You might think that buying an interest in a global network of data centers would cost you tens or hundreds of millions of dollars. But you can get in cheaper. Way cheaper. How cheap? Less than $130.
That’s what it would cost you to buy a single unit of Digital Realty (NASDAQ:DLR), a data center REIT that as of this writing is going for $125.10. If you bought said unit (available at any broker), you’d be part owner in a $37bn enterprise that operates over 290 data centers.
Whether or not that is the best use of your $125.10 is a different discussion, but first…
What is a REIT?
There are two kinds of Real Estate Investment Trusts. One is the mortgage REIT, which handles bundles of mortgages. I won’t be going into those further as they are more of a financial product.
The other kind are equity REITs, which feel like a “mutual fund of real estate”. Imagine a group of investors pool their money (and perhaps borrow more) and buy a bunch of office buildings or apartment complexes. They hire managers for these buildings and collect the rents. The specifics of who pays maintenance and taxes depends on the lease and specific industry or local customs, but after deducting these and normal business expenses, they pay out all the profits to their investors.
That’s what a REIT is. There are REITs that specialize in apartments, industrial buildings, warehouses, retail areas, hotels, shopping malls, luxury apartments, tract housing, hospitals, prisons, public storage, and many other categories. What they all have in common is
- special tax rules that allow corporations to hold real estate favorably, provided they meet a set of conditions
- they must pay out 90% of their earnings every year to a diverse investor pool
Are REITs a good investment?
That’s like asking if stocks are – it depends on the specific REIT, and also on the macroeconomic environment.
Any given REIT might have too much debt, or be mismanaged. This is not different than the management of a large public company borrowing too much money or making poor decisions.
In some macroeconomic settings, different REITs are more or less attractive. For example, if corporate spending is declining, hotel and office REITs struggle with occupancy, leading to lower revenue. REITs with long-term leases may not be able to raise rents in an inflationary environment, and thus their performance may be less attractive than bond yields, etc.
After you purchase your units (shares), you are hoping for two things:
- A continued stream of dividend payments. These may be annual, semiannual, quarterly, or even monthly depending on the REIT. Many REITs sport attractive dividends (e.g., DigitalRealty’s is about 4%). Typically, a portion (and possibly all) of a REIT’s dividends are nonqualified and taxed as ordinary income.
- Appreciation in the value of your shares as the underlying portfolio of properties is developed and managed.
Datacenter REITs
Besides Digital Realty, another major “pure play” is Equinix (NASDAQ:EQIX). You can also check out Switch (NYSE:SWCH) and Singapore’s Keppel.
Unfortunately, many pure play DC REITs have been acquired and the options have narrowed in recent years. Another option is the Data Center REITs & Digital Infrastructure ETF, which has the whimsical ticker VPN. Note that this is more than just data centers – you’re also getting cell towers, fiber infrastructure, etc.
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I also enjoy using LEBs! I have an empire of little guys for VPNs, larger guys for apps, and big guys for databases and storage. When I'm not in front a screen I'm into German Shepherd dogs, quality knives, target shooting, theology, tabletop roleplaying games, and forest hiking.
I enjoy writing technical articles here on LowEndBox to help people get more out of their systems. You can find me on LowEndTalk @raindog308
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