PARTNER CONTENT by GRAVIS
This content was paid for and produced by GRAVIS
Digital infrastructure - inflation proofing, future proofing
Increasingly investors are looking for ways to protect portfolios from inflation. There is arguably no better route than by gaining exposure to modern physical assets which provide opportunities for steady income and growing capital through inflation linked rental revenue and growing dividends.
The ‘fourth industrial revolution’, in which digital technologies pervade every area of life, from how we work and play, to how we navigate day-to-day life, is well underway. Driven by the emergence of new technologies, its beneficiaries include real estate companies which own and operate data centres, fibre optic networks, logistics warehouses and mobile communication towers.
Often structured as real estate investment trusts (REITs), these companies are listed on stock exchanges worldwide and must distribute the vast majority of their rental profits (e.g. 90% in the UK and USA). The rental income from digital infrastructure REITs in many cases benefits from inflation-linkage or fixed-rate rental escalators – these assets produce growth income not fixed income. Over the past decade, reinvesting this income has created a significant compounding benefit for investors: while the global real estate benchmark1 has delivered a 7.57% annualised return, the power of compounding income increases investor returns to 10.70%2.
For example, Cellnex, the pan-European mobile communications tower developer and operator, calculates that approximately 65% of its revenue is linked to local inflation indices with average lease lengths of more than 10 years. In the US, specialist logistics REITs, such as EastGroup Properties, incorporate fixed upward-only revisions into nearly all leases, with average lease lengths spanning between five and seven years.
Beyond fixed rental increases, in-demand digital infrastructure assets have real pricing power with substantial demand led rental growth. This was evident during the first quarter of this year, with several digital infrastructure companies having dividend events and particularly strong results.
American Tower, the world’s largest owner and operator of wireless infrastructure cell sites listed in the US, declared an interim dividend of $1.40 per share in March 2022, an annual increase of 12.9%. This growth was underpinned by contractual annual rent increases incorporated in their leases, with in the US these typically being an average of 3% per annum, and internationally rents being linked to local inflation indices.
SEGRO, a leading owner and developer of modern warehousing across the UK and continental Europe, reported increased “strength, breadth, and depth of occupier demand”. Record leasing activity drove a 4.9% like-for-like growth in rental income and a 10.0% growth in the total dividend per share. This was coupled with a new high in the level of investment activity focused on securing future profitable growth. Simultaneously Prologis, the US listed global leader in modern purpose-built logistics real estate, declared a 25% increase in its quarterly dividend.
Equinix, the operator of 240 data centres spread across 27 countries on five continents, reported record quarterly bookings and its 76th consecutive quarter of revenue growth. Management emphasized that 2022 has started well and “the underlying performance of our business is exceptionally strong”. Based on the strength of current trading and an optimistic outlook management guided for an inflation beating 8% growth in dividends in 2022.
Beyond providing steady increasing income, the future growth achievable by investing in REITs supporting the digitalisation of society must not be overlooked. Testament to this is the premiums at which private markets value these publicly listed assets, with ever increasing private equity interest seen in this space.
This is particularly evident within the data centre sub-sector, with private equity firms acquiring best-in-class listed digital infrastructure companies. Last year, US listed QTS was acquired by Blackstone at a 20.9% premium to the undisturbed share price, whilst Spanish data centre REIT CyrusOne was acquired by KKR and Global Infrastructure Partners at a 24.7% premium to the undisturbed share price.
Private equity interest is not reserved just for data centre REITs, Uniti Group, a A$3.4bn market cap Australian listed ‘fibre to the home’ network owner and developer, was recently the target of competing take-over bids by two private equity consortiums, and chose the one led by Canada's Brookfield Asset Management and fund manager Morrison & Co.
The digital infrastructure sector offers both inflation proofing and future proofing. The REITs which own and operate digital infrastructure assets provide an attractive investment opportunity, with growing income and real pricing power whilst the acceleration of the ‘fourth industrial revolution’ with the pandemic, how we live, work and play has fundamentally shifted making these assets, data centres, fibre optic networks, logistics warehouse supporting e-commerce and mobile communications towers, critical.
1 MSCI World IMI Core Real Estate GBP Index
2 MSCI World IMI Core Real Estate Total Return GBP Index
Matthew Norris, Fund Adviser to the VT Gravis Digital Infrastructure Income Fund, Director of Real Estate Securities.
To find out more about the VT Gravis Digital Infrastructure Income Fund, please click here
Find out more
