Data-center REITs will likely continue experiencing a boom market, with growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure. Also, the estimated growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five-eight years.
These factors, along with an improved outlook for economic growth, are anticipated to provide substantial growth impetus to data-center REITs, including Digital Realty Trust, Inc. (DLR - Free Report) , Equinix, Inc. (EQIX - Free Report) , CyrusOne Inc. (CONE - Free Report) and CoreSite Realty Corporation (COR - Free Report) , and others.
Specifically, Digital Realty is poised to benefit from this strong demand for data centers through accretive acquisitions and development efforts. In September 2017, Digital Realty announced the completion of a merger with DuPont Fabros, in an all-stock deal, for an enterprise value of about $7.8 billion. This move enhanced the company’s portfolio in the top U.S. data-center metro areas across Northern Virginia, Chicago and Silicon Valley. It helped the company enhance its hyper-scale product offering and grow Digital Realty’s blue-chip customer base.
Recently, Digital Realty unveiled its third data center in Toronto. The move further expands the company’s presence in the fourth largest city in North America which is also the financial and business capital of Canada. Further, the company had acquired Telx in October 2015 and a portfolio of eight high-quality, carrier-neutral data centers in Europe (Amsterdam, Frankfurt and London) from Equinix in July 2016. Also, it has fortified its presence in Europe, Australia and Asia in recent years through development of high-quality facilities.
The company focuses on maintaining an investment grade balance sheet and is committed to a conservative capital structure. It enjoys ample and growing liquidity, with diversified sources of capital and has a well-laddered debt maturity schedule.
Additionally, solid dividend payouts are arguably the biggest enticement for REIT shareholders and Digital Realty remains committed to that. Much to the delight of its shareholders, on Mar 1, 2018, the company announced an 8.6% hike in dividend. The company has raised dividend every year since its initial public offering and the March 2018 raise marked the 13th consecutive year of increase.
However, Digital Realty faces stiff competition in its industry. In fact, the company contends with several data-center developers, owners and operators, many of which enjoy ownership of similar assets at locations same as Digital Realty. Also, there are multiple local developers in the United States and several regional operators across Europe, Asia and Australia.
Given the solid growth potential of the data-center real estate market, competition is expected to intensify in the upcoming period from existing as well as new players. Amid all this, an aggressive pricing pressure is anticipated in the data-center market.
Moreover, Digital Realty’s earnings have a notable exposure to foreign currency translation. Also, hike in interest rate is a concern for the company. In fact, it has substantial debt burden. Essentially, rising rates imply higher borrowing cost for the company, which affect its ability to purchase or develop real estate, and lower dividend payouts as well. Moreover, the dividend payout might become less attractive than the yields on fixed income and money market accounts.
Shares of Digital Realty have outperformed the industry it belongs to in the past three months. The stock has gained 15.1% compared with the industry’s rally of 12.4%. However, the stock has seen the Zacks Consensus Estimate for 2018 funds from operations (FFO) per share remain unchanged at $6.55 over the past month.
Digital Realty has a Zacks Rank #3(Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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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