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Digital Realty Trust, Inc. DLR has been displaying strength. This Zacks Rank #2 (Buy) stock has appreciated 12.5% over the past six months, outperforming its industry’s rally of 8.8%. The recent trend in estimate revisions indicates that analysts are bullish on this stock. Over the past 60 days, the Zacks Consensus Estimate for funds from operations (FFO) per share for 2020 and 2021 moved marginally upward to $6.08 and $6.53, respectively.
Notably, data-center REITs are experiencing a market boom, with growth in cloud computing, IoT and big data, and an increasing number of companies are opting for third-party IT infrastructure. The estimated growth rates for the AI, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five to six years.
Moreover, data centers are poised to benefit from the rising reliance on technology in the wake of the coronavirus pandemic. Thus, data-center landlords like Digital Realty, Equinix, Inc. EQIX, CyrusOne Inc. CONE and CoreSite Realty Corporation COR will keep witnessing significant demand.
Particularly, Digital Realty has enough room for further growth, given the strength in its fundamentals and solid prospects.
Factors That Make Digital Realty a Solid Pick
Acquisitions and Development: Digital Realty is poised to benefit from the healthy market fundamental through accretive acquisitions, development and expansion efforts. In March, the company completed its previously-announced acquisition of Interxion, a European provider of carrier and cloud-neutral colocation data-center services, thereby, enhancing its presence in the major European metro areas, while its size and scale are expected to lead to an efficient cost structure and superior EBITDA margins. Also, the company enhanced its presence in Europe, Australia and Asia in recent years through the development of high-quality facilities. Such expansion efforts will likely drive its top and bottom lines in the years ahead.
Healthy Operating Performance: Backed by growth in revenues, the company delivered a surprise of 4.05% in terms of funds from operations (FFO) per share in second-quarter 2020. In addition, the company’s projected sales growth of 18.9% for 2020 is ahead of the industry’s expected break-even level, signaling brighter days ahead.
It has a decent surprise history in terms of FFO per share, delivering a surprise in three of the trailing four quarters and missing in the other, with the average being 1.94%. Also, over the last three-five years, Digital Realty witnessed a 5.79% increase in FFO per share compared with 0.72% growth of that of the industry.
Balance Sheet and Cash-Flow Strength: The company focuses on maintaining a solid balance sheet and enjoys ample liquidity, with diversified sources of capital. As a result of its proactive balance-sheet management, it had $505 million of cash on the balance sheet as of Jun 30 together with $2.5 billion of availability on its global revolving credit facilities. Its debt maturity schedule is well-laddered, with weighted average maturity of 6.7 years and 3% weighted average coupon. Also, Digital Realty currently enjoys BBB/BBB/Baa2 credit rating, with stable outlook from S&P Global, Fitch and Moody's.
Digital Realty enjoyed a historical cash flow growth (3-5 years) of 19.4%, which comfortably exceeded the industry’s growth of 12.7%. Also, the company’s current cash flow growth of 14.1% is way ahead of the industry’s rate of 3.4%.
Superior ROE: Digital Realty’s trailing 12-month return on equity (ROE) highlights its growth potential. The company’s ROE of 6.72% compares favorably with the industry’s 3.37%, reflecting that it is more efficient in using shareholder funds than its peers.
Dividend Payment: Solid dividend payouts are the biggest enticement for REIT shareholders and Digital Realty remains committed to that. In February 2020, the company announced a 4% hike in its dividend to $1.12 per share. It raised the dividend every year since its initial public offering and the latest dividend hike marked the 15th consecutive year of increase. Given its solid operating platform and balance sheet management efforts, the company remains well-poised to sustain the dividend payment.
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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Equinix, Inc. (EQIX) : Free Stock Analysis Report
Digital Realty Trust, Inc. (DLR) : Free Stock Analysis Report
CoreSite Realty Corporation (COR) : Free Stock Analysis Report
CyrusOne Inc (CONE) : Free Stock Analysis Report
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