Should You Retain Digital Realty (DLR) Stock in Your Portfolio?
Digital Realty’s DLR portfolio of data centers, located all over North America, Europe, South America, Asia, Australia and Africa, 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.
Demand is strong in top-tier data center markets, and despite enjoying high occupancy, these markets are absorbing new construction at a faster pace. 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. For 2023, the company expects to incur capital expenditures for its development activities in the range of $2.7-$3.2 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.
Further, the company’s capital-recycling efforts are likely to drive long-term growth while preserving its financial flexibility. As of the end of the third quarter of 2023, it completed $2.5 billion of capital recycling transactions, bolstering and diversifying its sources of capital and improving its balance sheet. For 2023, it expects to carry out dispositions in the range of $2.7-$3.2 billion, up from its earlier guided range of $2.2-$3 billion.
Digital Realty focuses on maintaining a solid balance sheet and has ample liquidity with diversified sources of capital. As a result of its proactive balance sheet management, the company 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. Its net debt-to-adjusted EBITDA was 6.3X, while its fixed charge coverage was 4.1X as of the end of the third quarter of 2023. With proceeds from asset sales and growth in cash flows as the signed leases commence, the company is expected to experience an improvement in net debt-to-adjusted EBITDA.
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, and the five-year annualized dividend growth rate is 3.69%. 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 28.9% in the past six months, outperforming the industry’s increase of 8.7%.
Image Source: Zacks Investment Research
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. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. DLR has a substantial debt burden, and its total consolidated debt as of Sep 30, 2023 was $16.9 billion. 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 Lamar Advertising Company LAMR and STAG Industrial, Inc. STAG, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Lamar’s current-year FFO per share has been revised 1.7% upward over the past two months to $7.31.
The Zacks Consensus Estimate for STAG Industrial’s 2023 FFO per share has moved marginally upward in the past two 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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Lamar Advertising Company (LAMR) : Free Stock Analysis Report
Digital Realty Trust, Inc. (DLR) : Free Stock Analysis Report
Stag Industrial, Inc. (STAG) : Free Stock Analysis Report
