Digital Realty Trust (DLR Quick QuoteDLR - Free Report) is slated to report second-quarter 2023 earnings on Jul 27 after market close. The quarterly results are expected to reflect year-over-year growth in revenues and funds from operations (FFO) per share.

This data center real estate investment trust (REIT) reported core FFO per share of $1.66 in the previous quarter, beating the Zacks Consensus Estimate by a whisker. While the results reflected growth in operating revenues during the quarter, rising rental property operating expenses acted as a dampener.

Over the last four quarters, Digital Realty’s core FFO per share surpassed the Zacks Consensus Estimate one occasion, met the same once and missed it in the remaining two, the average negative surprise being 1.67%. This is depicted in the chart below:

Factors to Consider

During the second quarter, the demand for high-performing data centers is likely to have been robust amid the continued strength in strong demand drivers such as cloud computing, enterprise modernization, and the rise in streaming of content and usage of social media.

Also, emerging demand drivers like AI, Internet of Things, edge computing and 5G technology are likely to have accelerated the need for digital infrastructure globally.

These factors are anticipated to have played a key role in fueling the demand for Digital Realty’s data centers in the quarter, benefiting its second-quarter 2023 earnings.

DLR enjoys a diversified tenant base, majority of which are investment-grade, with several of its customers using multiple locations across the portfolio. This is expected to have enabled it to generate stable revenues. In addition, strong net absorption rates are likely to have supported rent growth, boosting the company’s top line.

The Zacks Consensus Estimate for quarterly rental revenues is pegged at $891.3 million, up 16.1% from $767.3 million reported in the year-ago quarter. We project the same to increase 16.6% year over year this quarter. The consensus mark for revenues from tenant reimbursement utilities is pegged at $312.6 million, up from $218.2 million reported in the prior-year quarter. Our estimate for quarterly revenues from tenant reimbursement utilities suggests growth of 29.4% from the prior-year period.

Also, solid demand for Digital Realty’s interconnection solutions in the second quarter is likely to have paid off well. The Zacks Consensus Estimate for interconnection & other revenues currently stands at $103.8 million, indicating an 11.2% increase from the year-ago quarter’s reported tally. We expect interconnection & other revenues to improve 14.1% year over year.

The consensus estimate for quarterly total revenues is pegged at $1.36 billion, indicating a 19.6% year-over-year jump.

The company, continuing with its accretive asset-base expansion to meet data center demand, in late June 2023, purchased a land parcel spanning 36,000 square meters (8.9 acres) in Amsterdam. The parcel has the capacity to support a data center with a total installed IT power of more than 40 MW on its existing Amsterdam Schiphol campus.

Further, DLR is expected to have benefited from its strategic partnerships with EXA Infrastructure and Colt Technology Services during the second quarter. While its collaboration with EXA bolsters connectivity infrastructure across the Mediterranean region, the extended partnership with Colt Technology enables businesses to accelerate their digital transformation journeys and migrate to the cloud.

However, higher interest expenses and adverse foreign currency fluctuations might have cast a pall on its quarterly performance. We expect interest expense to flare up 34.2% year over year in the second quarter of 2023.

The Zacks Consensus Estimate for the company’s quarterly FFO per share has been revised marginally downward over the past month at $1.66. Nonetheless, the figure indicates a year-over-year increase of 7.1%.

Q2 Developments

During the quarter, to raise capital to fund its ongoing and future investment activity and repay debt, Digital Realty divested 100% of its interest in a non-core data center in Texas and sold around 11 million shares issued under its at-the-market program. This included 3.5 million shares to be issued pursuant to forward sales agreements. The data center was sold for around $150 million, while the shares sold under the ATM program resulted in gross proceeds of nearly $1.1 billion.

What Our Quantitative Model Predicts

Our proven model does not conclusively predict a surprise in terms of FFO per share for Digital Realty this season. The right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — increases the odds of a beat. However, that’s not the case here.

Earnings ESP: Digital Realty has an Earnings ESP of -1.64%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Digital Realty currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks That Warrant a Look

Here are some stocks that are worth considering from the REIT sector, as our model shows that these have the right combination of elements to deliver a surprise this reporting cycle:

EastGroup Properties (EGP Quick QuoteEGP - Free Report) is scheduled to report quarterly figures on Jul 25. EGP has an Earnings ESP of +1.22% and a Zacks Rank #2 (Buy) currently.

American Tower (AMT Quick QuoteAMT - Free Report) is slated to release report quarterly numbers on Jul 27. AMT has an Earnings ESP of +1.55% and a Zacks Rank #3 at present.

W.P. Carey (WPC Quick QuoteWPC - Free Report) is slated to report quarterly numbers on Jul 28. WPC has an Earnings ESP of +1.13% and carries a Zacks Rank #2 presently.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.