Jon Jacobson's Sohn Conference Presentation: Short Digital Realty Trust (DLR) ~ market folly

Thursday, May 9, 2013

Jon Jacobson's Sohn Conference Presentation: Short Digital Realty Trust (DLR)

We're posting up notes from the Ira Sohn Conference 2013 in New York.  Next up is a summary of the presentation from Jonathon Jacobson of Highfields Capital.  He presented "The Illusion of Yield."  His pitched the short case on Digital Realty Trust (DLR).  

The Illusion of Yield

Jacobson said money market assets are in decline. Individual investors fled mutual funds, and slowly, but surely individuals are tiptoeing back to the market. They are buying high-yield bond funds and dividend stocks.

"Low risk" such as REITs, pharma/healthcare, Utilities, Telcos, even blue chips. He showed how health care is up 18% ytd, Utilities 18%, staples 16%. Very rare for this to happen in a bull market. This shows that investors are buying high dividend "safe" stocks. "All dividends are not created equal"

AT&T (T) beware: wireline a melting ice cube, wireless becoming competitive. Short: Linn Energy (LINE). Half of cash flow is from hedging gains.

Short Digital Realty Trust (DLR)

Short idea: Digital Realty Trust (DLR). $9B market cap, trades at 18x AFFO (adjusted funds from operations), 4.6% dividend yield. Fundamentals deteriorating, commodity business without barriers to entry.

CAPEX higher than company represents, dividend not sustainable. Stock worth about $20/share, not the $65 it's trading for. Cloud-based competition is coming in- Google (GOOG), (AMZN), and Microsoft (MSFT).

Rents at new data centers are down 20% since 2006. Spent $967M on CAPEX, claim only $22M of it was maintenance capex. This doesn't square. It's actually more like $413M/ year over time. So on $1B on revenue, cost of maintenance capex is more like 40%, not 2% This makes a huge difference- it implies they are only making 87c/share, not $3.12/share.

With a 4% yield on this 87c, you get a $19 stock. Replacement cost as estimated by the company is $18/share.  With no barriers to entry, increasing competition, prices dropping, why should you pay 3x book value for this business? Keep issuing secondary shares to fund ongoing operating cash shortfall, still doing acquisitions to mask what is happening.

Check out the rest of the hedge fund presentations from the event: notes from Ira Sohn Conference 2013.

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