If you want to benefit from the latest technologies, but don't want your portfolio dependent on high-growth tech start-ups, Digital Realty Trust (NYSE:DLR) could be a stock worth considering. In this Fool Live video clip, recorded on Sept. 13, Fool.com contributor Matt Frankel, CFP, explains to fellow contributor Jason Hall why Digital Realty is the largest tech investment in his personal portfolio.
Matt Frankel: If you're not familiar, Digital Realty is a real estate investment trust that owns data center properties. Data centers are purpose-built facilities designed to house networking equipment like servers, in a secure and reliable environment. Data needs to be secure. Obviously, you don't want data breaches, things like that. You also need reliability. Data centers generally can claim things like 99.999% uptime, which I don't know about your powers in your house, I can't claim that. Jason with their earthquakes and stuff probably can't claim that.
Jason Hall: Not even close.
Frankel: Definitely, a big need for Digital Realty is not the biggest in the space. That title goes to Equinix (NASDAQ:EQIX). Ticker symbol for them is EQIX. I prefer Digital Realty because it prioritizes owning its properties. Equinix uses about half-and-half ownership in subleasing model. They own about half of their data centers, the others, they lease the building and sublease the space inside through tenants. With that in mind, why have data centers performed so well over the past few years? Well, first of all, just to put that claim into context, Digital Realty went public in 2004 pioneering the data center REIT model. Since that time, Digital Realty has returned a total of 2,400% to shareholders in 17 years. I forgot year it was for a second. That's compared to 475% for the S&P. It has 5X the S&Ps total return. Anyone that tells you real estate stocks are boring, tell them that.
Hall: They're the right kind of boring.
Frankel: They're the right kind of boring. They've just consistently done well for 17 years. They're probably going to be a Dividend Aristocrat once they qualify. They've raised their dividend every year including last year during the pandemic.
Hall: Sixteen years in a row since they started it. Yeah.
Frankel: Just like the infrastructure REITs, these are a great play on the surge in the number of connected devices, the sophistication of data flowing around the world, and just the volume of data flowing around the world. Let me share this, this is from American Tower's presentation. This shows you why data centers have really surged in need. This is the data used in megabytes for these activities. Sending an email, 0.02, this is what people were doing 20 years ago on the Internet. Song 133 times that much, three-minute video clip on YouTube, 600 times that much. Looking all the way on the right, this is what people are using these networks for and what we need these servers for these days. A 30-minute TV show on Netflix or Hulu, 11,000 times the data usage of sending an email. This is why the need for data centers have really just exploded exponentially. As more content on streaming services transitions from standard high-def to 4K to 8K, that's going to get even more sophisticated. Think of all the data-heavy Internet-connected devices that we're seeing just explode. Augmented reality devices. My daughter uses an augmented reality device to help her brush her teeth at night, she's five. The use is very data-heavy. When I was that age, my parents gave me a toothbrush and said, "Go in the bathroom." It's really changed.
Hall: I just want to say you may have single-handedly improved my son's dental care with this.
Frankel: It really helps. The surgeons, autonomous vehicles. Very few devices use as much data as a self-driving vehicle. Even me I'm not full self-driving. Obviously, that doesn't exist yet, despite what Tesla (NASDAQ:TSLA) will tell you. Even the driver assistant features use tons of data. That is creating a huge need for these data centers going forward. That's why you've seen that tremendous outperformance and why you're going to continue to see it. Digital Realty has 291 data centers around the world. They operate in the US, Europe, and Asia. 61% percent of the revenue is North America, 28% Europe, so those are by far the two big markets. They're trying to build out their Asian presence. Like I said, they own most of their data centers, they own 86% of them. I don't want to get into the logistics of owning property overseas, but in some markets, it's not really practical to own properties, which is why that's never going to get to 100%. Who do they lease these properties out to? They have over 4,000 customers, but the bulk of their rental income comes from their top 20 tenants. My computer will cooperate one more time, less visual aid of my speaking. This is who is renting space. A couple of interesting things. One, they can't reveal the names of all their tenants, not everyone wants their names revealed. Their biggest tenant we have no clue who it is. We know it's a Fortune 50 software company. So use your imagination. There's only so many software companies in the Fortune 50. IBM (NYSE:IBM) is their biggest tenant. Other than that, Facebook (NASDAQ:FB) leases a lot of space from Digital Realty, Oracle (NYSE:ORCL). Interesting things, look at number six, Equinix, the number one data center provider in the world, leases space from Digital Realty. They're their number six tenant. Go down to number 11, Cyxtera (NASDAQ:CYXT) is the number three provider of data centers. That's one of their biggest tenants. Not only do they lease to these big tech companies, the other data center providers lease their space, which is a pretty cool moat. They have that big cash flow coming in. The data center space, it's not hard to see why this has been a big growth industry. The volume of data isn't going to slowdown anytime soon regardless of what the economy does. It's actually fairly recession-resistant. Technology keeps moving forward even during recessions. The first iPhone gained popularity during the great recession.