The real estate investment trust (REIT) sector has been smashed during the COVID-19 pandemic. Mortgage REITs have seen the value of their assets fall, with their sources of funding severely restricted. Retail REITs have seen their tenants shuttered, with no ability to generate revenue to pay rent. Office REITs have seen small businesses fail, and apartment REITs have seen some of their tenants unable to pay the monthly rent.
Have any REIT sectors worked during this crisis? Actually, two have done well: cell tower REITs (on the 5G buildout) and data REITs. Data REITs are one of the few places to look for growth in the REIT world, and that's why Equinix (EQIX 0.90%), a top player in the field, is worth a look.
Image source: Getty Images.
Data REITs are in high demand
Data REITs run facilities that allow companies to store and distribute data. These facilities are generally located in large cities where there is high demand for data. The biggest customers are tech giants like Oracle and telecom titans like Verizon. Equinix is by far the biggest player in the market, with more than 200 data centers in 55 metropolitan areas on five continents. While many REITs have been putting new acquisitions on hold, Equinix has recently purchased a $750 million portfolio of 13 data centers from BCE.
During the first quarter, Equinix grew revenue 6% year over year (and 2% from the fourth quarter of 2019) to $1.45 billion as it expanded customer relations with Zoom Video Communications, TikTok, and Hurricane Electric. Adjusted funds from operations (AFFO -- the REIT equivalent of earnings) rose 13% to $535 million. The company ended the quarter with 370,000 interconnections, and it has added more interconnections than the top 10 competitors combined for the past 13 quarters.
COVID-19 accelerated some trends that were already in place
The coronavirus crisis has accelerated the use of video conferencing and remote working, which is yet another growth area for Equinix. On last month's earnings call, CEO Charles J. Myers had this to say:
We're seeing a magnification of the role that Equinix plays not only for our customers but in the basic operation of our society. The massive work-from-home experiment in which we find ourselves has created a spike of near-term demand from a variety of customers, much of which we believe will sustain even as we calibrate on a new normal. And perhaps most importantly, the unique characteristics of this particular crisis have increased the resolve we see from customers relative to their focus on digital transformation as a long-term priority and have highlighted the relevance of Equinix in supporting these efforts.
Despite Equinix's resilient business model, it didn't completely escape the COVID-19 crisis. Full-year 2020 guidance was trimmed slightly, with revenue expected to grow 6% to 8%. The virus and negative foreign exchange effects are driving the decrease. AFFO is expected to increase 4% to 8%, hitting $23.62 to $24.66 per share, which works out to a valuation of rough 28 times AFFO per share based on Friday's closing price. Equinix's multiple has been increasing slightly over time, but it dominates its space, and stocks like that almost invariably trade at premium multiples. The quarterly dividend of $2.66 amounts to a 1.6% dividend yield. Compared with most REITs, this is a somewhat miserly payout, but the company's business model has a lot of future growth potential.
Stocks are often cheap for a reason, and they are often expensive for a reason. Equinix is up 16% year to date, which is a lot better than most of the REIT sector. Equinix is a stock that would make sense for a growth investor who also desires income. For that reason, Equinix is a REIT you should know.
