Some investors are avoiding data center REITs like the plague. This makes sense given rising competition, but such REITs are not yet extinct. In fact, due to a massive sell-off, some are trading at low prices. This provided a great opportunity for income-seeking investors.
Altered playing field
Prior to the rise of Amazon.com, Inc. (NASDAQ:AMZN) and Google Inc (NASDAQ:GOOG), data centers were a hub of activity. Now, Amazon.com, Inc. (NASDAQ:AMZN), Google Inc (NASDAQ:GOOG) and other tech firms are leaving some center owners wondering how they will respond to the market.
Amazon.com, Inc. (NASDAQ:AMZN) Web Services enables users to run virtually any application in the cloud, including data center capabilities. Forrester Research estimates that Amazon.com, Inc. (NASDAQ:AMZN) claims about 70% of the market for renting computing capacity and data. Additionally, Amazon.com, Inc. (NASDAQ:AMZN) continues to re-position itself to sell its services to large companies which historically own their hardware or used data centers.
Google Inc (NASDAQ:GOOG) is in the heat of the battle, too. In 2006 Google Inc (NASDAQ:GOOG) invested over $600 million to establish a state of the art, energy efficient data center that could potentially serve as the hub for the firm’s war against Amazon.com, Inc. (NASDAQ:AMZN). Google Inc (NASDAQ:GOOG)’s centers paved industry standards in environmental protection, energy efficiency, and security. Further, the search engine giant offers Google Inc (NASDAQ:GOOG) Compute Engine, an application which enables organizations to “run large scale computing workloads…hosted on Google’s infrastructure.”
Data center REITs that have to compete with these giants are at a disadvantage.
Jonathon Jacobson, founder of Highfields Capital Management, frames the situation well:
Analysts are concerned about rising capital expenses and declining rent at data center REITs. They also worry that technology companies such as Amazon and Google are increasingly building their own data centers rather than renting space from REITs. That is decreasing demand for space in the REITs’ centers and is further troubling because the big technology companies potentially could compete with REITs by leasing out space to smaller businesses.
Digital Realty Trust, Inc. (NYSE:DLR) and DuPont Fabros Technology, Inc. (NYSE:DFT) are the largest publicly-traded data center REITs. Just in the past month, Digital Realty Trust, Inc. (NYSE:DLR)’s stock price has plummeted over 12%. As of the most recent quarter, it has operating cash flows just over $89 million and over $355 million cash outflows from investing activities. Even with a negative cash flow, Digital Realty Trust continues to increase its bottom line. Investors should also note that its dividend yield far exceeds its competitors’ yields. Currently, its long term investments seem to be working.