At a Wall Street conference in December, Toby Neugebauer, the CEO of Fermi America, pitched his company as a cutting-edge utility built to power the artificial intelligence boom.
“We’re one of the most sophisticated utilities on the planet,” Neugebauer told an audience of UBS clients. “There will not be a more sophisticated utility. When you look at redundancy, when you look at technology, there won’t be another one.”
There’s just one problem. Fermi America has a specialized corporate structure that limits its income sources. And selling power isn’t one of them.
More specifically, it’s a real estate investment trust, or REIT. Under IRS rules, REITs have to earn most of their money from things like rent, dividends, or mortgage interest. They pass on most of their earnings to shareholders as dividends and don’t have to pay corporate income tax.
If a REIT runs afoul of those guidelines, it can be a big deal.
“Public statements describing the company as an ‘operating company’ or ‘utility’ can be scrutinized if they contradict how income and assets are classified for REIT purposes,” Jussi Askola, the founder of Leonberg Capital, told Business Insider. “Substance matters more than labels, but careless language increases risk.”
The company has said in filings that selling power could put its REIT status at risk. It plans to make sure the power sales stay within limits and keep the power business in separate units.
REIT status isn’t something a company applies for or receives in advance; it elects for treatment as a REIT when it files its tax return. It’s up to the IRS to accept that position or challenge it later. (The agency told Business Insider it doesn’t comment on specific companies.)
If Fermi were to lose its REIT status, the consequences for investors could be significant. The company would be taxed as a regular corporation, reducing distributions and potentially causing the stock price to dip. It would also be barred from re-electing REIT status for four years following disqualification, according to Fermi’s filings.
“Such an outcome could materially and adversely affect our valuation, dividend expectations, and access to capital,” the company wrote in a September IPO filing.
Fermi is one of many startups racing to cash in on the AI-driven data center boom. With what it’s calling Project Matador, the company is betting it can profit by supplying power directly to those facilities. It plans to generate electricity behind the meter, bypassing the grid, in what remains a largely unproven strategy with uncertain returns.
More broadly, the scramble to find the next big AI investment has created an opening for financial engineering alongside technological innovation. Companies like Fermi aren’t just pitching power; they’re pitching a financial structure. And while the appeal of tax-advantaged returns with exposure to the market’s hottest themes may attract investors, it also carries a high degree of risk.
“Fermi America’s sophisticated REIT structure was intentionally designed for foreign investment, given that Fermi is a global company with international business partners and suppliers,” Lexi Swearingen, a spokesperson for the company, told Business Insider.
“Real estate is all about location, location, location — and Project Matador is blessed to sit on one of the most premier sites in the country,” she said, “where we will rent access to power to the world’s leading companies.”
She later clarified that the company would “rent access to power-ready real estate.”
‘The most practical and prudent approach’
Fermi, which counts former Energy Secretary Rick Perry among its directors, went public in September, promising to build 11 gigawatts of electricity in West Texas to supply the data centers behind the AI boom. It pitched investors on a REIT structure, a tax-advantaged investment that often attracts shareholders with lower risk tolerance.
In general, Askola said, “most REITs are still considered safer than your average stock.”
Despite Fermi’s pitch, analysts have struggled to pin it down. Macquarie, which acts as both a lender and research firm covering Fermi, groups it with other REITs. In its first note, the firm compared Fermi to data center REITs, but it also included a table with eight publicly traded utilities, suggesting Fermi could also be compared to those companies.
At Evercore ISI, the company appears to be the only REIT covered by Nick Amicucci, the head of power, utility, and clean energy research. He wrote in the firm’s first report that “while we would expect Fermi to be more comparable to some of the more traditional data center REITs over time,” during its early buildout, “comparing it to independent power producers is the most practical and prudent approach.”
Amicucci told Business Insider that his analysis rested on the idea that it would be years before Fermi would generate the income needed to act like a traditional REIT. “There is still a massive buildout to go before they say they are going to be issuing a dividend,” he said.
