Pokemon Go Not The Only Reason To Consider Data Center REITs

pokemongoThe recent craze over Pokemon Go is yet another illustrative example that leads us to believe that the demand for data centers will continue to grow at its accelerated rate.

New technologies and services that increase the demand for mobile data also increase the demand for data center services. The high levels of growth have been accompanied by a high fragmentation of the data center industry. Both of these aspects of the industry have had a substantial impact on data center REITs.

The demand for data center services is growing across the full market range. Whether the services are supplied wholesale, retail or as something in between, a number of different business strategies have flourished in this high demand market, and REITs have been racing to keep their expansion at pace with the market’s demand for capacity.

The data center industry’s fragmentation has resulted in a number of small operators, mostly composed of up to three data centers each. These small operators combined earn the majority of the industry’s current revenues. The current set of data center REITs are just the tip of the iceberg that is transforming the face of the data center industry.

Equinix and Digital Realty are the two largest data center operators by far among the REITs, as well as in the industry as a whole. They have respective market capitalizations of $23 billion and $16 billion. All of the remaining data center REITs are significantly smaller; Digital Realty itself is larger than the other four data center REITs combined (DuPont Fabros at $3.1 billion, Cyrusone at $2.7 billion, QTS Realty at $2.7 billion and CoreSite Realty at $2.4 billion).

Market fragmentation opens an industry to new entrants and makes the market more competitive. To maintain market share, companies begin to look at mergers and acquisitions of smaller rivals to gain economies of scale and offer more competitive prices. Therefore, it is highly likely that we will see the continued consolidation of the industry illustrated by Equinix and Digital Reality over the last year.

The on-going acceleration of industry growth and the current state of fragmentation show that the data center industry is still in a state of maturation and transformation.

Source: DuPont Fabros Technology, Inc.(NYSE:DFT), Cyrusone Inc.(NasdaqGS:CONE), QTS Realty Trust, Inc.(NYSE:QTS), CoreSite Realty Corporation(NYSE:COR), Equinix, Inc.(NasdaqGS:EQIX), Digital Realty Trust Inc.(NYSE:DLR)

http://www.datacenterknowledge.com/archives/2015/04/17/colocation-data-center-market-to-reach-36b-by-2017/

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, and CLDT.

Data Center REITs Gained Attention Again

chart01This week U.S. equity REIT stocks have been slightly up, with a 0.8% average increase. The S&P500 also saw a similar trend. This time we noticed that the market was holding stronger opinions towards sectors. Generally, the more popular sectors suffered losses while underappreciated sectors experienced gains.

Data center gained attention because all data center REITs lost ground, with a median share price decline of -3.2%. Most stocks dropped between 2% and 4%, but that was not the case for CoreSite Realty.

CoreSite share price plummeted by 8.1%, the worst among all U.S. equity REITs last week. The most dramatic drops occurred on Wednesday and Thursday, just two weeks before the company releases their Q2 results. Hopefully their results will be on par.

Despite the drop, CoreSite remains the most successful data center REIT in 2016. They have returned with 48% percent to date. The stock has remained one of the top five best performing stock among U.S. equity REITs. It is also important to mention that CoreSite is a midcap REIT with 17 data centers across the United States. They also have the second highest multiple when compared to peers.

Data center, the best performing REIT sector of 2016 so far, has definitely been the center of several online publications. Fundamentals have been spectacular leading the average multiple to surpass 20 times AFFO. For that particular reason, investors have been very cautious in adding new positions; some have done the opposite and realized profits. Manufactured homes and self-storage were among the other sectors who did poorly last week.

Lodging and timber saw quite a bit of gains. Several lodging stocks were among the weekly top twenty returns. Pebblebrook Hotel Trust and Chatham Lodging Trust returned around 6%-7%. Their portfolios are skewed toward the west coast, where the lodging industry should demonstrate much better results.

We are approaching the start of Q2 results season, so this could very well tell us how things will unfold.

Source: Chatham Lodging Trust(NYSE:CLDT), Pebblebrook Hotel Trust(NYSE:PEB), CoreSite Realty Corporation(NYSE:COR)

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on July 15, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of May 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH.

Can Data Center REITs Repeat Their Outstanding Performance in H2 2016?

chart01.pngTo most investors’ excitement, data center REITs managed to provide almost a 50 percent return in the first half of 2016, which is a remarkable feat, to say the least. After all, all of them with the single exception of DuPont Fabros had seemed overvalued at the start of the year, meaning that a rational investor would have expected that they were in for a moderate period rather than a sustained surge. However, those are who interested in capitalizing on this trend should maintain their normal care and caution because there are no guarantees that it will continue this way into the second half of 2016.

Given the ubiquitous use of social media platforms and other online services in our lives, it is understandable why so many investors made the choice to invest in data center REITs. However, it is important to note that some aspects of this trend seem to be based more on hype, as shown by how the trend has lifted up similar but not quite the same stocks such as Iron Mountain, which actually specializes in storing physical documents. As a result, while investors in data center REITs at the moment could earn great returns, those great returns should be taken lightly.

