Morgan Stanley: Closer Look - 2 Data Center REITs Prior Q4 Earnings, Plus Equinix

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On February 17, Morgan Stanley released a note prior to the earnings calls of data center REITs CyrusOne Inc.
CONE
and QTS Realty Trust
QTS
, as well as global interconnection giant Equinix, Inc.
EQIX
, (still awaiting final IRS REIT approval). Morgan Stanley Data Center - Overview Overall, core enterprise demand remains strong, drivers include:  Continued demand for IT outsourcing, investments to capture growth is the main action of 2015.  Morgan Stanley recent CIO survey that shows the continued move of in-house data centers to areas such as colocation and cloud.  Most investments have been towards organic expansions, though the recent Telecity and Interxion proposed merger suggests that the data center industry may be reaching a faster stage of consolidation. CyrusOne - Overweight CONE provides wholesale and retail colocation services to enterprise customers. Morgan Stanley's $30 PT (base case), represents a ~4.25 percent 2015E return from the $28.78 closing price on February 13.
MS bull case: PT of $37 assumes 12.0x Bull Case 2016E EV/EBITDA; 14.1x 2016E P/AFFO - "Expansion plan successfully drives growth in 2014."  CONE's new sales force becomes productive and diversifies the customer base in the newer facilities (Phoenix, Dallas / Carrollton).  Revenues growth accelerates in 2014 to >20%. CONE may also benefit from being a strategic asset in an industry consolidation scenario. MS base case: PT of $30 assumes 11.1 2016E EV/EBITDA; 12.6x 2016E P/AFFO - "CONE benefits from broader secular trends."  Enterprises continue to outsource IT as data becomes integral to business operations.  CONE maintains high-teen Y/Y revenue growth rates, in-line with market. MS bear case: PT of $22 assumes 10.4x Bear Case 2016E EV/EBITDA; 11.7x 2016E P/AFFO - "Weaker macro trends impact data center growth while competition increases."  Enterprise uncertainty delays IT spending decisions.  Larger data center entrants become aggressive on price in response. QTS Realty Trust - Equal Weight QTS owns, manages, and operates third-party data center facilities for enterprises and operates as a REIT. Morgan Stanley's PT of $29 (base case), represents a negative 24 percent 2015E return from the $38.20 closing price of February 13.
MS bull case: PT of $38 assumes 13.3x Bull Case 2016E EV/EBITDA; 12.5x 2016E P/AFFO - "Hybrid cloud adoption drives revenue growth."  As the only public data center provider that offers the spectrum from wholesale to cloud, QTS capitalizes on the bulk of the IT outsourcing trend.  An embedded enterprise customer base provides QTS with a head start relative to peers that do not offer hybrid clouds, (as existing customers trade current wholesale and retail workloads for hybrid clouds internally with QTS). MS base case: PT of $29 assumes 12.1x Base Case 2016E EV/EBITDA; 11.2x 2016E P/AFFO - "Pricing remains stable."  Revenues continue to grow as QTS expands into its large amount of available for development footprint.  Margins expand to peer averages as oncoming revenues offset previously front-loaded costs. MS bear case: PT of $21 assumes 11.0x Bear Case 2016E EV/EBITDA; 10.0x 2016E P/AFFO - "Increased competition creates commodity-like pricing."  Wholesale providers gain market share in the retail space through deep price cuts.  Utilization falls as lower pricing becomes irrational.  Margins converge at a slower pace to industry averages. Equinix, Inc. - Equal Weight Equinix provides third party colocation services to enterprise customers. It benefits from robust demand drivers which include: cloud computing, low latency connectivity, internet growth. Morgan Stanley PT of $206 (base case), represents a negative 10 percent 2015E return from the $227.70 closing price of February 13.
MS bull case: PT of $253 assumes 15.0x 2015E AFFO; 13.0x 2015E EBITDA - "REIT conversion occurs in 2015."  Cloud computing and low latency applications become integral for Enterprise customers.  EQIX successfully expands its footprint while maintaining strong underlying price fundamentals on new space… MS base case: PT of $206 assumes 13.5x 2015E AFFO; 12.1x 2015E EBITDA - "Utilization increases, pricing stable."  REIT conversion occurs in 2015.  Demand continues as enterprises transition more applications to third party vendors.  Though cross connect traction increases, overall pricing remains stable. MS bear case: PT of $118 assumes DCF Based; 8.9x Bear Case 2015E EBITDA - "Aggressive pricing limits revenue growth and margin expansion."  Declines in the wholesale segment accelerate and enterprise growth stalls.  EBITDA growth and FCF limited, resulting in slower debt repayments. Data Center Sector - Big Picture
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Posted In: Analyst ColorNewsREITGuidancePrice TargetReiterationAnalyst RatingsGeneralReal EstateMorgan Stanley
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