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Strategies & Market Trends : Fundamental Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Sergio H who wrote (3072)	6/6/2013 1:19:54 AM
From: E_K_S	2 Recommendations Recommended By Sergio H Spekulatius Read Replies (1) \| Respond to of 4720

Re: Digital Realty Trust Inc. (DLR) -NYSE Hi Sergio - I recently upped my DLR position by 40% last week. For me the value proposition is w/ their FFO (their 2012 FFO was $4.44/share and 2013 analyst estimate $4.79/share; 2014 @ $5.30/share). FFO is calculated by adding depreciation and amortization expenses to earnings. This gives an idea of the REIT's cash performance, which is a better measure of the REIT's performance than earnings. So you really want to look at (1) the growth of the FFO and (2) the price/FFO. The value proposition is to buy the stream of FFO at a reasonable price. If you scan the different REITs the Price/FFO can vary between 10x - 18x. Look at the seeking alpha article below. The Price/FFO Metric: A Driving Force Of Outperformance So, for me I wanted at least a 5% dividend AND to pay no more than the growth rate of the FFO when looking at the Price/FFO. At $60.00/share DLR meets this criteria. The unknown is can the company continue to grow their FFO at 13% or more? DLR's Price/FFO is about 13x ($60.00/$4.61) These "Cloud" REITs are a huge user of electricity and this is sold to their customers at a premium (w/ contract commitments) that allow nice margins for the facility. It's a big revenue stream (only the monthly rental lease per sqft is more) and as new efficient generating technologies emerge, their margins can expand even more as their cost to generate electricity per kilo watt falls. Many of these facilities are using NG fuel cells to generate this electricity on demand. So the re-sale of electricity was one area that attracted me to this sector. It's the number two expense to the client. Also, the server footprint is getting smaller so as these facilities upgrade their usable sq footage, rents can increase accordingly. Arguments have been made that these "cloud" computing facilities are a commodity and rents over time will fall. I am betting that this is not the case and in fact total revenues will actually increase over time as new technologies are installed. Therefore, with a 13x FFO, DLR is a bargain. COR is another "Cloud" computing company I own and they are selling at 19x FFO. COR 's FFO growth rate is around 13% but has bounced around from QtoQ. My cost on COR is around $ 16.00/share bought 6/2011 (latest price $31.51/share). DLR has made it into my top 10 (No 9) w/ an average cost of $61.19/share. If DLR was priced like COR it should sell at $87.59/share. That represents a 45% discount to COR's price. FWIW, my main value screen is/was the 5% dividend yield. BP and VALE are two other new buys I am looking at that present a similar value proposition. However, both BP and VALE sell close to BV and w/ pretty good earnings history (ie over 10 years), you can arrive at a discounted value to their GN. VALE could/may be selling 100% below it's GN and BP about 52% below it's GN. Using a similar analysis for DLR just does not work as it is a REIT and you have to analyze it by their FFO. But based on COR's price, DLR appears undervalued to me maybe by 45% of what the market is pricing for similar "cloud" computing companies. EKS

To: Sergio H who wrote (3072)	6/6/2013 1:31:24 PM
From: E_K_S	Read Replies (1) \| Respond to of 4720

Cyrusone Inc. (CONE) -NasdaqGS This is another "Cloud Computing" company I have been following. My buy target was $12.00-$15.00/share but their IPO went out at $21.00/share on 1/18/2013, I just watched the company. It traded as high as $24.00/share but has sold off recently to $20.88/share. I just went back and looked at their FFO. It looks like they will generate a FFO for 2013 of $1.08/share. So using my 13x FFO figure, my initial target price seems to be correct (ie $14.00/share). Based on today's price of $20.90.share, CONE is selling at 19.35x their 2013 FFO. Just another data point to confirm to me that DLR's FFO selling at 13x FFO is still a bargain. Of course, if any of these "cloud" computing companies slip up on their FFO and begin to report lower growth, look out below. Based on the recent sell off of both CORE and CONE, maybe some of those "value" investors where selling their high priced shares and buying some DLR. This sector is somewhat new so the past FFO history is not that good. I could see the whole sector sell off significantly (perhaps by 20%) if the growth in their FFO stops. EKS