Alex Pettee, CFA
Data Center REITs: Cloud Keeps Growing
Data Center REITs were the best-performing REIT sector in 2020, riding the "work-from-home" tailwinds that powered a surge in cloud spending, but the post-vaccine sector rotation has pressured these high-flyers.
Recent earnings reports were solid but not spectacular. Leasing activity - the most closely-watched earnings metric - surged to record highs in Q4, but "same-store" pricing remains flat amid stiff competition.
Consistent with the other "essential" property sectors - housing, technology, and logistics - FFO growth was firmly positive in 2020, averaging roughly 4%. Forward guidance suggests similar growth in 2021.
With muted pricing power amid stiff competition from the hyperscale giants – Amazon, Microsoft, and Google - these REITs will continue to rely heavily on development and M&A to fuel future growth.
All five data center REITs boosted their dividends in 2020, and two have raised payouts again in early 2021. While growth rates have moderated, valuations appear attractive with data center REITs trading at historically modest premiums to the REIT sector average.
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