Unlike most types of commercial real estate, data center REITs benefited from the remote work and stay-at-home economy of 2020. But what happens in 2021 as the COVID-19 pandemic (hopefully) comes to an end? In this Fool Live video clip, recorded on Jan. 19, Millionacres real estate analyst Matt Frankel, CFP, and editor Deidre Woollard discuss what 2021 could have in store for data centers and the REITs that own them.
Deidre Woollard: Let's talk about two categories that are relatively new but end up lumped together, which is data centers and infrastructure. So 2020 Nareit numbers for returns on data centers up 21%. Obviously, this was one of those areas with the work-from-home stocks. For 2020, the infrastructure returns were up 7.3%. I think that some of the data centers that boomed during middle of the summer, there seems to have been a little bit of a work-from-home penalty that has happened. At the same time, we got the vaccine bump for things like retail and hospitality. We got a little bit of a vaccine penalty on some of those stocks that were going up during the pandemic.
Matt Frankel: Yeah, data centers are definitely among those. The pandemic just amplified the need for great places for the Internet to live, which if you're not familiar with what a data center is, it's essentially the home of the Internet. Every time you access a web-based program, like we're doing right now, every time you upload photos to your social media, every time you stream something on the Internet, that all has to physically live somewhere, and that's where data centers come in. There's never been more data flowing around the world than there was in 2020. As the pandemic comes to an end, there's a lot of unanswered questions like, are people going to still be using Zoom (NASDAQ: ZM) as much? I hope they do, so we're still doing this. But are people still going to be working at home as much? Are people still going to be streaming as much now that they can go out and do things? There's a lot of unanswered questions when it comes to the need for just how much growth there is going to be in the near-term for data centers.
Woollard: But with us, we've got a couple of questions on a couple of the data center and communication REITs. Randy asks about AMT, which is American Tower (NYSE:AMT) and says, "AMT is a great opportunity that has had a downward slope for over six months. It doesn't pay as large a dividend as far as REITs grow. Can you just guess what you think is the reason for the downward slope?"
Frankel: So AMT, it's American Tower, and by the way, my video is going to come in and out. I turned it off, so I'd rather you hear me than see me, if I had to choose one or the other. AMT is American Tower. I'd advise you to zoom out on your chat a little bit. If you look over the past five or 10 years, American Tower has been a massive outperformer as the need for communications infrastructure has just exploded, not just in America but all over the world. American Tower is the one that's really a worldwide company. They have operations literally on almost every continent. I think other than Antarctica, they're all over the world. They are a huge company, they have done phenomenally well lately. They don't pay a large dividend because they're valued like a growth company because they have been a growth company. Generally, growth stocks don't pay dividends on par with value stocks, which most REITs are value stocks. The reason for the downward slope, I would say is more of just a sector rotation out of the stay-at-home stocks, which American Tower is definitely one of, into the reopening stocks. Now, as to 5G play, I think there is a ton of growth potential over the next few years as networks build-out. They're going to benefit from a much longer tailed growth trend than some of the more domestic players. Just because in the emerging world, this is going to take years and years and years to play out the 5G rollout. 5G technology, I'm not a tech expert by any means, but 5G technology generally require smaller antennas, which they call small nodes that work closer together than previous versions of technology. They're going to have to build out the closeness of their networks, I guess you would say. There's definitely some opportunities to grow. It's definitely a compelling 5G play. I think it's more, like you said, during the pandemic and during the stay-at-home months, the stock might have gotten a little overheated, just like a lot of these stay-at-home plays. But if you zoom out on your chat, you'll see that it can give back that much of it's gains. It's really done phenomenally well over the past few years.
Woollard: Absolutely. We've also got a question from Nadia who gives the tickers of some of our favorites in this space. She asked for our thoughts on AMT, which we just talked about, DLR, which is Digital Realty Trust (NYSE:DLR), which is a data center REIT, CCI, which is Crown Castle (NYSE:CCI), and then EQX, which is Equinix (NASDAQ:EQIX). Those are pretty much all ones that we've talked about a lot and really like as very strong companies.
Frankel: Yeah, American Tower and Crown Castle are the two leading telecom infrastructure REITs. Crown Castle is much more of a domestic play and Crown Castle is more of a play beyond just the towers. American Tower as the name implies is a tower company. Crown Castle has 80,000 miles of fiber optic network. They own a lot of the small cell nodes, more than American Tower in the US anyway. They are just a different play. Both have been in the same boat performance-wise lately, they've just been on a slump since all this vaccine news and everyone's excited about reopening. Since all that happened, they've just been on a slump. Digital Realty and Equinix are the two top data center REITs. Equinix is the biggest one, Digital Realty is my personal favorite play. Equinix leases a lot of its space, Digital Realty owns pretty much all of its space. Equinix is actually one of Digital Realty's largest tenants, fun fact. They're data center REITs, they've pulled back a little bit because they might have gotten a little overheated during the pandemic. Like we said, in the middle of the pandemic, no one knew when this was going to end, if it was going to end. The thought was, well, what if we're staying at home and streaming and doing Cloud software and working from home and doing all this forever? These companies are going to rule the world. But now that that's not going to happen and it looks like work-from-home is going to be in greater abundance than it was before the pandemic, that's pretty much a given. But it's not going to be quite the stay-at-home economy for years and years that a lot of people feared at the beginning of the pandemic. That's why you're seeing some of these stocks, I wouldn't even call them stay-at-home plays because cell infrastructure we are going to need, whether people are at home or on the go. But the companies that didn't get hurt by the stay-at-home economy are starting to pull back or have pulled back a little bit. All four of those are well-run companies. I know they're four of the top 10 REITs by size in the world. All of them are great companies, all of them have a lot of growth going for it. I can't imagine anyone disrupting any of them other than the other one. I can't imagine anyone coming along and disrupting American Tower or Crown Castle, for their size is still big at this point. It's a great competitive advantage and I see all four of those having a pretty bright future. Maybe not a bright 2021 as reopening takes place, but as far as the long-term, 2021 might be a nice opportunity to buy some of them as they come down.
Woollard: Yeah, I think that's true. I find this interesting because yes, work-from-home is going to shift and we're all going to go out into the world, but I don't see our usage of data changing anytime soon. So I think that's going to continue to go up. I find it interesting that these stocks are getting dinged along with other stocks. It didn't quite make sense to me, but it's an opportunity for those of us that are watching them.
Frankel: The market, if money flows out of one sector, it's got to come from somewhere. If money flows into these reopening stocks, it has to come from somewhere and it's putting selling pressure on some of these stocks that their business is held up. I wouldn't even call all those stay-at-home stocks just because they are just needed no matter what, but it's a sector rotation that can create good buying opportunities.
Woollard: Exactly. PM also mentions that AMT is also pursuing edge computing markets near its towers as part of its 5G rollout.
Frankel: Edge computing is definitely a trend. Fastly (NYSE: FSLY) is the big company in that space that everyone's talking about right now. The general idea's you bring the access points closer to their final locations and it makes the Internet run faster, is the short explanation of it. There's definitely opportunities in the data center space and the infrastructure space for Edge computing applications. Like I said, I'm not a tech expert, so I don't want to get too deep into it and sound silly.