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3 Data Center REITs For Income Generation

Feb. 06, 2019 12:53 PM ETCONE, AMT, DLR10 Comments
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  • REITs have rallied more recently due to an increasingly dovish tone being taken by the Fed as it relates to the current trajectory of interest rate hikes.
  • Cash-releasing spreads for data center REITs are expected to decline in 2019 as releasing rates become increasingly dependent on moves made by large cloud operators.
  • The top tier of hyperscale data center operators will only grow in terms of influence over data center landlords in coming years.
  • Let's take a look at three intriguing data center REITs and their income generation potential.

Image Source: Paul Sableman

By Valuentum Analysts


In its fourth quarter earnings report, Digital Realty Trust (DLR) reiterated the guidance it released earlier this year, which brought with it meaningful implications for the data center REIT space. Shares of Digital Realty and a number of its peers have since rallied as a result of an increasingly dovish tone being taken by the Fed as it relates to the current trajectory of interest rate hikes, but the fundamental concerns raised by the REIT's guidance remain in place.

Digital Realty's guidance for 2019 included expectations for a high single-digit decline in rental rates on renewal leases on a cash basis and core funds from operations (FFO) guidance of $6.60-$6.70, the latter of which came in below the market’s expectations. However, cash-releasing spreads being expected to decline in 2019 is indicative of the pricing environment for wholesale data center capacity across the industry as releasing rates become increasingly dependent upon moves made by large cloud operators such as Amazon (AMZN), Apple (AAPL), and Alibaba (BABA).

According to the Cisco Global Cloud Index report, hyperscale data centers will account for ~53% of all installed data center servers by 2021, which is a material increase compared to an estimated ~38% at the end of 2018, and such a concentration makes the current 24 global hyperscale operators of high importance to data center landlords such as Digital Realty. Fortunately, for such landlords, however, is the generally impressive credit quality of these operators and the long-duration leases that help to mitigate the negative impact of poorer pricing power.

REITs are also inherently sensitive to changing interest rates. Because an investor’s required return will always be a spread above the risk-free rate, cap rates and interest rates will be tied together. In periods of rising interest rates, for example, property values can

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (10)

No need for cymbalta with a full load of DLR.
cymbalta profile picture
@ RoseNose

I concur with the compliment given by RoseNose and look forward to all of Valuentum's reviews.
Thank you.
RoseNose profile picture
Thank you @Valuentum !
You provide a very sobering, yet honest and open review of the data center eREITs with some powerful excellent companies.
I am long DLR now for many years and bought a lot of it when it was cheap. I think it was overvalued for a long time and its price is getting better now.I did sell some when it was above $110 and even $125. I will continue to just hold, but near ~4.5% yield is where it becomes attractive again as a purchase for value minded Rose ...lol
Happy Investing :))
gastro4 profile picture
Have DLR and CONE.
Do you have an opinion on any of the Chinese Data Center stocks such as GDS, VNET?
Mr George Stobbart profile picture
Both look strong - results in Mar will shoot them much higher
Shaine profile picture
rnsmth profile picture
I have a DLR position started in late 2013 according to my Fidelity records. Added to it twice and it is currently up 100%. It is now an overweight position and is my only data center REIT. I think it will remain my only one.
the conservative speculator profile picture
I have both CONE and COR. I like DLR and would if price gets more attractive.
jgrever621 profile picture
Good article about a opaque area for most investors. While we may buy them (I am long CONE), actually understanding the entire field has been difficult. So I really appreciate the work exhibited in this article.
eaglebear profile picture
@V :
Good synopsis. Building a full position in DLR since last year. Will put cor on the watch list. Thanks again for your efforts!
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