Investors Are Loving This Massive Data Center REIT | Smart Change: Personal Finance


Given the industry demand, it’s no surprise why investors continue to flock to data center stocks. In this clip from “Real Talk” on Motley Fool Live, recorded on March 25Motley Fool contributors Matthew DiLallo and Matt Frankel discuss their favorite data center stocks, and share which companies they think could scale the most over the next decade and which might be a future dividend aristocrat.

Matthew DiLallo: If switch (NYSE: SWCH) wasn’t looking at strategic alternatives, that would probably be my favorite one because it has everything we look for in a Motley Fool pick, like founder-led. He’s really engaged in the business. It’s all about building better data centers and so much growth. They own five campuses around the country, that’s 16 data centers, and they have about five million square feet of capacity, but they have enough space in their campuses to bill up to 16 million square feet of space. You’re talking about a company that could really scale in the next decade. I think it’s a decade-long thing. Whoever buys that, I think, is going to get a great long-term growth company. I really do think they’re going to get bought out because there’s just so much money flowing into the sector. Because of that, Digital Realty (NYSE:DLR) is really starting to show up for me as being a really good deal these days. It’s down about 20% from its high and this is just such a fantastic company. They’ve grown their FFL per share at a double-digit rate since 2005, so it’s very consistent. They’ve increased their dividend every year for 17 years. They’re much more of a real estate play even than equinix (NASDAQ: EQIX), and that’s one of the reasons they have a higher dividend yield. They really want to be more traditional REITs. They have a higher payout ratio, but still a good balance sheet. They’re able to grow both through acquisitions. They can leverage their balance sheet and basically buy whatever they want. And development, they have a good land bake and they’re just continuing to expand in the right places. I think at their current price, I believe it’s 20 times FFO, which is really cheap for what data centers have been going at. We saw a lot of these getting taken out at 25 times plus. You’ve got a great company trading at a relatively inexpensive price. Dividend yield’s over 3.5%. It’s looking really attractive to me.

Matt Frankel: I’ll give my answer and then, Ryan, we have another Slido question or two to get through. You guys have the exact same exposure to data centers it sounds like. I have Digital Realty. I have Iron Mountain (NYSE: IRM) and I do have Cyxtera (NASDAQ:CYXT). i love Starboard Value (NASDAQ: SVAC) as a value investor and I love their involvement in Cyxtera, which really got it on my radar, but I also love that they have an asset-light business model. Out of their 61, I believe, data centers, they only own two of them. The rest are leased and subleased, which is a very capital-light business model. It’s also why it has, by far, the smallest market cap, even though it actually is not the smallest footprint. I think they are actually the No. 3 co-location data center operator. I like Cyxtera. As far as the place to put money into today, I’d have to go with Digital Realty. I love all these global expansions they’re doing, specifically, their India partnership with Brookfield Infrastructure (NYSE: BIPC), where they’re bringing their data center platform to India, which is just a massive market opportunity and it will be a long tail growth opportunity for that company. I am a big Digital Realty believer. I think it’s a future dividend aristocrat. Other than Iron Mountain, I think it’s the highest yielding out of all these. They’ve made it a priority to return capital to shareholders, 17 straight dividend increases. It’s, I think, tripled the S&P 500’s total return since its 2004 IPO. It’s just been a great performer and I don’t really see that changing anytime soon. Just a really well-run company.

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Matthew DiLallo owns Brookfield Infrastructure Corporation, Digital Realty Trust, Equinix, Iron Mountain, and Switch. Matthew Frankel, CFP® owns Cyxtera Technologies, Inc., Digital Realty Trust, and Iron Mountain. The Motley Fool owns and recommends Cyxtera Technologies, Inc., Digital Realty Trust, Equinix, Iron Mountain, and Switch. The Motley Fool recommends Brookfield Infrastructure Corporation. The Motley Fool has a disclosure policy.