What Does Next Week’s Earnings Call Hold For DuPont Fabros?

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CoreSite Realty Corporation (NYSE: COR) and CyrusOne (NASDAQ: CONE) have been market darlings in the data center sector space. Due to the adverse impact of a tenant default as well as lackluster 2015 FFO projections, DuPont Fabros Technology (NYSE: DFT) has been punished by the investment community.

Year-to-date, both CoreSite and CyrusOne have been solid performers with gains of 23 and 17 percent respectively. The market opportunity seems so favorable that Carlyle Group decided on Monday, April 27, to monetize their investment in CoreSite by selling a portion of their holding. The shares decreased by 4 percent yesterday.

Conversely, DuPont Fabros is down 3 percent this year. Nevertheless, by addressing key questions during their next earnings call scheduled for May 7, DuPont Fabros’s outlook for the balance of 2015 could improve. Some of the questions are as follows:

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Has the situation with Net Data Centers been rectified?

Net Data Centers, one of DuPont Fabros’s top customers, filed a voluntary petition for relief under Chapter 11 Bankruptcy protection last February and ceased making rental payments. The question is whether Net Data Centers will either resume making payments or vacate the space enabling DuPont Fabros to generate revenue with a new tenant.

Will the average interest rate increase?

The company has indicated that interest expenses will increase due to the issuance of new debt for development. The outstanding concern is the extent to which the increase in interest expenses will limit 2015 FFO results.

Will the new CEO Christopher Eldredge shed light on growth prospects?

As noted in the previous earnings call, Mr. Eldridge has been tasked by the Board of Directors to create a strategic plan for the company. The question is whether the growth focus will change from their wholesale product to alternative offerings such as the recently launched mini-wholesale product.

With answers to the above questions, it is believed a more informed investment decision can be made.

Summary

 Metrics 2011 2012 2013 2014 2015P
Dividends declared per common share, $ 0.48 0.62 0.95 1.47 1.68
Q4 Dividend, $ 0.12 0.20 0.25 0.42
Dividend payout ratio, in percent 39.7 48.1 50.8 58.8 67.2
Dividend yield, in percent 2.0 2.6 3.8 4.4 4.7
FFO per share, $ 1.61 1.48 1.46 2.37 2.30
FFO per share (Q4 only), $ 0.37 0.38 0.46 0.58
Alternate FFO per share (Normalized), $ 1.48 1.96 2.39 2.37
AFFO per share, $ 1.21 1.29 1.87 2.50 2.50
Debt to total capitalization, in percent 23.9 23.3 27.0 25.1
Occupancy – Total, in percent 79 90 94 94
Share Price on 31 December, $ 24.22 24.16 24.71 33.24 36.07
P/FFO on 31 December 15.0 16.3 16.9 14.0 15.7
 2015P= 2015 Projections

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.​

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 – Digital Realty Disappoints

Release: 15 March 2015


  1. Despite impressive historical growth, Digital Realty’s revenue and funds from operations (FFO) growth rates have slowed significantly over the past three years.
  2. In 2014, Digital promoted positive initiatives to increase return over invested capital.
  3. However, net rentable square footage increase was weaker, and development space was proportionately lower.
  4. Inorganic growth could be a real game-changer and alter Digital’s trajectory towards mediocre performance in an industry full of growth opportunities.

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Despite a 15 percent FFO and 14 percent dividend compounded annual growth rate over the past ten years, Digital Realty (NYSE: DLR) has disappointed lately. Digital is one of the largest REITs in a fragmented industry with growing opportunities such as multi-tenant data centers, so I’d been hoping to see stronger performance. This is not in line with their target markets (mobile, social media, cloud, big data, and so on).

Chart01Source: Q4 2014 Earnings Conference Call Presentation

In public appearances Digital has been trying to live off its glorious past (which demonstrates management commitment to growth), but unfortunately the underlying truth is that the revenue, FFO, and dividend growth rates have slowed significantly over the past three years, and there hasn’t been any indication this will turn around in 2015. chart02

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On one hand, in 2014 Digital promoted a number of positive housekeeping initiatives to increase return over invested capital. The company reduced finished inventory, initiated a program to strengthen the quality of its capital by selling non-core assets, reduced total debt and preferred stock to enterprise value from 47 to 39 percent, and incrementally boosted its portfolio occupancy from 92.6 to 93.2 percent. Kudos to senior management for these great efficiency-boost results (although they would be more suitable in a mature industry).

