Digital Realty (DLR) Up 12.1% in a Month: Will the Trend Last?
Shares of Digital Realty DLR, currently carrying a Zacks Rank #3 (Hold), have soared 12.1% in the past month, outperforming the industry’s increase of 7.2%.
The rising demand for high-performing data centers amid enterprises’ growing reliance on technology and acceleration in digital transformation strategies has been one of the key forces driving the performance of data center real estate investment trusts (REITs) like Digital Realty.
Against this backdrop, the company’s efforts to expand its presence globally to meet this growing demand and capital-recycling efforts are likely to have enabled it to ride the growth curve this far.
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Let us decipher the factors behind the surge in the stock price.
Digital Realty’s reported third-quarter 2023 results, which came out in October, reflected better-than-anticipated revenues aided by strong enterprise leasing activity. The company registered operating revenues of $1.402 billion in the third quarter, surpassing the Zacks Consensus Estimate marginally. It also reported "same-capital" cash net operating income growth of 9.4% in the third quarter.
Data center infrastructure demand has remained robust globally amid strong demand drivers, such as cloud computing, enterprise modernization and the rise in content streaming and social media usage. Also, emerging demand drivers like artificial intelligence (AI), the Internet of Things, edge computing and 5G technology are likely to have fueled the rise.
Digital Realty’s portfolio of data centers located all over North America, Europe, South America, Asia, Australia and Africa is expected to have capitalized on this upbeat trend, contributing to the increased optimism surrounding its stock.
Moreover, with demand for high-performing data centers expected to increase in the coming years due to growth in AI, autonomous vehicles and virtual/augmented reality, Digital Realty is well-positioned for growth.
In a significant move, Digital Realty has entered into a JV with Realty Income Corporation O to facilitate the development of two build-to-suit data centers in Northern Virginia, known for its prominence in the data center market. The two data centers, whose construction started in the fourth quarter of 2022, will deliver 16 megawatts of capacity, expandable up to 48 megawatts based on the client's discretion.
This joint venture diversifies and strengthens Digital Realty's capital sources. Moreover, it marks Realty Income's foray into the data center sector and underlines its strategic approach to align with industry leaders. Apart from promising well for the growth prospects of both Digital Realty and Realty Income, the move also signifies increased investor confidence in the data center market.
Moreover, this data center REIT is expanding its footprint globally via strategic acquisitions and development activities to meet this growing demand. In September 2023, the company expanded into the Italian market by purchasing land in Rome and commenced the pre-development planning for a new colocation and connectivity hub. The move further strengthened its position as the leading provider of digital infrastructure capacity in the Mediterranean region, a key gateway between Europe, Africa the Middle East and Asia.
Also, DLR has a robust development pipeline, which seems encouraging. As of Sep 30, 2023, it had 9.2 million square feet of space under active development and 3.9 million square feet of space held for future development. Further, in recent years, Digital Realty has expanded in the Americas by adding capacity. For 2023, the company expects to incur capital expenditures for its development activities in the range of $2.7-$3.2 billion, up from $2.3-$2.5 billion estimated earlier.
The company’s capital-recycling moves highlight its prudent capital management practices, preserve balance sheet strength and flexibility and bank on long-term growth scopes. At the third-quarter 2023 end, it completed $2.5 billion of capital recycling transactions, bolstering and diversifying its sources of capital and improving its balance sheet. For 2023, it expects to carry out dispositions in the range of $2.7-$3.2 billion, up from its earlier guided range of $2.2-$3 billion.
Solid dividend payouts are the biggest enticements for REIT shareholders, and Digital Realty remains committed to the same. The company has increased its dividend four times in the last five years, and the five-year annualized dividend growth rate is 3.69%. Given its solid operating platform and balance-sheet management efforts, the company remains well-poised to sustain the dividend payment.
However, given the industry's strong growth potential, intense competition from existing and new players could prompt competitors to resort to aggressive pricing policies, making DLR vulnerable to pricing pressure. Also, high interest rates pose a concern for the company.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Welltower WELL and STAG Industrial, Inc. STAG, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Welltower’s current-year funds from operations (FFO) per share has moved marginally northward over the past week to $3.58.
The Zacks Consensus Estimate for STAG Industrial’s 2023 FFO per share has moved 1.3% upward in the past three months to $2.28.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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Digital Realty Trust, Inc. (DLR) : Free Stock Analysis Report
Realty Income Corporation (O) : Free Stock Analysis Report
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