Tech-Exposed Real Estate Is Pulling Away From Other Properties

(Bloomberg) — The same trends behind soaring stock prices for Amazon.com Inc. and Zoom Video Communications Inc. are benefiting shares in the companies associated with their real estate.

Communication towers and data center stocks — sometimes referred to as “where the internet lives” — have seen some of the biggest gains in the S&P 500 so far this year as stay-in-place measures to combat the coronavirus have accelerated the demand for digital services and connectivity.

Whereas the pandemic has severely hit many commercial property owners, shares in real estate investment trusts related to technology are outperforming. The combined market value gained by just five of those stocks is almost the same as the amount lost by 30 REITs specializing in malls and shopping centers, according to data compiled by Bloomberg News.

“If you’re a real estate investor and your mandate is to own real estate, you’re obviously not doing very well owning offices or owning retail,” Cowen analyst Colby Synesael said in a phone interview.

With more people at home, the demands on technology and its infrastructure have been tremendous, whether it’s allowing for online shopping, mobile streaming or working remotely. As a result, certain REITs have emerged as defensive plays for investors, Synesael said.

American Tower Corp., Digital Reality Trust Inc., Equinix Inc., Crown Castle International Inc. and SBA Communications Corp. have added roughly $50 billion in total market capitalization this year, and valuations for towers and data centers have never been higher.

Data centers, for instance, are trading at a roughly 15% premium to the overall REIT average on a price to estimated adjusted funds from operations basis, according to Berenberg analyst Nate Crossett. Historically they’ve traded at a 7% discount.

As a global data center company, Equinix has boasted of its work building out coverage and scale for clients that have gone on to become household names in the work-from-home era including Zoom and Cisco Systems Inc.’s Webex.

“Two significant customers of ours is Zoom and Webex — both of whom obviously saw exceptional increases in their demand as work from home took off,” Chief Executive Officer Charles Meyers said in an interview. “We played a very key role in helping them ramp up their capacity to meet that demand. That was true also in networking cloud providers.”

Meyers said it’s difficult to anticipate how much more revenue the company could see over time. In terms of demand, he pointed to recent overall online traffic trends, which surged 25% to 30% over a 30- to 45-day period– growth that normally would take nine months to a year to achieve.

Digital Realty Chief Financial Officer Andy Power said in an interview that the company had seen a pickup in data center demand from clients filling near-term gaps but that longer-term, he was “pleasantly surprised” at how larger enterprises were also taking this moment to plan for the future.

“We’re seeing the criticality of our infrastructure playing out front and center while many of our other asset classes [in real estate] are seeing sloping rent,” he said. Even for clients in struggling industries such as travel, the company has seen increased deployments. “Our services are fundamentally mission critical for their businesses. You cannot book an airline ticket or any hotel reservation without the infrastructure we’re essentially providing.”

Bloomberg Intelligence analyst Lindsay Dutch said the need for increased connectivity during the pandemic has demonstrated the importance of digital infrastructure, which is a long-term driver for the stocks.

“If you think of everyone on their computers, trying to connect to their workplace and do all these Zoom calls and stream Netflix — that creates more traffic and the need for power,” she said.

Before the virus, shares in tech-related REITs had already been rising, catching the attention of investors, Cowen’s Synesael said.

For communication towers, he noted a sea change in 2018 when Vanguard Group began adding towers to its investment portfolio, prompting more investors to do the same ahead of the U.S. rollout of 5G spectrum.

Unlike data centers, tower stocks aren’t seeing a fundamental change in earnings from the pandemic, Synesael said. However, they are still benefiting from trends Covid-19 has accelerated like mobile data use, which Synesael expects to continue.

Despite their relative premium, Berenberg’s Crossett said that on an absolute basis “there’s still plenty of room to run” for data center stocks.

“To the extent that there’s a pullback, I would be adding to these names,” he said.

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