On the other hand, Digital’s latest size numbers simply haven’t been compelling. 2014 marked the company’s lowest expansion rate in net rentable square footage over the past ten years.

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Further, development space is at its lowest in a decade in proportion to total net rentable square footage.

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Note: ’13 and ‘14 use the most conservative published numbers.

In addition, Digital’s leverage has been higher than its data center REIT peers’ – despite the company enjoying one of the lowest interest rates in the industry due its BBB investment grade rating. For Q4, Digital’s average debt rate was 3.99 percent, as opposed to QTS – Quality Realty’s 4.74 percent, DFT – Dupont Fabros’s 4.1 percent, and EQIX – Equinix’s 4.93 percent. COR – CoreSite is the only competitor that enjoys a lower rate, at 2.5 percent.

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Moreover, Digital’s dividend has stalled. Annualized Q1 2015 dividend grew only 2.4 percent compared with 2014 annualized dividend.

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Last but not least, 2015 guidance has been disappointing. Digital’s management believes that both FFO and Core FFO (which has been tracked by the company since 2012) will stay at current levels, despite pronounced growth rates in previous years.

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Although size might be a reason for underperformance compared with Digital’s smaller peers, Equinix – which also targets enterprise – has been enjoying better revenue growth rates.

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Source: MarketWatch

Overall, Digital Realty isn’t a bad company. Quite the opposite, in fact. It enjoys healthy margins (Adjusted EBITDA has been flat at around 60 percent), and has been distributing most of its adjusted FFO. Dividend yield is currently at 5.3 percent, price-to-FFO has been around 13 (lower than its peers), and annualized rents have been growing. That should explain why some analysts are still bullish about Digital. See chart below.

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Source: Benzinga, March 13, 2015

Digital’s management seems to be committed to finding a path to rapid growth. They’ve been trying new products and attracting small to mid-size clientele. Also, they decided to begin a strategic evaluation. The only downside is that it might take a while for Digital to figure out which direction to pursue next.

If organic growth is slowing down, inorganic growth can be a real game-changer and alter Digital’s trajectory towards mediocre performance. Chief Executive Officer and Chief Financial Officer William Stein hasn’t discarded the possibility of opportunistic acquisitions in 2015. However, I personally have made up my mind, and will wait for the next ride – this one won’t lead me to the express lane.


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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.​

U.S. REIT – CyrusOne’s current share price is just about right

Release: 01 March 2015


Introduction

CyrusOne (NASDAQ:CONE) is one of the fastest growing companies in the data center REIT sector. However, that doesn’t make it an easy buy. Although the company is well positioned in a market where the fundamentals have been strong, CyrusOne is already trading at a reasonable value. Taking into consideration the company’s 2015 guidance, as well as its history and peers, the current share price is already the correct valuation.

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Company Description

Entering its third year as a public company, CyrusOne is a small cap company (market capitalization of US$1.1 billion) that develops, owns, and operates data center properties. It has 25 operating data centers in eleven distinct markets (nine cities in the U.S., as well as London and Singapore) that include power, cooling, and telecommunications systems, which enable interconnectivity between data centers and a range of telecommunication carriers. These data center facilities are critical to the continued operation of its customers’ information technology infrastructure.

CyrusOne generates recurring revenues by leasing colocation space, and nonrecurring revenues from the initial installation and set-up of customer equipment. It provides customers with data center services pursuant to leases, with a customary initial term of three to five years. At the end of the lease term, customers may sign a new lease or automatically renew pursuant to the terms of their lease. As of December 31, 2014, the weighted average initial lease term was 69 months, and the weighted average remaining lease term for the top 20 customers was 34 months.

Recognizing the growth potential of outsourcing in a market where only a portion of large U.S. enterprises use third-party data center colocation services, CyrusOne focuses on high-revenue clients – out of 669 customers, 144 are in the Fortune 1000. This strategy has led to revenue concentration within a small pool of customers: 40 customers account for 71 percent of leased space and 58 percent of annualized revenues.

