By now, you’ve probably heard about “the cloud.” Instead of storing their software programs through data files on “in-house” computers, data storage devices and servers, the cloud allows companies to house them in remote data centers that are owned and operated by independent third parties. These remote data centers, offer reliable and secure environments while serving dozens, or even hundreds, of different companies. Analysts expect the demand for remote data center services to increase at double-digit annual rates for the next few years.
The good news for investors is that at least six firms in the business of building and operating cloud data centers are organized as real estate investment trusts (REITs).
As regular readers probably know, REITs (pronounced ‘reets’) are special types of corporations that invest mainly in real estate and don’t pay federal income taxes as long as they pay out at least 90% of their income to shareholders. Consequently, REITs typically pay higher dividends than regular corporations.
The six data center REITs are CoreSite Realty, CyrusOne, Digital Realty REIT ($DLR), DuPont Fabros Technology ($DFT), Equinix (EQIX) and QTS Realty.
When evaluating just about any list of stocks, all else equal, you’ll do best by picking those that generate the fastest revenue and earnings growth while you hold them. With that in mind, I winnowed the original list down to the three REITs with the most promising outlooks based on next year’s forecast revenue and earnings growth. Here’s the list:
CoreSite RealtyCorp (COR) : A September 2010 IPO, CoreSite operates 17 data centers in the U.S., plus an additional two under construction. Analysts expect CoreSite to grow revenues and earnings per share (EPS) around 15% and 17%, respectively, in 2016. Current dividend yield is 3.0 percent.
CyrusOne Inc. (CONE) : Cincinnati Bell acquired CyrusOne in 2010 and then spun it out as a separate company via an IPO in January 2013. CyrusOne operates more than 30 data centers in the US, London, and Singapore. Forecast 2016 revenue and EPS growth: 25% and 19%. Dividend yield 3.5 percent.
QTS Realty Trust Inc. (QTS) : An October 2013 IPO, QTS operates 25 data centers in North America, Europe and Asia Pacific. QTS differentiates itself by offering technical support services to its tenants rather than simply leasing space. Forecast 2016 revenue and EPS growth: 32% and 25%. Dividend yield 2.8 percent.
I found the quoted revenue and earnings growth forecasts on Yahoo’s (finance.yahoo.com) Earnings Estimates Report for each stock.
If you’re rusty on your stock terminology, dividend yield is your expected next 12 month’s return from dividends divided by the current share price. It’s analogous to savings account interest, except, of course, your principal is not insured by the US government.
As always, consider the REITs that I’ve described as research candidates, not a buy list. Do your own due diligence. The more you know about your stocks, the better your results.
For tips and information on the best utilities and dividend stocks from Harry Domash, please check out Dividend Detective.
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