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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 an 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 in the upcoming 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 Jun 30, 2023, it had 8.8 million square feet of space under active development and 3.9 million square feet of space held for future development.
Further, the company’s capital-recycling efforts are likely to drive long-term growth while preserving its financial flexibility. As of the end of the second quarter of 2023, it completed $2.2 billion of asset sales and stabilized JVs. For 2023, it expects to carry out dispositions in the range of $2.2-$3 billion, up from its earlier guided range of $1.5-$2.5 billion.
Digital Realty 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 4.9 years and a 2.7% weighted average coupon as of Jun 30, 2023. Its net debt-to-adjusted EBITDA was 6.8X, while its fixed charge coverage was 4.2X as of the end of the second quarter of 2023.
Moreover, solid dividend payouts are the biggest enticements for REIT shareholders, and Digital Realty remains committed to that. The company has increased its dividend four times in the last five years, and the five-year annualized dividend growth rate is 4.05%. Given its solid operating platform and balance sheet management efforts, DLR remains well-poised to sustain the dividend payment.
Shares of this Zacks Rank #3 (Hold) company have rallied 25.4% in the past three months against the industry’s decline of 0.2%.
Image Source: Zacks Investment Research
However, Digital Realty 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 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. DLR has a substantial debt burden, and its total consolidated debt as of Jun 30, 2023 was $17.7 billion. Our estimate for interest expenses indicates a rise of 46% year over year in the current year.
The Zacks Consensus Estimate for Welltower’s 2023 FFO per share has been raised marginally over the past month to $3.53.
The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved marginally northward over the past week to $12.88.
The Zacks Consensus Estimate for Americold Realty Trust’s ongoing year’s FFO per share has been raised 1.6% upward over the past week to $1.26.
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.
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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 an 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 in the upcoming 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 Jun 30, 2023, it had 8.8 million square feet of space under active development and 3.9 million square feet of space held for future development.
Further, the company’s capital-recycling efforts are likely to drive long-term growth while preserving its financial flexibility. As of the end of the second quarter of 2023, it completed $2.2 billion of asset sales and stabilized JVs. For 2023, it expects to carry out dispositions in the range of $2.2-$3 billion, up from its earlier guided range of $1.5-$2.5 billion.
Digital Realty 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 4.9 years and a 2.7% weighted average coupon as of Jun 30, 2023. Its net debt-to-adjusted EBITDA was 6.8X, while its fixed charge coverage was 4.2X as of the end of the second quarter of 2023.
Moreover, solid dividend payouts are the biggest enticements for REIT shareholders, and Digital Realty remains committed to that. The company has increased its dividend four times in the last five years, and the five-year annualized dividend growth rate is 4.05%. Given its solid operating platform and balance sheet management efforts, DLR remains well-poised to sustain the dividend payment.
Shares of this Zacks Rank #3 (Hold) company have rallied 25.4% in the past three months against the industry’s decline of 0.2%.
Image Source: Zacks Investment Research
However, Digital Realty 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 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. DLR has a substantial debt burden, and its total consolidated debt as of Jun 30, 2023 was $17.7 billion. Our estimate for interest expenses indicates a rise of 46% year over year in the current year.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Welltower (WELL - Free Report) , SBA Communications (SBAC - Free Report) and Americold Realty Trust (COLD - 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 Welltower’s 2023 FFO per share has been raised marginally over the past month to $3.53.
The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved marginally northward over the past week to $12.88.
The Zacks Consensus Estimate for Americold Realty Trust’s ongoing year’s FFO per share has been raised 1.6% upward over the past week to $1.26.
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.