2 Top Picks: MLV & Co. Weighs In On Data Center REIT Sector

Data centers are a relatively new, but fast growing specialty REIT sector. Recently, shareholders across the board have been rewarded with exceptional returns.

There are currently five publicly traded REITs focused on developing and leasing mission-critical, data-center space:

• Digital Realty Trust, Inc. DLR
• DuPont Fabros Technology, Inc. DFT
• CyrusOne Inc CONE
• CorSite Realty Corp COR
• QTS Realty Trust Inc QTS

Typical customers can range from small tech startups to large enterprise, colocation, healthcare and government agencies to big data and cloud computing giants such as: Facebook, Yahoo and IBM.

Related Link: Deutsche Bank Weighs In On REITs With 4 Top Picks

Tale Of The Tape

It is anticipated that a sixth company, Equinix Inc EQIX, which is primarily focused on domestic and global interconnection, will receive formal IRS REIT approval during 2015.

MLV & Co. – On Data Centers Versus REIT Sector

In a February 5 Barron's piece, REIT analysts from MLV & Co. weighed in on the data center space with an overall favorable view for 2015, despite the recent run up in share prices.

"Despite the sector's 9 percent outperformance relative to other REITs in 2014 and 3 percent outperformance year-to-date, the sector still trades at a multiple that is 3.7 times below the REIT sector, compared to the long-term average of 1.4 times, since 2007."

"Rents increased throughout 2014, as supply and demand were in balance; the vacancy rate finished the year at a healthy 9.0 percent. The data-center real estate investment trusts' (REITs) development projects have leased up quickly and yields have remained firm (generally 11 percent to 15 percent)."

MLV likes two of the smaller cap names in this sector, in part because of their ability to grow at a faster rate.

Related Link: Jefferies Weighs In On Best Data Center REITs For 2015

MLV & Co. – 2 Buy Ratings

"With the best located portfolio in our coverage (second to Equinix, which we do not cover), we believe CoreSite should trade at the lowest-cap rate. The opportunity for external growth through development, and internal growth as CoreSite closes the 35 percent gap between their rents and Equinix's, creates a multiyear earnings growth opportunity."

"Management at QTS has a knack for finding infrastructure-rich properties, for a fraction of the initial development cost, that are ideal for data-center conversion – this allows the company to achieve high yields on development. QTS can approximately double its leasable square feet just by building out already completed shells."

MLV & Co. – 3 Hold Ratings

"CyrusOne has a strong sales force, which has been effective in attracting corporate users to their highly efficient data centers. However, 30 percent of CyrusOne's revenue comes from the energy sector, and we are concerned that falling oil prices will affect demand."

"Pairing back the development pipeline to primarily build-to-suits is the right strategy for Digital Realty as the firm can rely on their brand name and customer relationships. However, we do not see enough earnings growth to justify that Digital Realty should trade at more of a premium to net asset value (NAV)."

Very long-term leases and a stable tenant base give surety to cash flows. However, DuPont Fabros' top tenants are not growing with the company as quickly as before, and the company lacks a large sales force to attract new tenants.

Notably, DuPont Fabros recently announced that Christopher P. Eldridge will become the new CEO, effective February 17.