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Digital Realty's (DLR) Stock Declines on Weak '19 Guidance

Zacks Equity Research

Shares of Digital Realty Trust DLR witnessed a decline of 5.1% during yesterday’s trading hours. This fall can be attributed to management’s announcement of its soft initial guidance for 2019 core funds from operations (FFO) per share.

Notably, the company expects 2019 core FFO per share of $6.60-$6.70. In fact, it indicates 5% year-over-year growth from the mid-point of 2018 core FFO per share guidance of $6.55-$6.65.

This excludes the effect of foreign currency translation and adoption of the new lease accounting standard that will likely impact results by 1-2% and 2-3%, respectively. Notably, Digital Realty owns a global portfolio and is also considering making additional international acquisitions. Although a sound global footprint helps the company meet rising data-center requirements of customers around the world, it exposes its earnings to foreign currency translation.

Management expects the company’s solid portfolio, a global and sustainable platform, along with encouraging demand drivers, will facilitate growth in earnings, cash flow and dividends per share in the upcoming years.

In fact, in 2018, the company undertook strategic initiatives to strengthen its portfolio and capital position. Digital Realty boosted its global presence by entering into the Latin America market. In December, it acquired a Brazilian data center provider — Ascenty from Great Hill Partners — for nearly $1.8 billion.   

The company also purchased land parcels in key metro regions to fortify its supply chain. Moreover, an $1.1-billion forward equity offering will bolster Digital Realty’s investment grade balance sheet. It has also enabled the company to pre-fund capital needs for 2020.

Admittedly, data-center REITs are experiencing a boom, with growing popularity of cloud computing, Internet of Things and big data, as well as the use of third-party IT infrastructure by several companies.

Further, estimated growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five to eight years. In fact, demand has been outpacing supply in top-tier data-center markets. These markets are absorbing new construction at an accelerated pace despite enjoying high occupancy. This, along with an improved outlook for economic growth, will significantly aid data-center REITs such as Digital Realty, as well as Equinix EQIX, CyrusOne Inc. CONE, CoreSite Realty Corp. COR and others.

However, this robust outlook may intensify competition in the upcoming period from existing as well as new players. Amid these, pricing pressure is anticipated to prevail for this real estate asset class, resulting in muted growth.

In addition, rising interest rates may affect its ability to purchase or develop real estate and lower dividend payouts as well in the upcoming quarters.

Also, the Zacks Consensus Estimate for 2019 FFO per share has been witnessing constant downward revisions. In fact, over the past week, estimates have moved marginally south to $6.9.

Digital Realty currently carries a Zacks Rank #3 (Hold). Over the past three months, its shares have declined 5.3% as against the industry’s growth of 1.9%.




You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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