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Real Estate Investment Trusts

Crunching the Numbers on Data-Center REITs

By Roger S. Conrad, on Feb. 28, 2014

FFO-based payout ratios provide useful insight into the safety of a REIT’s dividend. All four data-center rates stack up well on this metric.

These low payout ratios and recent distribution growth suggest that this niche of the REIT market remains relatively healthy, despite worries that larger customers such as Google (NSDQ: GOOG) and Amazon.com (NSDQ: AMZN) recently have opted to construct their own data centers.

During Digital Realty Trust’s fourth-quarter earnings call, CEO Mike Foust highlighted the REIT’s record lease signings as a result of efforts to “lease up” its existing capacity.

Cloud infrastructure and applications have helped to drive demand for data center, accounting for more than 60 percent of Digital Realty Trust’s lease signings in 2013.

Foust cited tighter supply conditions in most major US markets, but also noted that rents in Ashburn, Va., and Richardson, Texas were lower than those in Europe, the Asia-Pacific region and elsewhere in the US.

This pricing discrepancy suggests that data centers can suffer from overbuilding, driving down rents and driving up vacancies in the worst-case scenario.

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