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Jefferies Weighs In On Best Data Center REITs For 2015

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Jefferies Weighs In On Best Data Center REITs For 2015
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There was a lot to like about how data center REITs Digital Realty Trust, Inc. (NYSE: DLR), DuPont Fabros Technology, Inc. (NYSE: DFT), CyrusOne Inc (NASDAQ: CONE), CoreSite Realty Corp (NYSE: COR) and QTS Realty Trust Inc (NYSE: QTS) performed during 2014.

The REIT sector was as a whole, as represented by the MSCIUSREIT Index (INDEXNYSEGIS: RMZ), was up over 25 percent during the past year.

Related Link: What Do Macy's Latest Moves Mean For Retail REIT Investors?

Tale Of The Tape

Data center REITs even kicked that up a notch with the top three returning approximately 42 percent in 2014.

jefferies_2014_data_center_reit_total_return_chart.jpg

But how will 2015 play out for this technology focused REIT sub-sector?

Good News Going Into 2015

On a relative basis, the data center REIT sector is still a relative bargain compared to both historical pricing and the vast majority of the other REIT sectors.

jefferies_reit_nav_by_sector.jpg

This is a contributing factor to Jefferies analyst Omotayo Okusanya's overall positive view of the data center REIT sector for 2015.

Growth Drivers For Data Centers -- 2015

Jefferies sees the growth in cloud usage and enterprise outsourcing to remain strong in 2015. Demand drivers behind this include:

Outsourcing Trends: Handling IT needs solely in-house is becoming more costly. Third-party vendors continue to improve their infrastructure and product offerings, making outsourcing to the cloud or to a private data center more attractive for small- to medium-sized businesses.

Big Data And The Internet Of Things: Led by social media, mobile devices and greater need for analytics.

Jefferies noted that according to "IDC and EMC Corp, by 2020 the amount of data in existence will mushroom to over 44 zettabytes (from approximately 5 zettabytes currently, or approximately 5 trillion gigabytes), translating into a doubling of the digital universe annually."

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2015 Trends -- Collocation & Hybrid Solutions

Jefferies believes that the retail collocation stocks are setting up for stronger earnings growth in 2015, despite the higher valuations, and this is reflected in their picks.

Additionally, Jefferies sees "hybrid" data centers, (utilizing both public cloud and private data centers), as increasingly being the preferred IT infrastructure model.

Jefferies thinks this trend will continue to benefit companies that offer the full data center solution stack, namely QTS Realty (which is the only REIT to offer a cloud service).

CoreSite and CyrusOne trail closely behind with their collocation, managed services and connectivity options. While Jefferies acknowledges the recent diversification by Digital Realty and DuPont Fabros into these areas, they note that these initiatives are still in early stages of deployment.

One Notable Downgrade

Jefferies downgraded Digital Realty from Buy to Hold, choosing to "cash in" on the strong performance during 2014. Jefferies notes that management will be stepping on the brakes when it comes to new development and M&A activity to focus on recycling capital in order to boost long-term ROIC. The Price Target (PT) was reduced from $72 to $70.

2 Buy Ratings

Jefferies maintains its Buy rating for QTS Realty, noting the record approximately $63 million leasing backlog reported during Q3 2014. Jefferies also noted that QTS still trades at a discount to its $40.10 NAV, (net asset value). Jefferies sees a potential 15.7 percent total return and raised its PT from $38 to $40.

Related Link: Jefferies Debuts 'Lucky 7': Top REIT Picks For 2015

Jefferies selected Buy rated CyrusOne as its top conviction pick for 2015, while cautioning the recent slide in oil prices is a risk factor given that 30 percent of CONE's revenue is tied to the oil and gas sector. However, Jefferies noted that oil companies may also choose to outsource data center requirements to reduce capital spending. PT was reduced from $34 to $32.

2 Hold Ratings

CoreSite Realty was maintained as a Hold by Jefferies, while noting that COR is expected to put up "robust yoy FFO/sh growth in 2015 of 15.1 percent." PT was raised from $40 to $43.

DuPont Fabros was maintained as a Hold by Jefferies after a 39 percent gain in 2014, noting that the company was a "super wholesale" REIT with high concentration risk -- with just four internet/cloud tenants accounting for approximately 60 percent of ABR (Facebook, Microsoft, Yahoo and Rackspace). PT was raised from $35 to $36.

Image credit: Beraldo Leal, Flickr

Latest Ratings for DLR

DateFirmActionFromTo
May 2017Wells FargoDowngradesOutperformMarket Perform
Apr 2017MacquarieInitiates Coverage OnNeutral
Jan 2017Deutsche BankDowngradesBuyHold

View More Analyst Ratings for DLR
View the Latest Analyst Ratings

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