Personal Finance ($39 for the first year) is a relative low cost “entry level” investment newsletter, the kind that all the big publishers use to recruit the wave of new subscribers who get fed into their marketing “funnel” that generates leads for their higher-priced services… though, to be fair, we also often hear from readers that these “entry level” newsletters are where the real value is. The cost is low, the coverage usually interesting and sometimes profitable, and the editor doesn’t have to reach for ludicrous gains to justify a $2,500 subscription price (which often ends in tears, of course, since the potential for high gains is inexorably linked to the potential for 100% losses).
You can see how subscribers say they feel about Personal Finance here, but the letter been around for several decades, with a handful of different pundits at the helm — these days it’s Jim Pearce who signs the ad letter as “Chief Income Strategist”, and he’s promising that he has a “hidden rollup” for us that’s going to save TV and make you a 2,049% windfall.
Sound enticing? Well, of course — that’s the whole point. So let’s see if we can unravel that enticement, name the investment for you, and send you on your merry way with a little start on your research. Ready?
The basic spiel is all about how streaming television will create a crisis for the internet, with more and more high-bandwidth video data being transmitted every which way as every player starts their own streaming service… he throws the term “World War Stream” around a lot… and that the only way to solve this is with more data centers that are more closely connected. Here’s a taste of the ad:
“To save TV, the internet, & modern life as we know it… plus cash in on all the profits…
‘We’re going to need a bigger boat’
“Put simply, we need every data center around the world to be glued together…
To make one giant network.
“In other words, the biggest digital heart this world has ever seen.
“It would save TV. It would save modern life as we know it.
“And it could make investors (that’s you) incredibly rich.”
So that’s the backdrop, then we add in the hero CEO…
“… there’s one exceptional man who can take on a problem this BIG… And get it done fast.
“His name is Bill.
“… over the last 6 years, he’s manned the helm of this mega data center provider…
“The stock has already grown by 137%.
“So, you can see why investors love him already.
“What’s his superpower?
“He has a special knack for closing a very profitable type of business deal called a ‘roll-up.'”
The ad also harps on the idea of something big coming down on February 20…
“The future of TV will be decided on Feb. 20 — but the fallout (and the profits) will last for a CENTURY….
“Just make sure you get in before February 20, okay?
“Because that’s the day I fully expect…Are you getting our free Daily Update
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“The secret puppet master behind World War Stream will shower well-positioned investors with cash”
And, not to put too fine a point on it, also says that you’ll be getting guaranteed cash…
“This one’s a guaranteed payday… It’s the law!
“Thanks to a little-known government document called PL 86-779…
“If the profits go up, down, or sideways… you still get paid.
“Better still, all that’s required to secure MAXIMUM profits is one simple stock trade.
“No complicated options. No ‘leverage.’
“No constantly watching out for alerts.
“Making money on this unusual growth play is dead simple…
“You don’t need to know much about streaming TV.
“You don’t need to know much about investing, either.
“In fact, all it takes is 1 easy ‘click’ to secure your chance at a fortune.”
So what’s the story here? This pitch is all about Digital Realty Trust (DLR), which has indeed been very acquisitive in recent years under CEO Bill Stein — they bought DuPont Fabros, another data center REIT, about two years ago, and they are in the middle of a deal to get a much larger presence in Europe as they acquire the ~$7 billion InterXion (INXN), the one large US-traded data center operator that hadn’t yet converted to REIT status. That still won’t make Digital Realty the largest data center REIT, giant Equinix (EQIX) will continue to have an easy hold on that title, but it will remain second largest, and is one of the dozen or so largest REITS in US markets (half of the huge REITs are telecom or tech related, including the three major cell tower REITs as well as Equinix and Digital Realty).
There’s even some hinting that “this is what Warren Buffett would do” … which, of course, is what we all want to hear.
“You don’t hear this much, but ‘The Oracle of Omaha’ has quietly invested in TV companies for years.
“One of the hidden patterns in his current portfolio at Berkshire Hathaway — remember, this is the largest public financial company in the entire world…
Is a series of deals he’s made with a shadowy “TV hedge fund.”
“These actually make up 5 of the 47 positions in Berkshire Hathaway’s dealbook… more than ANY other investment.
“And that hedge fund?
“Its performance record is simply staggering.
“According to a research study conducted by Edge Consulting Group…
“These classic, TV-related investments turned a modest $500 starting stake into a $1,576,685 fortune.”
That’s just a reference to the fact that Berkshire Hathaway owns several of the John Malone stocks — Sirius XM, Liberty Global and Liberty Latin America, in several different share classes. And yes, you would have done very well if you had held the various Liberty companies since the beginning of John Malone’s empire, but, of course, Warren Buffett didn’t do that… and it also has nothing at all to do with the basic “we need more data centers” pitch (Liberty does own some critical telecom infrastructure in its various associated companies, particularly with the Liberty Global cable companies and the Liberty Latin America wireless and subsea cable firms, but data centers are definitely not a focus).
