Digital Infrastructure REIT

Transcription

1 1 Digital Infrastructure REIT Finance & Investment Club Real Estate Sector 2 Fall 2016 Senior Analysts: Alex Hall & Yash Shah Junior Analysts: Aaron Yong, Mitchell Starominsky, Zack Bookbinder

2 Agenda 2 Sub-Industry Definition Revenue Generation Value Chain Trend Analysis Risks Comp Co Summary

3 3 Industry Definition This sub-industry consists of specialized REITs that focus on digital infrastructure which provides the ability to store and exchange data through a centralized communication system. For example, data centers and telecom equipment enable the storage and 24-7 access of information. Various REITs allow investors to invest in this industry. To qualify as an REIT, a company or trust must distribute 90% of their taxable income to shareholders annually in the form of dividends By law, at least 75% of a REIT s assets must be invested in real estate, cash or Treasuries and 75% of gross income must be from real estate Income is largely generated from rent, interest and capital gains American Tower Corp. NYSE: AMT Mkt Cap: 47.33B Equinix Inc. NASDAQ: EQIX Mkt Cap: 26.10B Digital Realty Trust Inc. NYSE: DLR Mkt Cap: 15.26B Iron Mountain Inc. NYSE: IRM Mkt Cap: 8.3B Communications Sales & Leasing Inc. NASDAQ: CSAL Mkt Cap: 4.0B CyrusOne Inc. NASDAQ: CONE Mkt Cap: 4.15B CoreSite Realty Corp NYSE: COR Mkt Cap: 3.9B DuPont Fabros Technology Inc. NYSE: DFT Mkt Cap: 3.20B QTS Realty Trust Inc. NYSE: QTS Mkt Cap: 2.62B

4 4 Revenue Generation Digital service and product supporting infrastructure Main source of revenue generation is by renting digital cloud space to clients Provide a variety of data management services and solutions Cellular and wireless Infrastructure Leasing of space on communications sites to wireless service providers, radio and television broadcast companies, wireless data providers, government agencies and tenants in a number of industries

5 Value Chain 5

6 Trends affecting Digital Infrastructure REITs 6 Growth of Digital Infrastructure Relevance Growth of Cloud Computing and Cloud Services Global Digitalization (Internet of Things)

7 7 Trend #1: Growth of Digital infrastructure investments and relevance Increase in businesses utilizing digital infrastructure (cloud computing, M2MC, IoT) Growing importance of data analytics and the result of big data has benefited the digital infrastructure sub-industry Annual global data center traffic (4.7ZB-15.3ZB) Increase represents a 27 percent CAGR. (Graph.A) Cloud IT infrastructure spending will grow at CAGR of 15.1% from 2014 to 2019, reaching $53.1B by By 2020, cloud IT infrastructure spending will be 50% of total expenditures on enterprise IT infrastructure. Key Takeaway: Importance of data analytics in businesses will drive the growth of this industry as more money is invested into cloud IT infrastructure

8 8 Every time we stream video on Netflix, share photos on Instagram or listen to "Lemonade" on loop on Tidal, we add to the internet traffic glut -- and to the pocketbooks of data REIT shareholders. That's not going to stop anytime soon. -Rani Molla (Bloomberg Gladfly) Social Media Today: 100 hours uploaded/min 500M tweets/day 150B friend connections

9 Increase Spending on Wireless Communications Infrastructure 9 Spending on Wireless Communications Infrastructure Growing Despite Mature US Market The market is saturated in the US with 95% of adults connected to a wireless provider In the global landscape, spending is growing at a CAGR 3% American Tower investing $2 Billion in India Prefabricated modular data center s (PFDs) are on the rise The PFD sector has evolved tremendously over the past year and has grown at a CAGR of 30% The market is forecasted to reach $4 Billion by 2018 compared to $1.5 Billion in % CAGR

