Best Data Center REITs in 2022

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Contributor, Benzinga
December 13, 2022

Want to jump straight to the best data center real estate investment trusts (REITs)? Digital Realty Trust Inc. (NYSE: DLR), American Tower Corp. (NYSE: AMT), Equinix Inc. (NASDAQ: EQIX) and Iron Mountain Inc. (NYSE: IRM) are some of the best data center REITs. All are available on Webull, eToro, and Robinhood.

Real estate investment trusts (REITs) can specialize in unique sectors from shopping centers, office space, cannabis and data storage.

Data storage is an extremely high-growth industry since it’s expected to grow by $615.96 billion from 2022 to 2026. Some factors behind this record growth include more businesses moving to multi-cloud networks and needing to upgrade their networks to support 5G. 

These businesses also need to secure their data, which is where data center REITs come into play.

What Are REITs?

REITs pool investor funds to invest in physical real estate. Like a mutual fund or ETF, they have hundreds of underlying holdings, providing diversification for their investors.

These funds can be a great way to allocate some of your portfolio to real estate without lengthy trading processes or the need to come up with tens of thousands of dollars for a down payment.

REITs are also attractive inflation hedges since rents and apartment values often increase with inflation. Unlike a dividend-paying stock, the average REIT can have much higher yields, ranging around 5%.

Other REITs offer yields of 10% or greater.

Understanding Data Center REITs

A data center REIT owns and manages facilities that its customers use to store their data. These REITs contain valuable equipment like a company’s servers, networks and other support systems. These REITs generally own the land on which companies build their data centers on and lease it back to them.

Many companies also store IT resources electronically on the cloud as seen with Gmail and other Google suite tools. 

However, more cyberattacks make it riskier to use cloud storage. Cyberattacks increased by 42% in the first half of 2022 compared to 2021.

Physical data centers are especially helpful for government agencies, which generally have stricter compliance requirements.

What are the Advantages of Data Center REITs?

Data center REITs include major advantages.

Being recession-resistant: Regardless of the economy, every company needs a safe way to store its data. Unlike shopping centers or office buildings, data center REITs are much more resilient during economic downturns and pandemics.

Tech exposure with less risk: Technology has greatly advanced over the last decade with the rise of smartphones, the 5G network, edge computing, artificial intelligence (AI) and the metaverse. However, many tech companies have had massive losses this year and have been laying off their employees. Data center REITs provide exposure to tech with less risk than directly investing in a startup.

Steady, above-average yields: Many data center clients, especially government agencies, sign long-term contracts to store their data. As a result, data center REITs can offer steady income and high growth potential.

Best Data Center REITs

Below, you’ll find four of the best data center REITs that offer solid business histories, provide steady returns and demonstrate sound financials.

Digital Realty Trust (DLR)

Digital Realty Trust owns over 300 data centers throughout the world. Its offerings range from single cabinets to "cold shells," where hyper-scale cloud service providers can rent most if not all of a barren, power-connected building. 

Its dividend is currently 4.5%, and it has had a history of growing its yield since 2012. This REIT has a somewhat low payout ratio of 98.77% and a low debt-to-equity ratio of 91%. These metrics mean that it can manage its finances and provide sustainable yields.

American Tower Corp (AMT)

American Tower Corp owns and operates cell phone towers. It recently acquired data center REIT CoreSite Realty Corporation, which has grown its data center holdings. It has a respectable 4.68% yield and a high three-year revenue growth of 7.94%.

While it offers a good yield and high growth, it does have high debt levels as shown by its higher debt-to-equity ratio of 6.83%. Most of this debt was likely incurred by acquiring CoreSite.

Equinix (EQIX)

Equinix is one of the largest data center managers in the world and has over 10,000 clients around the globe. The bulk of its revenue, 70%, comes from renting data storage space to its tenants. It offers a 1.98% yield, which is on the low side.

However, Equinix customers generally sign long-term contracts, which stabilize this yield. As a result, it has a manageable debt-to-equity ratio of 1.44% and a high interest coverage of 3.39%. Having a higher interest coverage ratio means that Equinix can easily service its debts.

Iron Mountain (IRM)

Iron Mountain got its start in storing physical records, but it has expanded into offering data storage for over 200,000 customers. It offers a sustainable 4.69% yield with a low payout ratio of 98%. 

This REIT also stands out for having a high return on equity (ROE) of 66%, which means that it does a better job of providing its investors with profits.

How to Buy the Best Data Center REITs

Webull, eToro and Robinhood can help investors buy the best data center REITs online. The four data center REITs listed above are publicly traded.

Unlike private or non-traded REITs, you won’t have to worry about redemption periods when trading public REITs. Redemption periods tie up your funds for a specific amount of time before you can cash out your investment.

How to Buy the Best Data Center REITs With an IRA

It’s wise to hold REITs in a tax-advantaged account like an IRA or Roth IRA since their yields are taxed at higher ordinary rates. TD Ameritrade and Fidelity can help you buy data center REITs for an IRA.

You can also use these partners’ free educational resources to find the best data center REITs for your goals, which cover important concepts like a REIT’s dividend and earnings, analyst ratings and comparison charts.

Comparison charts give you a line-by-line breakdown of how your target REIT stacks up against the competition.

How to Trade or Sell Your Data Center REIT

It’s never been easier to trade data center REITs. Unlike buying a physical property, you can buy these REITs in minutes securely and electronically.

Buying REITs also doesn’t have to break the bank because of fractional investing. With fractional investing, you can buy REITs in dollar amounts instead of having to save hundreds of dollars for one share.

Best of all, these partners offer commission-free trading on U.S. REITs, keeping more money in your pocket.

Are Data Center REITs a Good Investment?

Many tech companies, including the famous FAANGs (Facebook (Meta), Amazon, Apple, Netflix and Google) are going through tough times. Some of these companies have realized large losses and laid off a good percentage of their workforce.

Regardless of the economy, companies need to securely store their data. The best data center REITs can help companies and government agencies feel secure knowing that their sensitive data is being stored properly.

As a result, investors can invest in data centers to get potentially less risky exposure to tech and earn steady, above-average yields.