Real Estate Investment Trusts (REITs) offer a promising pathway for investors to earn higher yields on their investment, compared to that of traditional dividend stocks.
According to Hoya Capital Real Estate, “data centers were the standouts of the REIT sector in 2017, returning more than 25%.”
Helped by the minimization of double taxation, REITs often provide more frequent payouts and are less sensitive to inflation than other stock options. And as cloud computing enters its second decade of growth, data center REITs have become a lucrative way to benefit from the surge in consumer demand for data.
The Australian Competition and Consumer Commission revealed in its 2017 report that data downloads had increased by 52 per cent for fixed broadband and mobile had increased by 69 per cent.
Data center REITs own and operate facilities offering a range of services for the storage of data capacity. They derive at least 75% of their revenue from renting floor space to companies, especially those who need to scale up, quickly.
The industry is transitioning from hosting digital assets and colocating assets of other Internet companies, serving as a cross-connect between customers and their cloud computing platforms.
Investors seeking data center REIT payouts can be confident of a robust cash flow for the foreseeable future, although the revenue mix may fluctuate as the industry evolves.
Having said that, there are notable disadvantages for investing in REITs, namely sensitivity to interest rates, difficulty in accurately valuating stock and the inability to benefit from any tax reform.
This article takes a look at the FY2017 for the world’s largest publicly traded data center REITs, which account for approximately $75 billion in market value: Equinix, Digital Realty Trust, CyrusOne, QTS and CoreSite.
The world’s largest IBX data center and colocation provider, and the largest publicly traded data center REIT, Equinix (EQIX) operates approximately 180 data centers across five continents for over 9,500 customers.
Despite having the “highest quality portfolio of network-dense assets”, Equinix is a relative newcomer to data center REITs having only converted to a corporate structure in 2014. In its most recent quarterly report published in February 2018, the company revealed year-on-year revenue growth of 21% to $4.4 billion – its 60th consecutive quarter of growth. 2017 revenue included $359 million from the acquisition of 29 Verizon data centers and $17 million from Itconic and Istanbul 2 acquisitions.
In the report, Equinix also announced an $800 million acquisition of Infomart Dallas, and a $791 million agreement to acquire Australian data center operator Metronode. Equinix continues to expand its global reach with 30 projects currently underway including expansions in Culpeper, Houston, London, Paris, São Paulo, Silicon Valley, Sofia and Washington, D.C.. The company forecasts continued strong growth, with revenues of more than $5 billion expected in 2018.
“Equinix achieved a number of significant milestones around interconnection, innovation and acquisitions in 2017 that add even more value to our role as a strategic partner to companies in the execution of their digital business strategies.” – Peter Van Camp, Executive Chairman and Interim CEO, Equinix.
Digital Realty Trust (DLR)
The second largest data center REIT, Digital Realty (DLR), manages infrastructure spanning four continents, with over 170 facilities and more than 2,300 customers. In its full-year report for 2017, the company reported a 15% increase in revenue to $2.5 billion, with an adjusted EBITDA of $1.4 billion. The company delivered full-year core FFO of $6.14 per share, a 7% increase from 2016.
In Q4 2017, Digital Realty entered into a joint venture with Mitsubishi Corporation to deliver data center solutions in Japan. Mitsubishi contributed two facilities in Tokyo, while Digital Realty contributed a recently completed data center in Osaka.
Digital Realty also acquired many substantial global real estate assets throughout the year, including a 250,000 square foot data center in Chicago, a 132,000 square foot site in London, a 78,000 square foot data center in Sterling, VA, and a 156,000 square foot office building in St. Louis, MO.
“We closed the year on solid footing, with total bookings of $56 million of annualized GAAP rental revenue in the fourth quarter of 2017, including a $6 million contribution from interconnection. Looking ahead to 2018, we see robust global demand driven by the second wave of cloud, particularly in our core major metropolitan areas around the world” – A. William Stein , Chief Executive Officer, Digital Realty Trust.
