Managing U.S-based global data and communication infrastructure REITs through increasing interest rates

Abstract

This paper aims to explore the implications of increasing interest rates on the financial performance of global data and communication infrastructure REITs based in the US. In order to analyze this impact, various financial metrics and indicators are employed to assess the potential risks and challenges faced by these specialized REITs. Additionally, the paper seeks to investigate whether there are disparities in the financial performance between data and communication infrastructure REITs. To motivate the analysis, a multiple linear regression model is presented, which highlights the influence of the 3-month and 10-year Treasury rates on the financial metrics and indicators. The findings of this study demonstrate that the financial performance of these REITs is significantly and negatively affected by both short-term and long-term interest rate increases, with the exception of the D/E and D/A ratios, which show a contrasting pattern. Furthermore, notable distinctions between the data and communication infrastructure REITs are not apparent, except for the observation that rises in both interest rates have a more prominent effect on rental revenues from data center real estate. Moreover, evidence suggests that global operating communication infrastructure REITs experience a more dominant impact on their financial performance do to rising interest rates, as their value increases. However, given the limited representation of the REITs in the dataset, the comparative results should be interpreted cautiously, as they may not accurately reflect the broader landscape. As the findings differ from existing literature that suggests the financial performance of the specialized REIT sector in the US remains unaffected by interest rate fluctuations, it is crucial for future research to underscore the vulnerability of foreign investment risk and the unique characteristics and market dynamics of data and communication infrastructure REITs that differentiate them from the broader specialized REIT sector.