10 Increase Data Center IP Traffic Growth and Data Center Revenue 10 R²=

11 Trends affecting Digital Infrastructure REITs 11 Growth of Digital Infrastructure Relevance Growth of Cloud Computing and Cloud Services Global Digitalization (Internet of Things)

12 12 Trend #2: Growth of Cloud Computing and Cloud Services Increase use of cloud services, so much so that it is seeing demand powering ahead to doubledigit rates. Big players in the tech world, banks, insurance companies, and other financial services sectors are driving this industry forward Spending on the cloud computing infrastructure and platforms will grow at a 30% CAGR from 2014 through 2018 compared with 5% growth for the overall enterprise IT Traditional IT is shrinking in value as more companies transition to Public Cloud and Private Cloud IT Infrastructure

13 Expansion of Cloud Computing in Business 13 The adoption of cloud computing technology services, including the growth of hybrid/multi-clouds, enterprise cloud service offerings Software-as-a-Service (Adobe) Infrastructure-as-a-Service (Data Centers) Platform-as-a-Service (Developers) Disaster recovery services (Companies) Significant increases in power and cooling requirements for today s data center equipment In-sourced data centers are unable to accommodate these new power and cooling demands The high capital costs associated with building and maintaining in-sourced data centers creates an opportunity for capital savings by leveraging an outsourced colocation model 12% CAGR 23% CAGR

14 Increase Consumer Cloud Storage Traffic and Industry leader Revenue 14 R²= Years Equinix Revenue CyrusOne Revenue Industry Leaders Average Consumer Cloud Storage Traffic (Exabytes/yr) ,566 1,063 1, ,887 1,279 1, ,153 1,482 1, ,444 1,616 2, ,726 1,763 2, *Revenue in Millions *Average of Industry leaders

15 Trends affecting Digital Infrastructure REITs 15 Growth of Digital Infrastructure Relevance Growth of Cloud Computing and Cloud Services Global Digitalization (Internet of Things)

16 16 Trend #3: Global Digitalization - Internet of Things Potential Effects of IoT on global data centers Cloud services are accelerated in part by the unprecedented amount of data being generated by people and machines Cisco GCI estimated that 600 ZB will be generated by all things by 2020 from just 145 ZB in 2015 Sensors can be installed across an asset system such as a network utility to provide real time intelligence about its condition and performance Sensors monitoring an asset s condition can detect wear, break, anomalies, and external stresses Improve factors that determine operational efficiency and the quality of service delivered to end customers Key Takeaway: Unprecedented generation of data will drive the need for industry products and services. Information will help make better business decisions.

17 Risks in Digital infrastructure industry 17 General economic conditions and the cost and availability of capital may be adversely affected in operations of digital infrastructure REITs Interest hike later this year will make it more costly to acquire funding which makes it harder to expand operations for digital infrastructure REITs Must meet their REIT requirements to pay back their debt and pay dividend to their shareholders Cyber-Security is an important component of DI REITs because a lot of the data stored by these firms are confidential and are records kept for internal management and tax filings A business based on trust and client relationship contributes to picking which third party to outsource the business to Internet of Things with wirelessly connected devices could be hacked by hackers and could allow them to spread malicious code through the system Examples: wirelessly connected homes, home security Key Takeaway: Hike in interest rates is a risk as REITs rely on debt financing. Cyber security will remain a risk for this data driven industry

18 Comparable Companies Analysis 18

19 Summary 19 Industry Recap sub-industry refers to digital infrastructure which is the ability to store and exchange data through a centralized communication system Outlook Trump presidency will bring higher interest rates and inflation Hedge against inflation Real estate is a long-lived asset with income that adjusts to inflation REIT holds large amounts of long-term fixed-rate debt Trends 1) Growth of digital infrastructure investments and relevance 2) Growth of cloud computing and cloud services 3) Expanding global digitalization (Internet of Things) Digital Infrastructure REITs Marketweight Risks 1) Availability of capital Interest hike- increase cost of capital 2) Cyber-security Client relationship and trust