Latest / Investor Exchange / Why NTT DC REIT Is The Lucrative Infrastructure Play For The Robotics Revolution

Transcript

Why NTT DC REIT Is The Lucrative Infrastructure Play For The Robotics Revolution · Investor Exchange

• 0:02
  At Investor Exchange, it's time for another podcast with your hosts, David and Brenda.
• 0:08
  Welcome to The Debate. Today, we're digging into a fresh initiation report on
• 0:13
  NTTDC REIT, and it's certainly making some waves.
• 0:17
  The numbers are, well, they're aggressive.
• 0:20
  We're talking about a projected dividend yield that could hit 8% and a price
• 0:25
  target implying a 40% upside.
• 0:27
  So the central question is, is this a huge undervalued opportunity or is that
• 0:33
  high yield just bait for a very risky trap?
• 0:36
  I'm arguing the fundamentals here make this a screaming buy.
• 0:39
  And I'm going to be taking the other side of that.
• 0:42
  I look at those exact same numbers and I see a valuation that is frankly priced for perfection.
• 0:48
  You've got this massive reliance on a single tenant and a growth story that's
• 0:52
  completely pinned on deals that haven't actually closed yet.
• 0:55
  I'm arguing that investors should probably keep their powder dry on this one.
• 0:59
  Okay, let's start with the payout, because I think that's the main draw here.
• 1:03
  We are looking at a distribution yield of about, what, 7.2% for this year,
• 1:08
  and that climbs to a massive 8% next year.
• 1:11
  Now, when you stack that up against its peers, I mean, digital core REIT is
• 1:15
  hovering around 6.5%. Keppel DC REIT is way down at 4.6%. It's clear NTT DC
• 1:22
  REIT is trading at a steep discount.
• 1:24
  The analyst has a target price of $1.42.
• 1:27
  That is a 40% jump from where it is today. You rarely see that kind of spread
• 1:32
  backed by a sponsor as huge as NTT. Hmm.
• 1:35
  Hold on, though. That 8% yield, it looks fantastic on paper,
• 1:39
  I'll give you that, but it is not money in the bank.
• 1:42
  It is completely contingent on a, quote, potential acquisition and some very
• 1:48
  aggressive operational assumptions.
• 1:50
  They're planning to buy a hyperscale data center in Frankfurt in the first half
• 1:53
  of this year, and potential is the key word there.
• 1:57
  If that deal slips, or if they don't boost their occupancy from the mid-90s
• 2:01
  up to nearly 98% right on schedule.
• 2:03
  Well, that yield compresses immediately.
• 2:05
  You're paying today for a best-case scenario that hasn't happened.
• 2:08
  I think you're being a little too cynical about the pipeline.
• 2:12
  I mean, we aren't talking about a speculative build here.
• 2:15
  The Frankfurt asset is tangible. It has a solid 6% net property income yield
• 2:20
  and a weighted average lease expiry, or wall, of 10 years.
• 2:25
  That is a full decade of guaranteed income just waiting to be unlocked.
• 2:28
  And plus, you have to look at the sponsor.
• 2:31
  NTT has over 120 properties globally, something like 2,000 megawatts of capacity.
• 2:38
  This REIT has the first right to grab those assets. The growth runway is,
• 2:42
  I think, clearer here than almost anywhere else.
• 2:44
  The pipeline is fine, but we have to talk about who is actually paying the bills.
• 2:50
  You just can't ignore the concentration risk.
• 2:53
  Almost 30% of their base rank comes from a single client. That Fortune 100 U.S.
• 2:59
  Electric vehicle company, that is nearly a third of their entire income tied to one single name.
• 3:06
  And while you might see a stable tech giant, I see a company that is pivoting
• 3:10
  into some extremely high-risk ventures.
• 3:13
  If that tenant has a bad year, or if regulators crack down on their projects,
• 3:17
  this REIT takes a massive, massive hit. But that's exactly why I like it.
• 3:22
  That risk, as you call it, is the catalyst.
• 3:25
  This tenant isn't just making cars anymore. They are building the infrastructure for autonomous AI.
• 3:31
  I mean, think about the sheer computing power required to run millions of autonomous
• 3:36
  taxis and humanoid robots.
• 3:38
  That data has to live somewhere. This tenant isn't just renting space.
• 3:43
  They're literally building the physical brain of their AI and infrastructure
• 3:46
  inside these data centers.
• 3:48
  Demand is set to explode and they're taking NTTDC REIT right along for the ride.
• 3:53
  Right, but building that physical brain costs a fortune. And who's footing that bill?
• 3:58
  The REIT is. They're borrowing heavily to make this happen. Just look at the
• 4:02
  balance sheet. Leverage is spiking.
• 4:04
  We're looking at net debt to equity jumping from around 47% to well over 55% in just two years.
• 4:12
  That is a heavy debt load. And in a world where interest rates can fluctuate,
• 4:16
  carrying that much leverage, it just significantly reduces their margin for error.
• 4:20
  But you have to look at the income that's covering that debt.
• 4:23
  Their EBITDA, so their operational cash flow essentially, is projected to jump
• 4:27
  by almost 50% by next year, hitting over $90 million.
• 4:31
  So yes, the leverage is rising, sure, but it's being used to acquire assets
• 4:35
  that generate immediate cash flow.
• 4:38
  Their interest cover ratio is healthy, it's over four times.
• 4:41
  This is just efficient capital management, using debt to fuel growth,
• 4:45
  not reckless borrowing.
• 4:46
  It's efficient if the cash flow actually materializes.
• 4:50
  And again, that jump to $90 million relies on absolutely everything going right.
• 4:57
  The Frankfurt deal closing on
• 4:58
  time, the tenant ramp ups in California and Singapore executing perfectly.
• 5:03
  If there are delays in onboarding, which, you know, happens all the time in
• 5:07
  this industry, the revenue falls short. But the debt...
• 5:11
  The dead remains. Look, the market is simply mispricing this asset.
• 5:15
  You have an 8% yield on the horizon, huge upside potential, and the backing of a global tech giant.
• 5:22
  The risks you're mentioning are, I think, standard operational hurdles.
• 5:26
  But the reward here is just completely outsized.
• 5:29
  For an investor looking for both income and growth, this is the trade.
• 5:34
  And my conclusion is that there's just too much potential and not enough actual.
• 5:40
  The concentration risk with that one EV tenant and the rising leverage just
• 5:45
  make this a very fragile thesis for me.
• 5:47
  I'd much prefer to wait until the ink is dry on that Frankfurt deal before even
• 5:52
  thinking about jumping in.
• 5:54
  And that's the eternal struggle, isn't it? Balancing the knowns against the potential.
• 5:58
  We encourage you to dig into the documents yourselves and decide if you're chasing
• 6:02
  yield or playing it safe.
• 6:04
  Absolutely. Do your own homework. Thanks for listening to The Debate.