What the Price Assumes

Every price in this sector reduces to one valuation equation. The value of a data center, or a platform of them, is the present value of its expected future cash flows, discounted at a rate that reflects their risk. Two levers move the answer: the cash flows, and the discount rate. Every argument about a deal price is an argument about one or the other.

Practitioners use several shorthands for that equation. The most common in private transactions is a multiple of earnings before interest, taxes, depreciation and amortization, or EBITDA, a measure of operating cash generation before financing and accounting charges. In property markets the equivalent is the capitalization rate, or cap rate: a building's net operating income divided by its price. A lower cap rate means a higher price for the same income. In public markets, as the second module described, REITs are compared on price relative to adjusted funds from operations. Each shorthand compresses the same underlying logic into one number, and each hides the assumptions that produced it.

Now the complication specific to development platforms. When a buyer acquires a company such as Aligned Data Centers, which described its portfolio at the time of sale as spanning operational and planned capacity, it is not buying only current earnings. It is buying capacity under construction, land with power commitments and leases not yet in service. Current EBITDA may be a small fraction of what the platform will earn when its pipeline is built. A multiple of today's earnings can therefore look extreme while the implied price per megawatt of eventual capacity looks reasonable. The reverse can also be true. The honest way to read such a price is to separate the value of what is operating from the value of what is promised.

That separation leads to the most useful single metric for development-heavy deals: value per megawatt, split into categories. How many megawatts are built and leased? How many are under construction and pre-leased? How many are merely planned, with land and a power commitment but no tenant? Each category deserves a different valuation, because each carries different risk. A platform whose value rests mostly on the last category is closer to a real estate option than to infrastructure.

The discount rate side of the equation is driven by interest rates and by the perceived stability of the cash flows. When the Federal Reserve raised rates through 2022 and 2023, the risk-free rate that anchors every discount rate rose with it, and in principle every contracted cash flow became worth less. That CyrusOne closed at about fifteen billion dollars in March 2022, as the increases began, and that Aligned was valued at about forty billion dollars in October 2025, is itself informative. Buyers were either accepting lower returns, expecting faster growth in rents, or pricing the scarcity of powered sites. Faraday's read is that the third explanation carried most of the weight, and that power scarcity has functioned in this market as a substitute for low interest rates.

Rent growth deserves its own sentence. When new supply is constrained, as it has been in markets such as Northern Virginia where Dominion Energy's transmission limits slowed new connections from 2022, existing capacity can be re-leased at higher rates when contracts roll over. Buyers pay for that expected uplift. They are, in effect, underwriting that the constraint persists. If constraints ease, the uplift shrinks.

Comparable transactions provide a cross-check. An analyst pricing a new deal will look at what buyers paid in QTS, CyrusOne and Aligned, adjusted for differences in scale, tenant mix, geography and pipeline. The difficulty is that private deal terms are rarely disclosed in full, and headline values often combine equity, assumed debt and future capital commitments in ways that are not directly comparable. A disclosed enterprise value, the combined value of equity and net debt, is more comparable than a headline figure that mixes in future spending, and it is worth checking which one a report is quoting.

There is a final discipline worth adopting. Every valuation rests on a small number of assumptions: the renewal rate on expiring leases, the rent on re-leasing, the capital needed to keep facilities current, the timing of new capacity and the exit value at the end of the holding period. Changing any one of them moves the answer materially. A deal memorandum that does not state these assumptions explicitly is not a valuation; it is a price in search of a rationale.

So when a transaction value is announced, do not ask whether it is high or low. Ask what it assumes about power, tenants and rates, and whether those assumptions would survive the next five years.