DLR Forays in Suburban Chicago

Digital Realty Trust Inc. ( DLR - Snapshot Report ) , a niche real estate investment trust (REIT), has recently completed the acquisition of ‘Digital Chicago’ – a data center facility spanning 575,000 square feet of space in suburban Chicago, from an unnamed seller for $22.3 million.

The acquisition is in sync with the long-term investment objectives of the company that focuses on investing in institutional quality data center facilities in high barriers-to-entry markets with significant potential to generate attractive risk-adjusted return on investments (ROI).

Spanning 22 acres, the three-building data center facility is located in close proximity to the O'Hare International Airport along Grand Avenue, and is capable of accommodating up to twenty 1.125 megawatt Turn-Key Flex PODs (Performance Optimized Data Centers), or 32.6 megawatts of IT load.

The first phase of construction comprising six Turn-Key Flex PODs is expected to be delivered and operational by mid-2013. Turn-Key Flex data centers of Digital Realty offer a modular approach to deliver secure, enterprise quality data center space to meet customers’ just-in-time requirements, and provide maximum flexibility, reliability and efficiency with a dedicated electrical and mechanical infrastructure.

The acquisition is expected to provide stabilized cash flow in the short term, with a substantial upside potential in the long-term and opportunity to expand its footprint in the suburban Chicago market. Post-acquisition, the seller would continue as a tenant on a short-term lease occupying two-thirds of the property.

However, Digital Realty would have the right to terminate the lease agreement to redevelop more space to accommodate increased demands of new or existing clients. The company would provide primary electrical service in the facility through Commonwealth Edison Company, which is better known as ComEd.

Over the years, Digital Realty had established itself as the leading player in downtown Chicago data center market through the ownership of ‘350 East Cermak’ – the digital facility that serves as the city’s primary Internet hub. With the recent foray in suburban Chicago, the company aims to bring on board a significant volume of high-quality datacenter space to meet the increased demand and provide critical infrastructure to support the economic growth in the region.

Digital Realty operates datacenters and digital storage facilities, which are primarily used by telecommunication companies to maintain their Internet presence or augment their data networks. Datacenters usually incur high costs for building and maintenance, and as such supply is relatively inelastic.

Digital Realty provides flexible and cost effective datacenter facilities to a wide range of customers, including domestic and international companies across multiple industry verticals. Its portfolio includes 103 properties throughout Europe and North America, spanning approximately 19.7 million square feet of space (including 2.3 million square feet of redevelopment space).

With demand for digital storage facilities increasing in recent years, Digital Realty has benefited greatly by negotiating favorable lease terms and maintaining strong occupancy rates. The long-term lease agreements have also insulated the company from short-term volatility and unfavorable market swings experienced during the recession. This has enabled Digital Realty to continue paying out solid dividends to its shareholders.

We presently have a Neutral recommendation for Digital Realty, which currently has a Zacks #3 Rank, translating into a short-term Hold rating. However, we have an Outperform recommendation and a Zacks #1 Rank (short-term Strong Buy rating) for MPG Office Trust Inc. ( MPG - Snapshot Report ) , one of the competitors of Digital Realty.