So that’s all well and good, but it’s largely irrelevant to the main point. Is Digital Realty an exciting buy, and will it generate massive returns as they continue to try to increase the size and efficiency of their global network of data centers?
Remember, this is the immediate, gotta get rich push from Pearce:
“Sorry to break it to you…
“You will not make 12 figures on this deal, BUT…
“The 275 hours of financial analysis I’ve devoted to this one profit play led me to conclude that it could start sending you a 2,049% profit windfall as soon as this Monday…
“That’s why I’m writing you this message as fast as I can.
“Because a money-making opportunity as exciting as this only happens once.”
And he implies that there’s another “roll up” coming soon for Digital Realty, a deal that would be even larger than the InterXion deal, which is not even finalized yet but would be the largest data center acquisition so far.
“The underground MEGA roll-up that will save TV…
“Just make sure to get in BEFORE this deal closes to cash in on the huge profits
“Everyday investors stand to pocket huge profit from this MEGA roll-up — even a modest stake could turn into a fortune.
“There are nearly no Wall Street bankers involved… only 0.08% of the Street is watching this data center play.
“This deal has all the right conditions for a 2,049% surge in profits.”
I don’t know what this could be, but there aren’t that many real targets in the public markets — the data center “pure play” stocks that are smaller than DLR are GDS Holdings (GDS), which owns Chinese data centers and is pretty richly valued, but is big enough to make a dent at about $10 billion, and CoreSite (COR), QTS (QTS) and CyrusOne (CONE), the midsize US operators which are all in the $4-7 billion neighborhood and quite a bit smaller than InterXion (I’ve owned COR for a long time, for disclosure). Or who knows, maybe Equinix and Digital Realty will try to merge someday — though you’d have to imagine that there would be some antitrust objection to that.
He does drop some more detail on this “Trifecta” of deals:
“Separately, these three companies generate $8.9 billion in revenue.
“Yet, once all three combine in this Trifecta roll-up…
“This one mega data center would jump to $190 billion…
“That’s 2,049% growth virtually overnight.”
Huh? That’s some wacky math. I have a hard time seeing how $8.9 billion in revenue somehow magically turns into $190 billion — data centers do generally have revenue growth (though this past year was not a good one for organic growth, most of them were pretty flat), but they do not ever have the potential for real exponential growth like that. These are still real estate companies at heart — they own the data center, they supply the space and the power and the telecom connections, so to sign more tenants they have to build more space or otherwise cram more server cabinets into those existing buildings through breakthroughs in interconnection and cooling and power supply. There’s no real magic involved, and the efficiency gains from economies of scale are real but they’re not “turn $8.9 billion into $190 billion” real.
For what it’s worth, if you’re talking about a “trifecta” that gets this company up to a current revenue of $8.9 billion, then you can’t do it without Equinix — Digital Realty has trailing revenue of $3.2 billion, Equinix of $5.5 billion, and nobody else in the public markets is over a billion. And no, I can’t imagine Equinix ($52 billion market cap) buying Digital Realty ($26 billion before the InterXion deal), or the other way ’round, but I suppose anything is possible.
What does February 20 mean? Well, that’s roughly the time that Digital Realty should be making its next dividend declaration, which should include an increase from the current $1.08 per quarter (they raised the dividend on February 21 last year). If they continue along the recent trend, with dividends increasing at 7-8%, it would probably be something in the $1.15 neighborhood, though they do have enough cash flow to support a larger dividend increase if they wish.
Assuming that’s an accurate guess regarding the next dividend, then at $125 DLR would have a forward dividend yield of 3.7%. That’s decent, and the combination of a 3.7% yield and reasonable 5-8% annual increases in that dividend makes Digital Realty a reasonable buy for dividend-focused investors, particularly if you’re optimistic about this INXN deal and their expansion into Europe. Let it compound and you’ll probably do pretty well over time… but unless there’s some kind of blockbuster deal (like EQIX buying DLR for a stiff premium, which I think is unlikely), then you’re going to get a return that will probably be pretty similar to the past returns DLR has put together, fueled in part by acquisitions.
Over the past three years, going back to a few months before they agreed to acquire DuPont Fabros, a deal similar in size to InterXion, DLR has had a total return of about 30%, roughly 10% a year including the dividend. I’d look for the future to probably appear pretty similar to that, given DLR’s already large size, but it is possible that they could do better — if they were to get valued more similarly to the larger Equinix, for example, then DLR could potentially get rated up to 27X FFO, which would be roughly $178 per share (it’s at $125 now), though they’d probably have to show more flashes of growth to get there.
