This article originally appeared on January 24, 2017. It has not been updated.
This ad has generated quite a few questions from Gumshoe readers, and I’ll agree that it sounds pretty enticing (of course, almost all ads do — that’s why they work so well!)… here’s part of the Jim Pearce email that gets the juices flowing:
“You’ve probably never heard of this company – but the world’s best-known CEOs are very familiar with it. Facebook, AT&T, JPMorgan Chase, and others pay them more than $180 million a month for the right to keep their websites online.
“The best part? 90% of the money coming in goes directly to shareholders. That’ll put an extra check in your pocket every three months.
“This company is taking over the world. They just gained a foothold in my neighborhood… and they may be coming to yours next.”
The spiel is an ad for Personal Finance, which is one of the venerable old generalist investing newsletters that predates the wave of internet and email newsletters — Personal Finance helped to launch some fairly well-known names in investing punditry, like Stephen Leeb, and led the Hulbert charts a few times in the past, though I don’t know what the record has been like in recent years. (The Hulbert Financial Digest was closed by Marketwatch last year, FYI, Mark Hulbert has restarted it on his own but seems to track a very tiny portfolio of newsletters now).
Personal Finance has been through quite a few analysts and editors in the past decade (and a name change or two for the publisher, which is now the generic-sounding “Investing Daily”). The ads for Personal Finance have lately been coming from Jim Pearce, who is now the “chief investment strategist” for the newsletter.
And, as you’ve already guessed, they’re hinting at a fantastical investment… and they’ll send you the name and info just as soon as they get your subscription bucks ($40/year) and your credit card number.
So what’s that investment? The spiel is that “ordinary Americans just like you are pocketing an extra $8.47 every second in ‘Digital Rent Checks’,” and Pearce opens up the story by talking about the valuable “dirt” in that headline — which is really just a reference to the fact that he got caught in a traffic jam near his home in Northern Virginia because this secret collector of “Digital Rent Checks” was moving some dirt around as they build a new facility.
Here’s a bit from one of the FAQ’s after the presentation:
“Will I really get a ‘digital rent”’ check in a matter of weeks?
“Yes! Your ‘digital rent’ checks are subject to PL 86-779, a government document that mandates that 90% of REIT income be paid out to shareholders. So, if you take my recommendation and buy the data center REIT I recommend, they MUST send you “rent checks” on a regular schedule. It’s the LAW.
“The Internet landlord you’ll read about in your Data Center Profits report collects rent every second of every day. For convenience, it cuts checks on a quarterly schedule. Depending when you take advantage of this opportunity and the processing time, your first check will arrive between three and twelve weeks from today.”
So yes, Personal Finance is recommending the shares of a Data Center REIT — of which there are about a half dozen that are publicly traded. So which one?
Well, if you’re unfamiliar with Data Center REITs we should quickly explain what they are. They are Real Estate Investment Trusts, but instead of owning shopping centers or office buildings or apartments or what have you, they own data centers. Data centers are the brain of the internet, massive buildings with sophisticated connections to all the telecom providers, huge, sophisticated and complex power supplies and cooling systems, and racks and racks of computer servers that house the websites, movies, emails and everything else that we think of as being in “the cloud.”
You can see how the “cloud” terminology took off, because “in the cloud” sounds much more modern and ethereal than “in the dystopian, windowless, high security warehouse.”
But anyway, these providers are selling much more than just real estate — they do effectively lease out space, usually described in terms of square footage, and most of them are either renting out wholesale (supplying a “powered shell” for a large customer, like perhaps Facebook, though the major companies tend to also own some of their own data centers) or providing colocation services (renting out individual racks or small areas of racks, fenced off from other customers, within a powered and telecom-connected space), but much of what they provide is the security of the power supply and the interconnectedness with major networks. There are various tiers of data centers, but the higher end (tier 3 and tier 4), where uptime guarantees are huge and there’s required redundancy of network connections and power, can be difficult to place and build — partly because they need to be near major network hubs and also need incredible amounts of electricity.
For example, Digital Realty Trust (DLR) is the oldest of the Data Center REITs, and they own the huge Lakeside Technology Center in Chicago, which is in a million-square-foot building that used to house the printing presses for the Sears Catalog. That’s been calculated as the tenth largest single-building data center in the world, and I read recently that it is the second largest consumer of electricity in the Chicago area, second only to Ohare Airport. There are quite a few larger facilities now, often located in areas closer to cheap electricity (particularly hydroelectric dams), though the prime city locations are also important because of the high value of proximity — getting that shorter fiber connection to millions of homes and, at least as importantly, to key financial facilities like the CBOE and the NYSE just a few milliseconds faster.
So the value is in location, in the connections these data centers have to major telecom pipes and to power, in the ability to host network hubs that let data flow between the major telecom operators’ networks more quickly, and in the price and reliability of electricity… as well, of course, as in the amount of space these data centers have available and their ability to expand that space for future demand. Many modern data centers are built in campuses, like the one near Jim Pearce’s commute, so when the buildings fill up they can expand with another new center that has the same connections and access… though that expansion potential is much more difficult to find in downtown Chicago or Manhattan or Los Angeles than it is industrial or rural or, as in the case of Northern Virginia, suburban areas.
And yes, Real Estate Investment Trusts (REITS) are required to pay out at least 90% of their income to shareholders in the form of dividends — which means they are usually high-dividend stocks, and also that they are sometimes challenged to compound shareholder value because they can’t retain a