Valuation requires patience
Considering how much hype happened with Fermi and how much more promise Blackstone Digital seems to hold… it shouldn’t be surprising that there’s a lot of enthusiasm surrounding the latter’s stock.
Analysts expect explosive AFFO growth over the next several years as capital is deployed at attractive cap rates. And shares currently reflect that extreme optimism – another reason Wide Moat Research can’t recommend Blackstone Digital at this time.
Trust us when we say we understand the situation here – including how well competitors Digital Realty (DLR) and Equinix (EQIX) performed this past quarter. Not only did they report exceptional results, they also raised their guidance and committed billions of dollars more toward expanding even further.
Digital Realty, for instance, now has full-year core FFO guidance of $8.15–$8.20 per share. And its new development spending outlook ranges up to $4.75 billion.
Plus, it signed two more hyperscale leases after the quarter’s end, representing $410 million of annualized GAAP (generally accepted accounting principles) rent. And it has over $20 billion worth of projects under development right now.
Equinix, meanwhile, made what CEO Adaire Fox-Martin said is “the largest single guidance raise in the history of our company.” Management now expects 11%–12% full-year revenue growth and 10%–12% per-share AFFO growth.
And planned capital expenditures are now targeted at $5 billion to $6 billion for 2026, and $5 billion to $7 billion annually through 2029.
Source: Wide Moat Research
However, don’t forget that both Digital Realty and Equinix are well-established data center REITs with over two decades’ experience. Whereas Blackstone Digital, even with all of its promise, has mere months under its belt.
If its intended acquisitions occur more slowly or if pricing becomes too competitive, earnings growth could be pushed further into the future. So while I understand all the hype, I'm going to have to pass for now and patiently wait for something real to happen.
No matter how bad the fear of missing out (FOMO) might get.
Happy SWAN investing!
Brad Thomas
Editor, The Wide Moat Daily
