As the growing use of the Internet has pushed up demand for their space, data center REITs appear to have built up balance sheets strong enough to facilitate their growth.
Currently, there are three publicly traded data center REITs: Digital Realty (NYSE: DLR), DuPont Fabros Technology, Inc. (NYSE: DFT) and CoreSite (NYSE: COR). These high-tech storage companies, which house computer systems and their supporting infrastructure, have well-known tenants, such as Facebook, Google and Zynga. All are operating with substantially less leverage than the median of all equity REITs, according to data from research firm SNL Financial.
"This combination of low leverage and adequate liquidity places data center REITs in a good position to take advantage of acquisition and development opportunities that are in the best interest of the company," said Jim Stevens, an analyst with SNL Financial.
In the second quarter of 2012 CoreSite's debt was 10.9 percent of its total capitalization, according to SNL. This is below the broader equity REIT median of 36.1 percent. DuPont Fabros was 20.5 and Digital Realty was 26.9 percent.
He added that while the median liquidity for all equity REITs was $272 million, in the second quarter, Digital Realty had $1.22 billion available between its cash and credit facilities, while DuPont had $266 million and CoreSite had $153 million.
Digital Realty, the largest and oldest of the three data center REITs, is already putting its capital to work. In September, the company announced the acquisition of a 286,000 square foot data center and office complex in Colorado. On Oct. 2, it announced the opening of the first two facilities at its new Digital Chessington data center in London.
The data center sector could double in size in the next few years, according to Stevens. In August, Cyrus One Inc., a spinoff of Cincinnati Bell Inc., filed for an initial public offering. California-based Equinox Inc. announced in September that it intends to pursue REIT status as well.
However, despite the sector's current strength, Lukas Hartwich, an analyst with Green Street Advisors, said increased competition has lowered firms' returns and limited growth opportunities.
"As the data center REITs have grown in size, and acquisition and development opportunities have become increasingly scarce, it has become harder to move the needle through external growth," he said.