Data centers are a unique type of commercial real estate. There's high demand but also high barriers of entry because of the high cost to develop and maintain a data center in addition to needing specialized knowledge to operate in this field. This is one of the reasons data center real estate investment trusts (REITs) can be such an appealing investment option. It provides access to a growing sector while jumping the typical hurdles associated with this asset class. Digital Realty Trust (NYSE: DLR) and Equinix (NASDAQ: EQIX) are two of the leading data center REITs, but which is the better buy? Let's take a look to find out.
How they stack up
Equinix and Digital Realty Trust are similar in terms of assets owned with Digital Realty Trust having 280 properties under management in six continents and Equinix having 214 across five continents. Both companies have a diverse portfolio of bookings across multiple industries with the largest share of bookings in the cloud and IT services. When it comes to revenues, Euquinix surpasses Digital Realty Trust at $1.47 billion at the end of the second quarter of 2020 compared to Digital Realty Trust's $993 million in revenues. Recurring revenues is important in any real estate business, but for data centers particularly.
Both have consistently raised their dividend payouts since inception, but Equinix is a much younger company, with dividend payouts starting in 2014, compared to Digital Realty Trust, who has been around since 2004. Payout ratios for Digital Realty Trust are currently at 75% and at 65% for Equinix, both of which are conservative ratios and provide a lot of room for maintained dividend increases and liquidity to cover further debt service. Both companies have seen a slight decline in their FFO when compared to the same quarter last year but have shown improvement when compared to the previous quarter. This decrease is very likely related to temporary coronavirus-related disruptions in the market.
Equinix also has less debt as it relates to EBITDA, with roughly $14.2 million in outstanding debt and $720 million EBITDA. Additionally they have $4.7 billion in liquidity. Digital Realty Trust has roughly $12.4 billion in outstanding debt and $494 million EBITDA, which puts Equinix ahead when comparing the two. Nearly all of the debt carried by both companies is unsecured with low interest rates, which is helpful for long-term financial stability.
Both companies take their "green" initiatives seriously, putting great effort into finding sustainable energy and environmentally friendly solutions for the operation and management of their facilities, which helps reduce costs.
When it comes to new developments or expansion, both are aggressively adding to their portfolios. Over the past quarter, Equinix opened a new data center in a joint venture with Omantel in Oman, acquired 13 Bell Data Centers in Canada for $780 million, gained Nokia (NYSE: NOK) and Google Cloud (NASDAQ: GOOGL) as new clients, and expanded their reach to India by acquiring GPX India. The company uses a mixture of new acquisitions, expansion of current facilities or contracts, and joint ventures to help further their growth in both new and existing markets.
Digital Realty Trust over the past quarter has expanded to Croatia through the acquisition of Altus IT, acquired land for the expansion of a current data center in Madrid, and expanded their colocation abilities in Toronto. These projects, in addition to the other $2 billion currently under development, should bring new opportunities and revenues for the company moving forward.
Which is the better buy?
I think both companies are worthwhile investments, albeit they both seem a bit overpriced at the moment. However, Equinix's financial standing, low debt, and growth perspectives really make it stand out between the two. The biggest downside to Equinix is that share prices are far higher than Digital Realty Trust, making it a more expensive REIT to invest in while also providing a lower return, which at the time of writing is 1.2%. With that being said, I still think there is opportunity for growth in the long term. As technology continues to consume our modern world, the need for data will continue to rise with it.