Key Takeaways From The Deutsche Bank Dallas Data Center Tour

On May 25, Deutsche Bank analyst Vin Chao published a research note detailing key takeaways from his recent data center facility tour and discussions with Digital Realty DLR and CyrusOne CONE management.

Both of these data center REITs are Buy rated by Deutsche Bank, with CyrusOne being a sector Top Pick as well.

Tale Of The Tape - Past Year

The Vanguard REIT Index ETF VNQ tracks the MSCI REIT Index, which is a good proxy for broader REIT sector performance.

Related Link: Digital Realty CEO Bill Stein: 'Data Center REITs Undervalued'

Secular growth drivers for data centers include cloud computing, wireless data and enterprise outsourcing trends.

Deutsche Bank - Dallas Market Observations

Dallas, along with Northern Virginia, remains one of the strongest U.S. data center markets, with increasing supply of space being met with strong demand from enterprise customers.

Deutsche Bank noted, "Reasonable power costs, attractive state tax incentives, and limited natural disaster risk continue to make Dallas an attractive data center market and one that should see outsized growth for some time."

Notably, "the data being run by Oil & Gas companies today will impact their businesses 10-years from now with current oil prices of little consequence as it pertains to current data center demand," according to Chao.

Deutsche Bank - Digital Realty: Key Takeaways

Demand: DLR is seeing strong demand in Dallas and is building out space to meet that demand with 8.2MW of data center under construction and 8.4MW of base building under construction.

Scale: Digital has a 77-acre campus served by a 122 MW DLR owned electrical substation, located in Richardson, Texas comprised of: three completed facilities, four data centers in various stages of development, and land for three additional data centers.

Advantage: The owned substation allows DLR to buy power in bulk at 1 to 2 cents per KWH below typical market rates.

Flexibility: Digital is now building out shell space utilizing a strategy which allows DLR to competitively price space to match customer requirements; allowing DLR to attain its targeted margins when customers do not require higher levels of resiliency.

Deutsche Bank - CyrusOne: Key Takeaways:

Demand: Dallas, Northern Virginia and Chicago are top markets for CyrusOne. Chao noted that, "Demand remains strong with the late stage pipeline near record highs."

Scale: CyrusOne has ~680,000 SF of shell and 18 MW of total power capacity at its Carrollton, Texas facility. Typical data halls are 54K square feet, 4.5 MW; with three built-out (along with one smaller hall), and three more available for development. Delivery has averaged one hall per year, with construction commencing at the 80 percent lease mark of current phase.

Advantage: CONE is delivering its data halls in 36 weeks at ~$7 million per MW an estimated 3x to 4x less expensive than typical enterprise data center build-outs.

Related Link: Data Center REIT CyrusOne Jefferies Conference - Key Takeaways

Bottom Line: Even with the Dallas facility only ~50 percent built-out, CyrusOne is achieving a current yield of ~13 percent, "pointing to the scalability of CONE's model," according to Deutsche Bank.

Share Overhang: Deutsche Bank noted that Cincinnati Bell is being viewed as "very patient" regarding its remaining ~22 percent ownership interest in CONE.