Dupont Fabros Tech (NYSE:DFT)

CAPS Rating: 2 out of 5

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Player Avatar aparker385 (< 20) Submitted: 1/14/2009 6:18:20 PM : Outperform Start Price: $2.90 DFT Score: +395.83

At less than $3, if you ascribe $0 value to the construction in progress and land ($328 million in book value), then the implied cap rate on the 5 income producing assets is greater than 11%. For triple net lease properties, with high credit tenants, in long-term leases, 11% cap rate is too high, even in this economy and credit environment.

Even today, the fair NAV, using above market cap rates and being reasonable about the value of unfinished real estate, is well in excess of $6 and is closer to $9.

The stock is below $3 today because DFT management has come up short. Leasing on CH1 has been slower than expected. Development on NJ1, SC1, and ACC4 has been halted (due to credit markets and high costs of capital). Additionally, DFT suspended its dividend. The combination of these facts and the scary prospect of capital and liquidity shortfalls has frustrated and scared off investors. And I'm grateful for this reality, because now DFT is trading at a substantial discount to fair value.

The two founders of DFT collectively have economic interests in over 30% of the equity. Executives were buying shares after they announced a dividend suspension in November at around $2 per share. It would be great to get that price again.

DFT is likely to pay around $0.40 per share in dividends in 2009, given its REIT distribution requirements.

Basically, at today's price you can buy some of the best assets available at a substantial discount and get the development pipeline and all future growth for free while your investment is directly aligned with management's incentives all in a capital efficient structure (REIT).

Lastly, fundamentals in the data center space remain strong. The credit crunch slows supply and demand continues to outpace it at a sizable rate according to industry research. This bodes well for future pricing and for demand for DFT's pipeline. Furthermore, the contacts, technological sophistication, and capital intensity create substantial barriers to entry into this specialized real estate niche.

Be prepared for volatility. Be excited about making multiples of your money...

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