After saying last February that it was not raising equity, DuPont Fabros came back to the financial markets this year in mid-March to fund its development projects. The good news is that the company managed to raise about 10% of shares outstanding. Following last year’s events, the company has regained market confidence and is now on track to resume expansion. DuPont is not really a company for dividend chasers; although it is like any other REITs that distribute dividends, this is a company for those individual REIT investors who are looking for growth.
At the beginning of last year, DuPont bumped into a major roadblock, leading its share price to drop by 20% from its 2015 peak. The drop was an exception in a thriving sector, where last year, peers enjoyed exuberant returns. One of DuPont’s top tenants filed bankruptcy in February, leaving the company to face possible vacancies. Vacancies dropped to the lowest percentage in any of their previous years; however, they were able to quickly reverse the problem and reached their highest occupancy rate at 96%.
There are good things going on for DuPont. What I like about DuPont is that their new CEO, Christopher Eldredge, has demonstrated leadership to move the company out of their tumult. The company has shown signs that they have moved past last year’s issues; however, they still have conditions they need to catch up on in terms of peers’ share performance. Especially in the first years of his leadership, Eldredge does not wish the company to be left behind by its peers.
In fact, the company raised more than originally proposed. They have plans to retire some debt and invest in secondary markets (Portland, Phoenix) and internationally (Toronto). From a dividend point of view, DuPont has the second longest dividend-paying record after Digital Realty. It has paid similarly or increasing dividends for the past six years (versus 11 years for Digital). In late 2015, the company increased its quarterly dividend by 12%, still leaving a comfortable AFFO payout of 66%.
Serving purely wholesale customers, DuPont benefits from higher margins (highest EBITDA margin) and low administrative costs (lowest percentage of S&A). They have made lower investments as opposed to retail and they see prices increasing. They see market growth exploding in wholesale, and for that reason, they remain committed to it. They put up for sale a data in New Jersey, which is not as on-demand for their clients are requiring lower cost markets.
The other side of the coin is that their tenant base is highly concentrated. Microsoft, Facebook, and Rackspace account for more than one-half of its annualized-based rent. The company downplays this saying that, as a consequence, two-thirds of the revenue is from investment grade or equivalent customers. I would still say that tenant concentration is a delicate issue and still poses risks for them; it can bite them in the future just as it did in 2015. For that reason, I’d not expect their multiples to fly really high.
Definitely, whoever invests in data center REITs is looking for upside, not only dividend yields. Not surprisingly, all data center REITs, including DuPont, have yielded below average. In fact, DuPont presents the highest yield in the sector, and given its strength, I find it hard to believe that they will cut dividends in the short, midterm. In terms of valuation metrics, DuPont has been one of the lowest, so certainly the share price has upside.
Source: DuPont Fabros Technology, Inc.(NYSE:DFT), Fast Graphs.
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