Data center REITs, also called data storage REITs, manage and own facilities that safely store digital resources for customers. The primary focus of data centers is to ensure reliable operation of information systems and safekeeping the data used by these systems. For many companies, any break in service can disable IT operations and cripple the entire business. Cloud computing is meant to mitigate the risk that any one data center failure will disrupt customer operations, as data and services are distributed over multiple physical locations with automatic switching in the event of a site failure.
Colocation data centers rent out their own equipment, space and bandwidth to customers, and provide all required services. Some data centers house customer-owned equipment but provide the services and personnel needed to operate it.
Data center REITs perform various services using specialized products. For example, they keep data and servers secure, provide uninterrupted power and climate control, and offer physical security. The cost profile of data center REITs is unique and extends beyond the actual real estate to include building out technical facilities with specialized electronic and cooling systems. Electronic equipment includes servers, data storage devices, communications gear, cabinets, racks and power supplies.
One of the important advantages offered by data centers is rapid scalability. As a customer grows, it is fairly simple for a data center to add more servers and support gear to accommodate demand. It also permits a customer to downsize when necessary and feasible. Furthermore, data centers are responsible for staffing data centers, absolving customers of the need to hire and manage their own operational staff.
Differentiation exists within the sector. For example, some data centers might offer advanced high-speed networks while others provide low-cost wholesale storage. Customers might provide their own equipment and leave the management to the data center, whereas others use the data center as the provider of cloud computing using the center’s equipment. Security is always a primary concern, but security services vary according to customer requirements.
Data Center REITs and Economic Conditions
Internet traffic is the primary driver of data-center-REIT performance. The digital economy has experienced exponential growth, and Cisco Systems expects this pattern to continue through several coming years. Higher network traffic drives the need for servers, storage devices and communications gear. This trend is only loosely coupled to the business cycle, because e-commerce is often the low-price provider of goods and services, and the requirements of big-data and trading applications are expected to grow regardless of economic conditions, within reason.
The biggest threat to the growth rate of data center REITs is vertical integration of computing by the largest customers, some of whom are replacing leased data centers with their own in-house facilities. The data center demand trajectory appears healthy enough to withstand this countervailing trend.
Data center REITs have been outperforming the REIT industry and the S&P 500 since the 2008 financial crisis. The data center sector in the FTSE NAREIT All REITs Index is composed of six REITs with a combined market cap of almost $72.6B. The sector has an annual average growth rate of 25.47 percent over the last five years. Through the end of August, 2017, YTD return was 32.34 percent and the one-year return was 28.38 percent. The S&P 500 return during the same period was 11.29 percent. The data center returns are skewed towards capital appreciation rather than yield. The 2017 sector average dividend yield is 2.69 percent
Largest Players in Sector
The three largest players in the data center REIT sector are:
- Equinix (EQIX): This is the largest REIT in the sector with a market cap of $36.5B. The company offers services to interconnect an enterprise’s locations and departments. It owns more than 180 data centers in 44 markets around the globe and enables more than 230,000 connections between its 9,500 customers.
|FFO Payout (Q2 2017)||57.19%|
|Total Return YTD||32.96%|
|Total Return 1-Year||29.59%|
- Digital Realty Trust (DLR): Digital Realty owns, acquires, develops, leases and operates data centers. The number two data center REIT has a market cap of $18.9B. It acquired Telx in 2015 and recently merged tie Dupont Fabros Technology. DLR spans 170 data center, 32 global markets, 11 countries and 4 continents.
|FFO Payout (Q2 2017)||0%|
|Total Return YTD||22.50%|
|Total Return 1-Year||23.74%|
- Cyrus One (CONE): The third largest data center REIT’s market cap is $5.5B. It specializes in build-to-suit IT deployments, massively modular engineering, scalable power densities with a multi-data center platform. Cyrus One has more than 40 data centers worldwide with 4 million square feet of total net rentable space.
|FFO Payout (Q2 2017)||–|
|Total Return YTD||43.13%|
|Total Return 1-Year||28.01%|
In summary, the data center REIT sector is resilient and merits consideration as a long-term investment.