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Digital Realty (DLR) Q3 FFO Beats Estimates, Revenues Up Y/Y

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Data-center REIT Digital Realty Trust, Inc.’s (DLR - Free Report) third-quarter 2018 core funds from operations (FFO) per share of $1.63 outpaced the Zacks Consensus Estimate of $1.62. The figure also came in higher than the year-ago quarter tally of $1.51.

The company reported operating revenues of $768.9 million for the third quarter, which also marked an impressive 26.1% year-over-year rise. However, the reported figure missed the Zacks Consensus Estimate of $773.1 million. Nevertheless, the company reaffirmed its 2018 core FFO per share outlook.

Signed total bookings during the quarter under review are estimated to generate $69 million of annualized GAAP rental revenues. This would include an $8-million contribution from inter-connection. Notably, the weighted-average lag between leases signed during third-quarter 2018 and the contractual commencement date was five months.

Moreover, the company signed renewal leases, marking $61 million of annualized GAAP rental revenues. Rental rates on renewal leases signed during the quarter rolled up 0.2% on a cash basis and ascended 1.6% on a GAAP basis.

Notable Portfolio Activity

During the Sep-end quarter, Digital Realty acquired three separate sites in Manassas, Virginia, Sterling, Virginia and Sydney, Australia, aggregating 51.5 acres for a combined investment of $40 million. Further, Digital Realty entered into an agreement to acquire 424 acres of undeveloped land in Loudoun County, VA, for a purchase price of $236.5 million, in the quarter under review.

Also, the company entered into a deal to acquire Ascenty, a data-center provider in Brazil, in a transaction valued at around $1.8 billion. The company will acquire Ascenty from private equity firm Great Hill Partners.

Digital Realty has also entered into an “independent bilateral equity commitment letter” with a Brookfield Asset Management affiliate, per which Brookfield has committed to fund half of the initial equity investment. This is estimated to be approximately $613 million. In exchange, Brookfield will own 49% of the joint-venture entity which is likely to own Ascenty.

On the other hand, the company closed the sale of 360 Spear Street, a 155,000-square foot data center in San Francisco, CA, for $92 million.

Balance Sheet

Digital Realty exited third-quarter 2018 with cash and cash equivalents of around $46.2 million, up from the $17.6 million recorded at the prior-quarter end.

Additionally, as of Sep 30, 2018, the company had around $9.2 billion of total debt outstanding, of which $9.1 billion was unsecured debt and around $0.1 billion secured debt. Also, as of the same date, its net debt-to-adjusted EBITDA was 5.2x, while fixed charge coverage was 4.1x.

Outlook Reiterated

Digital Realty reiterated its 2018 core FFO per share outlook of $6.55-$6.65. The Zacks Consensus Estimate for the same, currently pegged at $6.60, lies within this range.

The full-year outlook provided by the company is backed by revenue projections of $3.0-$3.2 billion, year-end portfolio occupancy growth of +/- 50 bps, and "same-capital" cash NOI growth of 1-3%.

Our Take

Digital Realty’s impressive performance in terms of FFO per share in the Jul-Sep quarter is encouraging. Notably, solid fundamentals of the data-center market offer scope to the company to ride on growth curve. Additionally, its accretive acquisitions and development efforts augur well for long-term growth.

Nevertheless, the company faces intense competition in the industry. Amid this, aggressive pricing pressure is likely to continue in the upcoming period. Further, the company has a substantial debt burden and hence, rate hike adds to its woes.

Digital Realty currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Digital Realty Trust, Inc. Price, Consensus and EPS Surprise

We now look forward to the earnings releases of other REITs like UDR Inc. (UDR - Free Report) , Vornado Realty Trust (VNO - Free Report) and AvalonBay Communities, Inc. (AVB - Free Report) , all of which are slated to report their quarterly numbers on Oct 29.

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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