(Source: Nvidia investor presentation)
And according to analyst assessments in 2035, there could be 120 million car-free cars on the road, generating huge amounts of data as must be stored and analyzed via AI-driven algorithms stored in data center servers. And they are just some of the great growth catalysts for this exciting and fast growing industry.
(Source: EQIX investor presentation) 19659011] And when it comes to cloud computing, Equinix and Digital Realty are the heavyweight of the two industries.
Blue chip choice REIT investors want to make money on a decade-long megatrend that should lead to safe and steadily rising dividends for the foreseeable future.
2 Bue-Chip Data Center REITs You Want To Own  Digital Realty Trust
With nearly 200 data centers in 32 cities in 12 countries, Digital Realty is the world's second largest data center REIT. It serves more than 2,300 corporate customers, creating a diversified rental base of mostly investment-class Fortune 500 companies.
(Source: Investor Presentation)
Digital Realty is increasingly focusing on hybrid cloud, especially colocation (by smaller customers). Clients have their own hardware and Digital Realty provides the physical space, power and interconnection that allow businesses to connect their servers, including with the best cloud computing providers like Amazon (AMZN).
The growth and diversification of Digital Realty has been led by the industry's most aggressive M&A, including the 2015 $ 1.9 billion acquisition of Telx. This allowed the company to shift from a 95% focus on wholesale cloud to a greater focus on colocation and interconnection. Colocation enables reduced data resilience and improved cyber security, which is currently the top priority for large corporate IT departments, according to recent studies.
Another advantage of this switch from wholesale to colokations is that wholesalers generally involve renting space to just some large companies that need a lot of space. This creates a less potential market, which serves the needs of just a few giant companies. In co-location, there is a need for all companies to open Digital Realty to gain more market share in the bulk of the cloud computing market.
Colocation also allows for multiple interconnections, where companies connect their servers together. Interconnections are a premium feature that companies are happy to pay for and today, DLR has 77,000 of them, generating over $ 250 million a year (about 10% of REIT sales) in high margin revenues. [Source: investor presentation]
Over the years, DLR has continued to acquire more rivals, as it consolidates the industry and expands its geographical presence. Everyone has reported that REIT has spent $ 14 billion over the last eight years to reach the industry's second largest economies of scale.
While economies of scale are important to all REITs, in case one of the largest consumers of electricity in a given market means that DLR can cut good deals with electrical tools. For example, in Chicago, it has a power contract that is locked up to 20% below the market rate through 2022.
And since data centers generate a lot of heat Digital Realty is a major buyer of industrial AC equipment that it also receives discounts . This has made it possible to historically average 25% operating margins since 2010, the highest in the industry (EQIX has on average 19%).
But one big reason why DLR has historically had high rewards (including 95% during Great Recession) and approx. 70% rental renewal rates are the high cost of moving to a competing datacenter.
According to Align Communications, a company specializing in helping data center moving companies, it costs about $ 23 million for DLR's typical client to set up hardware in their facilities. It then costs about $ 15 million more, in a lengthy, difficult and risky process (in the form of business interruptions) to move to a competitor's facility.
(Source: investor presentation)
The management believes that despite the challenges it will face in 2019 and beyond (see the risk section), it achieves a long-term FFO / share growth of 6% to 9%.
AFFO Payout ratio: 67%
S & P Credit rating: BBB
Sensei Quality score: 9/11 (NYSEARCA: SWAN)
Historical FFO / share growth: 9, 0%
Expected 5-year FFO / Stock Growth (Analyst Consensus): 5.9%
Expected Long-Term Total Return (no valuation changes): 9.7%
Fair Value Discount: -2%
Valuation Adjusted Total Return Potential: 9.5% (vs. 2% to 8% for S & P 500)
According to FactSet Research, analysts currently expect a 6% long-term cash flow growth, giving today's nearly 4% return, should result in nearly 10% total return in the coming years.
Digital Realty is trading at about fair value (based on five-year average returns), which means investors shouldn't expect to see much more extensions that increase future returns. But while high single-digit return potential may not sound as much, remember that according to Morningstar, most analysts and asset managers expect the S&P 500 to deliver between 2% and 8% CAGR's total return over the next five years.