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How to Find the Best Data Center REITs

Just about a year-ago, I described a category of Real Estate Investment Trusts (REITs) that were in the business of owning and operating computer data centers.

These centers house data storage devices along with supporting equipment that constitute the “cloud” that you hear so much about these days.  

Many mid- to large-sized companies, regardless of industry, have found it advantageous to house their data in these “cloud” datacenters owned and operated by independent third parties rather than in company-owned facilities.

About REITs

REITs are corporations that invest mainly in real estate and don’t pay federal income taxes as long as they pay out at least 90 percent of their income to shareholders. Consequently, REITs pay higher dividends than most corporations do.

Only Six Datacenter REITs

I only know of six publicly traded datacenter REITs and business is booming for all. All have generated double-digit returns (share price appreciation plus dividends) over the last 12-months, as well as on average, annually, over the past three-years. Further, all signs point to continued strong growth. 

When REITs Went Wrong

But in the stock market, things often don’t go smoothly. About three months ago, the market began worrying about rising interest rates, and such concerns typically trigger a sell-off in high dividend paying stocks, particularly REITs and utilities. Consequently, by election day, most REITs, cloud and otherwise, had dropped around five percent from their early-August peak.

Then, after the election, fears surfaced that Donald Trump’s program of increasing government spending while at the same time cutting income taxes, would trigger inflation, and, hence, force interest rates higher. In response, although prices have recently rebounded somewhat, most REITs are down another five to eight percent, just since the election. Those events have created a buying opportunity, at least in my view.

REITS Rise With Interest Rates

My research has found that historically, when interest rates rise, so do REIT share prices and dividends. Why? Interest rates rise in a strengthening economy, which translates to more business for property owners in general. Datacenter REITs, the fastest growing segment, have the most to gain. Moreover, since REITs must pay out 90 percent of income to shareholders, when profits grow, so do dividends.  

Best Prospects

Of the six publicly traded datacenter REITs, here are the three that I think have the best 12-month appreciation prospects based on factors that I’ve found important, which include, among other items, earnings, revenue and dividend growth rates.

Cyrus One (CONE): Operates more than 30 data centers in the U.S., London, and Singapore. Analysts expect revenues to grow 33 percent to $528 million in 2016. Dividend yield is 3.6 percent.

DuPont Fabros Technology (DFT): Operates 11 multi-tenant data centers in three major U.S. markets and is expanding into two additional markets. Analysts are forecasting 16 percent 2016 revenue growth to $523 million. Dividend yield is 4.5 percent.

Digital Realty Trust (DLR): Operates 156 data centers on four continents in 11 countries. Analysts expect 2016 revenues to total $2.12 billion, up 20 percent vs. year-ago. Dividend yield 3.8 percent.

As always, consider the REITs that I’ve described as research candidates, not a buy list. Do your own due diligence. The more you know about your stocks, the better your results.

published 11/29/16

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