So far, data center REITs have been some of the most successful REITs in 2016. In main, this is because data center REITs have seen a 37 percent return in their stock prices, which has propelled them to the top of the list with a 40 percent return in spite of their lackluster dividends. However, it is important to note that the factors propelling this rise might not last throughout the rest of 2016, which is something that should influence the decision-making of REIT investors.
In short, the rise of data center REITs can be attributed more to the fundamentals of their sector than to the choices of their management, though the latter has had an effect as well. This can be seen in how the rise is not based on a small number of isolated cases but on the widespread success of the sector.
In part, this could be because of recent expansions such as Digital Realty’s choice to buy Telx, Equinix’s choice to buy Telecity, and DuPont Fabros’s choice to resume equity issuance for development after losing a major client in 2015. However, it could also be attributed to positive investor sentiment, which has received a significant boost after news came that the Federal Reserve will not be raising its federal funds rate until September. Finally, there is the fact that data center REITs have high multiples at the moment, which might bring in interested individuals on its own.
Unfortunately, this rising interest in data center REITs has not been matched by rising funds from their operations, as shown by the fact that their funds from operations per share has been rising at a slower rate than their share price. As a result, it seems possible that data center REITs will receive some backlash at some point in the future once REIT investors reconsider their initial investment decisions, meaning that interested individuals should be cautious about what will happen in the second half of 2016.
Source: Digital Realty Trust Inc. (NYSE:DLR), Equinix, Inc. (Nasdaq: EQIX),CyrusOne (NASDAQ: CONE), DuPont Fabros Technology, Inc. (NYSE: DFT), QTS Realty Trust (NYSE: QTS),CoreSite Realty Corporation (NYSE:COR)
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