- On 6/23, we hosted an investor call with Bryan Loewen, a data center broker at Newmark Knight Frank. Our discussion gave us greater conviction that global hyperscale bookings will be up considerably in FY2020 – with Q2’20 shaping up to be another strong quarter for demand. Hyperscalers including Microsoft, AWS, Facebook and Google are taking down meaningful capacity in the U.S. and Europe and shifting more toward third-party leasing given the demand spikes on their platforms. For instance, Northern Virginia has already leased more capacity in 2020YTD than in all of FY2019. While several private operators have won significant new hyperscale deployments, we think the broad increase in activity will benefit the operators that have these hyperscalers as existing customers. Pricing in competitive U.S. markets remains at or near historic lows, but appears to have stabilized as hyperscale customers prioritize speed-to-market and certainty of delivery. In our views, the top names to play the acceleration in hyperscale leasing are CONE, QTS and DLR. CONE ($74.70, Overweight) remains our top near-term pick, as demand in its U.S. markets steadily builds while the European markets provide an uplift to growth. With CONE trading at a ~2-4x discount on EBITDA and AFFO/share to peers, we believe it’s the best relative value story in the data center
- Hyperscale Demand Remains Elevated in Q2 – It appears Q2’20 will be very healthy from a hyperscale demand perspective. Microsoft has been aggressively expanding in both the U.S. and Europe. In the U.S., they have signed a 36 MW powered shell deal with DLR in the Chicago area; they have also taken down ~75 MWs of capacity in Europe since COVID-19 hit, largely ROFOs with existing operators. We heard that MSFT also has a ~36 MW requirement in Northern Virginia that has not yet been awarded. Facebook recently signed another 72 MW deal with CloudHQ. Google leased significant capacity in Frankfurt: 27 MWs with IRM and 40 MWs with
· Pricing Remains Aggressive, But Showing Signs of Stabilization
– Loewen noted that he saw a “bottoming” of U.S. hyperscale pricing with some select deals priced at <$65/kW per month early in 2020. Generally, the publicly traded data centers have not been bidding at those aggressive levels – typically staying within the $70-80 range given they can differentiate on factors other than pure space and power. Loewen has seen a slight uptick in recent pricing, as speed-to- market and certainty of delivery become of paramount importance – but competitive U.S. market pricing remains very low.
- Enterprise Vertical Has Seen Some Slowdown – Enterprise activity has slowed down somewhat in Q2. There was a small flurry of activity in March and April – “band-aid”-type solutions to keep remote applications running – but less activity in May and June. However, there does seem to be significant pent-up demand from enterprise customers to adopt hybrid cloud solutions – so a matter of when, not if, that demand
- More Takeaways Inside!
Please see page 3 for rating definitions, important disclosures and required analyst certifications. All estimates/forecasts are as of 06/24/20 unless otherwise stated. 06/23/20 20:33:28 ET
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