Are Data REITs For You?

09/28/2013 9:00 am EST

Focus: REITS

Brad Thomas

Editor, Forbes Real Estate Investor

The Intelligent REIT Investor's Brad Thomas discusses his outlook for real estate and the new class of data REITs.

SPEAKER:  Hi, I'm talking with Brad Thomas today about REITs.  Thank you for joining me, Brad. 

BRAD THOMAS:  Oh, glad to be here, thanks so much. 

SPEAKER:  You're welcome.  You know, we talked a couple of months ago and you were saying to me that there were a couple of things that investors really need to think about when they're investing in REITs, and one was what is the dividend yield, obviously, and second is the safety of that dividend.  So can you expand a little bit on that? 

BRAD THOMAS:  Sure.  Well, you know, REITs today are very attractive for investors because investors are looking for dividends and dividend safety.  You must remember that REITs are unlike any other public company in that they pay out dividends, forced dividends, and what I mean by that is by law, which is a law created in 1960 in the Eisenhower administration, so this is a law that was created over five decades ago, just point that out, that REITs are required to pay out 90% of their taxable income in the form of dividends, so that's created a very sustainable model for investors today.  That's what's attracted investors to this real estate secured industry because of the sustainability of the dividend model.  So we're seeing a lot of high dividends today, again because companies are forced to pay out at least 90%.  In most cases they pay out almost 100% of their taxable income in the form of dividends. 

SPEAKER:  But now, what happens if an investor owns a REIT and there's a cut in the dividend?  I mean, do you panic immediately? 

BRAD THOMAS:  Well, I mean we did see that. 

SPEAKER:  Yes, we did. 

BRAD THOMAS:  Great recession, but remember it was not only REITs -

SPEAKER:  Yes. 

BRAD THOMAS:  - everybody panicked.  I think quite a few companies panicked, but what's interesting is one of my mantras is huge failure makes for huge success.  I think that's really important, not only in the REIT business but any company today, but especially in the REIT sector which is the sector that I cover.  We're seeing a tremendous recovery in the real estate market today. 

SPEAKER:  Yes. 

BRAD THOMAS:  I like to refer to every business has a cycle. 

SPEAKER:  Yes. 

BRAD THOMAS:  Real estate is typically a seven to eight to nine-year cycle, so I like to say we're in the bottom of the third inning.  There's still a tremendous amount of growth ahead.  We're seeing, at least the economy is starting to recover.  Interest rates haven't started to rise yet.  We're talking about a rise in interest rates, and remember when interest rates rise that means the economy is performing well. 

SPEAKER:  Correct. 

BRAD THOMAS:  So again, I think real estate is definitely an asset class that I recommend for any investment portfolio today. 

SPEAKER:  And you also, when I spoke with you in May you were talking about data REITs.  Can you tell us a little bit about what the heck is a data REIT and what does that mean for investors? 

BRAD THOMAS:  Sure.  Well, I was actually over in Digital Realties headquarters today here in San Francisco, just right down the street, and Digital, ticker symbol DLR, they're one of the largest, actually they are the largest data sector REIT in the country.  This is a fairly new sector.  I mean, you know, we didn't have Facebook and Amazon ten years ago. 

SPEAKER:  Right. 

BRAD THOMAS:  So, you know, the fundamental value proposition for a data REIT is all of this data in my phone and your phone and these pictures of kids and grandchildren, where's that data stored today? 

SPEAKER:  Yes. 

BRAD THOMAS:  Where's all the business data stored today?  So there's a tremendous growth in this sector, supply and demand is very important today, so tremendous growth opportunities.  Digital's got around $10 billion market cap.  There are some smaller data sector REITs out there like Serex and Equinex (SP?) which is actually talking about converting to say REIT structure. 

SPEAKER:  Yes, they haven't done that yet, have they? 

BRAD THOMAS:  Right.  No, they've announced, and it's very large, it will be about at least a $10 billion company, so you're seeing when you aggregate all of the data storage product, not only public but also private and a lot of it is private equity driven, there's certainly a lot of real estate out there today so it's a very sustainable model.  Digital by the way, you talk about dividends we addressed earlier.  Dividend (SP?) has never cut a dividend.  They've been a public company for nine years -

SPEAKER:  That's great. 

BRAD THOMAS:  - and not only have they not cut the dividend, they've increased it every year in a row, so that tells you something about the data sector. 

SPEAKER:  Sure, good sector.  Thank you very much. 

BRAD THOMAS:  Sure, you're welcome. 

SPEAKER:  And thanks for being with us on the MoneyShow.com video network.

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