3 Data Center REITs With Attractive Dividends and Growth
These real estate investment trusts offer an attractive mix of high dividend yields and future dividend growth potential.
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Data center real estate investment trusts typically own properties that are a combination of data centers that store and process information, technology manufacturing sites and Internet gateway datacenters which are in high demand right now.
Here we will discuss three data center REITs that offer an attractive mix of high dividend yields and future dividend growth potential.
Data Center REIT #1
Digital Realty DLR owns over 300 facilities in 28 countries on 6 continents. The trust has a market capitalization of ~$30 billion.
On October 26, Digital Realty reported third quarter 2023 results for the period ending September 30, 2023. For the quarter, Digital Realty's revenue came in at $1.4 billion, an 18% increase compared to Q3 2022. During the quarter, the company generated $1.62 in core funds from operations (FFO) per share compared to $1.67 per share prior.
During the third quarter, Digital Realty created a joint venture with GI Partners for the sale of a 65% interest in two stabilized hyperscale data center buildings in Chicago, which earned DLR $743 million of gross proceeds and it holds the remaining 35% interest in the JV. Additionally, DLR created a JV with TPG Real Estate for the sale of an 80% interest in three stabilized hyperscale data center buildings in Northern Virginia, which earned DLR $1.3 billion of gross proceeds, while it continues to hold the remaining 20% interest in the JV. Digital Realty also updated its 2023 guidance, and now anticipates $5.475 billion to $5.525 billion
Digital Realty has been very strategic in its acquisitions. For example, in 2017, Digital Realty completed its purchase of DuPont Fabros Technology, a REIT that leased properties to some of the largest tech companies in the world. Companies like Microsoft MSFT and Meta META are then free to build their own data centers within the properties. More recently, Digital Realty added Interxion, gaining exposure to the European cloud industry.
Digital Realty's dividend payout ratio (using FFO instead of earnings) is comparatively low for a REIT, which should give shareholders confidence that the dividend is relatively safe. Its chief competitive advantage is that it is among the largest technology REITs in the world. This gives the REIT a size and scale advantage that competitors have difficulty matching. In addition, it has proven to be able to utilize its balance sheet to fund acquisitions in order to grow FFO and revenues.
Digital Realty has increased its dividend for 17 consecutive years.
DLR stock currently yields 3.5%.
Data Center REIT #2
Equinix EQIX also specializes in data centers. The trust operates 248 data centers across 32 countries on six continents serving over 10,000 customers. Slightly less than half of the data centers are outright owned by Equinix, and these generate 63% of recurring revenues.
EQIX reports revenue in a couple of different segments: colocation, interconnection, managed infrastructure and other. The Interconnection Solutions segment allow customers to connect directly, securely, and dynamically within and between other EQIX data centers around the globe. There are currently 452,000+ total interconnections.
The trust reported third quarter 2023 results on October 25. For the quarter, EQIX announced a 12% increase in revenue compared to Q3 2022, to $2.06 billion. The trust has thus achieved 83 consecutive quarters of revenue growth. Adjusted funds from operations (AFFO) for the quarter was $772 million. AFFO per share increased 6% compared to the previous year quarter to $8.19.
EQIX continues to expand on its platform and has 56 major projects in development across 39 markets. Management provided 2023 annual guidance and expects a roughly 12.5% increase in revenues to $8.19 billion. Guidance also calls for AFFO of roughly $3.01 billion, an 11% increase over 2022. It also estimates AFFO per share to increase by 8.5% to $32.03.
The average five-year payout ratio of 43% is well covered, and leaves plenty of room for growth. The trust's competitive advantage among the world of data center REITs is its global platform spanning 32 countries and which contains the industry's largest and most active ecosystem of partners in their centers, creating a network effect that improves performance and lowers cost for customers. The trust has an S&P credit Rating of BBB, and a consolidated net debt-to-adjusted-EBITDA of 3.5X, within the 3 - 4X range set by management.
EQIX has an attractive dividend growth profile. On February 15, 2023, Equinix announced a 10% increase to the dividend to $3.41 quarterly per share. It has increased its dividend for eight consecutive years.
EQIX shares currently yield 2.1%.
Data Center REIT #3
Iron Mountain IRM is a storage and information management REIT. Its services include record management, destruction, fulfillment services, data protection and recovery, server and computer backup services, and safeguarding of electronic and physical media. Iron Mountain operates in North America, Latin America, Europe, and the Asia Pacific region.
Iron Mountain reported its third-quarter earnings results on November 2. The trust announced that it generated revenues of $1.39 billion during the quarter, which was up 8% from the revenues that Iron Mountain generated during the previous year's quarter. This was slightly below what the analyst community had forecast.
The REIT generated better revenue growth compared to the last couple of quarters. Iron Mountain's adjusted funds from operations came in at $0.99 per share during the third quarter, which was up 1% compared to the previous year's quarter. Iron Mountain saw its FFO margin compress slightly, compared to the previous year's quarter, as its expenses rose meaningfully during the period.
Management reiterated its guidance for this year's adjusted FFO per share with a range of $3.91 to $4.00, which represents solid growth of around 4% at the midpoint of the guidance range.
Iron Mountain pays out a quite large portion of its cash flows to its owners in the form of dividends. It has not been raising its dividend very regularly in the last couple of years. The trust did, however, offer the first dividend increase in a while in 2023. The payout ratio has come down in recent years. Iron Mountain's dividend looks reasonably safe at current levels, considering the usual payout ratios for REITs.
With a dividend payout ratio of approximately 66% for 2023 (based on FFO per share) the dividend appears secure.
IRM shares currently yield 3.8%.
At the time of publication, Ciura had no positions in any securities mentioned.