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Is It Wise to Retain Digital Realty (DLR) Stock for Now?
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Digital Realty’s (DLR - Free Report) 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.
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. Moreover, growth in the artificial intelligence, autonomous vehicle and virtual/augmented reality markets is anticipated to be robust over the next five to six 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. Moreover, in uncertain periods, with a more resilient and predictable stream of earnings compared to other asset categories, data centers are likely to gain preference among investors.
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 are expected to be accretive to its revenue growth in the upcoming period. As of Dec 31, 2022, DLR had 49 projects underway in 26 metropolitan areas worldwide, with 58.5% of this data center activity pre-leased.
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 fourth quarter of 2022 with cash and cash equivalents of $141.8 million. Its debt maturity schedule was well-laddered, with a weighted average maturity to initial maturity of 5.2 years and a 2.7% weighted average coupon.
However, the company 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.
Moreover, a hike in the interest rate is a concern for Digital Realty. Rising rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate.
Digital Realty has a substantial debt burden, and its total consolidated debt as of Dec 31, 2022 was $16.6 billion. Management expects higher interest expenses in 2023. Our estimate for the same indicates a rise of 27.2% year over year. Further, the dividend payout might become less attractive than the yields on fixed income and money market accounts.
Shares of Zacks Rank #3 (Hold) DLR have declined 3.4% in the past six months against the industry’s rise of 4.4%. Over the past month, although the Zacks Consensus Estimate for its 2023 funds from operations (FFO) per share has remained unchanged at $6.70, the same for 2024 has moved marginally north to $7.22.
The Zacks Consensus Estimate for VICI Properties’ 2022 FFO per share has moved marginally north to $2.12 over the past month.
The consensus estimate for Americold Realty’s 2023 FFO per share is currently pegged at $1.19, which suggests 7.2% year-over-year growth.
The consensus mark for Terreno Realty Corporation’s ongoing year’s FFO per share has been raised a cent over the past two months to $2.17.
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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Is It Wise to Retain Digital Realty (DLR) Stock for Now?
Digital Realty’s (DLR - Free Report) 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.
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. Moreover, growth in the artificial intelligence, autonomous vehicle and virtual/augmented reality markets is anticipated to be robust over the next five to six 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. Moreover, in uncertain periods, with a more resilient and predictable stream of earnings compared to other asset categories, data centers are likely to gain preference among investors.
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 are expected to be accretive to its revenue growth in the upcoming period. As of Dec 31, 2022, DLR had 49 projects underway in 26 metropolitan areas worldwide, with 58.5% of this data center activity pre-leased.
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 fourth quarter of 2022 with cash and cash equivalents of $141.8 million. Its debt maturity schedule was well-laddered, with a weighted average maturity to initial maturity of 5.2 years and a 2.7% weighted average coupon.
However, the company 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.
Moreover, a hike in the interest rate is a concern for Digital Realty. Rising rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate.
Digital Realty has a substantial debt burden, and its total consolidated debt as of Dec 31, 2022 was $16.6 billion. Management expects higher interest expenses in 2023. Our estimate for the same indicates a rise of 27.2% year over year. Further, the dividend payout might become less attractive than the yields on fixed income and money market accounts.
Shares of Zacks Rank #3 (Hold) DLR have declined 3.4% in the past six months against the industry’s rise of 4.4%. Over the past month, although the Zacks Consensus Estimate for its 2023 funds from operations (FFO) per share has remained unchanged at $6.70, the same for 2024 has moved marginally north to $7.22.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are VICI Properties Inc. (VICI - Free Report) , Americold Realty Trust, Inc. (COLD - Free Report) and Terreno Realty Corporation (TRNO - Free Report) , 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 VICI Properties’ 2022 FFO per share has moved marginally north to $2.12 over the past month.
The consensus estimate for Americold Realty’s 2023 FFO per share is currently pegged at $1.19, which suggests 7.2% year-over-year growth.
The consensus mark for Terreno Realty Corporation’s ongoing year’s FFO per share has been raised a cent over the past two months to $2.17.
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.