Real estate investment trusts are a longtime favorite asset class of income investors. That's because, in order to maintain their status as REITs, they are required to pay out at least 90% of their net profit as shareholder dividends.
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A very promising REIT subsector is data centers, the facilities where websites and corporate networks are stored. They're particularly attractive because of very high expected growth -- according to one recent estimate from Cisco, overall worldwide IP traffic is anticipated to grow by nearly 80% between 2017 and 2020. So with that in mind, here's a trio of data center REITs I believe have the potential to keep paying their investors well.
Let's start with the largest data center REIT, mighty Equinix (NASDAQ: EQIX). It towers over its peers in terms of both market capitalization and revenue.
Equinix's customer list reads like a Who's Who of driven, 21st-century businesses. Netflix is a client, as are Priceline Group, Oracle, and Alibaba. And these are only companies that either signed up or expanded their presence in Equinix facilities in the REIT's third quarter.
The company's results were stellar in that fiscal period. Adjusted revenue grew by 10%, to $1.15 billion, while its adjusted funds from operations (AFFO) increased by 9% to $391 million. And the company raised its adjusted revenue and AFFO guidance for fiscal 2017.
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At the moment, Equinix's $2 per share quarterly dividend sports a low (1.8%) yield compared to its segment peers, and especially to the broader REIT market. Still, it's a solid company that knows how to mix asset buys with organic results to grow its business ever higher, and as such its share price and dividend should rise too.
Digital Realty Trust
It may be No. 2 in the segment, behind Equinix, but Digital Realty Trust (NYSE: DLR) is no second banana in this business. It provides its services to prominent customers such as Facebook, AT&T, and Amazon.com, among many other top companies. The REIT owns 182 data centers throughout the world, and has roughly 2,300 clients.
The company's Q3 was marked by the completion of an all-stock merger valued at around $7.6 billion, in which it subsumed the once publicly traded DuPont Fabros, also a data center REIT. The deal will bolster Digital Realty Trust's presence in critical metropolitan areas like DC, as well as California's Silicon Valley, and Chicago.
In that quarter, Digital Realty Trust booked $610 million in revenue, a 12% improvement over the same period the previous year. Core (i.e., adjusted) FFO jumped 21% higher to nearly $264 million, reflecting expansion activity particularly at the company's sprawling Ashburn facility in Northern Virginia, a fast-growing market thanks to its proximity to the nation's capital.
Digital Realty Trust likes to raise its quarterly dividend once annually around the beginning of a year; another lift is likely just around the corner. This is a company on the rise, so there's every reason to believe that habit will be maintained. At the moment, it pays a $0.93 per share quarterly dividend, which yields 3.4%.
A minnow next to the whales that are Equinix and Digital Realty Trust, CoreSite Realty (NYSE: COR) manages to produce very good returns with a limited footprint (it operated 20 facilities as of the end of September). It also operates exclusively in the U.S., with data centers in eight high-value markets across the country. These house digital infrastructure from such familiar names as Cisco and IBM.
In spite of this diminutive size and single-country focus, CoreSite Realty has a lot of punch. In Q3 it outgrew both its larger rivals (I'm going by Equinix's adjusted tallies) in both revenue and FFO. The former rose by a meaty 22% to slightly over $123 million, and the latter -- the company uses REIT industry group's Nareit's standard FFO measure only -- expanded by 23%.
High demand for extra space from its clientele put the zip into CoreSite's results for the quarter. If that dynamic continues, the REIT can benefit very handsomely -- it's planning an aggressive expansion program that would substantially increase its rentable square footage.
Out of my three picks, this is "the little REIT that could"; consistently good results and growth have helped to more than quadruple its stock price over the past five years.
CoreSite Realty only weeks ago raised its quarterly dividend, boosting it by 9% to $0.98 per share. Like Digital Realty Trust, the REIT's payout yields 3.4%.
It's a digital world -- we just live in it
You could, of course, get higher yields elsewhere in the REIT marketplace. But demand for data center space is high just now, and this will continue to be the case for at least the medium-term future. Good total returns -- share price appreciation plus dividends -- should propel these stocks to the top of investor-favorite lists.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Eric Volkman owns shares of Facebook. The Motley Fool owns shares of and recommends Amazon, Facebook, Netflix, and Priceline Group. The Motley Fool owns shares of Oracle. The Motley Fool recommends Cisco Systems and Equinix. The Motley Fool has a disclosure policy.