Pandemic boosts these tech and biopharma REITs

Two types of Real Estate Investment Trusts (REITs) that have thrived during the pandemic have growing niches in the technology and biopharma industries.

Their clients are a Who’s Who in these sectors, benefitting from demand for data centres and server storage and acilities for biotech research and drug development. The companies they work with include the likes of Microsoft, Facebook, Bristol Myers Squibb, and Pfizer.

Here are updates. (All figures are in U.S. dollars)

Digital Realty Trust Inc. (NYSE: DLR) is a giant in the data centre world with 210+ properties in 14 countries on five continents. The U.S. and U.K. are its top regions, but it has two Toronto area facilities in Markham and Vaughan.

It has a market capitalization of $41.1 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 Digital’s clients, in addition to Microsoft and Facebook, include IBM, Apple, Google, and Oracle.

Performance: Digital Realty’s shares are up 3.2% in the last 12 months, and 10.6% year-to-date.

Recent developments: The company reported strong first quarter 2021 results on Thursday and raised its guidance. Free funds from operations (FFO) per share rose 9.1% year-over year to $1.67 and net income of $1.32 per share was 14.6% higher.

Revenues of $1.1 billion was a 32% increase from the same quarter last year.

CEO William Stein said performance was balanced across products and regions. He noted the company has adapted to the pandemic with all of its data centres remaining open, allowing personnel to provide services and support for customers. 

Dividend: Digital Realty has raised its dividend in each of the past 16 years. Its latest increase was with the March payment, a 3.6% rise to $1.16 per share quarterly. It yields 3.1% at current prices.

Tax implications: Distributions received in a non-registered account or a Tax-Free Savings Account will be subject to a 15% withholding tax.

Discussion: Digital continues to expand its global footprint. Its clients are well suited to thriving during and after the pandemic given that cloud computing is in its early stages and its customers are industry leaders.

Alexandria Real Estate Equities Inc. (NYSE: ARE) rents labs and offices to life science and technology companies. All its properties are in the U.S. with most clustered around universities. In addition to Bristol Myers Squibb and Pfizer, its tenants include Google and Eli Lilly.

Performance: The shares are up 17% since being recommended and 18.7% in the past 12 months. Year-to-date the shares are up by 0.5%.

Recent developments: In February, Alexandria reported 2020 full year revenues of $1.89 billion, up 23% year-over-year. Free funds from operations of $983 million were 18% higher year-over-year.  It noted that 55% of annual rental revenue comes from investment-grade or publicly traded large cap tenants and the weighted-average lease term is 7.6 years.

Dividend: Alexandria increased its dividend by 3% with the December payment. It increased it again by 6% with the April 15 payment. The $4.30 annual payment yields 2.4% at current prices. Between 2010 and 2020, Alexandria increased its dividend 19 times, for an average of just under two per year.

Tax implications: Distributions received in a non-registered account or a Tax-Free Savings Account will be subject to a 15% withholding tax.

Discussion: Alexandria concentrates on facilities near university innovation clusters in urban centres. The facilities occupy prime space, and offer access to skilled workers. This creates high barriers to entry for their competitors. About 36% of rental revenue is in the Boston area, 25% in San Francisco, and 16% in San Diego.

The 18% increase in free funds from operations (FFO) in 2020 is a key number. REITs tend to use FFO as a more accurate measure of performance than earnings per share. That is because real estate companies have a lot of depreciation which is a non-cash expense, but depreciation charges understate cash flow. Rising FFO shows strong growth.

This is an edited version of article that appeared in the Internet Wealth Builder on April 26, 2021.  For information on how to reprint this article please view this page.