Investors Run Toward This Buzzy AI Data Center REIT for the Wrong Reasons

Investors are rushing at every opportunity related to the artificial intelligence boom, often without looking closely at the fundamentals. Dividend investors are no exception. As a result, the market is feverishly running certain stocks higher and ignoring great bargains elsewhere. We don’t mind this, as it provides us with opportunities to capitalize on.

One extreme example is the recent IPO of real estate investment trust Fermi FRMI, an energy and data center development company built to meet the growing need for AI infrastructure. It’s a risky investment which offers no dividend. In contrast, Healthpeak Properties DOC —one of the largest publicly traded REITs focused on the healthcare sector—is backed by long-term leases and pays out the majority of its cash flows to investors as a dividend.

The goal of the Morningstar Dividend SMA strategy is to generate a large, reliable, growing stream of dividend income while generating strong risk-adjusted total returns. This quarter, Healthpeak fits our process for the strategy, while Fermi does not.

AI Hype Leaves Opportunities Elsewhere

AI stocks are up 44% over 2025 as of Oct. 20, as measured by the Morningstar Global Next Gen Artificial Intelligence Index. That’s well ahead of the broader market, which is up 15.4% as measured by the Morningstar US Market Index. But a disciplined investment process shouldn’t shift with the latest narrative. Markets change, sometimes rapidly. Being disciplined and sticking with a well-defined and time-tested investment process can protect investors from getting whipsawed.

The current market environment is reminiscient of late 2020 and 2021. The economy was strongly expanding amid the loosening pandemic lockdown, the Federal Reserve was keeping interest rates low, and investors were aggressively bullish new technologies, such as the metaverse, booming crypto markets, and nonfungible tokens. Ebullient investors pushed markets rapidly higher in what seemed like a never-ending rally. But of course, it did end.

Our Income-Focused Investing Process

The Morningstar Dividend SMA is a separately managed account offered by Morningstar Investment Management. The strategy’s goal is to generate a large, reliable, growing stream of dividend income while generating strong risk-adjusted total returns. Stock selection is focused on high-quality, competitively advantaged businesses which have demonstrated track records of earnings durability.

The strategy employs a valuation-driven approach, seeking shares of companies that are trading at a discount to the investment team’s estimate of their intrinsic value. This often means the strategy is adding to positions in out-of-favor sectors and trimming back or eliminating positions where the stock’s price has run ahead of its fundamentals.

Since inception, the dividend yield of the portfolio has typically ranged at 3%-5%. Today the yield is 3.6%, well above the S&P 500’s 1.2%. The portfolio has generated dividend income growth of 8% per year, well ahead of inflation, providing the strategy’s investors with real gains in purchasing power. Dividend growth is primarily generated by allowing the underlying earnings growth of the businesses owned to compound over time.

Avoid This Data Center AI REIT; Stable Opportunities Lie Elsewhere

To take advantage of major market opportunities, we must be aware of the environment and be both vigilant and persistent in finding ways to capitalize. How do we tune out the noise while searching for signal? In our view, it is all about process. Having a disciplined investment process is like wearing a hazmat suit, protecting us as we carry on with our work.

REITs are fertile ground for us, given our focus on income generation, so we were intrigued by Fermi’s IPO. Our surprise that the company pays no dividend quickly gave way to shock that it also has no tenants, revenue, or physical property assets. What it does have are the rights to build an 11-gigawatt data center in Texas. There will be enormous upfront capital requirements to build the facility and co-located power generation. With no tenant commitments, this build is being done on spec. What are investors willing to pay for this shell of a company? The current market cap is $18 billion.

Investor willingness to suspend rationality is driven by the desire to participate in the AI hype, no matter the risks involved. But our investment process narrows our interests to investments we believe will generate strong risk-adjusted returns from businesses’ earnings power and not speculation.

We found an investment this quarter that fits our process better than Fermi. Healthpeak is one of the largest publicly traded REITs focused on the healthcare sector. It owns 702 properties that are leased to healthcare providers, hospitals, life science and biotechnology firms, and senior housing operators.

In the last year, Healthpeak generated over $2.7 billion in rental revenue and $1.2 billion in cash flow. These are backed by long-term leases with high-quality tenants. The market value of the firm at the time of our purchase was $12 billion, or approximately 10 times its cash flows. The firm also pays out the majority of those cash flows to its investors as dividends, and at the time of our purchase, the shares were yielding 7%. We believe the firm will be able to increase its dividend over time, and we expect to earn a low-double-digit annualized return on our investment.