There is increasing demand for data center centers. We don’t see a backlash against data center REITs in a near future. For those who are interested in their potential but still want to limit their exposure, they should keep data center REITs as a small part of their REIT portfolios, with 5 percent being a reasonable figure based on the FTSE NAREIT All REITs Index.

Source: DuPont Fabros Technology, Inc. (NYSE:DFT), Digital Realty Trust Inc. (NYSE:DLR), QTS Realty Trust, Inc. (NYSE:QTS), CoreSite Realty Corporation (NYSE:COR),Cyrusone Inc. (NASDAQ:CONE), Equinix, Inc. (NASDAQ:EQIX), Iron Mountain Incorporated (NYSE:IRM) 

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

The Most Successful REITs in 2016

chart01.pngSo far, data center REITs have been some of the most successful REITs in 2016. In main, this is because data center REITs have seen a 37 percent return in their stock prices, which has propelled them to the top of the list with a 40 percent return in spite of their lackluster dividends. However, it is important to note that the factors propelling this rise might not last throughout the rest of 2016, which is something that should influence the decision-making of REIT investors.

In short, the rise of data center REITs can be attributed more to the fundamentals of their sector than to the choices of their management, though the latter has had an effect as well. This can be seen in how the rise is not based on a small number of isolated cases but on the widespread success of the sector.

In part, this could be because of recent expansions such as Digital Realty’s choice to buy Telx, Equinix’s choice to buy Telecity, and DuPont Fabros’s choice to resume equity issuance for development after losing a major client in 2015. However, it could also be attributed to positive investor sentiment, which has received a significant boost after news came that the Federal Reserve will not be raising its federal funds rate until September. Finally, there is the fact that data center REITs have high multiples at the moment, which might bring in interested individuals on its own.

Unfortunately, this rising interest in data center REITs has not been matched by rising funds from their operations, as shown by the fact that their funds from operations per share has been rising at a slower rate than their share price. As a result, it seems possible that data center REITs will receive some backlash at some point in the future once REIT investors reconsider their initial investment decisions, meaning that interested individuals should be cautious about what will happen in the second half of 2016.

Source: Digital Realty Trust Inc. (NYSE:DLR), Equinix, Inc. (Nasdaq: EQIX),CyrusOne (NASDAQ: CONE), DuPont Fabros Technology, Inc. (NYSE: DFT), QTS Realty Trust (NYSE: QTS),CoreSite Realty Corporation (NYSE:COR)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

This Data Center REIT Went from Bottom to Top

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So far this year, DuPont Fabros Technology was the single best performing stock among data center REITs, as well as one of the best performing stocks among REITs as a whole with an astonishing 31% return. The stock was beaten out by no one but CorEnergy Infrastructure with an even more astonishing 40% return and Seritage Growth with 32%. However, it is important to remember that REIT investors should not put too much faith in a single factor because neither a REIT’s past performance nor a REIT’s future performance can be summed up with such ease. Last year, the stock performance was negative; by far, it was the worst performance among data center REITs.

First, the positives. In short, DuPont has a dividend yield of 4.5%, which should be an attractive prospect to investors who are more interested in a stable income than in something more speculative. Better still, it has some unique characteristics that enable it to stand out in an industry that already has strong fundamentals. It’s particularly encouraging its new leadership, who is both energetic and flexible enough to continue improving its performance.

However, it is important to mention the negatives as well. DuPont’s portfolio has high tenant concentration, so much so that its four biggest tenants are responsible for more than 60 percent of its annualized rental income. Although an argument can be made that DuPont has nothing to fear in pursuing the wholesale strategy that has led to the current situation because the majority of the revenues are investment-grade, it is nonetheless indisputable fact that the loss of even a single one of the main tenants would be devastating. Remember that the company had a bad experience with a top tenant last year.

Since the company is trading at a multiple of 16 times AFFO, at the lower end of the spectrum for data center REITs, it seems safe to conclude that DuPont has some room for continuing appreciation. However, based on the risks mentioned above, I wouldn’t say it will outpace its peers. For that reason, REIT investors interested in data centers should not put all of their faith in DuPont. For instance, as a good diversification strategy, Bill Stoller suggested in a recent article owning the entire data center sector on an equal weight basis.

In conclusion, investors that like DuPont should consider investing at least in another data center REIT with lower tenant concentration and something other than a wholly wholesale strategy in order to capitalize on the potential of data center REITs while also hedging their investments at the same time.

Source:DuPont Fabros Technology, Inc.(NYSE:DFT), Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

This Data Center REIT seems to have turned the page; is it time to buy?

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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.

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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%.

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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%.

chart03Serving 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.

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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.

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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.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

 

Storage Is The Magic Word In 2015

12con06Both the self and the data storage sectors have been titanium-proofed to market volatility and thrived in a year when less than a third of all U.S. equity REITs have shown positive returns.

