Investing strategies REITs

Two new economy U.S. REITs

Canadians tend to think local when it comes to Real Estate Investment Trusts (REITs). There are a lot of opportunities outside Canada.

Canadians tend to think of Real Estate Investment Trusts (REITs)  in terms of office buildings and shopping centres and also tend to think local. But the impact of technological change – a force shaping every aspect of the economic landscape – is being felt here too and on a global level. So looking outside the traditional offerings may provide investment opportunities.

Here are two U.S. REITs that operate in the new economy.

Digital Realty Trust Inc. (NYSE: DLRRecent price $128.89.  (All figures in U.S. dollars.)

 Background: Digital Realty is a giant in the data centre world, with a market capitalization of $26.6 billion and about 21% of the global market share for data centres. These centres capture the evolution of cloud computing, artificial intelligence, and the Internet of Things.

digital-realtyThe San Francisco-based company has been public since 2004. Its portfolio includes 210+ properties in 14 countries on five continents. It provides temperature-controlled facilities, with secure internet connections and high levels of data security for businesses interested in cloud computing and storage. The U.S. and U.K. are its top regions, but it also has two facilities in the Toronto area, one in Markham and the other in Vaughan. Its well-known clients include Microsoft, Facebook, IBM, Verizon, Oracle, and LinkedIn.

 Performance: The shares up are 23.6% year-to-date.

Financials: In its latest trailing 12 months to June 30, Digital Realty had revenues of $3.61 billion and net income of $316.13 million.

In the three months to June 30, results were in line with expectations. Revenues were up 6% year-over year with net income down 40% to $60 million. Excluding-extraordinary items, second-quarter funds from operations (FFO) were 1% lower than a year earlier.

Recent developments: Digital continues to buy land in key global centres and build new facilities. In its second quarter, it bought 22.5 acres in Tokyo, Paris, and the Washington D.C. area. In July, it announced the purchase of a land parcel near Seoul, South Korea which will open as a data centre in 2021. In early September, Cloud House opened, its latest facility in the London Docklands digital corridor.

 Dividends: Digital Realty is a dividend champion with increases in each of the past 14 years averaging 11% a year. Its latest increase in February brings the annual payout rate to $4.32, yielding 3.39% at current prices.

Distributions received in a non-registered account or a tax-free savings account will be subject to a 15% withholding tax.

 Outlook: Digital Realty carries a moderate price to earnings ratio of 18.94, which reflects its prospects. As offsite data storage grows, it is well positioned to maintain its dominance. It has geographic diversification and, if the economy slows, few clients are likely to cut back by shutting their web and related online activities.

Alexandria Real Estate Equities Inc. (NYSE: ARE)   Recent price $153.10. (All figures in U.S. dollars.)

 Background: Alexandria has a narrow focus on American life science and technology companies, to whom it rents offices and labs. It tries to locate its properties around universities and its clients include pharmaceutical, biotechnology, medical device, and life science agencies, as well as technology companies. Tenants include Pfizer, Google, and Eli Lilly.

Alexandria has been a public company since 1997 and has a market capitalization at current prices of $17.37 billion. As of mid-2019, 36% of rental revenue was in the Boston area, 25% in San Francisco, and 16% in San Diego.

 Performance: The shares are up 37.3% year-to-date on strong revenues and profit growth.Alexandria

Financials: Revenues in the first six months, reported July 29, were $732.7 million, which was 13.6% higher than a year ago. Net income of $200.2 million was 8.2% higher. On a per share basis, income was 1.7% lower with more shares outstanding.

Funds from operations, a key measure for a REIT, was up 5.2%. The company noted that the weighted average length of its leases is 8.4 years with the top 20 tenants having an average 20-year term.

 Dividends: Alexandria’s high growth in the last decade has led to steady dividend increases. The last increase was in June and the $4 annual rate yields 2.61% at current prices. Between 2010 and 2019, there were 17 dividend increases, for an average of just under two per year.

 Outlook: Alexandria has 37.1 million square feet of property. Roughly two-thirds are open with facilities, 4% are opening in 2019, and 6% in 2021 or 2022. Another 12% of its land is set aside for future projects.

 Alexandria is benefitting from the application of new technologies in the healthcare sector, which is spurring new products and drugs. Its high p/e ratio reflects its prospects.

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(This article first appeared in the Sept. 30, 2019 issue of The Internet Wealth Builder.)

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