Fermi plans to ringfence its power-generating assets inside special entities known as taxable REIT subsidiaries. Those subsidiaries can account for only 25% of the REIT’s total assets. Coupled with the income limits, the challenge will be keeping power sales within those subsidiaries low enough to maintain REIT status.
The company ultimately plans to sell power generated from natural gas, grid supply, and solar and nuclear sources, while also building and leasing more than 15 million square feet of data center facilities.
It hasn’t disclosed what percentage of projected revenue will come from electricity sales versus rent, nor how much of that activity will occur inside taxable REIT subsidiaries.
“We view Fermi’s structure as complex but durable, provided operational discipline and disclosure remain high,” Evercore wrote. The use of the subsidiaries, the analysts wrote, “to contain energy sales risk, combined with long-term lease arrangements that tie power delivery to real property, supports the durability of qualifying income.”
An ‘evolving mix’ of income sources
In its securities filings, Fermi has openly acknowledged the risk its power business could pose to its REIT classification.
“Our strategy involves developing power generation assets,” Fermi wrote, describing subsidiaries that “may sell power directly to tenants or third parties or engage in other activities that generate non-qualifying income for REIT purposes, that generate net income subject to the tax on prohibited transactions, or that are otherwise incompatible with REIT status.”
Elsewhere, it added “given our evolving mix of real estate leases and energy service revenue, we may not meet these thresholds in all periods.”
The power plan isn’t just theoretical. Under a lease with the Texas Tech University System, on whose land Fermi is building its facilities, the company will provide nuclear power to a Texas Tech research campus and data center “at cost.” The lease also says that Fermi will pay Texas Tech University System 1% per quarter on any of the power it sells.
Fermi has also said it may join either the Southwest Power Pool or the Electric Reliability Council of Texas, two regional grid operators.
Still, Haynes and Boone LLP, Fermi’s Dallas-based lawyers, issued a letter included in the IPO filing stating that it believes Fermi qualifies as a REIT.
“The company has been organized and operated in conformity with the requirements for qualification and taxation as a real estate investment trust,” the law firm wrote, adding “its current and proposed method of operation will enable it to continue to meet the requirements.”
The letter includes caveats, noting the law firm cannot be expected to oversee the company’s operating activities, its means of generating income, or asset mix in ways that may or may not violate the rules around REITs.
“Accordingly, no assurance can be given that the actual results of the Company’s operations for any one taxable year will satisfy the requirements for taxation as a REIT under the code.”
Should its REIT classification get challenged, the business could suffer.
Scott Robinson, director of the REIT Center at NYU’s Schack Institute of Real Estate, said investors would likely demand a lower stock price to protect themselves.
In December 2023, Hannon Armstrong Sustainable Infrastructure Capital, Inc. announced that it would convert from a REIT to a corporation the following January, saying that “most of our recent investments and pipeline are non-REIT qualifying,” and that remaining a REIT “may create misperceptions regarding the company and its exposure to real estate risk.” In the first three weeks after converting from a REIT to a corporation, the stock declined almost 20%.
Robinson said REIT risk would make him leery of Fermi stock.”I would probably want to buy that stock at a discount to account for that uncertain economic outcome if they don’t get their REIT ruling,” he said.
Much of the downside reflects a potential shakeup in investors: income-focused investors drawn to the reliable REIT dividends could exit, pushing down the stock price. If the company is fortunate, they would eventually be replaced by investors more interested in growth and willing to forgo the tax advantages, and the constraints, of the REIT structure.
When Neugebauer spoke, in early December, the stock was trading around $15 or $16, below its IPO price of $21. It’s now trading around $9.
Neugebauer may have understood the tension.
After touting Fermi’s utility bona fides at the UBS conference, he went quiet. “I’m trying to make sure I don’t get in trouble,” he said. “I’m known to share. Over-share.”
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