Sweet Spot for Data Center REITs: A Wall Street Transcript Interview with David Toti, a Senior Managing Director and Senior REIT Analyst at Cantor Fitzgerald

Wall Street Transcript

67 WALL STREET, New York - February 20, 2014 - The Wall Street Transcript has just published its Data Hosting Centers and Data Storage Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Data Hosting Centers - Flash Memory - Cloud Computing Secular Trends - Data Center REITS - Colocation, Managed Hosting and Cloud Computing - International Enterprise and Consumer Demand - Mobile Computing - Infrastructure Upgrades and Consolidation Activity

Companies include: Digital Realty Trust Inc. (DLR), DuPont Fabros Technology, Inc. (DFT), Cortex Pharmaceuticals Inc. (COR), Prudential Financial, Inc. (PRU) and many others.

In the following excerpt from the Data Hosting Centers and Data Storage Report, an expert analyst discusses the outlook for the sector for investors:

TWST: Let's start with a snapshot of your coverage universe. We're going to focus on the data center REITs today.

Mr. Toti: Our coverage universe today is pretty broad, including a mix of large caps and small caps. We cover office, specialty office, industrial, data centers, multifamily, self-storage, manufactured housing and lodging; we're still a little bit light on retail and health care, and will be pushing into those sectors in the next quarter or two.

Our total coverage right now is 32. We tend to focus on stocks that have a differentiated "story," such as a unique strategy, niche market, or perhaps there are some structural problems. We then try to cover at least one bellwether per sector so we have benchmarks.

TWST: In terms of the data center REITs, how would you describe investor and analyst sentiment? What's your outlook for the space?

Mr. Toti: I will preface it by giving you the backdrop that we're underwriting. We are neutral to the REIT sector overall. We downgraded our RMZ outlook in mid-May to "neutral" from "positive" three days before the index peaked around 1070. Since that time, we've maintained that neutral view on the REITs overall.

Our current target for the index is 984. We think that in this environment it is tough for REITs to offer really compelling returns relative to broader equities, so we are a bit more cautious on the space. It does not mean you cannot make money, however. We do not think there is a strong argument for value declines in real estate overall, but we do think you have to be very careful in your stock selection.

So that leads us to some of our top stock picks, and right now we are very overweight two sectors in particular, and both are very contrarian views. One is self-storage, the other is data centers. Data centers are particularly unique at this point in the cycle for many reasons. First, it is one of the sectors within real estate that really has a diverse investor base. In other words, it is not just a dedicated real estate investment community; there are a lot tech investors involved in the stocks as well.

Because these assets are half technology and half real estate, they sit in a demilitarized zone for many investors. By that I mean a lot of the tech investors do not fully understand the real estate angle, and many of the real estate investors do not fully understand the technology. Of course I am generalizing heavily here. So we find a lot of investors throw up their hands and say, "I won't touch it, I don't really understand it, and it's so complicated. I don't have the bandwidth and it changes every six months, so why bother?" So that is one issue. It is an unusual dynamic relative to other real estate sectors.

The other thing I would point out is that there is a high short interest in the subsector on a relative basis. There is a very high-profile hedge fund that has been short the stocks for some time, and they have been very public about their position.

The data centers are an area in which we have spent a lot of time...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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