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.

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.

When will DuPont be leaving the bullpen?

sample.pngOver the past week, in anticipation of its Q4 results which are to be released this coming Thursday on February 4th, the rally for DuPont Fabros has been over 9 percent.

For a great part of 2015, DuPont was in the bullpen. CEO Christopher Eldredge was the one put in charge to contain losses after a top tenant declared bankruptcy. It is good news that the succeeding tenant seems to be doing quite a lot better and kept some of the storage space. Due to the issue, it is expected that the 2015 AFFO per share will go up by 6 percent in a sector in which competitors have increased by two digits.

Since the arrival of the new year, new forecasts have been put forth, and DuPont is expecting to experience a better year in 2016. Especially in the first years of his leadership, Eldredge does not wish to be left behind by its peers. Since the company might soon overcome last year’s issues, this could be the year that the company really thrives as things currently are looking rather favorable.

In comparison to its peers, DuPont has a great entry point, which is based on a 12x AFFO multiple along with a decent dividend of 5.7 percent. The dividend payout is set under 70 percent. Though it does not possess an investment grade rating as that of Digital Realty, the company’s ratio for debt to total capitalization is suitably under control.

Because of the fact of tenant concentrations, a risk premium should be added to the company’s valuation. The reason is that there is always the possibility of a corporate decision that will change the storage host or make a downgrade, even if they are not running out of money. More than half of the annual based rent is represented by Microsoft, Facebook, Rackspace, and Yahoo!.

The truth of the matter is that tenant concentration is a delicate issue, but I would not be surprised to see DuPont leave the bullpen sooner than most companies with the same issue.

What happened to make STAG Chief Financial Officer leave?

On Tuesday, STAG Industrial informed that CFO Geoffrey Jarvis left the company. I wonder if the unexpected exit has to do with the company’s challenging period. Because its share price dropped in 2015, the company has been unable to offer major issuance of equity. The management expects to grow assets by 25 percent annually. In 2016, the stock is currently down by 8.2 percent.

Check the reports for Dividend Yield by Sector and Weekly Returns.

Source: Digital Realty Trust Inc.(NYSE:DLR), DuPont Fabros Technology, Inc.(NYSE:DFT), STAG Industrial, Inc.(NYSE:STAG), Fast Graphs, Yahoo!Finance.

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 January 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 December 31, 2015, 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.