A buzzy data center startup calls itself a utility. That could be a problem.

At a recent Wall Street conference, Toby Neugebauer, the CEO of Fermi America, presented his company as an innovative utility positioned to support the burgeoning artificial intelligence industry. "We’re one of the most sophisticated utilities on the planet," Neugebauer claimed to a gathering of UBS clients, emphasizing the advanced technology and redundancy measures the company boasts. However, there’s a significant hitch. Fermi operates as a real estate investment trust (REIT), a structure that inherently limits its income sources. This legal classification restricts the company from generating revenue through power sales, as REITs must primarily earn income from rents, dividends, or mortgage interest. If Fermi deviates from these guidelines, it risks jeopardizing its REIT status, which could have severe repercussions for investors. Experts caution that terms like "utility" or "operating company" are risky for a REIT to use, given the strict income and asset classifications that must be adhered to. Jussi Askola, founder of Leonberg Capital, highlighted that while labels are important, the actual substance of the company’s operations holds greater significance. The stakes are high; losing its REIT status would subject Fermi to standard corporate tax rates, likely diminishing dividend distributions and affecting stock prices. Fermi’s strategy hinges on its Project Matador, which involves generating and supplying power directly to data centers, a plan that is not without its uncertainties. The company aims to create electricity using a combination of natural gas, solar, and nuclear sources while maintaining its operations within permissible limits to uphold its REIT classification. The complexity of Fermi’s financial structure is designed to attract foreign investment, as the firm has significant international partnerships. Lexi Swearingen, a spokesperson for the company, stated that their real estate endeavors are strategically located, allowing them to rent access to power to major industry players. Yet, the intricacies of managing its income streams and maintaining compliance with REIT regulations raise questions about the long-term viability of this model. As Fermi progresses with its ambitious plans to build substantial electricity generation capabilities in West Texas, analysts remain divided on how to categorize the company. While some liken it to traditional data center REITs, others suggest comparisons with independent power producers may be more fitting at this stage of development. Fermi's public filings acknowledge the inherent risks linked to its power generation assets, confessing that its evolving revenue mix may not consistently meet the necessary thresholds for REIT compliance. The company has already secured agreements, including a lease with Texas Tech University, for the provision of nuclear power to affiliated campuses. As Fermi continues to navigate these complexities, the potential for significant downturns in stock value looms if its REIT status is challenged. Industry experts suggest that investors may demand a lower stock price to mitigate risks associated with Fermi’s uncertain regulatory future. With the stock trading well below its IPO price, the pressure is mounting for Fermi to clarify its business model and ensure its compliance with REIT standards to maintain investor confidence.