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.

U.S.REITs: Data Center Up, Self Storage Down

chart01

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In a week during which several REITs have released their Q1 results, REIT stocks were slightly up. While data center stocks were the best performing sector, self storage was the worst. This week’s highlight was the merger between two office REITs.

Among data center REITs, CoreSite Realty shares saw a 5.2% increase in the last week when the company announced stronger results for the year. They also saw a 4% increase in their 2015 FFO per share guidance. The FFO multiple of the $2.3 billion market cap company is currently around 22 times.

For yet another week, self storage stocks fell. We’ve been noticing the formation of a negative sentiment against this sector. Despite the high multiples, this is the first time we have seen a real movement to dump the stocks, which fell, on average, by 10% in April.

For instance, Public Storage, the largest self storage REIT, saw a 6% increase in dividends during the last week, yet this wasn’t enough to excite the public. Despite the good Q1 results, their shares were down by almost 5%. Rather than investing in the common, many investors have opted to invest in their preferred stocks.

However, last week’s highlights definitely involved office REITs. Cousins Properties and Parkway Properties entered into a stock to stock merger where Parkway shareholders will receive 1.63 shares of Cousins stock for each share of Parkway stock they own. Following its merger with Cousins Properties, Parkway shares went up by 9.2%, while Cousins shares went down by -0.3%.

Right after the merger, the Houston assets will be spun off into a new publicly traded REIT called HoustonCo. The merger will produce a larger Cousins, which will focus on the Sun Belt markets, while excluding exposure to energy markets. HoustonCo will be an independent and internally managed REIT led by some Parkway executives.

On a final note, the shares of Investor Real Estate Trust plummeted by 13% when the activist Land and Buildings went short. L&B believes IRET has 35% downside due to North Dakota’s struggling energy market and a weak apartment market.

Source: CoreSite Realty Corporation(NYSE:COR),Public Storage(NYSE:PSA),Cousins Properties Incorporate(NYSE:CUZ),Parkway Properties Inc.(NYSE:PKY),Investors Real Estate Trust(NYSE:IRET)

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 April 29, 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 March 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 has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Enthusiasm for CoreSite Realty cools down before Q1-15 release

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Even before the financial results for the first quarter of 2015 arrive this Thursday, the market has begun to lose its passion for CoreSite Realty Corporation (NYSE: COR). Its stocks became the worst performing on the equity REIT space the past week, with the price per share decreasing by 4.1 percent. Two analyst reports on April 16 downgraded the stock, and the CEO of CoreSite Realty on April 10 sold a small portion of its shares, resulting in a decline in the stock’s popularity among investors.

This decrease has not been enough for the valuation of the company to back down and converge to those of its peers. The most recent price-to-FFO multiple of 19.9 is still above the sector’s median of 17.1. Moreover, according to Fast Graphs, the price-to-FFO remains above its historical average. As far as dividends go, CoreSite Realty has been in the “middle of the pack,” exhibiting a 3.5-percent yield. The company has not provided a dividend distribution guidance for 2015.

WANT TO SEE CORESITE’S METRICS AGAINST ITS PEERS? DOWNLOAD FREE FILE.

There are several reasons for investors being excited with CoreSite Realty: It is a small-cap company in the expanding data center sector; it has posted double-digit expansion rates in revenues, FFO and dividend in the last quarter of 2014; and its FFO per share is expected to increase by 17 percent this year. It also has a comparatively conservative capital structure that provides room for more potential debt to fuel its expansion.

Takeaway: Despite its valuation, it is worthy of inclusion in the watch list.


Written by Heli Brecailo

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.​

U.S. REIT – The new CEO of DuPont Fabros has his hands full

Release: 22 March 2015 (Extra Edition)

Summary

  1. Following the February 5th announcement that the default of one of its largest customers would impair 2015 results, DuPont Fabros’s share price dropped 16 percent.
  2. The company has indicated that it is going to pay higher interest expenses due to new debt used for development, which will ultimately limit 2015 FFO results.
  3. New CEO Christopher Eldredge must show that under his stewardship the company can continue to prosper. He’s also in charge of putting together a strategic plan for the company and presenting it to the board and investors by the fall.
  4. These recent developments have really muddied the waters, and the company’s outlook is unclear.

