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All Contents © 2019The Kiplinger Washington Editors
By Dana Blankenhorn
| April 19, 2017
Real estate investment trusts (REITs) have been around for decades, allowing investors to buy into real estate not through land itself, but through a publicly traded company. These REITs, thanks to certain tax advantages, are required to throw off the majority of their earnings to shareholders as dividends, making them popular among the income crowd.
Datacenter REITs, however, are an interesting breed. They build, own and manage datacenters for corporate clients, and bridge the gap between dividend-heavy real estate and growth-oriented tech stocks.
Funnily, this business was supposed to have been killed in the age of the cloud, but it turns out to have been a boon for well-run operators. While the bulk of processing is now done in cloud data centers like those of Amazon.com, Inc. (AMZN), big companies are increasingly using third-party data centers to maintain and communicate corporate data stores.
Centers with the best optical connectivity and good security are becoming integral to the cloud, with super-fast interconnects between and among scaled clouds now dominating the world of computing.
Stock in data center REITs are up an average of 4.5% for the first quarter.
REITs themselves have been around for a half century. The whole category is hot again, thanks to the decision to separate these trusts from banking and insurance stocks last year, which increased interest in the stocks from index funds like the Vanguard REIT Index ETF (VNQ) and iShares Real Estate ETF (IYR). Datacenter REITs, however, are a particularly beloved play right now, with this subset charging ahead 4.5% for the first quarter to beat the broader sector.
Datacenter REITs are poised to deliver a rare combination of stable, secure income and steady growth connected to the continued explosion of technological advances. Today, we’ll look at five of these solidly yielding real estate/tech stocks that should continue to perform in the years ahead.
Prices and data are from the original InvestorPlace story published on April 17, 2017. Click on ticker-symbol links in each slide for current prices and more.
Dividend yield: 3.5%
CoreSite Realty Corp. was founded by the The Carlyle Group LP (CG) as CRG West in 2001, based in two California properties that had become “telecom hotels” in San Jose and Los Angeles. It was rebranded with its current name in 2009 and taken public in 2010.
CoreSite has since become a favorite institutional holding, with Vanguard Group holding the largest passive stake. (Carlyle cut its own stake to 35% in a 2015 offering.)
The keys to datacenter REITs, beyond technical competence, is the same as in any other real estate: location, location, location. CoreSite is in eight of the largest corporate markets, and it maintains a long list of partners that sell its services as both real estate and technical co-location.
CoreSite has been growing its top line at about 20% per year while at the same time increasing profit margins, with $58.71 million of $400.35 million in revenue flowing to the net income line last year. It has done this through debt — half of its assets are now subject to debt — but operating cash flows have been rising steadily to finance that debt, which stood at $690.45 million at the end of last year.
These are the kinds of numbers a REIT investor wants to see.
REIT investors pay for growth with lower yield, but make up for that over time. CoreSite’s first dividend was just 13 cents per share in 2010, but if you paid the $13.75 per share needed to grab it, you’re now sitting on stock paying 80 cents per share. That’s 500%-plus growth in the dividend in less than a decade. While today’s 3.5% yield looks a little thin, those who got in early are now getting $3.20 per year for what was an investment of less than $14 at the start of the decade. That’s a 22% yield on cost.
More than half the 11 analysts following COR have it on their buy lists, and so far, investors are listening, driving shares up 15% so far in 2017. The stock currently trades at all-time highs, and should be bought on any dips of 5% or more.
Digital Realty Trust, Inc. was developed with $500 million from the California Public Employees Retirement System, or CALPers, which selected a private equity fund to invest the money into data centers in 2001, with CBRE Group Inc (CBG) throwing in another $26.3 million.
Since going public in 2004, shares of DLR are up by more than 800% and have thrown off regular quarterly dividends that started at about 15 cents per share and now total 93 cents per share. An investor who got in at about $13 per share back then is now drawing nearly one-quarter of that investment back as income each year.
Such is the magic of a good REIT investment.
At the end of 2016, Digital Realty Trust ran 145 properties, 104 of them in the U.S., with 26.1 million square feet of rentable space. Most of the company’s $5.8 billion in debt is held at low fixed rates, and it is in position to be a seller of space this year, when prices are high, rather than having to be a buyer.
DLR counts some of the largest cloud players among its biggest clients, including Facebook Inc (FB) and Amazon. In 2016, Digital Realty launched Service Exchange, which provides secure connections between its data centers and major cloud providers, including tech stocks such as Microsoft Corporation (MSFT) and Alphabet Inc. (GOOGL).
Again, the argument that data center REITs were doomed by the cloud turns out to be wrong.
