With artificial intelligence dominating investors’ thoughts, there is a constant search for investment ideas to profit from the AI boom. Recently, one of my newsletter subscribers asked me about data center real estate investment trusts (REITs). They do exist, but I have not heard any discussion about them in the general AI investing talk.
With so much current discussion about data centers, you might think of them as a relatively new type of real estate; however, the need for data centers have been around for a couple of decades. For example, Amazon launched Amazon Web Services (AWS) in 2006. There are two data center REITs, both of which have long track records.
The Digital Realty Trust (DLR) IPO was on November 4, 2004. The company sold 20 million shares, raising $240 million. Today, the REIT has a market capitalization of $57 billion.
With REIT investing, you start with yield and dividend growth. Digital Realty Trust currently yields 3.0%; its dividend has grown by 500% since the IPO. That said, the last dividend increase came in March 2022. That means it’s been nearly four years of no dividend growth.
Since the IPO, the DLR share price has appreciated by 1,260%. The total return with dividends reinvested is over 3,000%. REITs have produced an average annual total return of 15%.
REIT returns have struggled since the pandemic. Over the last five years, DLR’s shares are up 9.5%, and investors earned a total return of 30%.
A recent research report from HSBC Global Investment Research forecasts 10% annual revenue growth for Digital Realty Trust, and 9% growth in adjusted funds from operations (AFFO) through 2028. If the company returns to dividend growth, it’s possible DLR could get back to a 15% total return.
Even older than Digital Realty Trust, Equinix (EQIX) issued its initial public offering on August 11, 2000. This REIT has a $70 billion market cap.
Equinix lost 95% of its value when the dotcom bubble burst. If we start tracking returns in 2002, EQIX has returned over 7,000% to investors, growing wealth at a 19% compound annual clip. Limiting our focus to just the last decade, EQIX yields 2.32% and has grown its dividend for 10 consecutive years. Dividend growth has averaged 12% per year over that period.
Over the last five years, the EQIX share price appreciated by 11.3% and investors earned a 21.8% total return.
With the rapid increase in interest rates since early 2022, REIT share values have struggled, and DLR and EQIX were not spared. But, with interest rates coming down and data center development surging, these two REITs could deliver high-teens annual returns over the next five years.
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