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Another Look at Data Center REITs

Almost two years ago, on November 25, 2016, I described a category of Real Estate Investment Trusts (REITs) that were in the business of owning and operating computer data centers.

In that column, I recommended three data center REITs.

Returns?

When I recently checked, since my November 2016 column, one of the three, CyrusOne, had returned 58%  (price appreciation plus dividends received), and another, Digital Realty Trust, was up 34% . The third, DuPont Fabros Technology, was acquired. When that deal closed in September, 2017, DuPont Fabros holders received $63 per share, a 60%  or so return from November 2016. Why the big returns?

About Data Centers

Those 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 “cloud” datacenters owned and operated by independent third parties rather than in company-owned facilities. The good news is that despite all you hear, cloud usage is still in the early stages and many analysts are forecasting continued fast growth.

Before giving you names, here’s what you need to know about REITs.

About Data Center 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 %  of their income to shareholders. Consequently, REITs pay relatively high dividends compared to most stocks.

I only know of five publicly traded datacenter stocks and all are organized as REITs. Despite the bright future, thanks to rising interest rate concerns, all five have suffered share price drops ranging from 3% to 10% over the past few weeks. Why? Fears that higher prevailing interest rates will make high-dividend paying stocks such as utilities and REITs less desirable, typically drive share prices down.

However, in my experience, such price drops are short-lived and provide buying opportunities, especially for stocks with strong potential, such as data center REITs.

Best Data Center REITs

Of the five publicly traded datacenter REITs, here are two that I think have the best appreciation prospects based on factors that I’ve found important, which include, among other items, expected earnings and revenue growth rates.

CyrusOne (ticker symbol CONE): A repeat from my previous column, CyrusOne owns and operates 31 data centers in the U.S., London, and Singapore. Analysts expect revenues to grow 22%   this year and 19% in 2019.. Dividend yield is 2.7%.

Equinix (EQIX): Operates 100 data centers in North and South America, Europe and Asia. Analysts expect 16% revenue growth thins year and 10% in 2019. Dividend yield is 2.1%.

As always, consider these REITs to be research candidates, not a buy list. Do your own due diligence. The more you know about your stocks, the better your results.

published 10/2/18

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