Data Center REITs: Everything You Need to Know
Data centers have slowly become a crucial part of society’s infrastructure. Accordingly, data center REITs have risen in popularity. These days, many investors view data center REITs as a low-risk, high-reward addition to their portfolio. But what exactly do these companies do?
Palo Alto Networks defines a data center as, “a facility that centralizes an organization’s shared IT operations.” They are basically big warehouses with servers, reliable power and cooling equipment. The main role of a data center is to store, process and send data. The type of data can vary greatly depending on the organization.
Here are a few examples of what a data center might do:
- Store and send emails and files throughout a massive company.
- Handle orders for an eCommerce company.
- Power online gaming communities.
- Store and organize social media profiles and posts.
Data centers can be physical or cloud-based. For example, Google, Microsoft and Amazon all offer cloud-based data centers. Every time you open Gmail or Office 365 you are using a cloud-based data center. This has become one of the most common ways to send, store and access data.
However, some organizations need more security. For example, many government agencies wouldn’t trust a cloud-based service to store sensitive data. This creates too much potential to be hacked. Instead, these organizations build their own physical data centers where they can store information.
In today’s digital world, data centers are as crucial as roads and hospitals. If you’re looking to invest in data centers, a data center REIT is a great option.
What Are Data Center REITs?
As a refresher, a real estate investment trust (REIT) is a company that owns income-producing real estate. The REIT owns a portfolio of property, earns income, and pays out dividends to its shareholders. Generally, a REIT pays out 90% of its income to shareholders each month. Just like a regular company, investors can buy and sell shares of the REIT. It’s a great way to get exposure to real estate without buying any property yourself.
Most REITs will specialize in specific types of real estate. For example, some REITs might only buy residential real estate. Or they might only buy real estate used for healthcare. And some REITs exclusively buy data centers.
Keep in mind that the REIT does not actually own the data center. Instead, it owns the land/building where the data center is located. It buys the land and then leases it to Microsoft, Amazon, etc. who build a data center.
Now, let’s examine why an investor would buy shares in a data center REIT.
Investing In Data Center REITs
The main benefit of investing in data center REITs is the dividend. As a shareholder, you are guaranteed a percentage of the REIT’s earnings. Remember that REITs have to pay out 90% of their earnings each month. This usually results in higher-than-average dividends. For investors, this dividend creates stable, reliable income.
Data center REITs also expose investors to technology, but with less risk. There are a lot of exciting things going on in the technology world. A few examples are edge computing, 5G and the metaverse. Investing in just one of these trends can be a little risky. However, all these initiatives will likely require data centers. Buying shares in data center REITs is a safe way to gain exposure to these trends. For this reason, data center REITs are considered low risk, high reward.
As we know, no investment is 100% upside. There are also a few downsides to investing in data center REITs. REITs are known for producing reliable income. The tradeoff is that their share prices generally do not appreciate very much.
Another downside to investing in data center REITs is interest rate risk. Rising interest rates are generally bad for REIT prices. Since we are most likely entering a period of rising rates, this is definitely something to consider.
With that said, let’s take a look at a few of the best data center REITs to buy.
Best Data Center REITs
If you hate researching dozens of companies then you are in luck. When it comes to data center REITs, there are only a few options. This makes it easy to find one to invest in. Here are the five main data center REITs.
Equinix (Nasdaq: EQIX)
Equinix is one of the world’s biggest data center REITs. In total, it owns 229 data centers in 27 countries. In 2021, it posted annual revenue of $6.26 billion. It also posted a net income of $500.19 million. It has a dividend yield of 1.92%.
DigitalBridge Group (NYSE: DBRG)
DigitalBridge Group is one of the world’s largest digital infrastructure investment firms. In addition to data centers, DigitalBridge invests in cell towers, fiber networks, small cells and edge infrastructure. In 2021, it reported annual revenue of $1.18 billion. It also reported a net loss of $310.1 million. DigitalBridge Group does not currently pay a dividend.
Digital Realty Trust Inc. (NYSE: DLR)
Digital Realty Trust is a REIT that invests in carrier-neutral data centers. It also provides colocation and peering services. In total, it owns 280 data centers in over 25 countries. In 2021, Digital Realty reported $4.43 billion in annual revenue. It also reported a net income of $1.71 billion. It has a dividend yield of 3.85%.
Iron Mountain Inc. (NYSE: IRM)
Iron Mountain is a unique data center REIT that primarily specialized in storing physical records. But to keep up with recent trends, it started building data centers globally. It has 20 locations spread out across three continents. In 2021, Iron Mountain reported $4.49 billion in annual revenue. It also reported a net income of $450 million. It has a dividend yield of 5.15%.
American Tower Corp (NYSE: AMT)
American Tower Corp is a REIT that owns communications infrastructure. Normally, this wouldn’t qualify it as a data center REIT. However, in December 2021, it acquired CoreSite Realty Corporation. CoreSite owns 24 data centers across the U.S. It has about 4.6 million rentable square feet in total.
In 2021, American Tower Corp reported annual revenue of $9.36 billion. It also reported a net income of $2.57 billion. It has a dividend yield of 2.22%.
I hope that you’ve found this article valuable! As usual, please base all investment decisions on your own risk tolerance and research.