REITWeek Data Centers: Stifel Reports On Rumored Digital Realty M&A Deal

On June 11, Stifel analyst Matthew Heinz published a research note, "NAREIT Takeaways: Poised for Accelerated Growth, Reiterate Buy," focused on Digital Realty Trust DLR growth plans, and an M&A transaction which has been rumored by Reuters to be under discussion.

Heinz sat down with DLR CFO Andrew Power, CIO Scott Peterson, and VP of IR John Stewart after Digital's REITWeek Investor Focus presentation.

During the "Earth To Ether" panel discussion which kicked off REITWeek on Tuesday, Digital CEO Bill Stein's closing remarks mentioned "M&A chatter" and that "the real opportunity during the next 12 months" for Digital Realty would be "good sized deals."

Related Link: Key Takeaways From The REITWeek 2015 Specialty REIT Panel Discussion

Tale Of The Tape - Past Year

The recent $14.85 billion cap Equinix, Inc. EQIX REIT approval, has eclipsed $8.85 billion Digital Realty as the largest global data center REIT by market cap.

While Equinix is focused on interconnection of 4,500 smaller customers, Digital Realty has the largest data center portfolio by far, with 130 data centers totaling over 26.4 million SF, including 2.5 million SF under development or held for future development.

Related Link: Pacific Crest Likes Equinix, Telecity Combo: Is InterXion Now In Play?

However, the recent M&A announcement by Equinix and Telecity Group TLEIY has served to up-the-ante, and perhaps increase the urgency, for Digital Realty to make a strategic acquisition to support its interconnection and co-location efforts.

Source - DLR June presentation

Stifel - Digital Realty: Maintain Buy Rating, $73 PT

The Stifel $73 target price represents a potential ~12 percent upside from Digital Realty's recent close of $65.20 per share; along with its 5.2 percent dividend, represents a total yield of 17.2 percent.

The DLR $73 PT is based on ~14x Stifel's FY2016 EBITDA estimate and 16.5x Stifel's FY2016 AFFO estimate.

Stifel - DLR: REITWeek Meeting Highlights

Telx Acquisition Rumor: Stifel claims no knowledge of M&A discussions reported by Reuters on June 10. However, Stifel "… would not be surprised if details were hammered out over the weekend and the company [DLR] announced an offer early next week."

Telx Deal Accretive: Stifel preliminary pro forma model yields "~6% AFFO accretion in Year 1, assuming a $2.0 billion EV funded with a 50/50 mix of debt and equity, and ~$30M of AFFO synergies."

Heinz also cautioned investors regarding "a high margin for error around projected Telx financials given the lack of publicly available reported figures for the company."

Organic Growth - Improving Returns: Stifel noted, "DLR is now seeing cash yields on new development at the high end of its historical 10-12% range, and tighter underwriting has reduced the book-to-bill lag to 3.7 months, down from ~5.5 months in early 2014."

Addition By Subtraction: The strategy of shedding non-core assets should position Digital for future accretive growth. "DLR has generated ~$200M in YTD proceeds through April ($95M gains) from asset dispositions, well on pace to achieve the high end of its $400M guidance for the year."

Development Pipeline "De-risked": Stifel noted that Digital has 1.2 million net rentable square feet (NRSF) and 45 MW under active development, "81% of which is pre-leased, with expected deliveries of 877K NRSF and 30 MW during the balance of 2015."

Developments mentioned by Stifel included, "Chicago (3.6 MW), New York (1.8 MW), Silicon Valley (6.0 MW), Melbourne (1.4 MW), and Sydney (1.4 MW), [and] a 12.6 MW expansion in Ashburn (due 4Q15) and 8.2 MW of new Dallas inventory coming in early 2016, which is close to fully pre-leased."