A data center REIT owns and manages infrastructure customers use to store and access data. The facilities usually contain servers, other hardware, networking equipment, generators, and support systems.
This type of real estate investment trust (REIT) has become popular as an investment because they are perceived as critical infrastructure, like utilities and recommunication stocks. Hence, they may offer a decent dividend payment and some capital appreciation.
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What are Data Center REITs?
Data center REITs own real estate and facilities they lease to businesses, governments, and other organizations so they can house their information technology (IT) hardware and operations.
The centers offer power, electrical, heating, ventilation, air conditioning (HVAC), generators, physical security, etc., permitting customers uninterrupted access to IT operations and data. They lease the land and facilities to the customer who builds a data center. The tenants also supply and own the computer servers and associated hardware.
Different versions of a data center REIT exist. Sometimes, a large enterprise or government agency will lease an entire facility, like an enterprise or hyperscale center. But in other situations, a data center REIT may specialize in co-located facilities where more than one company has placed its IT operations. They may also offer physical networking connections between two clients conducting business together.
Other Data Center Companies
Blackstone (BX) and KKR & Co. (KKR) have conducted M&A to enter the space. Blackstone bought QTS Realty, while KKR purchased CyrusOne; both are former REITs. However, Blackstone and KKR are publicly traded private equity firms.
In addition, DigitalBridge (DBRG) changed from a REIT to a C-Corp, providing a range of services. It also acquired Switch, a company planning to change to a REIT structure. Cyxtera will convert to a REIT in 2024.
Other companies may offer services similar to data center REITs. For instance, a large technology company can own data centers and provide public cloud services. Amazon (AZMN), Microsoft (MSFT), and Alphabet (GOOG, GOOGL) are primary players in this market space. Other IT companies offering public cloud services include International Business Machines (IBM), Salesforce (CRM), Oracle (ORCL), and Tencent.
Rackspace Technology (RXT) is a publicly traded C-corporation offering private and public managed cloud. Additionally, several private companies provide data center, hybrid, and public cloud services.
What is a REIT?
A real estate investment trust (REIT) is a corporation that develops, purchases, owns, and operates commercial real estate properties. A REIT is a company that owns, operates, or finances income-generating commercial real estate.
To qualify as a REIT, a corporation must own real estate that generates income distributed to shareholders. Specifically, according to Investopedia, a REIT must
- Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries
- Derive at least 75% of gross income from rents, interest on mortgages that finance a real property, or real estate sales
- Pay a minimum of 90% of taxable income in the form of shareholder dividends each year
- Be an entity that’s taxable as a corporation
- Be managed by a board of directors or trustees
- Have at least 100 shareholders after its first year of existence
- Have no more than 50% of its shares held by five or fewer individuals
Some REITs are privately held, and others are publicly traded on a stock exchange. As a result, retail investors can easily invest in the commercial real estate market by buying and selling a REIT’s stock. The advantage is that investors require significantly less capital.
Investors like REITs because they can pay higher dividend yields and diversify portfolios. However, a risk the dividend may be cut during recessions. For instance, during the Great Recession and the COVID-19 pandemic, black swan event REITs suffered disproportionately, and many cut or suspended their dividend. Another negative is REITs do not pay qualified dividends, instead, they pay ordinary or unqualified dividends.
Pros of Data Center REITs
Publicly traded net lease REITs have a few advantages for investors.
No Minimum Investment – The minimum is the cost of one share.
Liquidity – Publicly traded REITs can be traded whenever the stock market is open.
Dividends – REITs must pay dividends permitting investors to generate a passive income stream. Some REITs are dividend growth stocks too. For example, Digital Realty Trust has increased its dividend for 18 years, making it a Dividend Contender.
Diversification – Investing in publicly traded REITs provides diversification to a portfolio.
Recession Resistant – Companies need data centers regardless of economic conditions.
Tech Exposure with Less Risk – Data center REITs offer tech exposure with less volatility.
Final Thoughts
Data centers are a small subset of the REIT industry. They are popular because of their perceived advantages for investors. The industry is also experiencing significant growth as the need for data storage and networking increases annually. Moreover, a few are dividend growth stocks.
List of Data Center REITs
Stock Rover* and Portfolio Insight* were used to create this table.
| Ticker | Company | No. Years | Dividend Yield | Dividend 10-Year Avg (%) | Payout Ratio | Price / Earnings | Cap ($M USD) |
|---|---|---|---|---|---|---|---|
| AMT | American Tower | 13 | 3.30% | 19.30% | 202.80% | 61.4 | $91,199 |
| DLR | Digital Realty Trust | 18 | 3.50% | 3.90% | 160.50% | 45.9 | $43,043 |
| EQIX | Equinix | 9 | 2.20% | - | 140.00% | 76.9 | $74,989 |
| IRM | Iron Mountain | 1 | 3.30% | 9.20% | 402.70% | 123.5 | $22,847 |
Dividend Calendar for Data Center REITs
Stock Rover* was used for creating this table.
| Ticker | Company | Ex-Dividend Date | Dividend Record Date | Dividend Payment Date | Dividend Frequency | Next Dividend Payment Per Share | Dividend Per Share |
|---|---|---|---|---|---|---|---|
| AMT | American Tower | 4/11/24 | 4/12/24 | 4/26/24 | 4 | $1.62 | $6.48 |
| DLR | Digital Realty Trust | 3/14/24 | 3/15/24 | 3/28/24 | 4 | $1.22 | $4.88 |
| EQIX | Equinix | 2/27/24 | 2/28/24 | 3/20/24 | 4 | $4.26 | $17.04 |
| IRM | Iron Mountain | 3/14/24 | 3/15/24 | 4/4/24 | 4 | $0.65 | $2.60 |
Other REIT Lists
- Apartment REITs: Information and a Guide
- Healthcare REITs: An Investment Guide
- Net Lease REITs
- Office REITs: Investing Guide and Data
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.