Background

DuPont Fabros Technology’s new CEO Christopher Eldredge has had his hands full since he took over the position on February 17. After the February 5th announcement that the default of DuPont Fabros’s seventh-largest customer would impair the company’s 2015 results, share price dropped 16 percent over the following several days. Although some of this loss has already been recovered (as of 20 March 2015, the price is down only six percent since the announcement), Mr. Eldredge has a winding road ahead of him this year if he wants to show investors that he can put the company’s growth back on track.

Sniff Test

I initially selected DuPont Fabros for a deeper study because it has the highest dividend yield and the second-lowest price-to-FFO among the six data center US REITs – QTS Realty Trust (NYSE:QTS), CyrusOne (NASDAQ: CONE), Digital Realty (NYSE: DLR), DuPont Fabros Technology (NYSE: DFT), CoreSite (NYSE: COR), and Equinix (NASDAQ: EQIX).

Chart01

Note: Bubble size indicates market equity capitalization; share price as of 20 March 2015; dividend and FFO are last quarter available.

Also, the company’s high revenue per net leased square foot and a utilization rate held high at 94 percent caught my eye.

Chart02

Note: Bubble size indicates total net rentable area; revenue, occupancy and net rentable area as of 31 December 2014.

On the surface, DuPont Fabros looks like an attractive choice, worth a drill-down report. The company IPOed on 24 October 2007, so it has a respectable history.

Historical Analysis

DuPont Fabros’s dividend history goes back to 2008, when it was interrupted four quarters in a row before getting back on track in the fourth quarter of 2009. Concerns about liquidity led the company to preserve cash and limit cash distributions to only 10 percent of its 2009 AFFO. On December 31, 2008, debt was 83 percent of total market capitalization, 55 percent of which matured in 2009 and 2010.

Since then, the liquidity issue has faded and no additional dividend interruptions have occurred. In fact, dividends have displayed a compounded annual growth rate of 78 percent between 2009 and 2014.

Chart03

Funds from operations have consistently increased since 2009, except for a drop in 2012 from which the company was able to recover the following year. The compounded annual growth rate between 2009 and 2014 was 22 percent.

Chart04

Additionally, AFFO has not shown any issues between 2009 and 2014, growing swiftly at a CAGR of 26 percent.

Chart05

Annual revenue growth has gradually decreased from 22 percent in 2010 to 11 percent in 2014. CAGR between 2009 and 2014 was 16 percent. Interestingly, the company has been able to consistently add US$ 43-44 million in revenues year after year, but this pattern will be harder to maintain in 2015.

Chart06

Price-to-FFO

Per the FAST Graphs chart below, the current price-to-FFO of 14.5 (black line) has been slightly under DuPont Fabros’s all-history average of 14.8 (blue line), indicating no significant share mispricing. The recent price rebound seemed to be an appropriate correction.

Chart07

2015 Guidance

This past February 5 during the Q4 2014 earnings call, DuPont Fabros senior management signaled that both Normalized FFO and AFFO per share for 2015 would not grow. In fact, 2015 result could even decline by $0.10 per share from the 2014 result.

Ticker Q4 2014 Release Date Share Price Change Since Release (as of 20 March 2015), in percent 2015 Guidance for FFO Growth, in percent
DFT 05-Feb-15 -6 -1
DLR 12-Feb-15 -2 -1
QTS 23-Feb-15 0 15
COR 12-Feb-15 12 17
CONE 18-Feb-15 16 13

Among other things, DuPont Fabros has conditioned a better performance of 2015 Normalized FFO to the financial performance of Net Data Centers, a top-seven customer that filed a voluntary petition for relief under chapter 11 on February 23, 2015. Responsible for approximately 3.5 percent of DuPont Fabros’s annualized base rent ($0.16 per share in revenues), Net Data Centers halted any 2015 base rent payments. As such, any revenue received from Net Data Centers will increase the 2015 Normalized FFO guidance.

