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.
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
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.