Digital Realty (DLR) to Post Q3 Earnings: Is a Beat in Store?
Digital Realty Trust DLR is slated to report third-quarter 2023 earnings on Oct 26, after the closing bell. While the quarterly results are expected to reflect year-over-year growth in revenues, funds from operations (FFO) per share might exhibit a decline.
This Austin, TX-based data center real estate investment trust (REIT) reported core FFO per share of $1.68 in the prior quarter, beating the Zacks Consensus Estimate by 1.82%. The quarterly results reflected better-than-anticipated revenues aided by strong enterprise leasing activity, robust renewal spreads and healthy organic growth.
Over the trailing four quarters, Digital Realty’s core FFO per share surpassed the Zacks Consensus Estimate on two occasions, met once and missed it in the remaining one, the average beat being 0.16%. This is depicted in the chart below:
Digital Realty Trust, Inc. Price and EPS Surprise
Digital Realty Trust, Inc. price-eps-surprise | Digital Realty Trust, Inc. Quote
Factors to Consider
Data center infrastructure demand has remained robust on the back of accelerated digital transformation strategies by enterprises. With growth in cloud computing, the Internet of Things and Big Data, and elevated demand for third-party IT infrastructure, the data center market is booming. Moreover, emerging demand drivers like AI, edge computing and 5G technology are likely to have spurred the need for digital infrastructure globally.
Digital Realty’s portfolio of data centers located all over North America, Europe, South America, Asia, Australia and Africa is likely to have capitalized on this upbeat trend, benefiting its third-quarter earnings.
Moreover, this data center REIT has a high-quality, diversified customer base comprising tenants from cloud, content, information technology, network, other enterprise and financial industries. Most of the company’s tenants are investment grade, and numerous customers use multiple locations across the portfolio. This is anticipated to have aided stable revenue generation for the company during the to-be-reported quarter, driving its top line.
The Zacks Consensus Estimate for quarterly rental revenues is pegged at $894.45 million, up 13.5% from $787.84 million reported in the year-ago quarter. We project the metric to increase 15% year over year this quarter. The consensus mark for revenues from tenant reimbursement utilities is pegged at $348.5 million, up 38.6% from $251.4 million reported in the prior-year quarter. Our estimate for quarterly revenues from tenant reimbursement utilities suggests growth of 22.4% from the prior-year period.
Also, Digital Realty’s interconnection solutions are expected to have gained from solid demand in the quarter under discussion. The Zacks Consensus Estimate for interconnection & other revenues currently stands at $106.6 million, indicating an 11.6% increase from the year-ago quarter. We expect interconnection & other revenues to exhibit growth of 12.6% year over year.
The consensus estimate for quarterly total revenues is pegged at $1.39 billion, indicating a 16.9% year-over-year jump.
The company, continuing with its accretive asset-base expansion to meet data center demand, in September 2023, 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 strengthens 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.
However, higher interest expenses and adverse foreign currency fluctuations are anticipated to have cast a pall on its quarterly performance to some extent. We expect interest expense to flare up 41% year over year in the to-be-reported quarter.
The Zacks Consensus Estimate for the company’s quarterly FFO per share has been revised marginally downward over the past two months to $1.62. Moreover, the figure indicates a year-over-year decline of 3%.
Q3 Developments
In July, DLR, Brookfield Infrastructure and Reliance Industries Ltd. entered into a three-way JV — Digital Connexion: A Brookfield, Jio and Digital Realty Company — to develop high-quality, highly-connected scalable data centers to address the needs of Indian enterprises and digital services companies. At the initial point, the JV will execute the development of data center campuses on existing strategic land parcels it owns in Chennai and Mumbai. The move is expected to help unlock value for India’s untapped data center market, providing DLR immense scope to capitalize on the country’s growing data center demand.
In August, Digital Realty announced the availability of high-density colocation services across its global data center platform, PlatformDIGITAL. The newly introduced services are equipped with high-performance computing-ready infrastructure configurations. These will empower businesses to overcome processing and proximity challenges linked to unstructured and exponential data growth. Further, these will enable the utilization of AI.
In September, the company announced that it will provide connectivity through Oracle Cloud Infrastructure FastConnect to the newly launched Oracle EU Sovereign Cloud. The interconnection offering is brought about by its proprietary interconnection and orchestration solution — ServiceFabric™. This will help customers establish secure and reliable connectivity to the Oracle EU Sovereign Cloud regions in Frankfurt and Madrid. They will also be able to interconnect their Oracle EU Sovereign Cloud-based applications and workloads to other cloud platforms via Digital Realty.
What Our Quantitative Model Predicts
Our proven model predicts a surprise in terms of FFO per share for Digital Realty this season. The right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — increases the odds of a beat. That is just the case here.
Earnings ESP: Digital Realty has an Earnings ESP of +2.09%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Digital Realty currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other Stocks That Warrant a Look
Here are some stocks that are worth considering from the REIT sector, as our model shows that these, too, have the right combination of elements to deliver a surprise this reporting cycle:
VICI Properties VICI is slated to report quarterly numbers on Oct 25. VICI has an Earnings ESP of +1.50% and carries a Zacks Rank #2 (Buy) presently.
American Tower AMT is slated to report quarterly numbers on Oct 26. AMT has an Earnings ESP of +0.59% and carries a Zacks Rank #3 presently.
SBA Communications SBAC is slated to report quarterly numbers on Nov 2. SBAC has an Earnings ESP of +0.27% and carries a Zacks Rank #3 presently.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
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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