bemink

Digital Realty Trust: Bound for a Correction

I am in this industry everyday, through the good times and through the bust period, so lets try to correct a few inaccuracies....

1) The biggest customer is "Savvis", not Navvis. In addition to cloud computing, they also perform managed services, apllications and do some systems intergration. The do not compete with DLR.

2) One of Digital Realty's (DLR) largest investors is Global Innovation Partners or "GI Partners", not GL. GI also owns Telx. Telx main business is cross-connections and access to multiple networks. They also offer colocation. They do not compete with DLR, and actually enhance DLR's offerings.

3) Qwest is a customer of DLR's and recently paid DLR $14m to get out of a Chicago lease in a building that DLR didn't have any space to offer. Now DLR will build out space in a very hot market and offer at a higher rent. DLR will start with the $14m they just received as a termination payout....not a bad deal. Also, Nacchio has not been associated with Q for many years (7+?), so not sure why the reference is here...too many other things to discuss with Q.

4) As a former employee of Equinix, I can tell you that EQIX does not offer the same services as DLR. If you knew this industry, this is probably the biggest stretch in this slanted article. EQIX offers managed colocation, the best "peering" in the world and at a level no other firm can do. EQIX and DLR do not compete.

5) The comment "so they can always build and operate their own centers if they get cheap enough" is out of touch with the current capital markets. This facilities are not cheap ($1000-1500 per sf). Not many firms can secure this much capital, and at a reasonable price. DLR secured a substantial amount prior to the current liquidity/capital crises. This crises will actually drive more business to DLR and others like it due to a lack of reasonably priced capital to build these facilities. Also, unlike 2000-2003, companies with data centers are not going bankrupt and putting facilities on the market for pennies on the dollar. This is because this time around, these companies have many paying customers and have occupancy levels that are in the 50-70% average, and need only approx. 32-35% to reach CF break-even. In the current environment, most of these firms offer more than basic colocation, thus layering services, peering and applications and making more per sf, and per customer.

Although the current markets keep many industries in turmoil, this data center/managed services space is one that is somewhat insulated because the investment is high, leases long and operations critical. I would rate DLR as an outperform in the sector, as they are the leader in the industry. At $51, I would also rate EQIX a buy. Q would be a hold and SVVS a hold or sell.

Disclosure: Long on EQIX, Q, SVVS. Do not own DLR currently, but have been long in the past - owned from $18 to $42. If it goes down much lower, I will probably buy it again as I like their model and how conservatively they are approaching the current market.