CyrusOne (CONE) announced revenue of $672 million in 2017, up 27% from the previous year. The company, which operates more than 40 data centers across the world, also revealed full-year adjusted EBITDA of $371.6 million, an increase of 33% from 2016.
Over the year, CyrusOne signed over 1,700 leases totaling 58 MW, representing $105 million in annualized revenue.
CyrusOne also announced the acquisition of two facilities from Sentinel Data Centers, as well as an agreement to acquire Zenium Data Centers, extending the company’s global footprint into London and Frankfurt. During Q4, CyrusOne increased its power capacity across three projects in Northern Virginia, Raleigh-Durham and Phoenix.
“We had another very strong year signing $105 million in annualized revenue, increasing the size of our footprint by more than 50%, extending our presence to the Southeastern U.S. and Europe, developing a solution for our customers in China, and raising nearly $2.5 billion in the capital markets.” – Gary Wojtaszek, President and CEO, CyrusOne.
QTS Realty Trust (QTS)
One of the smaller operators, QTS Realty Trust (QTS) aspires to more than simply renting rack space to customers, with its emphasis on hybrid IT, hosted and managed services.
However, the company’s growth has slowed over the past year, with the REIT reporting a significant decrease in net income. In 2016, QTS reported $24.7 million in net income, with 2017 producing just $1.5 million for the full-year.
Having said that, adjusted EBITDA was $208 million for the year ending December 31, 2017, an increase of 12.8%.
QTS has also reported the signing of new and modified lease renewals, totaling $8.7 million of incremental annualized rent during the fourth quarter of 2017. Furthermore, will now deliver repeatable hybrid data center solutions and a carrier-neutral peering system for the U.S. Department of Labor.
“During 2017, we established the foundation for growth in Hyperscale and Hybrid Colocation which sets QTS up for strong execution in 2018 and beyond. The opportunity within Hyperscale remains significant and through our mega scale assets and an expanded footprint in key markets, we expect to play an integral role enabling future Hyperscale growth.” – Chad Williams, Chairman and CEO, QTS.
CoreSite Realty Corporation (COR)
CoreSite Realty Corporation (COR), another small player in the data center REIT market, announced full-year 2017 revenue growth of 14%, with Q4 operating revenues of $126 million. Net income per common share was $0.44 for the three months ending 31 December 2017.
The company, whose clients include Verizon and Major League Baseball, operates 20 data centers across eight US markets. CoreSite also has a partnership with Amazon Web Services, offering direct connection to AWS compute power, database storage and content delivery.
In 2017, the company executed 128 new or expanded data center leases totaling 41,521 rentable square feet and representing $7.2 million of annualized GAAP rent. During Q4, CoreSite deployed 13,735 square feet of data center capacity in Boston and 3,087 square feet in Reston, Virginia. In January 2018, the company acquired a two-acre parcel of land in downtown Chicago, earmarked for a new 175,000-square-foot facility.
“When looking at 2017 in its entirety, we executed well on our strategic priorities and took important steps to grow our differentiated scalable and flexible campus strategy in key markets, including Santa Clara, Northern Virginia, Los Angeles, and most recently, Chicago.” – Paul Szurek, CEO, CoreSite.
Data centers were the standout performers in the REIT sector last year, with a surge in demand for data center floor space equaled by a strong rise in construction activity. Demand from institutional capital and private equity funds continued to support the market in 2017, as investors sought the handsome returns on offer.
As 2018 begins, the market has initially appeared less positive. The recent sell-off in US equities, along with concerns about upcoming interest rate hikes, drove down data center REIT values by an average of 8.75% last month.
This has opened an opportunity for investors to increase their positions in the above-mentioned REITs, with the expectation that solid earnings will help prices to recover as the year progresses. Demand drivers in 2018 include cloud computing, hyperscale leasing, hybrid IT deployments,SaaS, big data, AI, virtual reality and the Internet of Things (IoT).
Given these factors, the probability of data center outperformance this year remains high. Cloudscene will continue to publish the data center REIT results as they are released throughout the year, so stay tuned for the latest updates.