The One Best REIT To Own In 2020


As my regular readers know, I am a huge proponent of diversification, as I consider it one of the best ways to sleep well at night.

However, as we roll into the New Year, I am fielding requests from readers inquiring about the best REIT to own in 2020.

So, while I purposely fulfil that request, I must provide the following disclosure, and that is that one of the best ways to mitigate risk is to carefully diversify your portfolio. By diversifying, you provide yourself with insurance that if one stock blows up, it will not severely impact your nest egg.

Digital Realty: A Data Center REIT To Own For Decades

Digital Realty (DLR) is one of the oldest data center REITs in the world, having gone public in 2004 and as of Q3-19 owned 211 data centers in 35 cities across 14 countries. The company has global exposure represented in North America (77%), Europe (13%), Asia Pacific (7%) and Latin America (3%).

The data center REIT’s primary business model is focused on hybrid cloud offerings, and specifically it provides co-location services, meaning that its facilities are a mix of private (in-house) and public storage solutions. Each facility has numerous small data racks and servers, which customers provide themselves.

Recently Digital Realty announced an agreement to combine with InterXion Holding, a Netherlands-based information technology services company. While strategic in nature (“this $8.4 billion transaction will create a leading global provider of cloud and carrier-neutral data center solutions with an enhanced presence in high-growth major European metro areas”), integration risk provides uncertainty related to execution and short-term dilution.

However, as we have observed Digital Realty over the years, we have witnessed successful M&A deals and very consistent earnings and dividend growth. Since going public in 2005 the company has generated CAGR dividend growth of 11 percent, while maintaining an impressive payout ratio (currently 73 percent).

We’re confident the company can restore its long-term growth trajectory (7% forecasted in 2021) and ability to generate impressive total returns.  We consider the InterXion transformative and a deal that should provide long-term growth attributes as the combined companies capitalize on emerging global digitization trends.

Digital shares are trading at $118.18 with a dividend yield of 3.7 percent. Analysts forecast FFO per share growth of 4 percent in 2020 and 8 percent in 2021. We have a Buy rating on the company with expected returns targeted at 15 percent in 2020. Give the exponential growth in 5G and cloud storage, we believe this high-quality (rated BBB by S&P) REIT could provide long-term value for decades.

I own shares in DLR



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