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

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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.

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