Hedge funds, institutional investors, and mutual funds have been pouring billions of dollars into the data-center industry recently. In 2021, real estate investment trusts (REITs), private equity firms, and other institutions spent roughly $82.15 billion on data center acquisitions.
The record-breaking number of data-center transactions in 2021 has left just a few key players in the industry, one of which is Digital Realty Trust (DLR 2.58%). With 97.75% of its shares outstanding owned by institutional investors, it's clear smart money love this stock. Should you too?
Strong demand in an undersupplied industry
Big money likes growth opportunities in high-demand industries, and that's exactly what Digital Realty Trust provides. Nearly everything we do today relies on data centers to operate. Streaming services, social media platforms, autonomous vehicles, cloud-based programs, and countless other technologies require data centers to aggregate and store digital data.
Famous short-seller Jim Chanos recently raised concern over the waning demand for data centers as tech companies build their own centers rather than lease them from third parties like Digital Realty. Several tech giants like Meta Platforms, Google parent Alphabet, and Amazon already do this to some degree, but not every company has the money to develop and manage high-cost facilities, nor will they have the land necessary to establish them in the desired regions.
Data centers serve specific geographic areas -- known as co-location in the industry -- for reduced latency, which is the speed at which data is transmitted. If a massive tech company in Seattle, for instance, wants to establish its own data center, land in the surrounding area will be expensive and hard to come by. This means data-center operators like Digital Realty Trust, which already serves more than 50 major metropolitan areas around the world, will still be very much in demand as technology use grows.
Data centers are already in short supply. In 2021, net absorption, or the amount of square footage that became occupied in primary markets across the U.S, grew by 50%, a sign that demand for data centers is robust. Recent supply chain challenges and chip shortages are causing a slowdown in new deliveries, creating the perfect high-demand, low-supply opportunities institutional investors love.
Stable balance sheet and attractive dividends
Sound companies with strong financials and stable income are highly sought after in the financial world, which is one of the reasons Digital Realty Trust is so appealing.
The company has a great track record, having provided a 10% annualized return over the last decade, but it also boasts a stable balance sheet. Its ratio of debt-to-earnings before interest, taxes, amortization, and depreciation (EBITDA) is roughly 6.2.
This is slightly higher than the REIT average and its targeted ratio of 5.8, but that's largely thanks to its recent acquisition. The data-center REIT just completed the purchase of South African data-center operator Teraco for $3.5 billion, which will help it further its position as a colocation leader in Africa.
The company raised its dividend at the start of 2021 for the 17th consecutive year, putting its dividend return around 3.7% today, more than double that of the S&P 500. Dividend raises are likely to continue considering that Digital Realty Trust's payout ratio is well within healthy levels at 71% and its recent earnings are showing strong sustained growth.
Right now, the stock is down around 28% this year, making it an extremely attractive time to invest in this company.