Should You Hold Digital Realty (DLR) Stock in Your Portfolio?
Digital Realty’s DLR portfolio of data centers globally is well-positioned to benefit from the growing reliance on technology and an acceleration in digital transformation strategies by enterprises.
High growth in cloud computing, the Internet of Things and big data and the elevated demand for third-party IT infrastructure are spurring the demand for data center infrastructure. Growth in the artificial intelligence, autonomous vehicles and virtual/augmented reality markets is anticipated to be robust in the upcoming years.
With superior assets, DLR is likely to capitalize on this upbeat trend, which will aid its long-term growth. Moreover, in uncertain periods, with a more resilient and predictable stream of earnings compared with other asset categories, data centers are likely to gain preference among investors.
Digital Realty is making efforts to enhance its portfolio by carrying out various development and redevelopment activities. The company has a robust development pipeline, which seems encouraging. As of Sep 30, 2023, it had 9.2 million square feet of space under active development and 3.9 million square feet of space held for future development.
Further, in recent years, Digital Realty has expanded in the Americas by adding capacity in New York, Northern Virginia and Toronto. For 2023, the company expects to incur capital expenditures for its development activities in the range of $2.7-$2.9 billion, up from $2.3-$2.5 billion estimated earlier.
Moreover, in early December 2023, Digital Realty entered into a groundbreaking JV with Blackstone Inc., a global alternative asset manager. The $7 billion venture aims to develop four hyperscale data center campuses across Frankfurt, Paris and Northern Virginia, supporting approximately 500 megawatts of total IT load upon full build-out. The four campuses are slated to host 10 data centers.
Digital Realty has a solid balance sheet with ample liquidity and diversified sources of capital. Its capital-recycling efforts aimed at bolstering balance sheet strength and driving long-term growth are encouraging. As of the end of the third quarter of 2023, the company completed $2.5 billion of capital recycling transactions. For 2023, it expected to carry out dispositions in the range of $2.7-$3.2 billion.
As a result of its proactive balance sheet management, Digital Realty exited the third quarter of 2023 with cash and cash equivalents of $1.06 billion. Its debt maturity schedule is well-laddered, with a weighted average maturity to initial maturity of 4.6 years and a 2.9% weighted average coupon as of Sep 30, 2023.
Solid dividend payouts are the biggest enticements for REIT shareholders, and Digital Realty remains committed to that. The company has increased its dividend four times in the last five years. Moreover, its dividend witnessed a CAGR of 10% over the 2005-2022 period. Given its solid operating platform and balance sheet management efforts, the company remains well-poised to sustain the dividend payment.
Shares of this Zacks Rank #3 (Hold) company have rallied 13.3% in the past six months, outperforming the industry’s increase of 2.3%.
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However, Digital Realty faces stiff competition in its industry. 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.
A high interest rate environment is a concern for Digital Realty. The company may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side. It has a substantial debt burden, and the total consolidated debt as of Sep 30, 2023 was $16.9 billion. Its debt-to-capital ratio is 49.40% higher than the industry’s average of 46.87%. Further, with high interest rates in place, the dividend payout might seem less attractive than the yields on fixed-income and money market accounts.
Stocks to Consider
Some better-ranked stocks from the REIT sector are OUTFRONT Media Inc. OUT and STAG Industrial, Inc. STAG. While OUTFRONT Media sports a Zacks Rank #1 (Strong Buy), STAG Industrial carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for OUTFRONT Media’s 2023 funds from operations (FFO) per share has moved 1.9% northward over the past two months to $1.63.
The Zacks Consensus Estimate for STAG Industrial’s 2023 FFO per share has moved marginally upward in the past three months to $2.28 and indicates an estimated increase of 3.2% year over year.
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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Digital Realty Trust, Inc. (DLR) : Free Stock Analysis Report
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