Sami Badri Tells the 2017 Narrative at Leesburg Summit, Brings 2020 Into Focus
by Josh Anderson
LEESBURG, VA – CapRE’s Sixth Annual Washington, D.C. & Mid-Atlantic Data Center Summit, the largest and most influential of the year, kicked off with a rousing morning panel discussion, REIT Analysts’ Outlook: Hyperscale, Traditional and Edge Data Centers Against the Backdrop of Evolving Services Landscape, which featured the input of Sami Badri, Senior Analyst at Credit Suisse, about the public markets.
Moderator Kanan Joshi, Executive Director and the Head of Telecom Infrastructure for Upper Bay Infrastructure Partners got the ball rolling. “Let’s get into the valuation and how public equities are trading, and your outlook for the next twelve months,” Joshi suggested. “As we all know, public equity valuations drive a lot of the other valuations in the sector.”
“I definitely want to touch on some of the things that Rob mentioned but I also want to take the story a little bit earlier, in what I would describe as the information and data center supply chain,” replied Badri, going second after his co-panelist Robert Gutman, Director for Communications Infrastructure and Telecom Services Equity Research Guggenheim Securities.
“There are three interesting dynamics that occurred in the back half of 2017,” Badri continued, offering a lay of the land. “First thing is interest rates. Interest rates going up actually did put some pressure on the multiples across the data center group. The second thing, that I think actually had a big overhang of multiples, was actually M&A, out of what I would say is maybe a succession of multiple years, where you actually had a very favorable take-down of multiples for data centers. privately owned data centers. You essentially started to see multiples go up pretty significantly.”
“So for the first time, I would say, in maybe the first time in the sector’s history, you started seeing private sector multiples go above publicly trade data center multiples,” explained Badri. “And that is still the case up to this point, midway through 2018. “
According to Badri, the third big “overhang” on the multiples in the back-half of 2017 included backlog-signings dropping down pretty significantly. “So the combination of those three things actually drew down the entire group,” he surmised. “Now we look to 2018, and I would say that from where we are today, I would say that, just like Rob said, we are at about 18x our 2020 AFFO.”
Badri then asserted that that this dynamic feels right, for one simple reason. “Because if you actually look at the way that the majority of the publicly traded data centers are growing, they’re actually growing in markets that generate lower return on invested capital yields,” he explained.
The best examples of this can be found in Europe and Asia, Badri shared. “If you look at all of these companies’ models and all the ways that they generate revenue and the yield that they get on investments, they’re actually lower in Europe vs the U.S,” he outlined. “So naturally when you see yields start to compress, you start to see the multiples start to compress in coordination with that. And to some degree, that keeps the investors on the sidelines, and key companies like, for example, CoreSite are the beneficiaries of that, since they’re very U.S.-centric.”
“So net-net, we’re at 20x our 2020 cash-flow numbers. Does this feel light given the very strong data center signings that we saw coming from 1Q to 2Q 2018?” he asked the room, preparing to wrap up his remarks. “Not really, but does it feel right with all things considered on a macro level? A little bit.”
“There’s also one narrative in here – that 2018 for the biggest data center operator, Equinix, is actually an investment narrative,” added Badri, for good measure. “There’s a lot of noise in the model. There’s a lot of assets in the model that are new. For example, the hyperscale initiative that they’re also launching. So you’re going to need to wait to see how the dust has settled before you start to see investor confidence come back up. And then you’re going to see multiples potentially get sponsored.”
When that occurs, predicted Badri, it will end up driving M&A, because then the value of each share can now abide more private assets, or even develop more assets, as a function of them using their equity as a funding mechanism. “So from where we are today, the multiples make sense but we are still waiting to see some demand and some absorption play out in Q3 to give investors more confidence,” he concluded. “That’s my “short take” on this, believe it or not.”
For Robert Gutman’s take on valuations, check out an earlier CapRE Insider Report: Robert Gutman, Guggenheim Securites: Stocks Have Broadly Recovered, Optimism Has Returned, But Firms Trading in Line with Each Other