Valuation multiples of self-storage, for instance, have soared. At the year’s start, we observed price-to-AFFO between 20× and 25×. They are now approaching 30× and do not seem about to stop anytime soon. With total returns varying from 22% (Sovran Self Storage) to 53% (Extra Space Storage), it is easy to feel that one has missed out on that coveted high school party.

Self-storage appeared so good that Public Storage has been a top position in BlackRock’s residential REIT ETF iShares Residential Real Estate Capped (REZ).

Data center stocks, in comparison, have also soared this year, though by and large, valuation multiples remain below 20×.

What’s in favor of self-storage?

  • Positive fundamentals of the American economy have driven growth in the industry. Because self storage generates fewer jobs or tax revenues, some municipalities have been issuing fewer permits.
  • Zoning may also allow for limited opportunities, pushing away the long-term possibility of over-supply.
  • Baby boomers have initiated a downsizing trend that has also been observed in manufactured houses: Though looking for smaller houses, they still want to keep their belongings.

Is it too late to join the party?

Despite excellent performance and good fundamentals, there seem to be only limited appreciation opportunities, and dividend yields are among the lowest in the industry.

Having said that, smaller, newly-formed REITs like National Storage Affiliates Trust can be your ticket into this industry. National Storage’s price-to-AFFO is 18×, its dividend yield 5% and its management experience. The risk lies in investing in a company whose public track record is low. The stock has increased 27% since its IPO in April. Obviously, this is not a recommendation, but an investment idea that is worth considering.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Data Center Acquisitions Have Taken a Greater Role

We have seen a growing number of investments moving towards development in the capital-intensive data center industry. Data centers increase in size via internal growth–they either expand existing data centers or build new ones. Acquisitions have only been a portion of all investments.

During the year of 2015, acquisitions, however, have taken a greater role. They have helped companies increase their individual geographic footprints or have enhanced product selection. Eventually, they have made companies intrinsically better or have increased their range either domestically or internationally.

It is important to point out that some companies have not acquired any other companies in 2015; but, we cannot deny that acquisitions serve as a concrete indication of a company’s strategy.

cyrusone

Although their development has kept last year’s pace, their investments have spiked this year, mostly because of the $400 million acquisition of Cervalis. Cervalis includes four data center facilities and two work area recovery facilities serving the New York metropolitan area. This acquisition added an important location to the company’s footprint and brought new enterprises strengthening their client base.

 

qts.png

Their investments have doubled from last year because QTS bought Carpathia, a Virginia-based colocation, cloud, and managed services provider for approximately $350 million. The Carpathia acquisition added 230 customers and several new locations, including international ones.

 

digital

Digital Realty has recently raised proceeds of approximately $1.9 billion of debt and equity capital to acquire Telx, a New York-based data center solution provider with multiple US locations. The Telx acquisition strengthens Digital as a leading colocation and interconnection platform.

 

equinix

Equinix, the largest data center REIT, continues its international expansion by acquiring UK’s TelecityGroup for $3.5 billion and the Japan-based Bit-isle for $280 million.

 

coresite

A top performing stock in 2015, CoreSite has not resorted to acquisitions to raise its profile. Most of their investments have been deployed into developing real estate and the company has not made any material acquisitions.

 

dft

Most of their investments were developments and not acquisitions. Their level of investment has been reduced, indeed as the company has licked its wounds following the bankruptcy of a client.

Companies: DuPont Fabros Technology (NYSE:DFT), CyrusOne (NASDAQ:CONE), CoreSite Realty Corporation (NYSE:COR), Equinix, Inc. (NASDAQ:EQIX), Digital Realty Trust, Inc. (NYSE:DLR), QTS Realty Trust, Inc. (NYSE:QTS). 

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

DuPont Fabros Still Lags Behind Peers

chart01Thanks 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.

chart02DuPont 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.

chart03The 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%.

chart04Shares 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.

chart05While 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

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Good News Helped DuPont Fabros

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Since DuPont Fabros (NYSE:DFT) have released their results for the third quarter, their share price has risen almost 7 percent. Although their rates of cash flow and dividend growth have remained largely unchanged from Q2, good news helped improve the stock price performance.

The company ‘replaced’ a bankrupt customer, and the market has reacted well to this. In addition, its CEO Christopher Eldredge has helped the company to reach their goals for the year, and this is another factor that may have had an influence on how the market has reacted to these results. In the end, their outlook for 2015 FFO per share has been increased by a few cents.

However, in the data center sector, DuPont has not been our top choice as they have trailed behind other companies in terms of the potential that they have to generate dividends. Specifically, DuPont fell behind their peers in terms of the growth of their cash flow on a per-share basis.

This does not mean that DuPont is a bad REIT performer, even though they have been outperformed within the sector. Data centers have been doing well overall. It is currently a top performing REIT sector, and its group of stocks has returned 28 percent so far this year.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.