Deep Dive: This one niche of the sagging real estate market is growing rapidly

Deep Dive

The build-out of data centers and 5G technology stands in contrast to the retreating retail and commercial real estate markets

A contract crew for Verizon works on a cell tower to update it to handle the new 5G network in Orem, Utah.


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The response to the novel coronavirus is adding a twist to the real estate adage that it’s all about location, location, location.

Even before the coronavirus crisis, investors were well aware that most brick-and-mortar retailers — and their landlords — were facing a dire threat from the rapid growth of online shopping.

But now that working at home has become a new norm for a sizable number of people, more is on the table. “Location” now has a different meaning because it’s no longer about a physical structure in an attractive area.

That’s because two areas of growth for real estate investment trusts, or REITs, are data centers that are benefiting from cloud-based collaboration and the work-from-home trend, and the rollout of 5G networks.

Threats to real estate

As office leases expire, corporate management teams will have an incentive and opportunity to save a bundle. Not only can they trim their physical office footprints, they may be able to do so at a significantly reduced cost per square foot, with lower overall demand.

So now instead of having one real-estate sector to automatically avoid (unless you are a professional with intimate knowledge of value plays within the space), you have two: retail and offices.

“You will see every CEO ask, ‘Do we really need all this office space?’ ” said John Traynor, chief investment officer of People’s United Advisors in Fairfield, Conn., in an interview.

Pacer Benchmark Data & Infrastructure Real Estate Sector EFT

The Pacer Benchmark Data & Infrastructure Real Estate Sector EFT
US:SRVR
takes a weighted approach to investing in data center REITs and other companies that store and transmit data, including owners of cell towers.

SRVR is up 3.5% this year through April 24 (including dividends), compared with declines of 11.7% for the S&P 500
US:SPX
and 13.9% for the S&P 500 real-estate sector.

Here are all of its holdings as of the close on April 24:

Company

Ticker

Share of portfolio

Dividend yield

Total return – 2020 through April 24

Country

Equinix Inc.

US:EQIX 17.3%

1.55%

18%

U.S.

Crown Castle International Corp

US:CCI 16.3%

2.97%

15%

U.S.

American Tower Corp.

US:AMT 15.6%

1.62%

7%

U.S.

CyrusOne Inc.

US:CONE 5.2%

2.75%

12%

U.S.

Cogent Communications Holdings Inc

US:CCOI 5.2%

2.88%

34%

U.S.

CoreSite Realty Corp.

US:COR 5.0%

4.04%

9%

U.S.

SBA Communications Corp. Class A

US:SBAC 5.0%

0.61%

27%

U.S.

QTS Realty Trust Inc. Class A

US:QTS 4.9%

2.95%

19%

U.S.

Digital Realty Trust Inc.

US:DLR 4.9%

2.99%

26%

U.S.

GDS Holdings Ltd. ADR Class A

US:GDS 4.4%

0.00%

15%

China

Iron Mountain Inc.

US:IRM 3.4%

10.51%

-25%

U.S.

Lamar Advertising Co. Class A

US:LAMR 2.6%

8.08%

-44%

U.S.

Switch Inc. Class A

US:SWCH 2.5%

0.66%

21%

U.S.

Uniti Group Inc

US:UNIT 2.1%

9.47%

-21%

U.S.

Ooutfront Media Inc.

US:OUT 2.1%

12.03%

-52%

U.S.

21Vianet Group Inc. ADR Class A

US:VNET 1.9%

0.00%

130%

China

Clear Channel Outdoor Holdings Inc.

US:CCO 0.8%

0.00%

-73%

U.S.

Landmark Infrastructure Partners LP

US:LMRK 0.5%

8.16%

-39%

U.S.

Source: FactSet

You can click on the tickers for more about each company.

You will need to scroll the table to see all the data.

The ETF has a trailing 12-month distribution yield of 1.63%, according to FactSet. You can see on the table that some of the companies held by the fund have much higher yields, including some that are alarmingly high — indicating investors aren’t confident the yields will be sustained. These are also relatively small holdings in the portfolio.

The top three holdings make up nearly half the ETF. Equinix
US:EQIX
is a REIT focused on owning and operating data centers. Crown Castle
US:CCI
and American Tower
US:AMT
are REITs that own cell towers and lease space on them to multiple tenants running various communications networks.

One of the holdings with a very high yield is Iron Mountain
US:IRM,
which focuses on corporate information storage and disaster recovery. The stock is down 25% this year. Mitch Rubin, portfolio manager of the RiverPark Long/Short Opportunity Fund
US:RLSIX
US:RLSFX
recently said he had shorted the stock because it continues mainly to store paper. “That business will be much smaller two years from now,” he said.

Don’t miss:Seven stock picks for a volatile market from a manager who ‘finds innovation all over the place’

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