REITs are not supposed to be growth stocks, yet that is what DLR has proven itself to be. Its moat seems secure against the cloud — it supports the cloud — and its future seems secure.
Dividend yield: 3.9%
DuPont Fabros Technology, Inc. is one of the older datacenter REITs, founded in 1997 by Lammot du Pont and Hossein Fateh. Fateh left the company in 2015 to start a new data center company, CloudHQ, but Lammot remains chairman of the company’s board.
The company went public in 2007, and despite the 2008 market crash, it is up 123% since then. The stock currently pays a dividend of 50 cents per share, good for a yield of nearly 4%.
As of the end of 2016, DuPont Fabros maintained 11 datacenters with a total of 3.3 million square feet, and it had five more centers under development. It is focused on the Washington, D.C. area, the New York market, Chicago and Silicon Valley, where it operates out of San Jose, but it is expanding into Oregon and Canada. It too counts Microsoft and Facebook among its largest customers.
DFT had a rocky 2015, but recovered in 2016 to deliver $157.2 million in net income, $1.67 per share, on revenue of $528.7 million. That means 30 cents of every dollar the company brings in fell to the net income line.
Analysts who closely follow DuPont Fabros like its growth rate, which is among the fastest in the industry, noting that it recently purchased land in the Phoenix area near a new Apple Inc. (AAPL) cloud center, and that it plans to put $600 million in new capital to work this year.
Analysts consider DuPont Fabros to be measured and methodical — two words you like to hear about a REIT investment.
Dividend yield: 3.2%
CyrusOne Inc was founded in Carrollton, Texas, a suburb of Dallas, in 2001, but is in the process of moving to the central city’s Uptown neighborhood. It was bought by Cincinnati Bell Inc. (CBB), then spun out.
In its present incarnation, CyrusOne has been publicly traded since late in 2013, and CBB still owned a 9.5% stake at the end of 2015.
CyrusOne owns 33 data centers, with international operations in the U.K. and Singapore. In 2015 it bought Cervalis, which operated data centers in the Northeast. Last year it bought a center near Chicago from the CME Group Inc (CME).
Since coming public again, CyrusOne has nearly tripled its dividend, which now stands at 42 cents per share. Shares are up 150%, making this tech stock a true total-return play. If you bought in back in February 2013, at around $22 per share, you’re sitting on a yield of about 7.6%. That’s why current income on a stock can be misleading. Capital gains and dividend increases make today’s low yield tomorrow’s high yield.
On April 11, CyrusOne announced what it called a “strategic partnership” with Fujitsu Ltd (FJTSY), connecting its operations to Fujitsu’s Cloud Service K5, and helping extend its reach into Asian markets.
CyrusOne will announce its next earnings report May 4, and analysts expect profits of 68 cents per share on revenues of $143.48 million, versus 80 cents per share on $137.4 million, respectively. CONE has consistently delivered earnings well beyond its dividend for the past year.
CEO Gary Wojtaszek recently made the TV rounds, getting the blessing of Jim Cramer and delivering a 3% pop to the stock price. Not everyone loves the stock — Citigroup put a “Sell” rating on shares after its November bottom of roughly $38 per share. It has since recovered (and then some), perhaps proving that volatility is your best chance to get shares at a bargain.
Dividend yield: 3%
QTS Realty Trust Inc. is a datacenter REIT based near Kansas City, but some of its largest operations are in Atlanta and Richmond, Virginia. The former center is one of the world’s largest.
QTS was founded in 2005, and its first big purchase were datacenters owned by ITC Telecom, one of which was in Suwanee, Georgia, an Atlanta suburb. The larger Atlanta facility was bought the next year, along with the hosting business of Globix, which had gone bankrupt after the dot-com bubble. The company has been growing steadily, mostly through acquisitions, ever since.
One of the company’s specialties is disaster recovery as a service, under which customers can isolate workloads and migrate them to almost any environment.
The 36 cents per share dividend delivers a yield of just 3% at current prices, though the company has improved its payout by 50% since it came public in late 2014 at under $20 per share.
Most of the analysts who follow QTS love the stock. That should hold true after its next earnings announcement, due May 1. Analysts expect profits of 61 cents per share on revenue of $108.21 million; in February, the company guided analysts in line with those estimates. Should the company reach its goals, it will cover its dividend with earnings for the first time in more than a year.
QTS also has an “at the market” program allowing it to quickly issue up to $300 million in additional stock at any time, giving it ammunition for more deals.
This article is from Dana Blankenhorn of InvestorPlace. As of this writing, he was long AAPL, AMZN, FB, GOOGL and MSFT.