Equinix (EQIX 0.22%) is the largest real estate investment trust (REIT) focused on data centers, and one of the largest REITs of any kind in the world. And second-largest data center REIT Digital Realty Trust (DLR -1.07%) isn't too far behind it.
With some key differences in the business models of these two companies, but rapid growth in the industry, which is the better choice for investors? In this Nov. 30 Fool Live video clip, Fool.com contributor and REIT specialist Matt Frankel, CFP, and Industry Focus host Jason Moser discuss these two massive real estate companies and what investors need to know.
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Jason Moser: We have a question here from Deepa who asks, what are your thoughts for Equinix ticker EQIX? Equinix is a REIT. Matt, you are our residential. You like what I just did there? You see that, our residential REIT expert? That's right, self taught. Equinix. Equinix. What are your thoughts on Equinix? Is this the REIT that you've ever looked at?
Matt Frankel: Yeah. Well, the data center REIT space has done really well during the pandemic. Think of data centers as the homes of the Internet. When you access a cloud-based platform like we're using right now, that has to physically live somewhere and that's where data centers come in. So as millions of Americans have been forced to work from home, more people are at home streaming entertainment, things like that. The need for secure and reliable places to store servers, networking equipment, things like that, has expanded greatly. I remember there was one point in early April when I checked my portfolio in the middle of the pandemic, the crash, and the only stock that was up was Digital Realty Trust, which is a data center REIT. So these held up really well during the pandemic, especially in the early days. As we're getting good vaccine news, they have started to pull back a little bit. Digital Realty Trust is one of the biggest stocks in my portfolio, which is why I don't own Equinix, that's their biggest competitor. I mean, they are the two biggest data center REITs in the world. Equinix is the biggest. They are considered the hubs of the Internet. Other data centers are judged by how close they are physically to Equinix data centers. They are by far the market leader. They've traded at a very expensive valuation, which has historically been my limiting factor for investing in them, especially this year. I like Digital Realty better just because they own all of their data centers whereas Equinix leases about half and then subleases it to tenants. Equinix is actually one of Digital Realty's biggest tenants. They lease a lot of their space from them. So they're both great companies. You're not going to go wrong either way. I prefer Digital Realty, but like I said, both are great companies.
Moser: It feels like looking at Equinix and seeing a yield of one and a half percent when normally, a REIT, you're going to see a bit more of an attractive yield, but I guess that yield is probably just tied to that expensive valuation that you referred to earlier.
Frankel: Well, it is. I mean a REIT's taxable income and a REIT's actual income are usually two different things. I don't want to get into real estate depreciation and how it lowers taxes and things like that but Equinix is making more than that dividend conveys. But yes, they choose to only pay out really what they have to and reinvest what they don't have to pay out back into the business to grow because it's a big growth market right now. So Equinix and Digital Realty, unlike a lot of REITs are very much in growth mode right now. This is a big growing market. Whereas like mall REITs, you want to focus on quality. Data center REITs, there's enough room for all of them to grow, it's a big difference in that market. So like I said, you're not going to go wrong with either one.