Equinix is the largest and most richly valued player in the space by most measures, and that’s probably largely because they’ve been growing rapidly and still have lots of organic growth potential (building out new centers, etc.). Right now Equinix trades at 27X the trailing $22.60 per share in FFO they likely earned in 2019, and with a dividend yield of 1.6% with dividend growth of about 8%… but they also pay out less than half of their FFO as a dividend, so that leaves a lot of room for funding growth (or growing the dividend).
Digital Realty, the only company approaching EQIX in size in this space, trades at 19X its trailing FFO of about $6.60 and is growing at about half the speed on the top line (roughly 5% vs. 10%, though that was before the InterXion deal). They pay out a higher-but-reasonable 2/3 of FFO as a dividend, which, as I noted, will probably yield 3.7% in the coming year (depending on that announcement of the next dividend, which should come out in the next two weeks sometime), so they’re also pretty conservative for a REIT but not as conservative in the payout as EQIX… and the dividend is growing at about the same pace as EQIX.
Given that, and the potential of the InterXion merger, I wouldn’t try to talk you out of DLR here — I think the dividend is solid and should continue to grow at a decent rate, and that the combination of revenue and dividend growth and the dividend payout will probably get you something in the 10% neighborhood in annual returns, with a chance for more if growth surprises for whatever reason or, more importantly, if investors decide to accept a 2 or 2.5% yield from DLR instead of the current 3.7%, and that really depends on interest rates and assumptions about future growth.
Oh, and yes, I should note that the “legally binding” bit about the public law cited by Pearce is indeed true — but misleading. Yes, DLR (and most of these others) are real estate investment trusts (REITS), which means that they are legally obligated to pay out 90% of their taxable income as dividends if they want to keep their tax pass-through status (pass-through just means shareholders like you pay the taxes on your dividend income, instead of the corporation paying corporate income tax). That obligation is based on what would otherwise be their taxable income, though, and most REITS pay out dramatically more in dividends than they are obligated to pay — that’s because depreciation and other costs can be deducted from income, but are generally added back in when REITs calculate their Funds From Operations, and it’s usually the FFO that REIT investors go by and that we think of as providing the cash flow that supports the dividend.
Digital Realty could probably pay out a dividend that’s about 1/3 the current size without breaking the REIT rules — they only have net income of about $300 million a year, but because of $800 million in depreciation and amortization expenses they actually have plenty of cash available to support the nearly $1 billion they pay in annual dividends, and they know that REIT investors buy for dividends so they make some effort, like most REITs, to pay out as much as is feasible given their cash flow. The Feds might guarantee that you will get a dividend from Digital Realty as long as they are profitable and opt to be taxed as a REIT (they don’t have to pay a dividend if they don’t make money, just like they don’t pay taxes if they don’t make money), but the payout could certainly be cut if things get ugly for DLR… and if that happens, for whatever reason, you can be pretty sure that the share price would collapse (they haven’t cut the dividend in the past, which is a good sign, but that’s less than a guarantee). My general rule with REITs is that the shares will follow the dividend declarations over time — if the dividend rises, the share price will rise as well; if the dividend shrinks, likewise for the share price.
I personally own CoreSite (COR) shares, a much smaller company that’s in the doldrums right now after a decade of rapid growth, and I haven’t sold despite the fact that the next year will probably also be tepid, mostly just because I’m loathe to sell strong dividend payers who are still doing fine… but if I were going in today, I’d more likely choose DLR over COR and the smaller players at current valuations (COR grew the dividend so fast that they’re now paying out 95% of FFO, which means any immediate divdiend growth should be pretty limited). If you like all of them and don’t feel like trying to deal with the changing dynamics among competitors, I also like (and own shares of) the Pacer Benchmark Data & Infrastructure Real Estate ETF (SRVR), which is mostly made up of the large data center REITs and cell tower REITs.
And as to 2,049% returns? I have no idea where that’s coming from… but if you’re looking for that kind of return from Digital Realty, I’d urge you to plan on at least a 20 year holding period — and it wouldn’t hurt to also cross your fingers. This is a large cap stock that might do well, and I do like management and their acquisition of InterXion, assuming that goes through, but none of that is going to create a massively leveraged or magical return. Go into your research with that mindset, and without too much magical thinking, and you’ll probably do OK.
That’s what I’m thinking anyway, but for your money the important thing is what you think — have a fondness for Digital Realty or any of the other players mentioned? See huge growth for data center REITs? Let us know with a comment below.
Disclosure: I own shares of CoreSite and the Pacer Benchmark SRVR ETF. I will not trade in any covered shares for at least three days, per Stock Gumshoe’s trading rules.