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Is It Wise to Retain Digital Realty (DLR) Stock for Now?
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Amid a robust demand for data centers, Digital Realty’s (DLR - Free Report) focus on strategic acquisitions and developments and a diversified customer base bode well for long-term growth. It also maintains a solid balance sheet. However, stiff competition from its peers and high interest rates are near-term headwinds.
With an unmatched global footprint of data centers and a solid tenant base, Digital Realty is well-poised to capitalize on enterprises’ growing reliance on technology and acceleration in digital transformation strategies. Its diversified customer base comprises tenants from the cloud, content, information technology, network, other enterprise, and financial industries.
The majority of its tenants are investment grade and numerous customers use multiple locations across the portfolio. These factors assure stable revenue generation for the company. We estimate rental income to rise 16.2% year over year in 2023.
Digital Realty is expected to ride on its growth curve backed by strategic acquisitions. Recently, the MC Digital Realty joint venture acquired a three-acre land parcel in Osaka, Japan, which is likely to support up to 24 megawatts (MW) of IT load for ¥950 million or $7 million. Moreover, in the fourth quarter of 2022, the company acquired four sites totaling 65 acres for $55 million, expected to support the future development of up to 84 MW of IT load.
In recent years, the company has enhanced its presence in Europe, Australia, Africa, and Asia through the development of high-quality facilities. Such expansion efforts have helped Digital Realty make its business global and will drive the company’s top and bottom lines in the years ahead. For 2023, we estimate total operating revenues to increase 17.7% year over year.
Moreover, growth in the Internet of Things and big data, cloud computing, and rising demand for third-party IT infrastructures are experiencing a booming market. Additionally, the growth of artificial intelligence, autonomous vehicle and virtual/augmented reality markets are likely to remain robust over the next five to six years. These are anticipated to drive demand for data centers.
Digital Realty also focuses on maintaining a solid balance sheet and has ample liquidity with diversified sources of capital. Its debt maturity schedule is well-laddered, with a weighted average maturity to initial maturity of 5.0 years and a 2.8% weighted average coupon. The company has also increased its dividend four times in the last five years and the five-year annualized dividend growth rate is 4.30%.
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, as well as the entry of new players. Amid this, there is likely to be aggressive pricing pressure in the data-center market.
Moreover, a high interest rate environment is a concern for Digital Realty. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate.
It also has a substantial debt burden and its total consolidated debt as of Mar 31, 2023, was $17.9 billion. Management expects higher interest expenses in 2023. Our estimate for the same indicates a rise of 33.3% year over year.
Shares of this Zacks Rank #3 (Hold) stock have declined 0.4% in the past three months compared with the industry’s fall of 1.5%.
The Zacks Consensus Estimate for Americold Realty Trust’s 2023 funds from operations (FFO) per share has been revised 0.8% north over the past two months to $1.20.
The Zacks Consensus Estimate for Alexander & Baldwin Holdings’ 2023 FFO per share has been revised 2.9% north over the past two months to $1.08.
Note: Anything related to earnings presented in this write-up represents 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?
Amid a robust demand for data centers, Digital Realty’s (DLR - Free Report) focus on strategic acquisitions and developments and a diversified customer base bode well for long-term growth. It also maintains a solid balance sheet. However, stiff competition from its peers and high interest rates are near-term headwinds.
With an unmatched global footprint of data centers and a solid tenant base, Digital Realty is well-poised to capitalize on enterprises’ growing reliance on technology and acceleration in digital transformation strategies. Its diversified customer base comprises tenants from the cloud, content, information technology, network, other enterprise, and financial industries.
The majority of its tenants are investment grade and numerous customers use multiple locations across the portfolio. These factors assure stable revenue generation for the company. We estimate rental income to rise 16.2% year over year in 2023.
Digital Realty is expected to ride on its growth curve backed by strategic acquisitions. Recently, the MC Digital Realty joint venture acquired a three-acre land parcel in Osaka, Japan, which is likely to support up to 24 megawatts (MW) of IT load for ¥950 million or $7 million. Moreover, in the fourth quarter of 2022, the company acquired four sites totaling 65 acres for $55 million, expected to support the future development of up to 84 MW of IT load.
In recent years, the company has enhanced its presence in Europe, Australia, Africa, and Asia through the development of high-quality facilities. Such expansion efforts have helped Digital Realty make its business global and will drive the company’s top and bottom lines in the years ahead. For 2023, we estimate total operating revenues to increase 17.7% year over year.
Moreover, growth in the Internet of Things and big data, cloud computing, and rising demand for third-party IT infrastructures are experiencing a booming market. Additionally, the growth of artificial intelligence, autonomous vehicle and virtual/augmented reality markets are likely to remain robust over the next five to six years. These are anticipated to drive demand for data centers.
Digital Realty also focuses on maintaining a solid balance sheet and has ample liquidity with diversified sources of capital. Its debt maturity schedule is well-laddered, with a weighted average maturity to initial maturity of 5.0 years and a 2.8% weighted average coupon. The company has also increased its dividend four times in the last five years and the five-year annualized dividend growth rate is 4.30%.
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, as well as the entry of new players. Amid this, there is likely to be aggressive pricing pressure in the data-center market.
Moreover, a high interest rate environment is a concern for Digital Realty. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate.
It also has a substantial debt burden and its total consolidated debt as of Mar 31, 2023, was $17.9 billion. Management expects higher interest expenses in 2023. Our estimate for the same indicates a rise of 33.3% year over year.
Shares of this Zacks Rank #3 (Hold) stock have declined 0.4% in the past three months compared with the industry’s fall of 1.5%.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the REIT sector are Americold Realty Trust (COLD - Free Report) , and Alexander & Baldwin Holdings (ALEX - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Americold Realty Trust’s 2023 funds from operations (FFO) per share has been revised 0.8% north over the past two months to $1.20.
The Zacks Consensus Estimate for Alexander & Baldwin Holdings’ 2023 FFO per share has been revised 2.9% north over the past two months to $1.08.
Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.