When the Pokemon Go augmented reality smartphone game exploded onto the scene in July, traders quickly latched onto any investment threads connected to the game, but perhaps the best ways to capitalize on the trends illustrated by the game’s success are in real estate.
Though Nintendo shares soared as the game racked up users, pushing the scuffling Japanese gaming company’s market cap billions of dollars higher, investors soon came to terms with its limited share of any windfall from the game’s success. Companies that own data centers and wireless network towers, however, are poised to profit from additional mobile activity driven by apps like Pokemon GO for years to come.
To Burl East, who manages the Altegris/AACA Real Estate Long Short Fund, the Pokemon GO phenomenon wasn’t so much a singular opportunity, but more evidence of the growth in technology that justifies some of the biggest allocations in his real estate investment portfolio.
More than 30% of East’s portfolio is in real estate investment trusts that are connected to either data storage or telecommunications towers, he told Forbes in a recent interview. The biggest bets are storage plays QTS Realty Trust, CyrusOne and Equinix EQIX-US +%, accounting for more than 5% of the portfolio apiece, followed by tower plays American Tower AMT +0.39%, Crown Castle International CCI -0.02% and SBA Communications SBAC +0.04%.
The rationale is fairly simple: games like Pokemon GO and services like Instagram, Snapchat and countless others require the transmission and storage of data, pictures, video and messages. That means companies that lease cell tower space to companies like AT&T and Verizon, and those that house the servers that enable retrieval of information instantaneously from anywhere, own the equivalent of waterfront property in the digital world.
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“It’s the biggest thing I’ve seen in 30 years in real estate,” says East. “Nothing is as powerful as your kid wanting to watch Netflix, wherever and whenever.”
As for any concern that some type of breakthrough in compressing data might diminish storage needs – think the middle-out compression engine developed by Pied Piper on the HBO series Silicon Valley – East is fairly confident the marketplace will come up with new apps, software and games that will lead consumers and businesses to consume more data and create information that needs to be stored in a secure and easily-retrievable form.
“Every time the market has created more supply by compressing data, demand is created,” says East, whether through new uses of the technology or more powerful devices. “Your smartphone has more computing power than Apollo 13.”
Those are just the consumer arguments. There’s a whole corporate side of things too. Take Microsoft 365, and the software firm’s efforts to migrate more business clients to its cloud-based offering. “You’re talking about the migration of billions of spreadsheets, powerpoint, documents and e-mails,” says East. “That alone will power data centers for years.”
There is an argument that the value in these REIT bets is already well understood by the market, and already factored in to current stock prices. Current yields on American Tower and Equinox are below 2%, not much above the current levels of the 10-year Treasury. East scoffs at the idea these fast-growing REITs are overpriced, calling current valuations “fair” and pointing to underlying market and industry trends that make a paying a premium sound reasonable.
For one thing, he cites data that shows the looming creation of the independent real estate sector in the industry standard GICS classification system, set to occur Aug. 31 after the market close, will drive more than $100-$150 billion into REITs as fund managers rebalance to reflect the new sector lineup.
“Historically a growth and income [manager] may have just ignored real estate,” says East, dismissing it as being taken care of by exposure to financials. “That was passive ignorance. Now it’s active ignorance if you’re not invested.”
The other factor in REITs’ favor, and particularly the data plays he favors, is that landlords have leverage over tenants. The tower business is a “loose oligopoly” where “price competition takes a backseat,” says East.