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Growth & Income

Digital Realty Trust, Inc. (DLR - Snapshot Report) recently delivered its third consecutive positive earnings surprise on better-than-expected revenue in the second quarter.

Analysts raised their estimates off of the strong quarter, sending the stock to a Zacks #2 Rank (Buy). Based on current consensus estimates, analysts are forecasting 20% growth this year and 10% growth next year.

On top of this growth, the company pays a dividend that yields a solid 4.6%. It has been aggressively increasing its payout since going public in late 2004.

Company Description

Digital Realty Trust is a Real Estate Investment Trust (REIT) that owns, develops and manages technology-related real estate. Its portfolio comprises 97 Internet gateway properties, data center properties, technology manufacturing properties, and regional or national headquarters of technology companies in 29 key technology markets mostly in the U.S. and Europe.

Digital Realty was founded in 2004 and is headquartered in San Francisco, California. It has a market cap of $5.9 billion.

Second Quarter Results

Digital Realty reported better than expected results for the second quarter of 2011. Funds from operation (FFO) came in at $1.02 per share, beating the Zacks Consensus Estimate by 3 cents. It was a stellar 34% increase over the same quarter in 2010.

Revenue rose 36% year-over-year to $268 million, well ahead of the Zacks Consensus Estimate of $254 million. Rental revenues were up 29% primarily due to new leasing at its same store properties and through acquisitions. At the end of the second quarter, the properties in its portfolio were 93.9% leased.

Total operating expenses declined from 72.6% to 71.4% of revenues as the company leveraged its fixed expenses. Meanwhile, operating income increased 42%.

Outlook

Analysts raised their estimates for both 2011 and 2012 following the strong second quarter results, sending the stock to a Zacks #2 Rank (Buy).

Based on consensus estimates, analysts project 20% FFO growth per share in 2011 and 10% growth in 2012.

One of the main drivers of this growth is expected to come from overseas. The company recently expanded into Singapore and Australia, as well as London. Analysts expect Digital Realty to continue investing in Europe and Asia as opportunities arise there.

Dividend

As a REIT, Digital Realty must pay out at least 90% of its earnings to shareholders through dividends to avoid paying taxes on that money. As a result the company has increased its dividend at a compound annual growth rate of 18.2% since going public in late 2004:

DLR: Digital Realty Trust, Inc.

It currently yields a juicy 4.6%.

Valuation

Shares of DLR have pulled back a bit along with the recent market weakness. This has lead to some very reasonable valuations. Shares trade at just 13.3x 12-month forward earnings, in-line with the industry average, but a discount to its historical median of 14.9x.

The Bottom Line

With strong international growth opportunities, rising earnings estimates and a very solid dividend, the recent stock market pullback appears to be providing an attractive entry point for DLR.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.

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