Data-center REITs are experiencing a boom market, with growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure. Also, the estimated growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five to six years. Thus, data-center REITs like Digital Realty Trust, Inc. DLR, Equinix, Inc. EQIX, CyrusOne Inc. CONE and CoreSite Realty Corporation COR will keep witnessing significant demand.
Particularly, Digital Realty is poised to benefit from this healthy market fundamental through accretive acquisitions, development and expansion efforts. Last month, the data-center REIT announced the launch of Cloud House, the latest facility in the company’s Digital Docklands campus of data centers in London's Docklands area. This is in sync with its efforts to capitalize on the multibillion-pound technology boom that the city is set to witness in the coming years. Earlier, Digital Realty had announced the expansion of IBM Cloud's Direct Link access and capabilities in Sydney, which will likely accelerate the hybrid-cloud adoption for its local customer base.
Digital Realty has substantially enhanced its presence in Europe, Australia and Asia through the development of high-quality facilities in the past few years. These apart, the acquisition of Ascenty, a data-center provider in Brazil, and merger with DuPont Fabros played a significant role in boosting the company’s footprint in key markets.
Digital Realty’s diversified customer base includes tenants from Cloud, Content, Information technology, Network and Enterprise, and Financial industries. Its tenant roaster includes names like Facebook, IBM, Oracle, Linkedin, Uber, Verizon, Comcast and others, most of which are investment grade tenants.
Additionally, the company focuses on maintaining a strong balance sheet and enjoys ample liquidity with diversified sources of capital. Also, it has a well-laddered debt maturity schedule, with weighted average maturity of 6.4 years and 3.3% weighted average coupon. Further, 99% of its total debt is unsecured.
Digital Realty remains committed toward enhancing shareholders’ value. Its dividend has increased at a compound annual growth rate of 11% since 2005. Furthermore, this February, the company announced a 7% hike in dividend. Every year since its initial public offering, the company has been raising its dividend, marking 2019 as the 14th consecutive year of increase.
Such encouraging factors have helped Digital Realty’s shares gain 21.9% so far this year, compared with the industry’s rise of 24.6%.
Additionally, its current-year FFO per share estimate has been revised marginally upward over the past 30 days. Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
However, Digital Realty faces stiff competition from several data-center developers, owners and operators, many of which enjoy ownership of similar assets in locations same as the company. As the data-center market has the potential of further growth, these REITs remain under aggressive pricing pressure.
Further, the company has a substantial debt burden of around $10.8 billion, as of Jun 30, 2019. Although interest-rate levels are low at present, any hike in future might be a challenge for the company as it will escalate its borrowing cost. Moreover, the dividend payout might become less attractive than the yields on fixed income and money-market accounts.
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
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