Digital Realty Trust is focused exclusively on providing facilities for data centres and cloud computing.SUNDRY PHOTOGRAPHY/iStockPhoto / Getty Images
Real estate investment trusts (REITs), once the go-to companies for investors seeking safety and high dividend payments, have been hit hard by the COVID-19 fallout.
The S&P/TSX Capped REIT Index is down by about 25 per cent year to date, more than double the approximately 11 per cent decline of the S&P/TSX Composite Index. Some REITs have cut dividends while others, particularly in the office and retail space, aren’t sure which of their tenants will be able to pay their rents.
But there are some opportunities amid the REIT rubble – including specialty companies that cater to growth in the digital economy.
“It’s a huge mistake to think REITs are not the place to be,” says Srikanth Iyer, managing director of systematic strategies for Guardian Capital Group Ltd. in Toronto. “We are most excited about specialized and industrial REITs.”
He’s lead portfolio manager of Guardian Global Equity Fund and Guardian Global Dividend Growth Fund. His team uses sophisticated analytical techniques to find companies with high dividends and high dividend growth rates. The analysis also rates the sustainability of those dividends.
Mr. Iyer and Paul MacDonald, chief investment officer at Harvest Portfolios Group in Oakville, Ont., say REITs that offer data centres for cloud computing are one area of growth. These companies provide facilities with high-speed data and communications links. Their clients include the biggest tech companies such as International Business Machines Corp., Facebook Inc., Amazon.com Inc. and Microsoft Corp., as well as banks, insurers, energy and health care firms.
A second area is REITs that own warehouses and storage facilities for so-called last-mile deliveries of goods. As online shopping expands, these facilities are increasingly in demand.
Mr. Iyer says COVID-19 has accelerated trends that were underway, “hastening a global transformation in the way we live and work.”
The phrase “Big Data is the new Big Oil,” is apt, he says. Just as oil drove every aspect of the industrial economy, cloud computing and data storage are driving the new economy.
Canada doesn’t have publicly traded players that are focused on this space exclusively. One REIT both Mr. Iyer and Mr. MacDonald like is Digital Realty Trust Inc. (DLR-N), the “global gorilla” as Mr Iyer calls it. Digital Realty is a holding in Guardian Global Equity Fund, the actively managed Harvest Global REIT Leaders Income ETF (HGR-T) as well as Horizons Active Global Dividend ETF (HAZ-T) and Horizons Active US Dividend ETF (HAU-T), both of which Guardian subadvises for Horizons ETFs Canada (Management) Inc.
Digital Realty has about 21 per cent of the global market share for data centres. Its properties include two facilities in the Toronto area – in Markham and Vaughan. It recently acquired Netherlands-based InterXion to become the second-largest data centre provider in Europe.
Digital Realty’s shares are up by about 14 per cent year to date on strong earnings and it raised its dividend in March for the 15th consecutive year. The annual rate yields 3.24 per cent at the current price of about US$138 a share.
“It’s not just Amazon and Google who need these facilities,” Mr. MacDonald says. “Every company has to store data somewhere.”
CoreSite Realty Corp. (COR-N) is another REIT both Mr. Iyer and Mr. MacDonald hold in the funds they manage. CoreSite is U.S. focused and much smaller than Digital Realty, with a market capitalization of US$9-billion versus US$36-billion. Its customers include The Walt Disney Co., Apple Inc., Comcast Cable Communications LLC, Microsoft and Verizon Communications Inc.
A second growth area in REITs is so-called last-mile warehouses, which are where goods ordered online or shipped between factories are stored prior to delivery. In Canada, the exclusive public players have been acquired or taken private.
Mr. Iyer likes Stag Industrial Inc. (STAG-N), which has single-tenant properties. Customers include FedEx Corp., United Parcel Service Inc. and online retailers like Amazon and Walmart Inc. Stag operates across the U.S., but has many properties in the Midwest. The company will benefit from the repatriation of industry from China and other parts of Asia, he says. The dividend yields 5.7 per cent at current prices and has been raised in each of the past 10 years.
A global player is Prologis Inc. (PLD-N), which has been in business for 30 years, operates in 19 countries and has a market cap of US$64-billion. The dividend yields 2.65 per cent at current prices.
When it comes to how to invest, both Mr. MacDonald and Mr. Iyer say diversity is best.
“If you’re looking for a one-stop solution, I recommend buying a basket,” says Mr. MacDonald.
Mr. Iyer favours actively managed exchange-traded funds, although says some investors may prefer individual stocks.
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.