Two types of Real Estate Investment Trust (REIT) outperformed during the pandemic because they played to stay-at-home and work-at-home themes.
One type offers internet-based communication services for cloud computing and storage. The other provides medical research and lab facilities for drug companies. Both have followed the broader market decline this year, but have good prospects. Both increased their dividends during the pandemic.
Here’s an update.
Digital Realty Trust Inc. (NYSE: DRE) Closed Friday at $131.10 (All figures in U.S. dollars.)
Background: Digital Realty has more than 300 properties on five continents and a global market share of about 20% for data centres. This includes two facilities in the Greater Toronto Area.
It offers secure, temperature-controlled facilities for servers that provide internet connections and cloud storage. Digital’s clients include most big tech companies such Microsoft, Meta (Facebook), IBM, Apple, Google, and Oracle.
Performance: Digital Realty’s shares are down 28% year-to-date with most of the damage done in the last month as worries about rising interest rates and inflation have weighed on investor sentiment.
Discussion: Digital expanded its global footprint during the pandemic as its clients benefitted from lockdown trends and the need for internet-based communication services.
In its most recent quarter, most key measures improved. New leasing was a record and the average renewal was for a 7-year term. Retention levels remain high. Looking ahead, management sees consistent multi-year demand as global cloud computing needs expands. It believes it has pricing power to pass through inflationary costs in key markets including Toronto.
Dividend: Digital Realty has raised its dividend in each of the past 17 years. The latest increase of 5% with the January payment, raises the annual payment to $1.22. It yields 3.82% 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.
Alexandria Real Estate Equities Inc. (NYSE: ARE) Closed Friday at $159.71 (All figures in U.S. dollars.)
Background: Alexandria is a specialty REIT that develops laboratories, medical offices and related space that caters to the life sciences. It tends to cluster around universities which gives it customers access to skilled labour and the entrepreneurial spinoffs that come from academic research.
Clients include Pfizer and Eli Lilly. Bristol Myers Squibb is its largest tenant.
Performance: The shares are down 27% year-to-date, again with most of that coming in the last month.
Discussion: In a recent call with analysts, management said the outlook is positive with strong growth for labs in its cluster markets. It forecasts 8% growth in funds from operations (FFO) through 2023 with an occupancy rate at 95%.
The company noted inflationary pressures are affecting the cost to build new facilities including labour and materials. Russia’s invasion of Ukraine has reduced the supply of critical semiconductor materials such as palladium and nickel, which affects building control systems and emergency generators, the latter of which can now take up to a year to deliver.
Alexandria also has high quality properties, A-list customers and is a leader in a growing niche. It offers a secure dividend stream and long term capital gains.
Dividend: Alexandria increased its dividend twice in 2021, with a 5.8% increase with the April payment. It increased its dividend 19 times between 2010 and 2020. The current yield is 2.91%.
Tax implications: As with Digital, distributions received in a non-registered account or a Tax-Free Savings Account will be subject to a 15% withholding tax.