Amid the robust demand for data centers, Digital Realty DLR is well-poised to grow through its accretive acquisitions and development efforts. A solid balance sheet position also augurs well. However, with stiff competition in the industry, aggressive pricing pressure is a concern.
High growth in cloud computing, the Internet of Things and big data and the elevated demand for third-party IT infrastructure are spurring demand for data center infrastructure. Moreover, growth in the AI, autonomous vehicle and virtual/augmented reality markets is anticipated to be robust over the next five to six years.
Demand is strong in top-tier data center markets and despite enjoying high occupancy, these markets are fast absorbing new construction, which is anticipated to drive demand for data centers. Moreover, data centers are poised to benefit from excessive reliance on technology and an acceleration in digital transformation strategies by enterprises.
Capitalizing on such factors, Digital Realty is expanding its portfolio through accretive acquisitions and developments. In January 2022, DLR announced its agreement to acquire a majority stake in the African carrier-neutral data center and interconnection services provider, Teraco Data Environments. It also carried out land acquisitions worth $186.3 million in the first quarter of 2022. In recent years, the company has enhanced its presence in Europe, Australia, Africa and Asia through the development of high-quality facilities.
In the first quarter of 2022, Digital Realty’s development pipeline reached an all-time high. It had 44 projects underway, with 300 megawatts of IT capacity in 28 metros worldwide. This reflects strong customer demand. Further, Digital Realty has expanded in the Americas by adding capacity in New York, Northern Virginia and Toronto. To capitalize on its growth endeavors, the company continues to invest in the EMEA, with active development projects in 17 of its 18 markets.
We believe such expansion efforts have helped Digital Realty make its business global and will drive the company’s top and bottom lines in the years ahead.
Digital Realty focuses on maintaining a solid balance sheet and has ample liquidity, with diversified sources of capital. Subsequent to the first-quarter end, Digital Realty expanded its global revolving credit facility from $3.0 billion to $3.75 billion. As of May 3, 2022, the company had around $2.8 billion in borrowings available under its global revolving credit facilities.
In March, DLR announced that its board of directors authorized a quarterly cash dividend payout of $1.22 per share, representing a sequential hike of 5.2% from the prior dividend of $1.16.
However, Digital Realty faces stiff competition from its industry. The company competes with several data center developers, owners and operators, many of whom enjoy the ownership of similar assets at locations same as Digital Realty. Also, there are several local developers in the United States and several regional operators in Europe, Asia and Australia. Given the solid growth potential of the data center real estate market, competition is expected to increase in the upcoming period from existing players and the entry of new players. Amid this, there is likely to be aggressive pricing pressure in the data center market.
Digital Realty has a significant number of properties situated outside the United States. This exposes the company’s earnings to foreign currency translation. With the U.S. dollar further strengthening, management expects a drag of about 250 to 300 basis points in the revenue and core FFO per share growth for full-year 2022.
A hike in the interest rate is a concern for Digital Realty. Rising rates imply higher borrowing costs for the company, which will affect its ability to purchase or develop real estate. The company has a substantial debt burden and its total debt as of Mar 31, 2022 was approximately $14.4 billion. Moreover, the dividend payout might become less attractive than yields on fixed income and money market accounts.
Shares of this Zacks Rank #2 (Buy) player have declined 11.8% in the past three months, narrower than the industry’s fall of 16.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Other Stocks to Consider
Some other key picks from the REIT sector include Extra Space Storage Inc. EXR and OUTFRONT Media OUT.
The Zacks Consensus Estimate for Extra Space Storage’s 2022 FFO per share has moved marginally upward in the past month to $8.20. EXR presently carries a Zacks Rank of 2.
The Zacks Consensus Estimate for OUTFRONT Media’s ongoing year’s FFO per share has been raised 1.5% over the past two months to $2.09. OUT carries a Zacks Rank #2 currently.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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