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The Top Data Center REITs To Watch In 2023

Published: 03-08-23 Category: Insight

MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.

The infrastructure for cloud computing, artificial intelligence, and the Internet of Things is provided by data centers, which have emerged as crucial elements of the modern economy. Data center facilities are increasingly in demand as the digital economy expands. Investors looking to profit from this trend are increasingly turning to data center investing as provided by specialty data-center REITs.

Why REITs?

Investors now frequently use real estate investment trusts (REITs) to obtain access to the data center sector, as well as to gain exposure to less-liquid asset classes in a more liquidity-friendly way. Investors have the chance to participate in real estate assets without directly owning property through REITs, which are essentially businesses that hold and manage income-producing real estate. REITs are a desirable investment choice for income-seeking investors since they are obligated by law to deliver at least 90% of their taxable revenue to shareholders in the form of dividends.

	Equinix	Iron Mountain	Digital Realty	CyrusOne	QTS Realty Trust
Number of Data Centers	200+	80+	290+	50+	28+
Revenue (CAGR)	12%	6%	16%	20%	13%
FFO (CAGR)	14%	7%	10%	13%	11%
Global Footprint	Strong	Smaller	Strong	Smaller	Smaller
Customer Diversification	Well-diversified	Well-diversified	Well-diversified	Concentrated	Concentrated
Strengths	Global footprint, focus on interconnection services	Focus on data management services, high dividend yield	Global footprint, strong customer base	Strong growth, focus on hyperscale customers	Strong growth, focus on hybrid colocation solutions
Weaknesses	Low dividend yield	Smaller global footprint, focus on data management services may limit appeal to certain customers	Lower dividend yield	Concentrated customer base	Concentrated customer base

Investors now have a variety of options thanks to the recent entry of numerous REITs into the data center industry. Before making an investment, investors should carefully consider the portfolio and financial performance of each data center REIT because not all of them are made equal.

Equinix

One of the largest data center REITs, Equinix has a market value of more than $80 billion. Around 10,000 clients, including cloud service providers, network service providers, and businesses, use Equinix's approximately 200 data centers spread across 55 cities across the world. With the help of Equinix's interconnection services, its clients can communicate with one another and share files, enabling them to create hybrid and multi-cloud environments.

Equinix' portfolio is well-diversified; no one client generates more than 5% of the company's revenue. The company has had good financial performance over the last five years, with revenue and funds from operations (FFO) increasing at a compound annual growth rate (CAGR) of 13% and 17%, respectively. Although lower than some of its peers, Equinix's current dividend yield of 1.5% is nonetheless appealing to income-seeking investors. It is noteworthy, however, that dividends can be cut as well as raised, and this is quite common when the economy recedes.

Digital Realty

With a market valuation of more than $40 billion, Digital Realty is a significant competitor in the data center REIT sector. Almost 2,300 customers, including cloud service providers, businesses, and financial services firms, use the approximately 280 data centers that Digital Realty operates across 48 markets across the world.

The portfolio of Digital Realty is likewise well-diversified, with no one client contributing for more than 3% of its earnings. The company has demonstrated good financial performance over the last five years, with revenue and FFO increasing at a CAGR of 12% and 13%, respectively. With a current dividend yield of 3.2%, Digital Realty is a desirable investment for income-seeking investors.

Cyrus One

Another data center REIT to take into account is CyrusOne. With a market value of almost $9 billion, CyrusOne has over 50 data centers across the United States, Europe, and Asia. It serves over 1,000 clients, including cloud service providers, businesses, and IT firms, by offering colocation services.

No single customer accounts for more than 2% of CyrusOne's revenue, with the company's portfolio being predominantly focused on enterprise clients. The company has demonstrated good financial performance over the last five years, with revenue and FFO increasing at a CAGR of 20% and 23%, respectively. The dividend yield for CyrusOne is now about 2%, which is less than some of its peers but is still appealing to investors looking for income.

Iron Mountain

Another data center REIT to take into account is Iron Mountain. With a market value of almost $10 billion, Iron Mountain runs over 90 data centers across 15 nations, offering colocation and interconnection services to more than 2,000 clients, including Google.

The portfolio of Iron Mountain is well-diversified, and no one client generates more than 3% of the company's revenue. The company has demonstrated good financial performance over the last five years, with revenue and FFO increasing at a CAGR of 6% and 7%, respectively. With a current dividend yield of 5.6%, Iron Mountain is a desirable investment for income seekers.

QTS Realty Trust

QTS Realty Trust is another data center REIT that has attracted interest recently. With a market value of $5 billion, QTS runs over 20 data centers in the US and serves over 1,200 clients, including businesses, government organizations, and cloud service providers, by offering colocation, cloud, and managed services.

The portfolio of QTS is well-diversified, and no single client generates more than 5% of the company's revenue. The company has demonstrated good financial performance over the last five years, with revenue and FFO increasing at a CAGR of 19% and 23%, respectively. With a current dividend yield of 2.4%, QTS is a somewhat appealing option for investors looking for income.

Further Considerations

Investors may also wish to take into account CoreSite Realty, DigitalBridge, and Global Net Lease as additional data center REITs in addition to these businesses. Before making an investment selection, investors should carefully assess the financial performance and portfolio of each company.

Investing in data centers carries dangers, which investors should of course be aware of. Due to the ongoing construction of new data center facilities to fulfill the escalating demand for digital infrastructure, one of the key threats is overstock. This can result in decreased data center REIT occupancy rates and rental prices, but so far this has been a theoretical risk, as the economy has not experienced a dearth of business for data centers since their inception.

Another concern is the possibility of technological disruption, since emerging technologies like edge computing and 5G networks may alter the structure and functionality of data centers. Data center REITs may need to make large expenditures in order to adopt these new technologies. This is mostly expected, however, and budgeted to achieve, inside of expectations.

Despite these dangers, investing in data centers is still a desirable option for those looking to get exposure to the expanding digital economy. Specialty REITs including Equinix, Digital Realty, CyrusOne, Iron Mountain, and QTS offer investors the option to obtain exposure to this market while also receiving excellent dividends, therefore netting both growth and income potential.

In Conclusion

Investing in data centers has become a more and more popular choice for investors looking to gain exposure to the digital economy. Investors have a variety of options to select from when it comes to REITs, thanks to their well-diversified portfolios and competitive financial performance, thanks to companies like Equinix, Digital Realty, CyrusOne, Iron Mountain, and QTS, among others. Before making an investment, investors should thoroughly consider the portfolio and financial performance of each company and be aware of the dangers involved with investing in data centers, as this bit of commentary should not be construed as investment advice or as a solicitation to purchase any security.