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Digital Realty (DLR) Beats Q3 FFO Estimates, To Buy Interxion

Zacks Equity Research

Data-center REIT Digital Realty Trust, Inc. DLR has agreed to acquire European provider of carrier and cloud-neutral colocation data-center services, Interxion INXN, in a deal valued at $8.4 billion, including debt. The combined company will enjoy enhanced presence in major European metro areas, and its size and scale is expected to result in an efficient cost structure and superior EBITDA margins.

Further, the company delivered a better-than-anticipated performance in the third quarter in terms of funds from operations (FFO) per share. It reported core FFO per share of $1.67, beating the Zacks Consensus Estimate of $1.64. Results also compare favorably with the year-ago figure of $1.63.

However, reflecting the expected closing of the $1.0 billion joint venture with Mapletree in early November, the company has revised its 2019 core FFO per share outlook to $6.55-$6.65 from $6.60-$6.70.

Acquisition Deal

Interxion shareholders will get a 0.7067 Digital Realty shares per Interxion share they hold. The transaction values Interxion at around $93.48 per ordinary share, reflecting a 5.4% premium to the stock’s Monday close.

The acquisition transaction, likely to close in 2020, is subject to the approval of Interxion and Digital Realty shareholders and other customary closing norms. The deal is expected to be accretive to the long-term growth trajectory of the combined entity.

Interxion's European business presently comprises 53 carrier-and cloud-neutral facilities in 11 European countries and 13 metro areas, including Frankfurt, Amsterdam, Paris and Interxion's Internet Gateway in Marseille. With Digital Realty's solid presence in London and Dublin, Interxion's European business is complementary to the European footprint of the former.

Quarter in Detail

Digital Realty reported operating revenues of $806.5 million in the third quarter, marking a 4.9% year-over-year rise. The revenue figure, however, missed the Zacks Consensus Estimate of $815.1 million.

Signed total bookings during the reported quarter are estimated to generate $69 million of annualized GAAP rental revenues. This would include an $8-million contribution from interconnection. Notably, the weighted-average lag between leases signed during third-quarter 2019 and the contractual commencement date was five months.

Moreover, the company signed renewal leases, marking $ $152 million of annualized GAAP rental revenues. Rental rates on renewal leases signed during the quarter rolled up 7.2% on a cash basis and 10.1% on a GAAP basis.

During the September-end quarter, Digital Realty closed on the purchase of a 22,000-square-foot land parcel in Seoul, South Korea for about $15 million. On completion, the new facility is expected to support up to 12 megawatts of critical IT capacity. With commencement of construction slated in the coming months, its completion is expected in 2021.

In addition, Digital Realty signed definitive deals with affiliates of Mapletree Investments Pte Ltd and Mapletree Industrial Trust for the sale of 10 Powered Base Buildings, and the establishment of a joint venture on three existing data centers.  

Balance Sheet

Digital Realty exited third-quarter 2019 with cash and cash equivalents of around $7.2 million, down from the $33.5 million recorded at the end of the prior quarter.

Additionally, as of Sep 30, 2019, the company had around $10.9 billion of total debt outstanding, of which $10.8 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 4.3x.


Digital Realty revised its 2019 core FFO per share outlook to $6.55-$6.65 from $6.60-$6.70, reflecting the expected closing of the joint venture with Mapletree in early November. The Zacks Consensus Estimate for the same is currently pegged at $6.67.

The full-year outlook provided by the company is backed by revenue projections of $3.2 billion, year-end portfolio occupancy decline of 150 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. Nevertheless, the company continues to invest in a bid to enhance its global platform. The latest deal to combine with Interxion seems a strategic fit given the company’s portfolio-expansion opportunities and benefit from increased size and scale.   

Solid 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 Realty Income Corporation O and Host Hotels & Resorts, Inc. HST, both are slated to report their quarterly numbers next week.

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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