3 Really Good Reasons to Invest in Data Center REITs

A dramatic market downturn like this one might have you taking your cash and heading for the hills, but it also may be a great opportunity to find some deals, especially among companies that provide essential services in growing sectors.

For instance, data centers serve as the physical host of the digital world, which just continues expanding. This trend of growing data storage demand means providers of this infrastructure are as essential to much of the world as water and electric utilities.

Two people looking at a laptop in a data center.

Image source: Getty Images.

Data centers are hugely complex, expensive operations well beyond the reach of the average real estate investor. Enter real estate investment trusts (REITs).

After a wave of takeovers in the past year, there are only two pure-play data center companies structured as REITs left and a third that's sometimes counted in their number: Equinix (NASDAQ: EQIX) and Digital Realty Trust (NYSE: DLR), joined by Iron Mountain (NYSE: IRM), the document storage giant that is shredding its image as a document storage specialist by adding data center investments into its growing digital storage business.

Here are three really good reasons to consider investing in them now.

There's a large, growing addressable market

Research and Markets released a recent report that pegs North American growth in colocation and managed hosting services at $52.5 billion between now and 2026, growing at a clip of about 11.4% a year.

Arizton, meanwhile, pegs European market growth of 5.6% a year to an investment of $36.5 billion by 2027. Similar optimism can be found globally. All three have made sizavle investments in India, the rest of Asia, and across Africa as of late.

That growth may well be tempered by any downturn in demand from a recession or specific market disruptions, but no one's shutting off the internet anytime soon. Again, the essential nature of the services these companies provide comes into play.

They've generated solid returns and yields

Iron Mountain leads the three here in recent total return, providing a payback of 106% in the past three years compared with about 39% for Equinix and 20.5% for Digital Realty.

As for dividends, which may well gain in importance as investors turn to income stocks through these tough times, Digital Realty has raised its payout for 19 straight years and is currently yielding about 3.72%. Equinix is on a run of seven straight years, including by about 8% in the past three, and is yielding about 2%, compared with about 1.4% for the S&P 500. Iron Mountain is a bit of the laggard in dividend growth, with no real substantial increase since 2018, but it is yielding about 4.8%.

The cash flow appears to be there for all three of these to continue those payouts even through these uncertain times, with sustainable payout ratios right now of about 43% for Digital Realty, 52% for Equinix, and 65% for Iron Mountain.

Yield goes up when stock prices go down, of course, but as long as the cash is there to pay for the dividends, that flow of passive income will help ease the pain while you wait for the share price to gain.

They could be takeover targets

Big money finds these operations to be attractive investments.

Blackstone kicked off a wave of data center REIT takeovers last summer by acquiring QTS Realty Trust, and then on Nov. 15, it was announced that American Tower was buying CoreSite Realty and KKR and Global Infrastructure Partners were buying CyrusOne and taking it private.

Then just this month, Switch agreed to a buyout offer from DigitalBridge and IFM Investors that will end that company's announced transition to a REIT and instead take it private.

Does that mean similar fates await Equinix, Digital Realty, and Iron Mountain? That remains to be seen, but if it does, current shareholders would likely profit from the deal, especially at the low price of entry for their shares in this down market. And if not, then you can just enjoy the dividend income and what could well be a strong recovery for these operators' share prices once things turn around.

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Marc Rapport has positions in Digital Realty Trust. The Motley Fool has positions in and recommends American Tower, Digital Realty Trust, Equinix, Iron Mountain, KKR, Switch, and The Blackstone Group Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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