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Is it Wise to Retain Digital Realty (DLR) Stock for Now?

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 acceleration in digital transformation strategies by enterprises.

The demand in top-tier data center markets is robust despite a high occupancy level. This is leading to faster absorption of new construction and increasing the demand for data centers, benefiting data center REITs like Digital Realty.

The demand for high-performing data centers is expected to increase in the coming years, owing to the escalation in cloud computing, the Internet of Things and big data, and the rising demand for third-party IT infrastructure.

Growth in the artificial intelligence, autonomous vehicle and virtual/augmented reality markets is expected to gain pace over the next five to six years. Digital Realty is likely to capitalize on this upbeat trend, which will aid its long-term growth.

To meet the data center demand, Digital Realty has been expanding its portfolio through acquisitions. In August 2022, the company acquired a 55% majority interest in one of South Africa’s leading carrier-neutral data center and interconnection services providers, Teraco, for $1.7 billion in cash. Given the recent and ongoing implementation of subsea cable networks encircling Africa, the acquisition seems a strategic fit for Digital Realty.

The company’s development and redevelopment initiatives seem encouraging. As of the June-quarter end, DLR had 41 projects underway, with more than 360 megawatts of IT capacity in 18 strategically important metros worldwide.

Digital Realty’s efforts to enhance its presence in Europe, Australia, Africa and Asia through the development of high-quality facilities have enabled it to take its business to a global scale and is expected to be accretive to its revenue growth in the upcoming period.

Digital Realty maintains a strong balance-sheet position with ample liquidity. In second-quarter 2022, the company expanded its global revolving credit facility from $3.0 billion to $3.75 billion. Further, 99% of its total debt is unsecured, offering flexibility for capital recycling. With a well-laddered debt maturity schedule and enough financial flexibility, DLR is well-poised to capitalize on growth opportunities.

However, Digital Realty faces intense competition from existing and new players in the space, given the strong growth potential of the industry. This could prompt competitors to resort to aggressive pricing policies, making DLR vulnerable to pricing pressure.

Digital Realty is exposed to adverse foreign currency fluctuations, given its extensive international presence. With the strengthening of the U.S. dollar, the company expects a drag in its revenue and core funds from operations (FFO) per share growth for 2022.

Higher interest rates are likely to increase DLR’s borrowing costs, affecting its ability to purchase or develop real estate.

Analysts seem bearish about the Zacks Rank #3 (Hold) stock. The Zacks Consensus Estimate for the company’s 2022 FFO per share has been unchanged over the past month, indicating an unfavorable outlook for DLR.

Shares of DLR have declined 10.6% in the quarter-to-date period against the industry’s rally of 2.2%.

 

Zacks Investment Research
Zacks Investment Research


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Stocks to Consider

Some better-ranked stocks from the REIT sector are Prologis PLD, Extra Space Storage EXR and Host Hotels & Resorts HST, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

The Zacks Consensus Estimate for Prologis’ current-year FFO per share has moved marginally north in the past two months to $5.17.

The Zacks Consensus Estimate for Extra Space Storage’s ongoing year’s FFO per share has been raised 1.9% over the past month to $8.46.

The Zacks Consensus Estimate for Host Hotels & Resorts’ 2022 FFO per share has moved 2.3% upward in the past week to $1.79.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.


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