As far as possible outcomes go, DuPont Fabros has not been able to determine whether Net Data Centers will resume payments or vacate the space. Additionally, DuPont Fabros management has not totally discarded the possibility of acquiring all or part of Net Data Centers. A colocation internet services company, Net Data Centers could potentially help DuPont Fabros broaden its scope of services.

Events like the one involving Net Data Centers remind investors that a high customer base concentration has been a vulnerable spot for DuPont Fabros. The failure of a single customer has greatly diminished its ability to continue growing in 2015.

The other challenge will be to lease a portion of Yahoo!’s space, which will expire on September 30, 2015. Fortunately, Yahoo! will vacate the space long before that so DuPont Fabros will have time to market it to new customers. If the company does not find anyone by September 30, 2015, normalized FFO will decline by $0.05 per share per quarter.

Lease Profile

One of the main concerns about DuPont Fabros is the low number of customers and high rate of concentration. The company has more than 100 lease expiration dates from only 38 customers, and the top four customers (Facebook, Microsoft, Yahoo!, and Rackspace) represent 60% of annualized base rent.

Also, although DuPont Fabros’s facilities are located in popular data center regions, 65 percent of its net leasable square footage is concentrated in Virginia, and the remainder is in California, Illinois, and New Jersey.

Nonetheless, lease expiration profile is not an imminent risk. The company has pretty much secured an average six years of triple net leases with full expense recovery. The only thing that caught my attention was that 40 percent of annualized base rent will expire within four years. However, this is not nearly as concerning as it is for DuPont Fabros’s peers – for CyrusOne, QTS Realty, and CoreSite, more than 40 percent of annualized base will expire by 2016.

Debt

Another concern is that DuPont Fabros has a good portion of floating debt (40 percent). The company has indicated that it is subject to higher interest expense due to new debt used for development, which will ultimately limit 2015 FFO results. This new debt could raise its total debt plus preferred to total market capitalization, which today is 33.6, the second-highest among DuPont Fabros’s peers. On the other hand, because it has a mid-range credit rating the company should pay reasonable rates in comparison with its peers.

Chart08

Ticker S&P Credit Rating
CONE B+
QTS B+
DFT BB-
EQIX BB
DLR BBB

Outlook

Recent developments have muddied the waters, and as a result DuPont Fabros’s outlook is unclear. The company has many short-term to-do’s. It must address the Net Data Center issue and, on a less critical level, find a replacement for Yahoo!’s partial move-out. Also, it must be able to grow debt for development without compromising FFO. Finally, despite his twenty years of experience in the wholesale data center space, Mr. Eldredge has yet to demonstrate that under his stewardship the company can continue to prosper. He won’t lack help from former CEO, co-founder, and newly-appointed board member Hossein Fateh.

The good news is that the company continues to move forward, expecting the delivery of 25.1 MW by the end of the year. This will increase IT load base by 10 percent. Further, Mr. Eldredge has been tasked with putting together a strategic plan for the company and presenting it to the board and investors by the fall. He will hopefully bring to light potential new paths for the growth of the company – new markets to prospect, ideas for marketing the recently-launched mini-wholesale product for possible retail customers, and additional add-on services.

Ultimately, the numbers speak volumes, and I still see a reasonably priced stock with sub-par short-term growth prospects in revenue, FFO, AFFO and quarterly dividend. Mr. Eldredge will have to get these waters clear first.

Note from the author: All tables and graphs (except for FAST Graphs) have been processed and put together by the author using sources believed to be reliable.

Source: DFT website and FAST Graphs.


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Written by Heli Brecailo

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.​