The tech sector is one of the most dynamic and innovative segments of the economy, driving growth and transformation across various industries. Technology companies need specialized real estate to support their operations, such as data centers, logistics facilities, and cell towers. These properties are often owned and managed by real estate investment trusts (REITs), which offer investors exposure to the tech sector while providing steady income and diversification.
REITs are companies that own, operate, or finance income-producing real estate. They are required to distribute at least 90% of their taxable income to shareholders as dividends, making them attractive for income-seeking investors. REITs also benefit from lower corporate taxes and capital gains rates, as well as liquidity and transparency.
In this article, we will look at three REITs that have a front-row seat to the tech sector boom, and why they are worth considering for your portfolio.
Digital Realty Trust (DLR): A Leader in Data Centers
Data centers are the backbone of the digital economy, providing storage, processing, and networking services for cloud computing, artificial intelligence, e-commerce, gaming, and other applications. Data centers require high levels of security, reliability, power, cooling, and connectivity, making them expensive and complex to build and maintain.
Digital Realty Trust (NYSE: DLR) is one of the largest and most diversified data center REITs in the world, with more than 310 data centers across 25 countries and 50 major cities. Its customer base includes some of the biggest names in tech, such as Nvidia (NASDAQ: NVDA), Microsoft (NASDAQ: MSFT), and Amazon (NASDAQ: AMZN), as well as more than 5,000 other enterprises, service providers, and government agencies.
Digital Realty has a strong track record of growth, profitability, and shareholder returns. In 2023, it expects to generate revenue of $5.55 billion and adjusted EBITDA of $2.7 billion, implying a high margin of 49%. It also expects to deliver funds from operations (FFO) per share of $6.60, which supports its dividend payout of $4.64 per share annually. Based on its current share price of $130.50, Digital Realty trades at a reasonable valuation of 19.8 times FFO and offers a dividend yield of 3.6%.
Digital Realty has a competitive advantage in the data center industry due to its scale, geographic diversity, customer loyalty, and innovation. It has been investing in new markets, such as India and South Korea, as well as expanding its existing footprint through acquisitions and development projects. It has also been enhancing its product offerings with interconnection services, hybrid cloud solutions, and edge computing capabilities.
Digital Realty is well-positioned to benefit from the long-term growth drivers of the data center market, such as the increasing demand for cloud services, data consumption, internet of things (IoT) devices, 5G networks, and artificial intelligence. It is also resilient to economic downturns and pandemics, as data centers are essential infrastructure for many businesses and consumers.
Prologis (PLD): A Giant in Logistics Real Estate
Logistics real estate is another key component of the tech sector ecosystem, as it facilitates the movement of goods and services across the supply chain. Logistics properties include warehouses, distribution centers, fulfillment centers, and cold storage facilities that enable e-commerce, omnichannel retailing, industrial manufacturing, food delivery, and other activities.
Prologis (NYSE: PLD) is the world leader in logistics real estate, owning or co-owning 1.2 billion square feet of space in 19 countries leased to more than 6,700 customers. Some of its largest tenants include Amazon (NASDAQ: AMZN), Walmart (NYSE: WMT), FedEx (NYSE: FDX), UPS (NYSE: UPS), and Home Depot (NYSE: HD).
Prologis has a proven history of growth, efficiency, and value creation. In 2023, it expects to generate revenue of $5.9 billion and adjusted EBITDA of $4.4 billion, representing a robust margin of 75%. It also expects to deliver core FFO per share of $4.10, which supports its dividend payout of $2.96 per share annually. Based on its current share price of $127.80, Prologis trades at a fair valuation of 31.2 times FFO and offers a dividend yield of 2.3%.
Prologis has a competitive edge in the logistics real estate market due to its scale, quality, location, and innovation. It owns some of the most desirable properties in high-demand markets near major population centers, transportation hubs, and ports. It also leverages technology to optimize its operations, enhance its customer service, and create new revenue streams. For example, it offers rooftop solar installations, smart building systems, and e-commerce solutions to its tenants.
Prologis is well-positioned to benefit from the long-term growth drivers of the logistics real estate market, such as the rising e-commerce penetration, consumer preferences for fast and free delivery, global trade flows, and industrial automation. It is also resilient to economic downturns and pandemics, as logistics properties are essential for maintaining the flow of goods and services.
American Tower (AMT): A Pioneer in Cell Towers
Cell towers are the third type of real estate that supports the tech sector, as they enable wireless communication and connectivity for mobile devices, broadband internet, streaming media, and other applications. Cell towers require significant capital investment and regulatory approval to build and operate, making them scarce and valuable assets.
American Tower (NYSE: AMT) is one of the largest and most diversified cell tower REITs in the world, owning or co-owning more than 224,000 towers across 20 countries. Its customer base includes some of the leading wireless carriers in the world, such as AT&T (NYSE: T), Verizon (NYSE: VZ), T-Mobile (NASDAQ: TMUS), and Vodafone (NASDAQ: VOD).
American Tower has a consistent record of growth, profitability, and shareholder returns. In 2023, it expects to generate revenue of $9.4 billion and adjusted EBITDA of $6.3 billion, implying a high margin of 67%. It also expects to deliver adjusted FFO per share of $11.25, which supports its dividend payout of $5.04 per share annually. Based on its current share price of $272.50, American Tower trades at a premium valuation of 24.2 times FFO and offers a dividend yield of 1.8%.
American Tower has a competitive advantage in the cell tower industry due to its scale, geographic diversity, customer relationships, and innovation. It has been expanding its presence in emerging markets, such as India, Brazil, and Africa, where wireless penetration and demand are growing rapidly. It has also been investing in new technologies and services, such as edge computing, fiber optic networks, and data centers.
American Tower is well-positioned to benefit from the long-term growth drivers of the cell tower market, such as the increasing adoption of smartphones, tablets, and wearables, the growing consumption of mobile data and video, the rollout of 5G networks and IoT devices, and the emergence of new applications such as autonomous vehicles and smart cities. It is also resilient to economic downturns and pandemics, as cell towers are essential infrastructure for communication and connectivity.
The tech sector is one of the most attractive areas for investors, as it offers growth, innovation, and diversification. However, investing in tech stocks can also be risky, volatile, and expensive. REITs offer a way to invest in the tech sector without taking on too much risk or paying too much. REITs provide exposure to specialized real estate that supports the tech sector, such as data centers, logistics facilities, and cell towers. These properties generate stable and growing income from long-term leases with high-quality tenants. They also benefit from strong demand drivers, such as cloud computing, e-commerce, and wireless connectivity.
The three REITs we discussed in this article are among the best in their respective segments, with solid track records, competitive advantages, and attractive valuations. They are Digital Realty Trust (NYSE: DLR), Prologis (NYSE: PLD), and American Tower (NYSE: AMT). These REITs have a front-row seat to the tech sector boom, and they deserve a place in your portfolio.
