Thanks to a recent quarterly dividend raise of 12%, DuPont Fabros Technology stock is trading at 5.9%. This is the highest forward yield in the data center REIT space. What makes this so newsworthy is the fact that DuPont has been lagging behind its peers in terms of valuation, despite a bump in shares after an August selloff. This makes us wonder whether there is any share mispricing.
DuPont does have the highest EBITDA margin amongst its peers: 60% versus 44%. The company is also the only wholesale pure player in its segment. It’s true that wholesale means a much lower investment than retail, and SG&A is much cheaper and more straight forward in wholesale over retail; both of these combine to explain DuPont’s higher margins. As the company continues to grow, they look forward to their fixed costs becoming relatively lower while realizing higher margins.
The four top tenants account for 60% of the annualized base rent, making tenant concentration a major concern for the company. These concerns were on everyone’s mind at the beginning of the year when one important client had to file bankruptcy. This hurt DuPont’s earnings as shares fell to 16% in February. During a third quarter conference call, Christopher Eldredge (CEO) said that they were able to secure another client. However, shares never rose to the levels they were before the client left.
In Q2, the company finished second-to-last in our dividend growth ranking. This was basically due to lack of FFO per share growth. Peers increased their year over year FFO per share by 21%, while DuPont only had a 2% increase. DuPont had a slightly better Q3 as their FFO per share grew to 3%.
Shares fell in September to the lowest level in all of 2015. However, in October, shares soared to 24% and have since stabilized. This big jump brought their AFFO multiples closer to their 3-year average of 13x. On the other hand, the AFFO multiple average for the peer group is 20x.
DuPont is moving forward in addressing their cash flow generating issues. In 2016, they are planning on a double-digit growth in revenue, EBITDA and FFO per share. They also plan to fund growth through internal cash flow and debt, instead of equity. Their management team now includes a chief marketing officer and a chief revenue officer.
While tenant concentration is always on the top of a real estate investor’s worry list, it is not one of the company’s biggest concerns. DuPont Fabros expects to continue to grow and expand their clientele. We hope that adding more clients and generating more revenue will lessen the concentration problems gradually. For that reason, we expect the valuation gap between DuPont and its peers will persist.
Source:DuPont Fabros Technology (NYSE:DFT), Fast Graphs, Yahoo! Finance
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