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Source: CyrusOne Fourth Quarter 2014 Earnings Report

In 2014, CyrusOne’s growth was fueled by both new and existing clients, leading to an increase in leased colocation area of 20 percent, and to a corresponding increase in revenues by 20 percent, with the help of escalators, ancillary and services products, and interconnection.

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Source: CyrusOne Fourth Quarter 2014 Earnings Presentation

As of December 31, 2014, CyrusOne had 1.2 million colocation square feet. Colocation square feet (CSF) represents net rentable square feet (NRSF) leased or available for lease as colocation space, where customers locate their servers and other IT equipment. NRSF represents the total square footage of a building leased or available for lease based on engineers’ drawings and estimates, not including space held for development or used directly by CyrusOne. NRSF that is not CSF typically comprises office space and similar uses.

Market Landscape

During a webinar by 451 Research on February 18, enterprise data center expert Dan Harrington underlined that the number of data centers in North America has been declining due to the consolidation of enterprise data centers. In fact, he pointed out that the priority for data centers among enterprise in the short term has been asset utilization, consolidation, and retrofit (which allows more power into the rack and better cooling equipment).

However, although the overall market is in decline there are nonetheless pockets of growth. Cloud services, service providers, and multi-tenant data centers have been driving growth as companies look to outsource their IT to third-party providers.

In addition to being a third-party provider, CyrusOne is well positioned in the data center market for several reasons:

  • It is strategically located in popular locations in the U.S. that have grown significantly (Texas and Virginia) and in Europe (the UK).
  • A good portion of its top clients are heavy users – telecommunication services, information technology, and financial companies.

CyrusOne doesn’t expect material negative impact from energy companies. For its top 10 Oil & Gas customers, annualized rents represent only 0.006 percent of their operating expenses. On top of that, the proportion of business from energy customers is down to 28 from 37 percent two years ago (as of December 2014).

Source: Dan Harrington, Research Manager, Enterprise Datacenters, webinar The State of the Datacenter Market: Disruption and Opportunity for 2015 and Beyond

Revenue & FFO Outlook

Despite projecting 25 percent growth in colocation square footage in 2015, CyrusOne doesn’t estimate that revenue and funds from operations (FFO) will grow to the same degree. According to the company’s 2015 guidance, revenue should increase 12-16 percent and normalized FFO 10-16 percent. That’s certainly a slowdown in growth in comparison to the previous year.

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This disconnect between additional colocation area and revenue/FFO projected growth most likely results from one (or a combination) of three potential risks:

  1. The company cannot achieve its goal of adding 275-325 thousand CSF online in 2015, ending 2015 with approximately 1.5 million CSF. This is its most aggressive goal in recent quarters.
  2. The company cannot utilize the new area at the portfolio rate (88 percent), and consequently overall occupancy will fall.
  3. The company must lower its prices in order to quickly monetize the new areas. This possibility seems to be remote, however, because the average revenue per square foot has been flat over the past few years.

The chart below shows CyrusOne’s projected revenues for 2015 using the most conservative guidance numbers.

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Over the past four quarters, the median price-to-FFO has been around 14. Following the guidance of 11 to 16 percent growth in 2015, I estimate that Q4 2015 FFO will be between 0.53 and 0.56, which leads us to a target share price between 29.70 and 31.20 U.S. dollars. The current price is 29.72 U.S. dollars (February 27, 2015).

In addition, looking at CyrusOne’s peers (QTS, COR, DLR, DFT, and EQIX), the median price-to-FFO is approximately 15. Performing the same calculation, I estimate the target share price at between 31.80 and 33.60 U.S. dollars. This range is indeed above the current price, but too close for comfort.

Of course, relying on a company’s guidance can be tricky – companies tend to stand on the conservative side of the spectrum. Last year CyrusOne released guidance numbers for 2014 that it easily beat. If CyrusOne beats its guidance as it did last year, the share price range will move up to 30.91 to 34.60 dollars per share.

As such, I don’t see CyrusOne as a buy opportunity at this moment, for any of the scenarios mentioned above. I’ll move on in my analysis to another data center REIT.