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Digital Realty Expands in Denver

Zacks Equity Research

Digital Realty Trust Inc. (DLR), a niche real estate investment trust (:REIT), has recently completed the acquisition of a sprawling data center and office complex, spanning around 286,000 square feet, over a large-spread built up space in Aurora in the Denver Metropolitan area of Colorado. This acquisition is expected to provide stabilized cash flow in the short term, a substantial upside potential in the long term and the opportunity to expand its footprint in the downtown Denver market.

The purchase is also in sync with the long-term investment objectives of the company of focus on investing in institutional-quality data center facilities in high-barrier-to-entry markets which have significant potential to generate attractive risk-adjusted return on investments.

The acquired data center is located in the Cornell Business Park in 11900 East Cornell Road. The property is 94% leased to two clients with an average lease term of 10 years. The data center is divided over three interconnected buildings. The proximity of the property to 8534 Concord Center Drive facility – one of Digital Realty’s key properties in the same Denver Metropolitan area – makes it a noteworthy and strategic buy.

Digital Realty aims to augment financial flexibility and enhance its financial resources at the most favorable available price in the market. To add to this, the company has also increased its global revolving credit facility by $300 million to the tune of $1.8 billion for improved liquidity.

With demand for digital storage facilities surging in recent years, Digital Realty has benefited greatly through negotiation of favorable lease terms and maintenance of strong occupancy rates. The long-term lease agreements have also insulated the company from short-term volatility and unfavorable market swing experienced during the recession.

These factors have in turn enabled Digital Realty to pay steady dividends to its shareholders.  Digital Realty declared a dividend of 73 cents per share in the second quarter of 2012, which marked a 7.4% increase over the year-ago quarter. Since 2005, the company has raised its dividend 10 times from 24.4 cents, and even continued dividend payment during the recession. The current dividend payment affirms a yield of 4.2%.

Digital Realty provides flexible and cost effective data center facilities which are primarily used by domestic and international telecommunication companies to maintain their Internet presence or augment their data networks. The strong customer base of the company includes major companies – such as Facebook, Inc. (FB), Yahoo! Inc. (YHOO) and Microsoft Corporation (MSFT). As of September 17, 2012, its portfolio includes 109 properties throughout Europe, North America, Asia, and Australia. It spans a total of approximately 21.1 million square feet (including 2.2 million square feet of redevelopment space).

We currently have a long-term Neutral recommendation on Digital Realty. Also it carries a Zacks #3 Rank (a short-term Hold rating).

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