Dividend-Paying Data Center REITs Have Huge First Quarter: 4 to Buy Now

By Lee Jackson Updated Jan 13, 9:33AM EST · Published May 11, 10:25AM EDT

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Dividend-Paying Data Center REITs Have Huge First Quarter: 4 to Buy Now — © Thinkstock

[cnxvideo id=”625493″ placement=”ros”]Generally when investors think of real estate investment trusts (REITs), the first thought is companies that own office buildings, malls and shopping centers. But the data center REITs are growing like crazy, and with the numbers in it looks like they had an outstanding first quarter. If one top Wall Street firm is right, we are just in the early innings of what could be a long and very prosperous ball game.

A new research report from Jefferies examined the first-quarter results from the companies in their data center research universe and came away very bullish, noting that leasing volumes for the quarter reached new records. In fact, the companies in the Jefferies universe leased $155 million of annualized revenue, which the report says is 75% above the prior two-year average.

With growth expected to continue almost unabated, four companies are rated Buy.

CoreSite Realty

This is the second favorite data center pick at Jefferies, and the analysts forecast 20% adjusted funds from operations growth over the next three years, which is the highest in the group. CoreSite Realty Corp. (NYSE: COR) delivers secure, reliable, high-performance data center and interconnection solutions to a growing customer ecosystem across eight key North American markets. More than 900 of the world’s leading enterprises, network operators, cloud providers and supporting service providers choose CoreSite to connect, protect and optimize their performance-sensitive data, applications and computing workloads.

CoreSite’s scalable, flexible solutions and more than 350 dedicated employees consistently deliver unmatched data center options, all of which leads to a best-in-class customer experience and lasting relationships.

CoreSite investors are paid a 2.77% distribution. Jefferies raised price target on the stock to $91, and the Thomson/First Call consensus target is listed at $76.25. The stock closed most recently at $76.63 per share.
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CyrusOne

This is the Jefferies top pick among the data center stocks. CyrusOne Inc. (NASDAQ: CONE) designs, builds and operates facilities across the United States, Europe and Asia that give its customers the flexibility and scale to match their specific growth needs. Specializing in highly reliable enterprise-class, carrier-neutral data center properties, the company provides robust data center infrastructure to ensure the continued operation of IT equipment for a rapidly growing list of organizations that now nears 900, including nine of the Fortune 20 and more than 160 of the Fortune 1000 or equivalent-sized companies.

Many analysts feel that some of the best returns in the data center sector may be found in the smaller players in the space like CyrusOne. The company trades at numerous lower multiples than its bigger competitors, and the Jefferies team feels that the discount valuation is not warranted given the recent surge in leasing and above-average growth. The company also has exhibited faster deployment times, rapid new market expansion and low churn among customers, those are and all bullish reasons for buying the stock.

Unitholders of CyrusOne are paid a solid 3.12% distribution. The Jefferies price target was raised to $57, and the consensus target is set at $52.37. The shares closed on Tuesday at $48.69.
Digital Realty Trust

This stock may be a solid play for more conservative accounts. Digital Realty Trust Inc. (NYSE: DLR) supports the data center and colocation strategies of more than 600 firms across its secure, network-rich portfolio of data centers located throughout North America, Europe, Asia and Australia.

Digital Realty’s clients include domestic and international companies of all sizes, ranging from financial services, cloud and information technology services, to manufacturing, energy, gaming, life sciences and consumer products. The company rates highly with portfolio managers, as a large part of the market cap of the company is in institutional hands.

The company reported strong first-quarter numbers that were ahead of expectations. Last year, Digital Realty bought Telx, a national provider of data center colocation, interconnection and cloud enablement solutions back in a $1.89 billion deal, and the acquisition is expected to close this month. The combination is expected to double Digital Realty’s footprint in the rapidly growing colocation business, as well as to provide Digital Realty customers access to a leading interconnection platform.

Digital Realty investors are paid an outstanding 3.76% distribution. The $106 Jefferies price target is well above the consensus target of $91.29. The shares closed most recently at $93.63.

QTS Realty Trust

This company rounds out the four top picks data center REITs at Jefferies. QTS Realty Trust Inc. (NYSE: QTS) is a leading provider of secure, compliant data center solutions, hybrid cloud and fully managed services. Its integrated technology service platform of custom data center colocation and cloud and managed services provides flexible, scalable, secure IT solutions for web and IT applications.

QTS’s Critical Facilities Management provides increased efficiency and greater performance for third-party data center owners and operators. The company owns, operates or manages 24 data centers and supports more than 1,000 customers in North America, Europe and Asia Pacific.

Construction is nearing completion on a new gigantic state-of-the-art data center. QTS purchased the former Chicago Sun-Times Printing plant in the Chicago area, which sits on a 30-acre campus. The 317,000 square foot facility will open July 2016. This huge new facility accentuates the huge growth in business the company is experiencing.

QTS investors are paid a 2.78% distribution. The Jefferies price target was moved to $59, while the consensus estimate is posted at $53.09. Shares closed most recently at $51.71 apiece.
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It should be noted that all these stocks have had big runs over the past year, so investors may want to scale in some capital, buy a partial position and see if they don’t pull back some. It also is important to remember that distributions from REITs may contain return of capital.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.