Data Center REITs Set For Big Growth In 2016, Analyst Predicts

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For most enterprise organizations, IT infrastructure is kept in-house and in its early stages of a transition when it comes to outsourcing IT infrastructure to third-party data centers. As a result, there is a long-term potential avenue for growth for the data center REIT sector.

JPMorgan expects Digital Realty Trust, Inc. DLR to be a solid performer for 2016.

"We have a positive view of the Data Center REIT industry and believe the strong growth from 2015 can continue into 2016," JPMorgan commented in a note on Wednesday.

"Digital Realty on January 4 issued solid 2016 guidance and we look for even better growth guidance from CyrusOne Inc CONE and QTS Realty Trust Inc QTS when they report in February. Data Center REITs offer expertise regarding data center design, build, power and cooling system, land management, and security. CyrusOne remains our top pick and we are constructive on QTS," analysts noted.

JPMorgan highlighted its preference for the faster growing data center REITs.

"We like Digital Realty Trust (Digital Realty) for its scale, stability and dividend, but the company's lower growth outlook, in our view, justifies a lower multiple for the company. We look for low- to mid-double-digit growth rates in revenue, EBITDA, FFO and AFFO for CyrusOne and QTS in 2016 on a standalone basis," analysts noted.

"For Digital Realty, we look for mid-single-digit growth rates. Given Digital Realty's size and substantial wholesale revenue with long-term contracts and 2-3 percent escalators, the company's ability to grow at a faster rate looks limited near-term," the firm commented.

JPMorgan also expects the faster growth to better offset the valuation gap with tower companies and traditional REITs.

"We model Overweight-rated CyrusOne and QTS to grow revenue 18 percent and 29 percent (10 percent and 16 percent standalone) in 2016, faster than towers at 5 percent, yet CyrusOne trades at a ~3x turn AFFO discount and QTS ~1x (despite better growth) due to shorter relative contract lengths, slightly higher churn and an enterprise IT focus that leads to more abstract demand. We believe CyrusOne and QTS should trade at a premium to towers and overall REIT industry due to their solid business models and, more importantly, substantially higher growth rates," the firm commented.

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Posted In: Analyst ColorLong IdeasREITAnalyst RatingsTrading IdeasGeneralReal EstateJPMorgan
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