Options for investing in data center real estate investment trusts (REITs) are quickly dwindling. Three of the last five data center REITs were acquired by several large equity firms and REITs over the previous year. Now, only Equinix (EQIX 0.90%) and Digital Realty Trust (DLR -0.71%) remain as the only pure play REITs in this business. Demand for data storage, processing, and transmission is booming, making this unique real estate niche a smart buy for investors.
If you're looking for exposure to the high-growth data center industry, here's a closer look at how the companies compare and which company is a better buy today.
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Equinix
Equinix is the largest data center operator in the world, having interest or ownership in 240 data centers in 27 countries across six continents. The company doesn't wholly own its portfolio. Rather it rents around 41% of its space from other data center operators -- including Digital Realty Trust -- then subleases it to tenants on long-term net leases. Legalities in certain countries and the cost of real estate in prime markets make it more financially reasonable to lease the data center space rather than own or develop there.
Equinix's share price recently took a hit. Market volatility at the start of the year and missed estimates on earnings in fourth-quarter 2021 pushed share prices down nearly 12% year to date. Despite slightly lower-than-anticipated earnings, Equinix's performance in 2021 was strong.
Adjusted funds from operations (AFFO), an important metric to assess REIT profitability, grew by 9% year over year, and net operating income (NOI) jumped up 35%. The company paid down a notable amount of debt, bringing its net leverage ratio to 3.9 times its earnings before income, taxes, depreciation, and amortization (EBITDA), well below the industry average of 5. Bookings, aka new lease terms for data space in 2022, are projected to grow by 9% to 10%, which should bump AFFO by 8% to 9%.
The company recently acquired MainOne, a West African data center operator, adding 64,000 square feet across four data center facilities to its portfolio, in addition to undeveloped land for future expansion, terrestrial networks, and submarine networks across Africa. The company has also announced its plans to expand its presence in South America, Mumbai, and Canada.
Dividend returns aren't stellar for Equinix as the company is trading at a slight premium, being priced at 27 times its AFFO, meaning dividend return is around 1.57%. However, its dividends are extremely reliable, having maintained over 76 consecutive dividend increases -- which translates to 18 years of dividend growth.
| Stock | Market Cap | Dividend Return | Price to FFO | Payout Ratio |
|---|---|---|---|---|
|
Equinix |
$68 billion |
1.57% |
27 times |
49% |
|
Digital Realty Trust |
$43 billion |
3.23% |
22 times |
79% |
Chart by author. FFO = funds from operations.
Digital Realty Trust
While Equinix may be the biggest, Digital Realty Trust is close behind. As of Q4 2022, the company had interest and 100% ownership in 280 facilities in 25 countries across six continents. Like Equinix, Digital Realty Trust's share price is down notably, by 17% year to date.
This is due, in part, to market volatility but also to concern over the company's early 2022 announcement that it acquired 55% interest in South African data center operator Teraco. The acquisition, which would add seven existing data centers to Digital Realty Trust's portfolio, is projected to dilute FFO in 2022 before becoming neutral to FFO in 2023.
The Teraco deal would make Digital Realty Trust one of the largest data center operators on the continent. And while it may have a negative short-term impact, it certainly is a long play that would help improve the company's fundamentals years from now.
Digital Realty Trust is another loyal dividend raiser, having 16 consecutive years of dividend increases. With share prices down notably, year-to-date returns are over 3% -- very competitive in the data center space. Its debt ratios are much higher than Equinix, at 6.1 times its EBITDA, but its performance is strong, and the company projects a 7% growth in FFO in 2022. Share prices today are trading at 22.8 times its current FFO, meaning it's relatively undervalued compared with its peers in the REIT space.
Which is the better buy?
Both companies have extremely high-quality portfolios, a global presence, and ample opportunities for continued growth. Given that Digital Realty Trust owns all its properties, has a higher dividend return, a better-valued share price, and, generally speaking, a much lower entry point for investors -- with share prices trading around $145 compared to $735 for Equinix -- I'd say Digital Realty Trust is the better buy today. It does have higher debt ratios, which is something to consider. But overall, it's still an extremely well-rounded company that gives investors exposure to one of the most sought-after industries in the commercial real estate world today.
