These Top-3 REITs Offer Attractive Dividends Thanks to Their Data Center Holdings
These real estate investment trusts own properties that store and process information, manufacture technology and provide internet gateways.
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Real estate investment trusts, or REITs, are particularly appealing for income investors. REITs widely have high-dividend yields, well above both the market average and most other market sectors. With the S&P 500 Index yielding just 1.7% on average, it is a good time for income investors to consider REITs.
The best REITs display a track record of growth, in addition to their sizable dividend yields. Data center REITs typically own properties that are a combination of data centers that store and process information, technology manufacturing sites and internet gateway data centers.
This article will discuss three top data center REITs.
1. Digital Realty (DLR)
Digital Realty Trust DLR is a REIT that is a leader in buying and developing properties for technological uses. The company operates over 300 facilities in more than 25 countries on six continents.
On July 25, 2024, Digital Realty reported second quarter 2024 results for the period that ended that day. For the quarter, Digital Realty’s revenue dipped 1% year-over-year to $1.3 billion. During the quarter, the company generated $1.65 in core FFO per share compared to $1.68 per share in the prior-year period. Digital Realty reaffirmed its 2024 guidance, and still expects $5.55 billion to $5.65 billion in revenue and $6.60 to $6.75 in core FFO.
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.
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. Digital Realty’s 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, the company has proven to be able to utilize its balance sheet to fund acquisitions in order to grow FFO and revenues.
DLR has increased its dividend for 17 years and the stock yields 3.0%.
2. Equinix (EQIX)
Equinix EQIX operates 264 data centers across 33 countries on six continents serving over 10,000 customers. More than half of the data centers are outright owned by Equinix, and these generate 69% of recurring revenues. EQIX reports revenue in several segments, including colocation, interconnection and managed infrastructure.
EQIX has a highly-diversified client base which include major telecoms, mobile and network service providers, cloud and IT service providers, and financial services companies.
Equinix announced on July 22, 2024, that it will expand into the Philippines by acquiring three data centers from Total Information Management. The company aims to expand its business and capitalize on the rapidly-growing Southeast Asia market. The $180 million all-cash transaction is expected to close in the fourth quarter of 2024.
Equinix reported second quarter 2024 results on August 7, 2024. For the quarter, the company announced a 7% increase in revenue compared to Q2 2023 to $2.2 billion. It has thus achieved 86 consecutive quarters of revenue growth. And its AFFO per share increased 15% compared to the previous year quarter to $9.22. Equinix continues to expand on its platform and has 54 major projects in development across 36 markets.
Management provided 2024 annual guidance and expects a 6% to 7% year-over-year increase in revenues, AFFO to improve by 10% to 12% ($3.31 billion to $3.37 billion), and AFFO per share to increase by 8% to 10%.
Its major 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 investment-grade S&P Credit Rating of BBB, and a consolidated net debt-to-adjusted-EBITDA of 3.4x, within the 3x-to-4x range set by management.
EQIX is a strong REIT for dividend growth. It has increased its dividend for eight consecutive years. Shares currently yield 2%.
3. Iron Mountain (IRM)
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 reported its second quarter earnings results on August 1. The trust announced that it generated revenues of $1.53 billion during the quarter, which was up 13% from the revenues that Iron Mountain generated during the previous year’s quarter. Iron Mountain generated better revenue growth compared to the recent past, when revenues mostly rose at a single-digit pace.
Iron Mountain’s normalized funds-from-operations came in at $0.78 per share during the second quarter, which was up 10% compared to the previous year’s quarter. The company saw its FFO margin weaken slightly, compared to the previous year’s quarter, as its FFO was up less compared to its revenues.
Management reiterated its guidance for this year’s adjusted FFO-per-share, expecting a range of $4.39 to $4.51, which represents solid growth of around 4% at the midpoint of the guidance range. Iron Mountain guides for revenues of $6.1 billion for the current fiscal year.
Iron Mountain’s management forecasts that its revenues could rise by up to 5% a year on an organic basis in the long run, and that EBITDA could rise by 5%-plus annually. It is expected that the company will be even more profitable this year, and that growth will continue at a meaningful pace beyond the current year.
With a dividend-payout ratio of approximately 63% for 2023 (based on FFO-per-share) the dividend appears secure. Shares currently yield 4.6%.
At the time of publication, Ciura had no positions in any securities mentioned.