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Better Buy: Digital Realty vs. Boston Properties

Jul 22, 2020 by Matthew DiLallo

Boston Properties (NYSE: BXP) and Digital Realty (NYSE: DLR) are two leaders in the REIT sector. Boston Properties is one of the largest office REITs with a concentrated portfolio of Class A office space in Boston, New York, Los Angeles, San Francisco, and Washington, D.C. Meanwhile, Digital Realty is one of the leading data center REITs with 275 locations around the world.

Given their differentiated focus, these REITs will likely appeal to different sets of investors. Here's a look at what investors should consider before buying either REIT.

The investment case for Boston Properties

This year has been a challenging one for investors in Boston Properties. Its stock has fallen by about a third, pushing its dividend yield up to over 4%. The main factor weighing on the office REIT's shares this year is concerns that the COVID-19 outbreak will cause more companies to allow their employees to work from home permanently.

However, while that's the case in some notable instances, the work-from-home trend won't crush Boston Properties, since 88% of U.S. workers prefer coming into the office five days a week, only down slightly from 90% before the pandemic. On top of that, companies prefer the office environment because it facilitates collaboration, creativity, mentorship, productivity, and creating culture. Because of that, most companies have continued to pay rent on their office space -- Boston Properties collected 98% of June's office rent -- despite the impact of COVID-19 on their operations.

That excellent rental collection rate puts Boston Properties' dividend on solid ground. Meanwhile, it compliments that factor by having a low dividend payout ratio -- usually around 50% of its FFO -- the highest credit rating among office REITs, and a cash-rich balance sheet. Those features give it lots of financial flexibility to make acquisitions and continue investing in development projects during the current market downturn.

The investment case for Digital Realty

Digital Realty has bucked the trend in the REIT sector this year. Its stock has risen by almost 20%, pushing its dividend yield down to around 3%. One factor powering the company's rally is that COVID-19 has driven increased technology adoption, which will bolster demand for data centers in the future.

The company is already seeing this benefit as it has enabled the REIT to start construction on several more new data centers around the world. For example, its Ascenty joint venture with Brookfield Infrastructure (NYSE: BIP) (NYSE: BIPC) started building two new data centers in Mexico that should start up next year. Meanwhile, the company began construction on its first data center in South Korea and broke ground on its second one in Hong Kong, which will both be ready for customers toward the end of next year. It also bolstered its European platform by acquiring Interxion, which brought a large pipeline of expansion opportunities.

The REIT has ample financial capacity to fund future expansion thanks to its investment-grade balance sheet and a fairly conservative dividend payout ratio of around 75% of its FFO. That should give it the power to continue delivering above-average FFO and dividend growth.

Value or growth?

I think both Boston Properties and Digital Realty are good REITs to buy these days. The former is a compelling value buy on overblown work-from-home fears, while the latter is an excellent way to play fast-growing demand for data storage. However, if I had to choose just one, I'd pick Boston Properties since its 33% price decline this year makes it a near-term bounce-back candidate.

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Matthew DiLallo owns shares of Brookfield Infrastructure and Brookfield Infrastructure Partners. The Motley Fool owns shares of and recommends Digital Realty Trust. The Motley Fool recommends Brookfield Infrastructure and Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.

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