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Here's Why You Should Hold Digital Realty (DLR) Stock Now

Zacks Equity Research

Data-center REITs will likely keep witnessing a boom market, owing to 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 impressive over the next five-six years.

These factors are anticipated to substantially boost growth of data-center REITs, including Digital Realty Trust, Inc. DLR, Equinix, Inc. EQIX, CyrusOne Inc. CONE and CoreSite Realty Corporation COR, and others.

Specifically, Digital Realty is poised to benefit from this solid data-center demand through accretive acquisitions, development and expansion efforts. This July, the company reported signing a definitive agreement to acquire land in Seoul, South Korea. Located within the Sangam Digital Media City in northwest Seoul, this 22,000-square-foot land parcel will support the development of a new, carrier-neutral data-center facility. The construction of this facility, which will back up to 12 megawatts of critical IT capacity, is likely to begin within the coming months and be accomplished in 2021.

Further, Digital Realty has agreed to acquire a 34-acre land parcel in Hattersheim to develop its next data-center campus. The site, three miles from the Frankfurt Airport, marks the company’s third location in Frankfurt. The purchase, subject to certain closing conditions, including zoning and planning permissions, will support the next phase of Digital Realty’s growth in Frankfurt, with the delivery of up to 84 megawatts of IT capacity.

Last year, the company completed the acquisition of Ascenty, a Brazil-based data-center provider, for roughly $1.8 billion. This helped gain eight assets and six development projects in Brazil. Additionally, the earlier merger with DuPont Fabros has enhanced Digital Realty’s portfolio in the top U.S. data-center metro areas across Northern Virginia, Chicago and Silicon Valley. It helped Digital Realty boost the company’s hyper-scale product offering and grow its blue-chip customer base.

Digital Realty’s second-quarter 2019 core funds from operations (FFO) per share of $1.64 outpaced the Zacks Consensus Estimate of $1.63. Operating revenues were up 6.1% year over year but missed the consensus mark. Though the company continues to benefit from investments in its global platform, rental rates on renewal leases dipped during the quarter.

Nevertheless, the company focuses on maintaining a solid balance sheet and enjoys ample and growing liquidity, with diversified sources of capital, and has a well-laddered debt maturity schedule with weighted average maturity of 6.4 years and 3.3% weighted average coupon. Furthermore, 99% of its total debt is unsecured.

Additionally, solid dividend payouts are arguably the biggest enticement for REIT shareholders and Digital Realty remains committed to that. Its dividend has increased at a compound annual growth rate of 11% since 2005. Furthermore, much to the delight of its shareholders, this February, the company announced a 7% dividend hike. The company has raised dividend every year since its initial public offering and the March 2019 dividend marked the 14th consecutive year of increase.

However, Digital Realty faces stiff competition in the industry. In fact, the company contends with several data-center developers, owners and operators, many of which enjoy ownership of similar assets at locations same as Digital Realty. In addition, there are several local developers in the United States and several regional operators across Europe, Asia and Australia.

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 all these, an aggressive pricing pressure is anticipated in the data-center market.

The company also has a substantial debt burden. In fact, as of Jun 30, 2019, it had around $10.8 billion of total debt outstanding, of which $10.7 billion was unsecured debt and around $0.1-billion secured debt. Although interest rate levels are low at present, any hike in future is likely to be a challenge for the company. Moreover, the dividend payout might become less attractive than the yields on fixed income and money-market accounts.

Shares of Digital Realty have outperformed the industry it belongs to over the past three months. The stock has gained 6.3% compared with the industry’s rally of 5.1% 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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