Investing strategies REITs

These REITs have outperformed the market

REITs that own shopping centres and office buildings have been hard hit by the COVID-19 fallout. Two high tech REITs are thriving.

Real Estate Investments Trusts (REITs) that own shopping centres, office space and commercial buildings have been hard hit by the COVID-19 fallout.

Malls and stores are closed. Offices are empty as employees work from home. Many tenants aren’t paying their rent. Investors also wonder whether the work-at-home trend will continue post-COVID.

Two types of REIT have bucked the trend because the pandemic has created more demand for their customers’ services. The one houses data centres used by companies including IBM and Google for cloud computing. The other is in the healthcare sector renting space for biotech research, biopharma and drug development.

Digital Realty Trust Inc. (NYSE: DLR

Background: Digital Realty is a giant in the data center world with 210+ properties in 14 countries on 5 continents. The US and UK are its top regions, but it has two Toronto area facilities in Markham and Vaughan.

digital realty trust REITDigital Realty has a market capitalization of US $36.4 billion and about 21% of the global market share for data centres. The facilities are temperature-controlled with secure internet connections and high levels of data security. They capture the evolution of cloud computing and boast such clients such as   Microsoft, Apple and Oracle as well as IBM and Google.

Performance: Digital Realty’s shares are up 20.1% year-to-date.  The company reported 2019 revenues of US $3.2 billion with a net income of  $579 million. It reports first quarter 2020 Apr. 23.

Dividends: Digital Realty has raised its dividend in each of the past 15 years. Its latest increase was in March. The annual rate of $4.48 yields 3.12% at current prices.

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

Recent Developments & Outlook:   In March, Digital completed its acquisition of the Netherlands-based InterXion which has 53 data centres in 11 European countries. The $8.4 billion purchase  makes Digital the second largest European data provider.

Alexandria Real Estate Equities Inc. (NYSE: ARE)

Background: Alexandria rents labs and offices to life science and technology companies. All its properties are in the US  with most clustered around universities. Tenants include Pfizer, Google and Eli Lilly. About 36% of rental revenue is in the Boston area,  25% in San Francisco and 16% in San Diego.

Alexandria real estate trust REITPerformance: The shares are hit a high of US $175 in early February fell sharply in March and are down 7.3% year-to-date.

In February, Alexandria reported 2019 full year revenues of $1.5 billion, up 15% year over year. Free funds from operations of $783 million was 14.8% higher year over year.  Its current market capitalization is $18.6 billion.

Dividend:  Alexandria increased its dividend by 3% with the December payment. The $4.12 annual payments yields 2.8% at current prices.  Between 2010 and 2019, Alexandria increased its dividend 18 times, for an average of just under two per year.

Recent Developments & Outlook:  The search for a COVID cure and related research is likely to increase demand for Alexandria’s facilities. Co-president Dean Shigenaga said as much in a recent conference call where he said he expected Alexandria’s facilities to remain full with demand for more. He noted that Alexandria has a 10-year average occupancy rate of 96%. He said weighted-average lease term for its top 20 tenants is 11.6 years, providing a stable income stream going forward.

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(This an edited version of an article that appeared in the April 20,  2020 edition of the Internet Wealth Builder.)

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