The short thesis is essentially centered around a silly argument that Digital's earnings (or FFO in REIT-dom) aren't sustainable and that the San Francisco-based REIT is not accounting for certain cap ex-related expenses. It's not common for a blue-chip REIT to become the subject of a short play and I find Highfield's arguments to be extraordinarily stupid. Why?
Digital's growing revenue stream consists of over 2,000 leases with over 600 tenants. The diverse revenue includes many recognizable names such as CenturyLink
As a pioneer of data storage, Digital was effectively able to build a wide moat first, ahead of the competition. That enabled the company to scale and create a fortress brand that is now over three times the size of all other competitors: CoreSite
Digital's dividend policy of increasing its dividends paid by over 17% from 2005 through 2012 is amazingly sound and given the more recent drop in price ($59.89) I find Digital's dividend yield of 5.24% to be incredibly enticing.
In addition, a REIT with similar dividend characteristics would be trading at a much higher multiple and I find the data center king's valuation of 12.5 times earnings (P/FFO) to be a REAL DEAL. The short squeezer (Highfields) has made an openly stupid pitch that has created a buyer's dream.
In addition, as Equinix (another leading data provider) debates its value proposition (for becoming a REIT) with the Internal Revenue Service (mainly arguing over the interconnection fees that EQIX generates and whether these fees are considered income or real estate), the market uncertainty has created more good news for Digital share prices to move into Ben Graham's BARGAIN box.
This summarizes my case that now is a good time to consider Digital Realty as an unusual outlier wherein the current price has created an opportunity where all of the stars are lined up. Minimizing risk and maximizing returns are essentially the cushion (or margin of safety) that Ben Graham taught and on rare occasions there are bargains in which you will be able to "buy a wonderful business at a moderate price". That's what I call "sleeping well at night".
Courtesy of SNL
At the time of publication, the author had no shares in DLR.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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