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Digital Realty (DLR) Beats on Q2 FFO, Announces Expansion

Zacks Equity Research

Data-center REIT Digital Realty Trust, Inc.’s DLR second-quarter 2019 core funds from operations (FFO) per share of $1.64 outpaced the Zacks Consensus Estimate of $1.63. However, the figure comes in lower than the year-ago quarter’s $1.66.

The company reported operating revenues of $800.8 million in the second quarter, marking a 6.1% year-over-year rise. The revenue figure, however, missed the Zacks Consensus Estimate of $808.7 million. Nevertheless, the company reaffirmed its 2019 core FFO per share outlook.

Quarter in Detail

Signed total bookings during the reported quarter are estimated to generate $62 million of annualized GAAP rental revenues. This would include a $9-million contribution from interconnection. Notably, the weighted-average lag between leases signed during second-quarter 2019 and the contractual commencement date was eight months.

Moreover, the company signed renewal leases, marking $125 million of annualized GAAP rental revenues. Rental rates on renewal leases signed during the quarter rolled down 5.8% on a cash basis and declined 3.7% on a GAAP basis.

During the June-end quarter, Digital Realty closed on the purchase of 22.5 acres of land in the Tokyo, Paris and Northern Virginia metro areas, for about $49 million.

Balance Sheet

Digital Realty exited second-quarter 2019 with cash and cash equivalents of around $33.5 million, down from $123.9 million recorded at the end of the prior quarter.

Additionally, as of Jun 30, 2019, the company had around $10.8 billion of total debt outstanding, of which $10.7 billion was unsecured debt and around $0.1 billion secured debt. Also, as of the same date, its net debt-to-adjusted EBITDA was 6.1x, while fixed charge coverage was 4.2x.

Outlook Reiterated

Digital Realty reiterated its 2019 core FFO per share outlook at $6.60-$6.70. The Zacks Consensus Estimate for the same, currently pegged at $6.68, lies within this range.

The full-year outlook provided by the company is backed by revenue projections of $3.2-$3.3 billion, year-end portfolio occupancy growth of +/- 50 bps, and "same-capital" cash NOI growth of -2.0% to -4.0%.

Our Take

While Digital Realty put up an impressive performance in terms of FFO per share, its lower-than-expected top-line growth was disappointing. Particularly, rental rates on renewal leases declined during the quarter. Nevertheless, the company continues to invest in a bid to enhance its global platform.

In a separate press release, on the day of its earnings announcement, Digital Realty reported signing a definitive agreement to acquire land in Seoul, South Korea. Located within the Sangam Digital Media City in northwest Seoul, this 22,000-square foot land parcel will support the development of a new, carrier-neutral data-center facility. The construction of this facility, which will support up to 12 megawatts of critical IT capacity, is likely to begin within the coming months and be accomplished in 2021.

Further, Digital Realty has agreed to acquire a 34-acre land parcel in Hattersheim to develop its next data-center campus. The site, three miles from Frankfurt Airport, marks the company’s third location in Frankfurt. The purchase, which is subject to certain closing conditions, including zoning and planning permissions, will support the next phase of Digital Realty’s growth in Frankfurt with the delivery of up to 84 megawatts of IT capacity.

Robust fundamentals of the data-center market will likely help Digital Realty ride on its growth curve. The company remains well poised to bank on it through accretive acquisitions and development efforts. Nonetheless, aggressive pricing pressure is likely to prevail in the upcoming period. In addition, the company has a substantial debt burden.

Digital Realty currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Digital Realty Trust, Inc. Price, Consensus and EPS Surprise


Digital Realty Trust, Inc. Price, Consensus and EPS Surprise

Digital Realty Trust, Inc. price-consensus-eps-surprise-chart | Digital Realty Trust, Inc. Quote


We, now, look forward to the earnings releases of other REITs like Regency Centers Corporation REG, Apartment Investment and Management Company AIV and Federal Realty Investment Trust FRT, which are slated to report their quarterly numbers tomorrow.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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