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What Does Digital Realty's $557M Portfolio Sale Indicate?

Zacks Equity Research

Digital Realty Trust, Inc. DLR recently announced the closing of a $557-million portfolio sale to Mapletree Investments and Mapletree Industrial Trust. Per management, the transactions will back its aim to self-fund growth and diversify sources of equity capital.

Specifically, Digital Realty sold its 10 Powered Base Building® data centers to Mapletree Investments and Mapletree Industrial Trust for around $557 million, subject to customary closing costs and transaction fees. Nonetheless, Digital Realty will aid the portfolio’s transition by offering property-management services for a year from the closing date at a customary market rate.

The data centers are 100% leased and this portfolio is estimated to generate cash net operating income (NOI) of nearly $37 million in 2020, indicating a cap rate of 6.6%. This marked the second tranche of its transaction with Mapletree.

Moreover, in November, Digital Realty announced closing of the $1-billion joint venture (JV) with Mapletree Investments and Mapletree Industrial Trust on three existing Turn-Key Flex® hyper-scale facilities in Ashburn, VA.  Digital Realty retained 20% interest in the JV, while the entity acquired 80% stake for around $811 million.

With redeployment of proceeds in accretive investment opportunities and repayment of outstanding debt, Digital Realty remains well poised to register growth. Notably, with growth in cloud computing, Internet of Things (IoT) and big data, and an increasing number of companies opting for third-party IT infrastructure, data-center REITs are likely to keep witnessing a boom market.

In addition, the estimated growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five years. These factors are anticipated to give significant impetus for growth to data-center REITs, including Digital Realty, Equinix, Inc. EQIX and CoreSite Realty Corporation COR.

Amid these, accretive acquisitions and development efforts are anticipated to boost Digital Realty’s top-line growth. In October, the company announced that it has agreed to acquire the European provider of carrier and cloud-neutral colocation data-center services, Interxion INXN, in a deal worth $8.4 billion, including debt. The combined entity will enjoy enhanced presence in major European metro areas, with its size and scale projected to result in an efficient cost structure and superior EBITDA margins. The company is also focused on maintaining a strong balance sheet and has ample liquidity.

However, given the data-center real estate market’s solid growth potential, competition is expected to intensify in the upcoming period from existing as well as new players. Amid these, an aggressive pricing pressure is expected in the data-center market.

Over the past year, shares of this Zacks Rank #4 (Sell) company have underperformed the industry it belongs to. In fact, its shares have gained 15.3% compared with the industry’s rally of 17.6% during the same time frame. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



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