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Key Factors to Impact Digital Realty's (DLR) Q4 Earnings

Zacks Equity Research

Digital Realty Trust DLR is scheduled to release fourth-quarter and full-year results on Feb 5, after the market closes.

In the last reported quarter, this San Francisco, CA-based data-center real estate investment trust (REIT) delivered a positive surprise of 0.62% in terms of funds from operations (FFO) per share. Results were supported by growth in revenues.

Over the trailing four quarters, the company beat the Zacks Consensus Estimate in all four occasions — average beat being 1.90%. This is depicted in the graph below:

Digital Realty Trust, Inc. Price and EPS Surprise

Digital Realty Trust, Inc. Price and EPS Surprise | Digital Realty Trust, Inc. Quote

For full-year 2018, Digital Realty expects its core FFO per share in the range of $6.55-$6.65. The Zacks Consensus estimate for the same is currently pinned at $6.59.

Let’s see how things are shaping up for Digital Realty prior to this announcement.

Factors to Consider

Data-center REITs are experiencing a boom, with growing popularity of cloud computing, Internet of Things and big data, as well as the use of third-party IT infrastructure by several companies.

Further, estimated growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five to eight years. In fact, demand has been outpacing supply in top-tier data-center markets. These markets are absorbing new construction at an accelerated pace despite enjoying high occupancy.

Amid these, accretive acquisitions and development efforts are anticipated to boost top-line growth for Digital Realty. The merger with DuPont Fabros in 2017 enhanced Digital Realty’s portfolio in the top U.S. data center metro areas across Northern Virginia, Chicago and Silicon Valley. It helped upgrade its hyper-scale product offering and grow the company’s blue-chip customer base.

Furthermore, the company has fortified its presence in Europe, Australia and Asia in recent years through strategic acquisitions and development of high-quality facilities. Particularly, in December 2018, the company’s Brazilian subsidiary, Stellar Participações Ltda., completed the previously-announced buyout of a Brazilian data center provider — Ascenty, from Great Hill Partners — in a transaction valued at around $1.8 billion.

Moreover, in fourth-quarter 2018, in an effort to expand its presence in Japan, Digital Realty announced a multi-megawatt, multi-year agreement with a global cloud-service provider for capacity at its second facility in Osaka, referred as the Digital Osaka 2 Data Centre. Further, to expand its presence in Australia, Digital Realty announced the opening of Digital Erskine Park II — the company’s fifth data center in the nation. It also announced the purchase of an additional 1.4-hectare land parcel to build out the next phase of the Erskine Park connected campus, adding 12 megawatts of capacity.

In addition to the above, Digital Realty has consistently strived for attaining operational excellence. Amid these, the Zacks Consensus Estimate for total revenues is nearly $790.0 million, indicating 8% year-over-year growth. Also, the Zacks Consensus Estimate for FFO per share of $1.67 projects an increase of 7.7% from the prior-year quarter.

However, competition has intensified given the solid growth potential in the data-center real estate market. This is likely to have resulted in aggressive pricing pressure in the to-be-reported quarter. In addition to this, interest-expense burden remains a concern, with the company having a substantial debt position.

Prior to the fourth-quarter earnings release, there is lack of any solid catalyst. In fact, the Zacks Consensus Estimate of FFO per share for the fourth quarter moved down marginally to $1.67 over the past month.

Earnings Whispers

Our proven model does not conclusively show that Digital Realty will likely beat estimates this season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP is -0.36%.

Zacks Rank: Digital Realty has a Zacks Rank of 3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of a positive surprise.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Omega Healthcare Investors, Inc. OHI, scheduled to report quarterly numbers on Feb 11, has an Earnings ESP of +0.26% and flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Federal Realty Investment Trust FRT, slated to report fourth-quarter results on Feb 13, has an Earnings ESP of +1.53% and holds a Zacks Rank of 3.

American Tower Corporation AMT, set to release earnings on Feb 27, has an Earnings ESP of +0.29% and carries a Zacks Rank of 3.

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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