Fermi America Seeks 130 Billion Dollar IPO Amid AI-Driven Data Center Growth

Fermi America, a data center developer, has submitted an application to go public as a real estate investment trust (REIT). The company, co-founded by the former governor of Texas and former energy secretary, aims to raise 130 billion dollars through its initial public offering (IPO). The data center sector has been experiencing significant growth due to the increasing demand for cloud computing and data storage solutions, driven by the burgeoning artificial intelligence (AI) industry.

Fermi America's portfolio includes a 6000-acre energy and data center park, currently under construction in collaboration with the Texas Tech University System in Amarillo. The park is expected to house data centers with a total building area of 18 million square feet, powered by a mix of nuclear, natural gas, wind, and solar energy sources with a total installed capacity of 110 billion watts. The company plans to have 11 billion watts of power in operation by the end of next year.

Fermi America will join a niche group of REITs focused on the data center sector, which is experiencing sustained growth due to the increasing demand for AI. Companies such as Equinix and Digital Realty operate extensive data center portfolios, providing customers with access to cloud computing platforms and AI models. However, despite the growth in AI demand, data center REITs have not seen the same level of returns as other AI infrastructure investments.

One of the reasons for the relatively lower returns of data center REITs is the long-term nature of data center leases, which have predetermined rent increases. While this provides investors with a clear expectation of future cash flows, it also limits the ability of landlords to capitalize on the increased demand and supply shortages in the AI sector. Additionally, REITs are required by law to distribute at least 90% of their taxable income as dividends, which can slow down their growth through acquisitions. In contrast, other AI infrastructure providers, such as large-scale cloud computing service providers and chip manufacturers, can reinvest their profits to expand their businesses more quickly.

Furthermore, REITs are more sensitive to interest rates compared to other equity investments. Throughout the AI boom, interest rates have remained high. While the Federal Reserve recently lowered the federal funds rate, there are concerns that tariffs could cause inflation to accelerate again, potentially hindering further rate cuts. This sensitivity to interest rates, along with the long-term leases and dividend distribution requirements, has contributed to the relatively lower returns of data center REITs compared to other AI infrastructure investments.