Citi Upgrades CyrusOne

Citi upgraded CyrusOne Inc CONE Thursday from Neutral to Buy and raised its price target from $28.50 to $31.00.

Analyst Emmanuel Korchman upgraded the shares of the small-cap data-center REIT “as recent share underperformance (+20 percent YTD vs DC peers +39 percent) has driven valuation to more attractive levels at a ~10 percent implied cap rate and a 15.1x 2015 AFFO multiple, which creates a reasonable entry point as both industry and company trends appear to be holding up.”

Korchman noted that “CONE has an above average internal growth profile with upside to an 86 percent leased rate, low relative development costs and resulting high development yields, a fast development delivery timing, potential upside to the 3.2 percent dividend (48 percent payout) and a track record with enterprise users.”

“Similar to other data centers, leasing remains the key driver. These positives are somewhat offset by the risk of overbuilding, remaining CBB overhang (~44 percent), limited public company experience, and high leasehold interests,” according to Korchman

The analyst note concluded that oil-related concerns are overblown. “The energy sector is a large part of CONE’s business, contributing 30 percent of rents, and 30 percent of operating rents come from Houston...Lower revenues from lower oil prices are unlikely to drive tenants to either internalize these functions (at a higher cost) or shut them down completely (and risk either operations or future growth).”

CyrusOne Inc recently traded at $25.95, down 0.84 percent.