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Why Hold Strategy is Apt for Digital Realty (DLR) Investors

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Data-center REITs are experiencing a market boom with growth in cloud computing, IoT and big data, and an increasing number of companies opting for third-party IT infrastructure. The estimated growth rates for the AI, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five to six years.

Moreover, data centers are poised to benefit from the rising reliance on technology in the wake of the coronavirus pandemic. Thus, data-center REITs like Digital Realty Trust, Inc. (DLR - Free Report) , Equinix, Inc. (EQIX - Free Report) , CyrusOne Inc. (CONE - Free Report) and CoreSite Realty Corporation (COR - Free Report) will keep witnessing significant demand.

Particularly, Digital Realty is poised to benefit from this healthy market fundamental through accretive acquisitions, development and expansion efforts. In March, the company completed its previously-announced acquisition of Interxion, a European provider of carrier and cloud-neutral colocation data-center services, thereby enhancing its presence in major European metro areas while its size and scale are expected to lead to an efficient cost structure and superior EBITDA margins.

Also, the company enhanced its presence in Europe, Australia and Asia in recent years through the development of high-quality facilities. We believe, such expansion efforts will drive the company’s top and the bottom line in the years ahead. Moreover, Digital Realty has a high-quality diversified customer base comprising tenants from cloud, content, information technology, network, other enterprise and financial industries, most of which are investment grade.

Additionally, the company focuses on maintaining a solid balance sheet and enjoys ample liquidity with diversified sources of capital. As a result of its proactive financial management, the company had $505 million of cash as of Jun 30 together with $2.5 billion of availability under its global revolving credit facilities. Its debt maturity schedule is well-laddered with weighted average maturity of 6.7 years and 3% weighted average coupon. Further, the company consistently raised its annual dividend since its initial public offering and the latest dividend hike, announced earlier this year, marked its 15th consecutive year of dividend increase.

Such tailwinds have driven the 28.9% rally in Digital Realty’s shares so far this year against the industry’s decline of 5.5%. Moreover, the trend in estimate revision for the current-year funds from operations (FFO) per share indicates a favorable outlook. Notably, over the past month, the Zacks Consensus Estimate for 2020 FFO per share moved marginally north.



Currently, Digital Realty has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, Digital Realty faces stiff competition from several data-center developers, owners and operators, many of which enjoy ownership of similar assets in locations same as the company. As the data-center market has more upside potential left, these REITs are weighed on by aggressive pricing pressure.

While data centers are largely unaffected by the coronavirus pandemic, management noted that tenants, accounting for roughly 3% of annualized recurring rent, requested for rent deferrals. Also, a modest drag is anticipated from development delivery delays in the select markets.

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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